Tax competition, using low tax rates to attract business, is something of which the Republic has been accused in the past.

Something similar may be happening online, as the EU and the US take divergent positions on the taxation of online sales.

Last month President Bush signed a law that will extend a moratorium on applying sales tax to internet-based sales in the US until 2003. This law is controversial.

In the past year it is estimated to have cost individual US states (which rely upon sales taxes) between $13 billion (€14.6 billion) and $26 billion in lost revenue. At the same time, the EU is working on a draft directive on VAT applied to services supplied by electronic means. This proposal provides that VAT will be charged on anything supplied electronically on a commercial basis and this will be treated as a supply of services.

This makes it clear that online sales of software, sports results or data processing over the internet will definitely be subject to VAT within the EU. So all European suppliers of commercial internet-based services will have to start charging VAT, if they are not already doing so.

Tax laws are highly complex. If websites are liable for VAT then they will have to spend money complying with the law.

An internet-based operator is by definition operating electronically. It should, therefore, be possible to automate much of the process of VAT collection, which may limit the costs.

To this end the EU is proposing that all the administration in relation to VAT will be done electronically and the Revenue Commissioners are already making strides in this direction at www.revenue.ie.

The directive is important. If the internet remains untaxed then EU member-states will not collect significant tax revenues as Europe slowly goes online.

Dissent has emerged, however, notably from Britain. Its objections focus upon the most controversial section of the proposal, which deals with the taxation of sales by non-European websites to Europeans.

An Irish site that charges 20 per cent VAT will find it very difficult to compete with one based in the US whose prices are free of VAT or sales tax.

British internet service provider Freeserve is threatening to sue the British government or move its sites outside the EU if this anomaly is not dealt with. It points out that one of its rivals, AOL, is able to sell products to its customers VAT free via its US parent company.

The solution proposed by the EU is that websites based outside the EU should collect VAT in respect of sales to EU residents. This would mean that a non-EU-based site would gather information on their customer's geographical location to see if they are liable for VAT.

For the EU to propose the handing over of personal data en masse to non-European retailers raises serious data-protection issues and may discredit the Data Protection Directive.

This personal data might be gathered from electronic signatures, such as mandated by the Republic's Electronic Commerce Act 2000, and may discourage European use of such technologies.

Britain's objections to the proposed directive are that compliance would be difficult and enforcement impossible. It believes the system proposed by the EU would be complex, expensive and difficult to monitor. Instead, Britain has proposed a short-term moratorium on taxing e-commerce sales and, in the long-term, suggests an internationally agreed system could be developed in cooperation with the OECD.

A major defect with the proposal is that it does not explain how non-EU sites will be persuaded to collect the taxes of EU member-states, although it does suggest that international tax treaties may help.

Incentives might be given to non-EU suppliers, such as allowing European consumers and businesses to be charged more than those in the US or elsewhere.

Negotiations are continuing on what are highly complex issues of law and technology.

There may be no agreement for a year or more but this proposal may not dispel perceptions that Europeans pay more for goods and services than their US counterparts.

This perception may become stronger following the recent decision of the European Court of Justice in Levi Strauss v Tesco, which makes it much easier for brand owners to prevent supermarkets and other retailers from importing jeans and other branded goods from cheaper locations such as the US.

Denis Kelleher is a practising barrister and co-author of Information Technology Law in Ireland (Butterworths: Dublin). http://www.ictlaw.com