The European Commission has rejected as unfounded US objections to the proposed levying of value added tax on digital products supplied online in the European Union.

Last Tuesday, American officials informed European finance ministers that the Bush administration had concerns over the plan.

One major complaint, says US deputy Treasury secretary Kenneth Dam, is that American retailers of services delivered online will have to register in the EU and impose the VAT rate current in the customer’s nation of residence. He also suggested that such US firms might be forced to impose higher VAT rates than European rivals on sales to EU consumers and face heftier administration expenses.

Dam added that the proposals could violate agreements forged by the Organisation for Economic Cooperation and Development regarding the taxing of e-commerce and “may potentially be inconsistent” with World Trade Organisation requirements.

However, European officials rejected the complaints, arguing that the scheme would provide companies from the EU with a level playing field when competing with foreign rivals.

The measure, a result of tortuous negotiations, proposes to make non-EU firms supplying to consumers within the Union levy VAT on electronically delivered services (software, entertainment, information etc), an obligation already imposed on EU companies.

In addition, EU firms will no longer have to levy VAT when exporting such services beyond member states, so as to be competitive with foreign companies.

The European Union’s Ecofin council is expected to give the proposal the green light without discussion on Tuesday, handing it to the European Parliament for approval before it can become law.

Data sourced from: Financial Times and the European Union; additional content by WARC staff