EU approves e-commerce tax rules

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Posted 1:31PM on Tuesday, February 12, 2002

BRUSSELS, BELGIUM - Ignoring U.S. objections, European Union finance ministers Tuesday approved new rules for taxing Internet purchases of software, music and other ``virtual goods'' from non-EU companies. Spanish Finance Minister Rodrigo Rato, whose country holds the EU presidency, called the decision ``an important step forward, particularly in bringing new technologies into the European economy. ``The European Union here is now at the cutting edge'' of adapting its tax system to the information economy, he said. But the action sets the stage for another potential trans-Atlantic trade rift. The United States had pushed for a moratorium on sales tax on digital products until a ``global consensus'' could be reached. In two years of lobbying, Washington won some changes in the EU draft, such as allowing non-EU companies to register in only one EU country, instead of all 15. But last week the Bush administration said it still had ``serious concerns'' because in some cases, the EU directive would allow European companies to charge less tax than their U.S. competitors. Deputy U.S. Treasury Secretary Kenneth Dam said the Bush administration will try to convince the EU that the rules are unworkable during talks at the Paris-based Organization for Economic Cooperation and Development. If that fails, Washington may lodge a complaint at the World Trade Organization, he said. Rato denied the law was discriminatory calling it ``perfectly compatible with WTO rules.'' More than 90 percent of the e-commerce in virtual goods today is between businesses, which are already covered by EU rules on sales taxes, known as value-added tax. The new directive closes a loophole - Internet sales directly to consumers - which are expected to grow as more products become available and better Internet connections allow for faster downloads. But U.S. and even some European companies fear the cumbersome rules will stifle that growth. Under the new law, European companies will pay only their home country's VAT. Non-EU companies will have to charge customers the rate where the customer lives, ranging from 15 percent in Luxembourg to 25 percent in Sweden. The other 14 EU states were afraid non-EU companies would all set up for business in low-tax Luxembourg, emptying their tax base. Another provision requires Internet distributors to charge the full VAT on educational products, while regular stores are allowed to offer discounts. ``The new proposal creates discrimination,'' said Claudio Murri, European representative for Texas-based Electronic Data Systems Corp. Rato conceded there were ``difficulties,'' but said they had been overcome to allow finance ministers to approve the agreement at their regular monthly meeting Tuesday. However, a technical change in the regulation's legal basis means it has to be referred back to the European Parliament for consultation, a process that could delay its implementation by months. EU sources, speaking on condition of anonymity, said the finance ministers wanted to make sure the directive would require unanimity for passage because it involves taxes - one of the most sensitive areas of EU policy.