Multifunction Devices Pose Tax Headache for EU Policymakers

When is a mobile phone not a mobile phone? When is a printer not a printer? These may sound like the sort of riddles you'd find rolled up in a Christmas cracker, but to IT manufacturers, judges and politicians in Europe these questions are no joke.

The answers will determine whether billions of euros of import duties need to be slapped on multifunction devices such as printer/scanner/photocopiers, LCD screens for PCs and TVs, or mobile phones that pick up broadcast TV signals or function as GPS tracking devices.

Roughly 12 years ago the world's biggest trading partners agreed that in order to boost the global economy, they would apply zero import duties on all computer-related equipment. They dubbed this the Information Technology Agreement (ITA).

Since then, however, there has been an explosion of innovation in the technology industry. As manufacturers compete to cram as many functions into their devices as possible, tax officials in the E.U. have started to question whether the zero-duty ITA is being stretched beyond its original intended purpose.

They have reclassified many devices, including printer/scanner/photocopiers, LCD screens and TV set-top boxes that contain a hard disk drive as products that should be liable for import duties ranging from 3 percent to 14 percent. And they are considering doing the same thing now with mobile phones that double up as portable TVs or GPS devices.

Not surprisingly, manufacturers are up in arms about the reclassification of their wares, and are fighting with every weapon in their arsenal. Printer manufacturers Hewlett-Packard and Kip took their grievance to the European Court of Justice in Luxembourg.

The court gave a complicated judgment in the case Thursday, advising national courts in the E.U. to consider a multifunction machine according to its main feature. If the main feature is printing or scanning, then the machine should not incur any import duties, because these functions are directly connected to a computer. If photocopying is what defines the machine, or if all three functions appear equally important, courts should count the machine as a copier and slap on 6 percent duty.

Early next year the Court of Justice will rule in a similar case concerning customs duties on LCD screens.

While the judges in Luxembourg were finalizing their ruling Thursday, civil servants and politicians in Brussels were meeting to discuss what to do about multifunction mobile phones. No decision is expected until early next year, but the Commission, the E.U.'s executive body, is eager to find a solution that all countries in the E.U. can apply.

Some E.U. countries including Germany and the Netherlands have already reclassified these devices so that they qualify for import duty of 3.5 percent. However, the Dutch government is expected to reverse the move according to Mark McGann, director general of the IT industry trade group, the European Information and Communications Technology Association (EICTA).

"I think the Dutch government fears a consumer backlash," he said.

While welcoming the change of heart in the Netherlands, McGann poured scorn on the confusion among E.U. policymakers.

While tax officials in the Commission and in the finance ministries of the 27 E.U. members debate whether to make the price of multifunction mobiles less attractive by applying import duties, the Commission's telecoms directorate is looking at ways to encourage the spread of TV broadcasting to mobile phones.

"We are witnessing a lack of joined-up government in the E.U.," McGann said, adding that efforts to increase taxes on mobiles are a form of punishment for innovators. "All manufacturers are cramming in functionality into their products. Slapping duties onto multifunction devices like mobiles amounts to freezing time on innovation."

The Commission is acutely aware of the mixed messages it is sending out to the mobile phone industry. While telecoms commissioner Viviane Reding is trying to encourage innovation in mobile phones, "finance ministries and tax officials have other priorities," said Reding's spokesman Martin Selmayr."There's a tension there that has to be addressed," he added.

Europe's drive to strip such devices of their zero duty status appears to be out of kilter with other parts of the world, including the U.S. and Japan. Both countries have filed formal complaints against the E.U. with the Geneva-based trade arbitration body, the World Trade Organization, claiming that the E.U. is flouting the ITA.

The E.U.'s response is to call for a broad discussion about the ITA with the view to updating it, but that approach isn't gaining much traction. The U.S. and Japan aren't the only countries opposed to this idea.

"There isn't much enthusiasm to re-open the ITA. The talks at the WTO are ongoing but complicated. More time is needed," said Commission trade spokesman Peter Power.

Many suspect that the E.U. is being encouraged to impose import duties on multifunction mobiles by local competitors looking for a competitive advantage, but EICTA's McGann dismisses this theory.

True, Nokia, Europe's biggest manufacturer, builds most of its phones in eastern Europe, he said. But most of the parts that go into the phones are imported from outside of the Union and therefore incur the duties.

The consequences of the Kip ruling at the ECJ, and its imminent ruling on duties for LCD screens, could provide the clearest signal for how the Commission should proceed. Power said officials in the trade department of the Commission are "examining very carefully the possible implications of the case."

The IT industry hopes that the two cases will provide it with powerful ammunition with which to attack the Commission.

McGann's initial reading of the ruling Thursday is that it allows for most printer/scanner/copiers to remain duty free.

"The Commission appears to be losing the argument both in Luxembourg and Geneva. We say it should resolve this situation once and for all: honor the letter and the spirit of the ITA. As products evolve into multipurpose devices, err on the side of consumers and innovators, and not on the side of the E.U.'s coffers," he said.

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