Microsoft warns high VAT levy could deter investors

Microsoft has told the Government that the high rate of VAT levied on digital goods and Web services will hurt future investment…

Microsoft has told the Government that the high rate of VAT levied on digital goods and Web services will hurt future investment prospects for the Republic.

The US firm, which employs 1,800 staff in Dublin, wants the Government to review its 21 per cent VAT rate for digital goods and online services. This review should take account of a new EU directive that will force non-EU firms to levy VAT on European consumers for the first time.

The directive will come into force next Tuesday and will force non-EU firms to levy VAT on sales of digital goods or electronic services. This includes downloadable music, games and software bought by EU citizens from websites outside the region.

It will not affect sales of tangible goods, such as CDs, which are already subject to VAT.

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Previously only firms with a website based in the EU had to collect VAT and distribute it to national governments. This enabled firms such as AOL, eBay and Amazon to gain a competitive advantage over European rivals.

Under the new VAT directive, non-EU firms can either levy VAT at the consumer's country of origin or set up a hub in a single state and charge a uniform VAT rate across the whole of the EU.

In an interview yesterday, Mr Joe Macri, general manager of Microsoft Ireland, said having a VAT rate of 21 per cent would make it difficult to attract new investment to the Republic.

"We would prefer it to be lower to make it more attractive for Irish-based firms. . . This is a message we have given the Irish Government," added Mr Macri.

Microsoft has chosen the Republic as its hub to distribute software to Europe and has already invested millions in setting up an internet centre here.

The difficulty for companies like Microsoft, who have been levying VAT on EU customers already, is that rivals could locate in low VAT regimes and levy a uniform VAT rate across the EU.

AOL, which has six million European customers but has not up to now levied any VAT, last month set up a hub in Luxembourg, a jurisdiction with a VAT of just 15 per cent. The pan-European internet service provider Freeserve has gone one step further by registering in Madeira, where VAT is just 13 per cent.

However, Mr Macri says the VAT rate was just one factor that firms would evaluate when considering a location. Corporate tax rates, skills and infrastructure were also important. Microsoft's existing investment in the Republic would not be affected by the VAT directive, he added.

ICT Ireland, a technology lobby group of which Microsoft is a member, will press the Minister for Finance on the issue in the run up to the 2004 budget.

Mr Brendan Butler, director of ICT Ireland, said the VAT rate on digital goods was inconsistent with the Government's policy to attract e-commerce industries.

An IDA spokesman said yesterday the agency recognised that Ireland's VAT rate posed a difficulty regarding goods sold directly to consumers. He said IDA was actively working to try to solve this problem.