Disagreements are growing between the US and European Governments over the charge of VAT to on-line sales unless a compromise is agreed.

The European Commission earlier this year, closed a tax loophole for US companies when they stated that they had to charge VAT for software and music sold over the internet. US companies were given the choice as to which country they chose to pay tax to.

However, until now many US companies have avoided paying this tax because existing legislation did not take into consideration trading over the internet.

European governments are now challenging the decision made by the Commission and this could lead to a trade war as this move is more than likely going to anger US software companies. The opposition stems from the fact that VAT levels vary across Europe from between 15% to 25%, there most companies are going to opt to register in Luxembourg where vat is only 15%.

Many European governments could lose out on tax revenues, ahd have thus stated that they want all US companies to register throughout Europe.

However, not all member states agree with this, this raised the issue for non-european countries that would also be discriminated against. The main objective of the commissions proposal was that there would be a common platform for taxation of digital e-commerce throughout the rest of the european community and beyond.