US Treasury to Unveil tax scheme for cyberspace

The US Department of the Treasury soon will unveil a plan for taxing digital content sold and delivered over the Internet to overseas buyers. The new tax policy, currently applied only to over-the-'Net sales of software but next year expanding to include all digitised content, would eliminate the double taxation companies now face: They have to pay taxes to the US and foreign governments for goods sold abroad. Under the plan, US-based companies will have to pay income tax to Uncle Sam for digital content but no royalty taxes to foreign governments. While this could swell US tax coffers, the Treasury's cyberspace tax plan may not bring the same blessings to other countries because the US leads the world in copyrighted Web content and Web merchandising.

The US Department of the Treasury soon will unveil a plan for taxing digital content sold and delivered over the Internet to overseas buyers.

The new tax policy, currently applied only to over-the-'Net sales of software but next year expanding to include all digitised content, would eliminate the double taxation companies now face: They have to pay taxes to the US and foreign governments for goods sold abroad.

Under the plan, US-based companies will have to pay income tax to Uncle Sam for digital content but no royalty taxes to foreign governments. While this could swell US tax coffers, the Treasury's cyberspace tax plan may not bring the same blessings to other countries because the US leads the world in copyrighted Web content and Web merchandising.

''The proposed regulations would say that downloading software in Germany as a single copy is analogous to a sale of goods and only taxable in the US,'' said Treasury attorney Bruce Cohen, leading the team of experts now finalising the rules that will be issued by year-end. ''In the future, you would not have to pay foreign income tax.''

Similarly, a German company such as Software AG would not pay US tax if a person in the US downloaded a single program from its Web site, he added.

''In a sense, the German tax comes out of the US Treasury,'' he said.

Though the new rules originally were focused mainly on software sales, the Treasury has decided it will apply the same principles to digitised content.

''We're going to treat all types of content the same,'' said Cohen, adding that the Treasury still is trying to determine whether some types of digitised content could represent a service rather than goods - an important point because they are taxed differently.

The Treasury's new policy stance, which also applies to the sale of more tangible items such as shrink-wrapped software or CDs, seeks to tackle the thorny problems posed by Internet-based electronic commerce.

Web storefronts that accept credit cards can easily sell goods internationally. Digitised goods could be downloaded over the 'Net and bypass foreign postal systems and custom points, making it hard for tax authorities to hold the buyer accountable for a tax on the goods.

The US hopes to get support for its tax plan from trading partners in Europe and Asia, but the US may move ahead unilaterally with the rules even if that support is not forthcoming, Cohen said.

In Europe, there is bound to be unease about the plan because the US leads the world in Internet use and the sale of copyrighted works of all kinds.

Largely to counter this preceived American hegemony, European nations have discussed imposing a ''bit tax'' on all information that Internet users download from abroad. The bit tax would impose a small charge for all data downloaded off the 'Net, whether it was purchased digital content or not. Internet service providers would serve as the toll booths for the European tax authorities, keeping track of how much data customers downloaded.

This plan does not seem to have serious momentum.

But Europe is worried about US predominance on the Internet, said Patrick Vittet-Philippe, advisor for electronic commerce, multimedia content and business issues at the DG-13 telecommunications division of the European Commission.

''We are at a disadvantage vis-a-vis the U.S. competition,'' said Vittet-Philippe. ''Our worry is to make sure our existing tax base, especially the value-added tax (VAT), is applied to Internet sales.'' The VAT constitutes about 30% of all taxes collected by the state.

Some US-based companies also are worried about the pending cyberspace tax plan. Roger Cochetti, an IBM attorney, said IBM welcomed the Treasury's effort to remove ambiguity from the current tax law. But he warned that the plan might encourage some countries to set themselves up as international tax havens for companies trying to avoid the cyberspace tax.

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