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EU To Close VAT 'Loophole' For Telecom Firms,
by Ulrika Lomas, Tax-News.com, Brussels
Wednesday, May 10, 2006
A proposal by European Union finance ministers (Ecofin) to change the way that
value added tax is charged on certain services, such as telecommunications and
pay television, has provoked opposition from Germany, Luxembourg and Portugal.
Under a proposal advanced by Karl Heinz Grasser, the Finance Minister of Austria,
which currently holds the six-month rotating presidency of the EU, VAT will
be charged on the basis of where the customer is situated rather than the jurisdiction
in which the vendor is based.
At present, many companies are taking advantage of the fact that VAT rates
differ widely across the EU by registering their businesses in jurisdictions
where VAT rates are low, particularly in Luxembourg and the Portuguese island of
Madeira, which have the lowest rate of VAT in the EU, at 15%.
Examples of companies that have switched to Madeira include Wanadoo, the ISP
owned by French company Freeserve, which moved in 2002, and Virgin.net.
However, many EU members are keen to address the situation by insisting that VAT is charged
on the basis of the customer’s country of residence. According to EU Tax
Commissioner Laszlo Kovacs, the activities of the companies in question are
tantamount to tax avoidance, distorting intra-union competition.
“We want to avoid unfair tax competition because if we maintain the place
of origin principle, in that case, businesses will establish themselves in the
country with the lowest rates and that would certainly distort the competition,”
stated Kovacs.
"Until there's greater harmonisation we would prefer the country of consumption
as a principle,” he added.
Grasser commented: "We want to adjust the VAT system to the modern
era of electronic trade and there are lots of services involved, including telecoms
and pay-TV. We have to ask ourselves whether it makes sense if you have the
very low rates applied by an offshore island in Europe being used as a way of
distorting competition."
Grasser claims to be “confident” that the measure will be adopted
by all 25 EU member states when finance ministers gather again next month, although
Germany has warned that it will not be supporting the proposal, while Luxembourg
and Portugal are also likely to be opposed.
The measure will need to be approved unanimously by all member states before
it can be adopted.
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