Overseas internet retailers may see their push for profit in Europe derailed by a new EU directive requiring all internet firms to account for value added tax, or VAT, on "digital sales".
The law, which comes into force at the beginning of next month, adds a 15-25 per cent levy on select internet transactions such as software and music downloads, monthly subscriptions to an internet service provider and on any product purchased through an online auction anywhere in the 15-member bloc.
European dotcoms have been charging customers VAT since their inception. Their overseas rivals though have been exempt, making foreign firms an obvious choice for the bargain-hunting consumer. "It's a massive competitive disadvantage. It's good to see at last it being eroded," said Mr David Melville, general counsel of UK internet service provider Freeserve.
The affected firms are handling the new tax load in a variety of ways. AOL Europe has moved its continental headquarters to Luxembourg, one of the EU's cheaper tax regimes.
Amazon is still assessing changes to its charge structure while online auctioneer eBay will swallow the VAT in its smaller operations - such as those in France and Italy - but has raised its fees where it has a larger and more profitable presence, such as Britain and Germany.
Analysts say the new tax could dent sales in the short term, a blow for US dotcoms banking on higher growth in their overseas business.
