Europe and the US could be on the verge of yet another trade war, this time over VAT (Value added tax) on internet sales.

The row has been brewing since June, when the European Commission began levying VAT for online sales, ending an internet loophole previously exploited by US companies.

The Commission’s compromise was to allow US companies to select the EU state in which they wanted to pay VAT. Given that VAT rates vary considerably across Europe, most companies choose to register in places like Luxembourg, with a rate of only 15%.

However, some governments within the EU, such as France, feel that this agreement deprives them of tax revenue. One EC official claimed there was a “clear wish by some member states to have some share of the cake”.

However, forcing countries to register in every country could break world trade rules, leading to the economic wrath of the US.

Moreover, Frits Bolkestein, the EC’s commissioner for taxation, has declared his desire “to create a level playing field for the taxation of digital e-commerce”.

Clearly a compromise is needed, and the level-headed Belgians have suggested that non-EU firms should be allowed to register in one country, but then the revenues should be shared.

News source: BBC Online Business News (UK)