EU Adopts New VAT Rule

20 February 2002

A European Union council gave approval last week for a new rule that would require companies from non-EU states to pay the same value-added tax (VAT) on Internet sales of digital products when selling to EU-based customers that suppliers within the union would have to pay.

In addition, digital product companies within the EU would no longer have to charge VAT when selling to non-EU businesses and consumers. The rate of VAT charged will be equal to that of the European shopper's home country.

On Feb. 12, the Council of Economics and Finance Ministers agreed, without discussion, to the Commission's June 2000 proposals for the new directive and regulation. The new VAT rule will apply to the online sale and delivery of products like computer games, software, and subscription and pay-per-view radio and television programs.

The EU's member states must implement the new rule by July 1, 2003.

The measures will relieve EU companies of the "competitive handicap" of having to charge VAT when exporting to markets outside the union, said Frits Bolkestein, the European commissioner for taxation.

Under present VAT regulations, which pre-date e-commerce, electronically delivered services that are sold by an EU provider, regardless of where the service will be consumed, are subject to VAT.

The new regulations will not require non-EU companies doing business-to-business dealings with EU firms to pay VAT. In those instances, the VAT will be paid by the EU company as per self-assessment arrangements. However, non-EU companies will have to include the VAT in sales to individual consumers.

The United States opposes the new regulation as an administrative burden, the Sydney Morning Herald reported last week.