As the European Union this week started imposing value-added tax on electronic products and services supplied by non-EU firms, many small companies outside Europe fear that the levy will compromise their ability to serve EU consumers.
The main worries are the administrative headaches and extra costs that non-EU companies will have to bear in complying with differing VAT rates, depending on the country where their customer is located. Another concern is possible exposure to double taxation in the country of origin and the country of destination.
While the purpose of the directive is to enable European online firms to compete on a level playing field with non-EU companies, business representatives predict the opposite effect for thousands of small non-EU companies that lack the resources to set up shop inside the EU.
Products affected by the directive include downloadable software, database access, distance learning materials, e-books, music and the like. Previously, non-EU companies supplying these items to EU customers were not subject to VAT in the EU - and EU companies saw this as an unfair competitive advantage.
Unless a non-EU company establishes a physical presence in an EU country, it will now have to levy VAT at the rate applicable in the country where the consumer is located. VAT rates charged in EU countries range from 13% to 25%.
ICC e-commerce specialist Ayesha Hassan said: "The root of the problem is the extra burden imposed on non-EU firms of verifying customer location, retaining the data of transactions for 10 years and making it available to authorities in so many different tax authorities."
Speaking for the International Chamber of Commerce (ICC), Talal Abu-Ghazaleh said: "Tax policy reforms should not create new distortions in the marketplace, nor should they discourage innovation and the growth of e-commerce. A global perspective is required when addressing this subject, since electronic commerce cuts across national boundaries to a greater degree than other forms of business."
Mr Abu-Ghazaleh, a Jordanian businessman who chairs ICC's Commission on E-Business, IT and Telecoms, added: "The EU authorities seem to be disregarding the fact that most firms that will be affected by the new requirements lack the technical means to comply with 15 - soon to be 25 - different tax regimes."
