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En Garde, Transatlantic Callers

International Business: EUROPE


A French tax on "callback" services draws howls of outrage

Stephen Berkowitz won't be calling his parents in New York as often. The Paris resident had been using a U.S.-based callback service instead of France Telecom long distance. Berkowitz would dial his folks, hang up after one ring, and the service would call back with a U.S. dial tone and charge U.S. rates, about half of France's. Beginning this month, however, the French government plans to impose a 20.6% value-added tax on such services. Although a five-minute transatlantic callback call now will cost Berkowitz $2.43, vs. $4.20 using France Telecom, he is angry. "Europe's consumers are being abused," he says.

With the VAT, the French are trying to raise badly needed revenue and protect their state-owned phone monopoly before Europewide telecom deregulation kicks in next year. The tax will also support struggling Internet providers. But critics fear it'll spawn a black market in phone services and require Big Brother enforcement tactics.

BANNED IN SINGAPORE. Despite the risks, other European governments back the tax initiative. Germany plans to impose its 15% VAT on foreign callback services. On Jan. 22, the European Commission is expected to propose legislation letting its 15 members follow suit. Since customers who use European operators already pay a VAT averaging 20%, says an EC official, "we are just creating a level playing field." France alone could take in an estimated $40 million annually from the new tax.

Pioneered by small startups in the early '90s, callback has gone mainstream. Even giant AT&T has launched the service. Callback has made such inroads in Asia that several countries, including Singapore, have banned it. Total revenues are hard to gauge because most players are private, but C. Holland Taylor, president of USA Global Link, based in Fairfield, Iowa, says his sales rose to $240 million in 1996 from $94 million in 1994.

Collecting the tax will be tricky. Some callback operators say they'll add it to customers' bills, but it's not clear how the French will go after others. Telecommunications Minister Franois Fillon says that "payment of VAT will be based on a voluntary declaration." Otherwise, European officials may need to check records surreptitiously.

The new rules could also create a black market. Predicts David Chijner, a lawyer at Weil, Gotshal & Manges in Brussels: "You could see providers moving offshore to Caribbean islands, doing business for a few months, then moving a couple of hundred yards down the road--all to avoid the VAT."

Ultimately, the tax is just buying Europe's telecom behemoths a little time before open competition hits. Deregulation will quickly bring down the exorbitant costs of telephoning in Europe. But in the meantime, Europe's fiscally strapped governments probably will squeeze the consumer even harder.By William Echikson in Brussels, with Marsha Johnston in Paris

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