The European Commission (EC) is to change the rules for VAT on software delivered over the Internet by attempting to impose the tax on non-European Union (EU) companies.
At present, non-EU firms can offer Internet downloads to European customers without coming under EU tax laws. Under the proposed law, non-EU firms generating more than 100,000 euros (£63,350) in electronic sales to European customers will have to register for VAT in an EU state.
The EC says it will also level the playing field for European firms, which have to pay VAT on all electronically delivered services, by exempting from VAT those for consumption outside the EU.
Frits Bolkestein, EC taxation commissioner, said these amendments will help European companies delivering software services over the Internet.
"By modernising the VAT system to address the electronic delivery of services, we will ensure that all stakeholders are able to participate on a fair basis."
Leading US politicians and business figures have voiced their opposition to the plans.
The EU may find it difficult to enforce its proposals if non-EU firms refuse to register for VAT in a member state, because until they do so, European courts have no jurisdiction over them. Proving downloads have taken place is also difficult. Downloads from US Web sites do not carry an agreement on where tax is payable.
The changes are unlikely to be approved before the end of the year.
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