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European Web tax hits U.S. firms
By CNN's Nick Wrenn
LONDON, England (CNN) -- American Internet companies are gearing up for a new tax amid warnings that it could be jeopardized by non-payment and legal challenges. From July 1, firms outside the 15-nation European Union offering digital services -- including online financial help, software and music downloads, dating and pornography -- will be liable for value added tax (VAT) on sales to Europeans. Many of the companies affected are in North America, including online auctioneer eBay and AOL, CNN's parent, as well as thousands of smaller operators. The EU says extending VAT creates a level playing field between European firms who already pay the tax and their competitors. But some companies and analysts say it could be a nightmare to administer. The EU will not say how much revenue it expects to get. But Alexander Drobik, Vice President of UK-based business advisers GartnerG2, says it could be $200 million a year. Major companies have been preparing for the tax by expanding offices in Europe. VAT rates vary across the EU, from 15 percent in Luxembourg to 25 percent in Denmark and Sweden. But if a company complies with regulations in one of the EU countries, it is covered in all of them.
AOL spent a year preparing for the tax, building up its Luxembourg office. It will not say how much it might have to pay but a spokeswoman said: "AOL expects to break even in 2004 and that takes into account the tax." American e-commerce firm Digital River also spent a year preparing, including a new data center in London. It estimates the cost at $2 million over several years but says this will not be passed on to customers. "Twenty-five percent of our revenue is from outside the U.S. so this really does matter," said CEO Joel Ronning. He said U.S. companies had enjoyed an advantage over European rivals but now some of the smaller ones would find the tax hard to handle, while the EU could have big problems collecting it. "They are going to have a real hard time getting all the companies to comply, they have not made it simple. Some sparks are going to fly over the next year." Some may choose not to pay and hope they will get away with it while others will not even know about it, says Drobik. "I can see people buying software or digital music from sites in North America which don't know they are breaking the law and have no way of stopping it, other than putting a banner on their site. "It's more red tape but this is a new market. As soon as there's money around the normal claw of government takes hold. "The Internet is relatively new so people are trying to use existing legislation to cover it. There are a few gray areas which are going to keep the courts busy." An EU spokeswoman said: "To get extra income was not the objective. The objective is to put an end to discrimination suffered by companies established in Europe that supplied services via the Internet."
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Some sparks are going to fly over the next year
