8, rue Murillo
75008 Paris, France
Contact: Mr. Michel Béjot
Tel: 33.1.43.18.8080
Fax: 33.1.43.18.8090
Email: bejot2@aol.com
Website: www.bhbfrance.com

DVAT ON ONLINE SERVICES IN THE E.U.
By Michel B?jot

As of July 1st, 2003, companies located outside the E.U. which sell online services and products for download to E.U. consumers will have to pay value added tax (VAT) on such services.

On the opposite, E.U. companies selling online services outside the E.U. do not have to pay VAT.

This new system is likely to have major consequences for U.S. businesses which deal with consumers located within the E.U.

1. Why this new system?
This new system originates in the E.U. directive 2002/38 of May 7, 2002. The aim of this directive is to re-balance commercial relationships between E.U. countries and the U.S. The previous system caused a distortion in the competition between these countries, since European selling companies had to charge VAT whereas American companies did not have to, and were thus able to offer more competitive prices to E.U. consumers.

2. Which transactions are concerned?
Only online services and downloaded products are concerned by the directive (e.g., online supply of software programs, Internet providers' services, etc.). As a consequence, traditional goods sold online such as books do not fall within the scope of the directive. Moreover, traditional services such as advertising or legal advice are not concerned, even if provided online.

Only sales to E.U. consumers, as opposed to BtoB operations, fall within the scope of the directive.

3. How will it work in practice?
Under the new system, businesses located outside the E.U. will have to charge the VAT rate applicable in each E.U. country where its customers are located. This will lead to the application of multiple rates, which vary from one country to another (approximately from 15 to 25%).

For practical reasons, the directive allows foreign businesses to register themselves in an E.U. country of their choice, where they will declare and pay the VAT collected from deals conducted with E.U. consumers.

Businesses will be free to choose whether or not they want to increase their prices to cover the extra charges incurred.