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EU law taxing to U.S.

Firms to pay levy on Net sales of digital items

BRUSSELS — A new European Union law forcing U.S. firms to pay tax on Internet sales of digital products — including software, music, games and videos — to EU consumers is likely to spark a trade dispute with the U.S.

Under the law, passed Tuesday, non-EU firms must register for business in one of the 15 EU member states and levy value added tax (VAT) on Internet sales at the rate applicable to where the consumer lives from July 1, 2003.

Since VAT rates vary from 15% in Luxembourg to 25% in Sweden, U.S. companies will face a considerable administrative burden.The rule change comes after a campaign by European Internet firms including Freeserve, the U.K.-based Internet service provider that is part of France Telecom’s Wanadoo Group.

They have successfully argued that they have to levy taxes on all digital downloads, but U.S. competitors are free to undercut them with tax-free downloads.

EU tax commissioner Frits Bolkestein said the rules “will remove the serious competitive handicap which EU firms face.” The legislation will not apply to business sales, at least 90% of Europe’s $420 billion e-commerce market, since the VAT will be paid by the importing company under self-assessment arrangements, as at present.

Guido De Wit, a Brussels-based tax lawyer with Linklaters, told Daily Variety that, “the EU has attempted to level the playing field.… Today’s decision needs to be followed by a series of measures to ensure that it becomes workable for U.S. firms.”

The law will take effect July 1, 2003. by which time all EU countries will be required to have brought the law onto their statute books.