Europe is considering closing a loophole that allows ISPs and e-commerce operations to pay less tax.

In a proposal published last week the European Commission said it wanted to ensure a "level playing field" concerning VAT (Value Added Tax).

One of the proposed reforms highlighted in the document was the "abuse" whereby operators base their businesses in the Azores or Madeira, a move which results in them playing less VAT.

Last year, for example, UK ISP Freeserve moved its business for its Anytime unmetered ISP service to Madeira to take advantage of the island's 13 per cent VAT rate, as opposed to 17.5 per cent in the UK.

However, the EC believes such moves aren't on and reckons that the lower VAT rate "must be strictly limited to goods and services giving rise to consumption in those territories".

Said the document: "Recent experience has shown that the current derogations can give rise to abuse: for example, there have been cases of businesses in the e-commerce and telecommunications sectors moving to the Azores and Madeira in order to apply the lower rates applicable there to services they supply to final consumers throughout the Community.

"Steps must be taken to put a swift end to such practices as they are a misuse of the derogations which were granted solely to allow the Member States concerned to take account of the remoteness and special geographical situation of those regions," it said.

Freeserve - which has fought a long running battle over a loophole that, until recently, meant that AOL UK was exempt from paying VAT - was quick to comment.

Said a spokeswoman: "Lets not forget that Freeserve wouldn't be in Madeira in the first place if it wasn't for the fact one of our competitors was able to take advantage of not just differential VAT rates in the UK but not paying any VAT at all.

"Now that loophole has been closed the EC are looking at Madeira and the Azores but the current situation isn't likely to change for years to come.

"We would suggest that as the market for ecommerce continues to grow, the sensible solution would be to apply a common VAT rate for all online transactions across Europe." ®

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