Filed at 8:57 a.m. ET
The European Union agreed Tuesday to impose a new tax on products downloaded from the Internet -- including software, videos and music -- aiming to help Europe's Web-based businesses compete with U.S. companies.
EU Taxation Commissioner Frits Bolkestein said the new tax rules ``will remove the serious competitive handicap which EU firms currently face.''
Bolkestein complained that U.S. giants of the industry levy no taxes from online customers. The effect has been to give a sales tax loophole to European buyers, who find cheaper-priced goods on U.S.-based sites.
Although U.S. businesses are the focus of the legislation, the tax affects all non-European Internet businesses selling digital products, whether in the United States or elsewhere, said Nicholas Colannino, a European Commission spokesman in New York.
A separate measure that taxes ``hard'' shipped goods, such as books, could be considered in the future, Colannino said.
The U.S. has complained the EU taxes pre-empt ongoing talks on Internet taxation at the Organization for Economic Cooperation and Development. U.S. trade authorities have said they may lodge a complaint against the new tax at the World Trade Organization.
Rep. Mark Foley, R-Fla., who chairs a congressional task force on the entertainment industry, said he hoped the EU doesn't expand the tax to cover all goods sold online.
``They have single-handedly reversed a fiscally sound philosophy of keeping the Internet tax-free,'' Foley said. ``The only ones who will suffer are their own people.''
The European Commission said, however, that the tax ``complements the international process at the OECD.''
The tax, to be enforced beginning July 1, 2003, would take effect when an Internet customer in, say, Belgium, purchases MP3 music files from, say, San Diego, Calif-based EMusic.com.
EMusic.com would have to determine electronically that the purchaser is located in Belgium. Using that information, EMusic's computers would add the appropriate Belgian sales tax to the purchase.
This formula marks a significant change from the current tax rules, which permit EU residents to buy the same MP3 from EMusic.com without paying tax. But if a European customer buys the MP3 from, say, Stockholm-based eClassical.com, an online vendor of classical music, tax is levied on the sale.
Under the system, as now, European consumers will pay only their own country's so-called value-added tax. U.S. companies will be forced to charge customers the prevailing rate in force where their customers live.
Each of the EU's 15 countries taxes different products at different rates. General value-added rates vary from 15 percent in Luxembourg to 25 percent in Sweden.
The U.S. Treasury Department fears U.S. firms will be required to charge the EU's value-added tax at higher rates than their EU competitors. The department -- and American vendors -- also worry that EU rules will breed a complicated, difficult-to-enforce tax system that hampers e-commerce in general.
``We continue to be concerned about the potential for discrimination inherent in the new EU VAT regime that applies to downloaded products,'' said Treasury Department spokeswoman Tara Bradshaw.
Before Tuesday's decision, EU authorities considered handing U.S. companies the same advantages as European competitors, by allowing them to charge a single EU-wide VAT rate.
But member states blocked that idea. They feared companies would all set up for business in low-tax Luxembourg.
The tax has nothing to do with the ongoing U.S.-EU trade spat over American tariffs on foreign steel, Colannino said.
``There's no link at all,'' he said. ``This has been in the works for a while.''
------
On the Net:
http://europa.eu.int/comm/taxation--customs/whatsnew.htm
