12 February 2002 European Union (EU) finance ministers have approved a new law whereby value-added tax (VAT) will be levied on sales of so-called ‘virtual goods’. The law will apply to a range of products and services – including software and computer game downloads – regardless of whether the web sites are based in the EU.
The EU’s decision has been met with hostility in the US, where ecommerce transactions are not taxed. US Deputy Treasury Secretary Kenneth Dam deplored what he called the EU’s “unilateral proposals”. However, it may be some time before the new law is implemented because it needs to be referred back to the European Parliament for consultation.
“The new rules will affect less than 10% of sales from non-EU suppliers,” said European Commission spokesman Jonathan Todd.
The economic and finance ministers of the EU’s 15 member states met in Brussels today to endorse the new rules. The EU insists that they will help close a loophole whereby companies based outside the EU had been able to avoid VAT. This distorted competition to the advantage of non-EU companies – particularly American ones – argued EU officials.
Under the new rules, non-EU suppliers of goods and services delivered online will have to register with the fiscal authorities of the EU country of their choice for VAT purposes. However, the VAT rate applicable to an online transaction, will be that of the customer’s country of residence. EU VAT rates range from 15% in Luxembourg to 25% in Sweden.
VAT will be levied not only on software packages and computer games, but also on some radio and TV services and on other products that can be digitally delivered. Software vendors – particularly in the US – say that such transactions will be made more expensive as a result.
But UK Internet service provider (ISP) Freeserve, owned by France Telecom’s Wanadoo unit, has welcomed the new rules. The ISP had threatened legal action against the British government on the grounds that its US rival, America Online (AOL), benefited from an unfair advantage thanks to earlier legislation granting it VAT exemption.