Non-EU firms must charge VAT on Web sales from 2003


The European Union has approved rules that will require US and other non-EU firms to levy value-added tax (VAT) on products such as computer games and software they sell on the internet to private customers in the 15-nation bloc.

The new rules, which come into force in July 2003, may irk the United States and add to its ongoing trade row with the EU over US steel imports.

The European Commission said the new regulations were designed to address what the bloc saw as a competitive disadvantage against the United States.

"I welcome the decision of the Council (of ministers) to adopt these rules on applying VAT to digital products," European Commissioner Mr Frits Bolkestein said in a statement yesterday.

"They will remove the serious competitive handicap which EU firms currently face in comparison with non-EU suppliers of digital services both when exporting to world markets and when selling to European consumers."

Under United States rules designed to boost e-commerce, business is not taxed for selling digitally delivered products - items such as children's games, music or other services that are sent electronically to a consumer's home computer.

US-based companies make up a large chunk of firms selling such goods via the internet to private customers.

Thanks to the international nature of the internet, which is not impeded by geographic boundaries, they gain easy access to the EU market.

But from July next year, US and other non-EU companies will have to be registered with a tax authority in one of the 15 member-states and be required to levy that country's VAT rate on all applicable internet transactions.

The member-country will then distribute the taxes collected to other countries, based on where the actual sales are made.

The VAT liability will also cover electronic services that are downloaded or consumed online, as well as subscription-based and pay-per-view radio and TV broadcasting.

EU companies, which already charge VAT on such internet transactions conducted with the bloc's private citizens, will, however, be exempted from VAT for services they provide to non-EU residents.

The US, which threatened in February to take the case to the World Trade Organisation (WTO), believes the rules are discriminatory and will put additional administrative pressure on US companies.

"We continue to be concerned about the potential for discrimination against non-EU companies in terms of the tax rates required to be charged and the administrative and compliance burden," said Ms Tara Bradshaw, a spokeswoman for the US Treasury.