Taxing time for EU

EU finance ministers have given the go-ahead to new legislation that will add VAT to all internet purchases made by consumers from companies based outside the EU.

The legislation will come into play in February 2002 and means all non-EU companies that wish to sell over the net within the EU will be required to register with a European country for VAT purposes and keep records of all exchanges.

However, Christine Sanderson, tax partner at professional services organisation PricewaterhouseCoopers, said the idea will create massive compliance problems that outweigh any gains.

Sanderson said: "This is very bad news for US companies. I think this will stop US vendors from selling in the EU.

"Traffic of sales from the US to the EU is low, so VAT the EU is losing is not a big deal for them at the moment. US companies will have to invest heavily in creating numerous records and new technology to calculate all this stuff."

Sanderson added: "I'd recommend blocking non-EU sites to EU customers."

The onus of compliance rests with individual companies for the next three years until the EU has developed an electronic VAT collection system.

Companies must register in the country they will take their first electronic order from.

Once they are registered, all VAT charged by the company comes under the local law of that country, so smart organisations will try to register with countries such as Luxembourg which has 15 per cent VAT compared to France's 20.6 per cent.