Striking formal and final agreement on the proposal yesterday (Tuesday), Brussels has in effect challenged the US to prove its claims that the law breaks global trading rules.
The EU will now insist that foreign exporters of digital products, such as music or computer software downloaded from the internet, should pay VAT, as the goods are consumed within the EU, a principle strongly resisted by the US.
In response, a US treasury spokesman threatened to refer the issue to the World Trade Organisation – America claims the ruling could be used to shunt non-EU firms out of the market.
‘The US is concerned about the potential for discrimination against non-EU companies in terms of the tax rates to be charged,’ the spokesman said.
The new rule means non-EU internet retailers wishing to sell in Europe must register in one of the 15 EU nations. Once the country has collected the tax it will distribute it throughout all member nations.
The scheme will come into force in July 2003 and will apply to software and online film or radio subscriptions.
The European Commission said the new rules were designed to protect EU-based internet retailers, who are already obliged to charge VAT on sales to customers within the EU.
A Commission spokesman said: ‘They will remove the serious competitive handicap which EU firms currently face in comparison with non-EU suppliers.’