EU Council Approves VAT on Internet Sales

09 May 2002

The Council of the European Union has approved a new sales tax on electronically delivered products as proposed by the European Commission. It will come into force across all fifteen member states by July 1 2003.

The measure is designed to level the playing field between EU retailers of digitally delivered services – computer software, videos, music, broadcasting services etc – and their counterparts beyond the Union, in particular in the US.

Currently, EU-based firms supplying such products to consumers within the fifteen member states have to charge value-added tax on the purchased goods. This obligation does not apply to non-EU retailers, giving them a competitive edge in the prices they charge.

However, the new legislation will require firms sited outside the EU to charge European consumers VAT at the rate prevailing in the customer’s home country. But EU firms will no longer be required to levy VAT on goods sold beyond the member states.

Commissioner for taxation Frits Bolkestein welcomed the Council’s decision to “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.”

However, the tax has not gone down well with the US government, which has expressed its opposition to the tax reform for some months [WAMN: 11-Feb-02] and is threatening to file a complaint with the World Trade Organization.

Treasury Department officials fear American firms will end up paying higher VAT rates than their European rivals, and are also concerned that such tactics could generate an administrative quagmire which hinders ecommerce.

The tax does not affect ‘hard’ goods sold online – namely those that need to be shipped, such as books – though a measure dealing with such products will be considered in the future.

Data sourced from: Washington Post Online; European Union; additional content by WARC staff