In a statement released by the Treasury Department, Deputy Treasury Secretary Kenneth Dam warned that the proposal could unfairly discriminate against U.S. companies and cautioned the EU against approving the proposal before a global consensus emerges on the issue.
After reaching an agreement in principle on the proposal in December, the EU's Council of Economic and Finance Ministers (ECOFIN) is expected to take the next step toward final approval of the proposal on Tuesday.
"Each (EU country) has obligated itself in international treaties not to impose measures that discriminate against nationals of the other signatories," Dam said in the statement. "The EU proposal may be contrary to those agreements. The proposal may potentially be inconsistent with international trade obligations in the World Trade Organization."
But Jonathan Todd, a European Commission spokesman on internal markets and taxation, said that the proposal is in accord with internationally agreed upon principles on taxation, and that Dam's comments were simply giving voice to the complaints expressed by U.S. companies.
"It would be extraordinary and amazing if American firms were happy about having to levy the (value-added tax) for the first time," Todd said.
Dam's statement comes as the global consensus toward restricting Internet taxes appears to be shattering. Although Congress in November extended a ban on Internet taxes in the United States, the three-year extension was far shorter than supporters originally hoped it would be.
Meanwhile, with state revenues dropping with the economic downturn, many state officials, led by Gov. Mike Leavitt of Utah, have been moving to simplify state sales-tax laws and pushing Congress to allow them to collect taxes on e-commerce.
The EU requires digital goods to be taxed at the point where they are supplied. For example, an EU company that sells an MP3 file or an e-book to a U.S.-based customer is required to collect the EU's value-added tax (VAT). Meanwhile, a U.S. company that sells a similar digital good to an EU resident does not have to collect the tax.
Under the new proposal, digital goods would be taxed at the point of consumption, at least in cross-border sales. EU companies would no longer be required to collect VAT taxes on digital goods sold outside the union, while the EU would require companies based in the United States and other foreign countries to collect the VAT on digital goods they sold into the EU.
No break for small businesses
U.S. companies and industry insiders already have raised numerous objections to the proposal, noting that the definition of "digital goods" is fairly vague in the proposal and warning that small businesses may have a tough time complying with it.
Dam raised further objections to the proposal, warning that it could create an un-level playing field for U.S. businesses. Dam noted that unlike U.S. businesses that sell into the union, EU businesses will still be able to tax digital downloads sold within the European Union at the place of supply.
Thus, while a European company will be able to charge the same tax rate to every European customer, U.S. businesses will have to calculate the tax rate for each European customer who buys a download, based on the country they live in.
"U.S. sellers may be subject to more onerous administrative and compliance requirements than are placed on their EU competitors," Dam warned.
In addition, Dam noted that while some EU countries charge a lower VAT for books and newspapers, that same tax break wouldn't be available for digital versions of those products.
ECOFIN is expected to reach a political agreement on the tax proposal on Tuesday. But the proposal will still need to be approved by the European Parliament and by the parliaments of individual EU members before it will be formally implemented. That process could take up to 18 months.