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EC Mulls Move On VAT Derogations

by Ulrika Lomas, for, Brussels

30 July 2003

The European Commission is reported to be considering closing a 'loophole' which is attracting internet service providers (ISPs) to locate in jurisdictions such as Madeira, following the introduction earlier this year of the EU directive obliging non-European businesses to charge VAT on the sale of 'downloadable services' to EU residents.

Madeira is a region of Portugal, which, although it enjoys a great deal of autonomy, pays its taxes to Lisbon. However, because of the cost of importing goods onto the Island, it is allowed to levy a lower (13%) level of VAT.

This has made it extremely attractive to ISPs such as and Freeserve, as under the single registration clause of the EU directive, companies are allowed to pay the combined tax liability that they have accumulated throughout the EU in one member state, at that country's VAT rate.

In proposals released last week, the EC observed that:

'Recent experience has shown that the current derogations can give rise to abuse: for example, there have been cases of businesses in the e-commerce and telecommunications sectors moving to the Azores and Madeira in order to apply the lower rates (of VAT) applicable there to services they supply to final consumers throughout the community.'

It continued: 'Steps must be taken to put a swift end to such practices as they are a misuse of the derogations which were granted solely to allow the member states concerned to take account of the remoteness and special geographical situation of those regions.'

Speaking to The Register news service with regard to the EC's proposals, however, a Freeserve spokeswoman suggested that the company was not greatly concerned, as 'the current situation isn't likely to change for years to come'.

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