Forbes.com
EU Plans To Tax U.S. Internet Firms
By Matthew Richards
The European Union yesterday proposed tax reforms designed to raid the pockets of U.S.
high-tech companies that sell products on the Internet.
EU Commissioner Frits Bolkestein may hope to ``create a level playing field'' by taxing U.S.
sales in Europe, but the tax discourages e-commerce in Europe, and essentially encourages a less efficient way of doing
business--a trŠs European modus operandi.
Europeans already have to pay Value Added Tax (VAT), a sales tax of 15% to 25%, on non-physical goods sold by
European firms. Brussels bureaucrats claim this gives foreign firms an unfair advantage. Unlike the United States, which has
declared a moratorium on Internet taxes until Fall 2001, the European Union is determined to squeeze as much tax revenue out
of the Web as possible.
The proposals to impose VAT on software, data and other non-physical goods are a blow to companies such as Microsoft
(Nasdaq: MSFT - news), Dow Jones (NYSE: DJ - news) and Qualcomm (Nasdaq: QCOM - news), which sell software or
data online. Companies in the U.S. could lose $2 billion in the next five years to European Internet taxes, according to figures
from Internet consultancy Jupiter Communications.
Some companies have yet to assess exactly what the impact of the tax will be. ``We are reading the law and trying to
understand it,'' says RealNetworks' (Nasdaq: RNWK - news) Vice President of Government Affairs Alex Alban.
RealNetworks, which sells downloadable music and video software like RealPlayer online, booked 12% of its $131 million
1999 revenue in Europe.
Closing the tax loophole will inevitably put upward pressure on prices. Online software retailer Beyond.com (Nasdaq: BYND -
news) will raise prices to meet new tax demand, the company's chief financial officer and interim CEO Rick Neely said
yesterday. ``Europeans will inevitably try and extend tax into all areas. Our consumers are going to pay the price,'' he said. He
described the latest tax measure as one of many ``hurdles in front of new companies using new technology'' in Europe.
The good news is that the new tax demands are ``very difficult to enforce,'' according to Etienne Wong, a tax partner at
international law firm Clifford Chance. But he adds that the major players will not want to be seen as avoiding taxes on the
Internet: ``Large, respectable companies will comply with the new tax demands.''
In opposition, the U.S. has endeavored to keep the Internet a tax-free shopping zone and will most likely object to the new tax
demands. ``There is concern in the market that this will lead to a massive trade war on the Internet,'' Wong adds.
Commentators have reacted negatively to the tax proposals. ``This is good old-fashioned big-government interference,'' says
Nick Jones, an analyst at Jupiter Communications. Jones adds that the tax plans are at odds with European officials' frequent
declarations that the continent must embrace e-commerce wholeheartedly.
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