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New EU E-Commerce VAT Rules Come Into Force

by Mike Godfrey,, Washington

03 July 2003

New European Union VAT (Value Added Tax) rules came into force this week which require firms based in non-EU countries, including the United States, to start collecting the tax from sales of online services such as music downloads and software.

The VAT rules were changed by the EU after complaints from European firms that they were at a competitive disadvantage compared to their US and Asian competitors who were able to sell to consumers VAT free through their European subsidiaries.

However, US firms contend that far from levelling the playing field, which was the intention behind the EU Commission's decision, the situation is now discriminatory to US firms, who will have to keep abreast of 15 different VAT regimes (soon to expand to 25 after the intake of Eastern and Southern European nations to the EU next year).

Worse of all, it is not the well established multinationals such as AOL, eBay or Amazon that will be most affected. These companies have European HQs which means they need only charge the rate of VAT levied in the country that the subsidiary is based in. It will be the many hundreds of small and mid-sized US firms- many of whom have expressed frustration at a lack of information available on the new rules- that will be caught up in a bureaucratic tangle. Consequently, according to some tax experts, many of these firms are considering scaling back or pulling European sales.

This problem will be exacerbated by the requirement for US firms to verify where their customers are resident, which in e-commerce transactions is not always straightforward. No such obligation is placed on European firms.

The EU Commission has sought to play down the impact the new tax regime will have on non-European businesses by pointing out that the new rules apply only to business-to-consumer transactions, rather than business-to-business transactions, which it says account for 90% of e-commerce transactions.

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