Eurocrats Revive Internet VAT Talk

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The European Commission has started new initiatives designed to tame the Internet, from plans for value added taxes on Web transactions to new regulations to combat spammers and cyber crime.

EC President Romano Prodi reignited the tax battle this month, after the failure of proposals submitted last year that would have required every e-tailer doing business in the European Union to have a physical presence in an EU country.

The Europeans had hoped to collect VAT on companies with some bricks within the union. But when companies involved responded by saying they would set up shop in Luxembourg, which has Europe's lowest VAT at 12 percent, other members backed off.

The EU then decided to make the Internet tax part of an EU-wide restructuring of the value added tax. Rates vary sharply across Europe, both in amount and items covered. The United Kingdom, for example, has zero VAT on babies' clothes, newspapers and other goods.

"Trying to get this VAT business coordinated is a Herculean task," said Alastair Tempest, director general at the Federation of European Direct Marketing, or FEDMA. "Every time it comes up, tempers fray in every direction.

"So one excuse for not moving on an Internet VAT was that it would be part of a major plan to restructure and harmonize that tax for everyone. At least five directives are pending." Tempest said. "I think what Prodi is trying to do now is show that the commission is active on the tax issue and is ready to do something about it this year. That 'something' clearly is an Internet tax."

But Tempest, the DM industry's chief lobbyist in Brussels, doubts action will come quickly. The EU has a long history of moving slowly on most issues.

Still, pressure for an Internet VAT is rising. The German government estimates it is losing 60 billion deutsche marks (about $30 billion) a year from untaxed Internet transactions.

Prodi is not calling for an outright Internet VAT but for "tax equalization" between online and offline transactions, which has the same effect. He urged EU finance ministers to put aside their differences -- exactly how much of the potential golden Internet calf each country would get -- and focus on unifying their approach to taxing the Web.

The issue will be discussed at next month's EU summit in Stockholm, but observers expect little action before the July summit in Goteborg, Sweden.

On cyber crime, Erkki Liikanen, the commissioner in charge of the information society, plans a hearing in mid-March to consider what measures the EU should take to stop what Tempest calls "cardinal sins."

The EU, Tempest said, tends to examine big issues, such as money laundering, pornography, racism, incitement to violence, sale of Nazi insignia, copyright issues and theft of identity. FEDMA is more worried about the daily damage that "small fraudsters" do to e-commerce by ripping off consumers of $50 or $100 at a time, which affects consumers more than money laundering does.

"That is a big deal, but it doesn't hit consumers in the pocket in ways he notices," Tempest said. "So we're saying to the EC that national authorities should cooperate more closely to catch small-time crooks who are undermining trust and confidence in e-commerce."

Finally, commissioner Frits Bolkenstein released and EU study in February that said illegal spamming costs Internet users worldwide 10 billion euros ($9 billion) a year. Costs, he argued, arise from downloading unwanted e-mail.

Tempest is skeptical. "I'm suspicious about how they calculated those numbers, and I worry about this kind of figure gaining currency because it is the only one around anyone can refer to," he said.

"It adds up to another weakening of our efforts to make a clear distinction between spamming as an unacceptable practice of untargeted mailings and the normal thing direct marketers do -- targeted and carefully worked out e-mails.

"Throwing everything together mingles good DM practices with bad practices like spamming, which includes the illegal harvesting of names from chat rooms without informing consumers," Tempest said.

"That's illegal under existing data protection laws. You're not allowed to collect information on consumers without telling them and giving them an opportunity to opt out."

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