*US and EU Battle Over Privacy and Internet Taxation

BRUSSELS – The EU and the US are at loggerheads over two issues that deeply affect direct marketers and e-tailers – privacy and taxing the Internet.

Agreement on the first became unglued this month while the taxation issue was slammed on the table in the form of a proposed new EU directive issued in June.

On July 5 the European parliament passed a non-binding resolution asking the European Commission to re-open talks with the US over the so-called “safe harbor” provisions protecting data sent from the EU to the US from misuse.

In June, the EC issued a draft to put a Value Added Tax on all products loaded down directly from the Internet – software, music, videos and electronic information services.

It took two-and-a-half years to negotiate the set of seven “safe harbor” principles designed to meet demands in the EU’s data protection directive that data sent outside the EU receive “adequate” protection. The tax issue could take just as long to resolve.

The parliament’s action caught the EC unawares. Before the vote Commissioner Fritz Bolkestein, the man in charge of the internal market and responsible for both privacy and taxation, warned parliament that he wouldn’t go back to the negotiating table.

Afterward he wasn’t so sure and went off to consult with the other commissioners about the next move. No decision had been reached at press time but either way parliament’s action is seen as a “major setback” for a common US-EU approach to data privacy.

Although the resolution is not legally binding, Parliament could take the European Commission to the European court on charges of exceeding its mandate.

It could also argue that “safe harbor” is an international agreement and therefore must be ratified by parliament. The EC contends it is not, but merely in implementation of the data protection directive.

Parliament’s failure to vote “yes” or “no” on safe harbor left the EC to deal with a muddy and vaguely worded document that seemed to approve safe harbor provided several changes were made including these:

• Recognition of an individual’s right of appeal to an independent body regarding alleged violation of the principles.

• Obligation of firms that sign on to safe harbor to compensate individuals for damages.

• The delivery of an EC report within six months “on the proper functioning of the system.”

• Close monitoring of the safe harbor system.

At the Department of Commerce officials were tight-lipped, saying only they were watching closely how events would unfold at the EC, and issuing boiler plate statements that “the proposed safe harbor is the most effective vehicle for bridging our different approaches to privacy.”

At the American DMA International VP Charles Prescott said parliament’s concerns “were not unexpected given the data protection system in Europe” and he urged both sides to proceed with safe harbor “even if it is on a trial basis for a defined period of time.”

That may be one way out of it; certainly it would make sure that the flow of data from the EU to the US would not be interrupted. EC officials said that wouldn’t happen anyway since the two sides have a tactic understanding that nothing would be done so long as talks continue.

Industry representatives in Brussels tended to blame EC officials for parliament’s failure to approve safe harbor. “They weren’t out there banging on doors the way US lobbyists do in Congress urging passage,” one said.

Another expressed suspicion that EC bureaucrats deliberately held back, believing they could get more concession from the Commerce Department if another round of talks were held.

The vote, an official at the parliament said, was “a clear expression of what deputies felt and thought about safe harbor: for Europeans self regulation isn’t good enough. They are used to legislation. It’s a clash of cultures.”

The proposal to slap a VAT on Internet downloads ran into a buzz of opposition on both sides of the Atlantic. Deputy Treasury Secretary Stuart Eizenstat issued a statement expressing the administration’s “serious concerns with both the substance and the process” of the proposal.

The tax issue was being handled by the OECD which will come up with a proposal next year. Given the complexity of such taxation it is “critical” that proposals be developed “through a deliberative and inclusive process,” he said.

The DMA issued a statement urging the government to “vigorously oppose” EC plans to force companies “to levy value-added taxes on products and services sold via the Internet.

“Not only is the EC trying to press American companies into becoming their unpaid tax collectors, but adoption of this policy will have a detrimental impact on US exports to Europe,” said the DMA’s Senior VP for government affairs Jerry Cerasale.

But Europeans weren’t happy either. The Germans especially feared that their dot-coms would migrate to Luxembourg which charges Europe’s lowest VAT. Members of the German parliament criticized the proposal “as much too complicated.”

A commentator for the influential newspaper “Die Welt” called the proposal “a slap in the face of Europe’s new economy. The VAT would only hurt domestic companies. Online merchants from Silicon Valley or Tokyo could offer their wares on the net free of taxes.”

Like Eizenstat he recommended “creative, global and modest solutions” to the Internet tax problem and said that an Internet tax moratorium, like the one in the US, “is the least the new economy deserves.”

Bolkestein was unmoved. He told “Die Welt” that he was only interested in creating a level playing field for all Internet companies by removing the tax advantages non-EU e-merchants enjoyed.

“The proposal would put US companies on the same basis as European companies if they’re doing business in the EU,” one EC source close to the proceedings said. “This is not a solution to taxing e-commerce. It is not revenue driven. Enforcement is not simply a tax issue but applies to a range of issues from copyright to intellectual property.” Companies that want legal protection from piracy and other Web crimes need to operate inside Europe’s legal system.

The directive demands that all online companies selling to EU customers must establish an EU residency, collect the VAT and turn it over to the governments. Firms, he said, “will want to be good corporate citizens.”

The source said he was not surprised at the uproar but argued that current taxation “discriminates against European content providers, and by removing someone’s disadvantage you remove someone else’s advantage.”

France, which assumed the EU’s presidency for a six months term in July, has given the issue priority and will try to push the directive through before the end of the year, the source said, but admitted “that would be highly optimistic.”

Others say a year is too short, but Alastair Tempest, director general of the Federation of European Direct Marketing (FEDMA) and the industry’s chief lobbyist here said that “shooting it down will be very difficult.”

Once a directive is “floating around” it is hard to kill he said. “It might not get somewhere for some time but it will get somewhere some time. Eventually it will be enacted. It’s no whether but when.”

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