Europe is set to go ahead with a plan to tax digitally delivered products sold by non-EU companies to EU citizens. The current proposal is for Value Added Tax to be levied on downloaded software, music, video and the like for a period of three years, pending the development of a global tax system covering digitally delivered products.

That last bit may be a tad optimistic, but possibly not much more optimistic than the EU's view that it can successfully enforce taxation on overseas companies trading via the Internet. VAT, our readers in the US and in other non-EU territories should be aware, is to an extent similar to US sales tax. Its level varies from state to state and product to product, and matters are complicated further because businesses registered for VAT (this is compulsory once you achieve a certain level of turnover) can claim back the VAT they've paid on goods they've purchased.

This is complicated some more, when it comes to cross-border trade, because the VAT is paid in the country of delivery of goods or services, rather than in the country of sale. So you don't pay VAT on stuff you buy in the EU countries you don't live in, but on the other hand you do. Got that?

It could well turn out to be just a tad difficult to persuade overseas traders to get it. But there is a logic to Europe's desire to enforce taxation on the web, and the issues Brussels is trying to address also exist in the US to some extent. If you don't levy tax on stuff sold on the web, then you're disadvantaging bricks and mortar traders who have no choice but to pay VAT or local sales tax. And if you don't tax vendors equally, then companies domiciled in low- or no-tax regimes can undercut local vendors. We respectfully point to the matter of alleged international tax avoider AOL as example.

So the US 'no web taxes' policy maybe counts as sticking your head in the sand. Not, of course, that this means the EU one isn't pie in the sky.

It's intended to go like this. Non-EU companies selling more than E100,000 per annum into Europe will have to register for VAT. They will ordinarily do so in the first European country they're doing business in (presumably, after they pass the threshold), and their VAT will then be administered from there. VAT will be levied, however, according to the rate in the country of delivery. This will also apply within the EU, the objective here being that low indirect taxation rate countries will not be able to undercut local traders in high ones. Registered traders will also need to be able to differentiate between VAT registered and non VAT registered customers. All this will be done electronically.

Ah, you say, but how are they going to get me? This is indeed a tricky one, and it is by no means answered by the draft directive on the subject, which you can pick up here. Our friends in Brussels waffle on wistfully about tools, audit trails and enforcement, but fail to come up with anything that could even be termed slightly convincing evidence that European tax authorities will be able to find the vendors, never mind take a cut from every last eligible download.

But although Mom & Pop's Linux Store in Nobhead, Nebraska is probably safe for a few years yet, the big music and entertainment companies, big software and music stores and - oh yes - ISPs with a creative approach to taxation will surely have to turn themselves in. They're big targets, they've generally got local assets that would be threatened if the revenuers played hardball, and even if they don't they could quite possibly be pursued in their home country. So listen out for howls of pain from the big US software and entertainment outfits, and for menacing noises from US trade negotiators. ®