Millions of users who enjoy low cost tax-free international phone calls and Internet access may soon lose out, if the European Union member states are given permission to impose VAT on non-EU telecomms suppliers.
Service providers based outside the EU are likely to be hit, including online groups such as America Online and Compuserve plus those offering callback or charge card telephone services.
All the member states have put in requests to the European Commission to permit a derogation of the 1977 EU VAT directive, which requires EU-based telcos, but not outsiders, to tax customers. Derogation will allow each member state to effectively break the law and impose their own VAT laws. France has already decided to charge customers who use the services of non-French telcos a levy of 20.6 per cent.
The Commission is also working to agree on a draft legislation that would change the current law.
In the UK, the Department of Trade and Industry and Custom & Excise have been calling for the loophole to be plugged for two years. The 20-year-old directive does not take into account overseas-based telecomms suppliers, which have subsequently been allowed to compete in an almost deregulated EU market.
A spokesperson for Custom & Excise said that, once the derogation has been agreed, UK customers will be liable to pay tax no matter where they source their telecomms services. This closes a loophole that is costing the UK #10 million in undeclared taxes, he said. It also levels the pricing playing field for EU-based telecomms service providers. Non-EU suppliers have been able to offer EU customers tax-free services because customers sign contracts with their head office based overseas.
The Commission is expected to agree the draft legislation on 22 January. After that it will be forwarded to EU finance ministers for consideration in the next few months.
A change to the directive would particularly harm callback operators. They allow European customers to make low cost international calls by routing them via a country with cheap international dialling rates - usually the US. They then cut the call cost even further because customers are billed from where the calls are made, and so are not subject to European VAT. Calls can be up to 60 per cent cheaper than when using European suppliers.
US-owned MFS does not offer callback facilities but its customers currently do not have to pay VAT because their contracts and services are provided by MFS? offices in the US. It is fully licensed in the UK to offer telephony services to the finance sector. A UK spokesperson said: ?We will continue to operate as we are. It would be the responsibility of our customers to gross up their invoices to include VAT and declare as necessary.? However, unlike other industries, the finance sector is exempt from being able to reclaim tax.
Similarly, Compuserve?s customers do not have to pay VAT because the paperwork is done in the US. A spokesperson said the company would do what is necessary to comply with the law if the legislation is changed.
Swift Call offers tax-free international calls to UK residential customers and is registered in Jersey. A spokesperson said it is examining how changes in legislation would affect its operations but said: ?This is a very competitive market and we would not pass on the cost to the customer.?
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