Under the EU's plans, a foreign company selling into the EU will be forced to register for VAT in one of its member states, but will then have to charge VAT at the rate applying in the country of residence of its customer. US retailers complain the tax will give European competitors an unfair advantage as it will force non-EU companies to verify where consumers live to determine the correct level of tax. No such obligation exists for European companies, which simply charge the rate of the country in which they operate.

It isn't clear how EU member governments will enforce the law, which will essentially be voluntary for a small company whose Internet transactions could only be discovered by an audit of credit card records; but larger companies will probably feel obliged (and will certainly be advised) either to submit to the law as drafted or to set up sales subsidiaries in the countries where they have the most trade.

The decision will be a difficult one: Madeira's 13% VAT rate would give a company a substantial advantage over its competition, and Madeira also operates a low-tax trading zone (the Madeira International Business Centre) where companies can establish sales subsidiaries which are free of corporation tax. It must be tempting for other low-VAT areas such as the Isle of Man to lower their VAT rates as well.

The US government however is far from having submitted to the new regime, and has recently begun to ask the EU to postpone or change its plans, saying that they may infringe WTO rules. With the Foreign Sales Corporation spat unresolved, and still inflaming EU/US trading relations, it would not be surprising to see the administration making a link between the two issues.