Freeserve may leave the U.K.

  07/31/2001 2:08:33 PM MDT Albuquerque, Nm
  By Dustin D. Brand; Owner AMO

Issuing an ultimatum to the British Government, Freeserve may leave.
  Charge us the same tax which you charge AOL - or we'll leave the U.K. - Freeserve says to the British government in their ultimatum.

  Freeserve is currently the U.K.'s largest Internet Service Provider, even over AOL Europe. Freeserve charges that AOL Europe, one of its largest rivals, avoids paying the European value-added tax, or VAT, on its services because it is a U.S.-based company. In effect, this gives AOL a margin advantage of 17.5 percent over Freeserve and other U.K. providers.

  "I can't think of any other company that is getting that kind of advantage over U.K. companies," Freeserve CEO John Pluthero said in an interview. "We don't ask Honda to come over here and sell its cars without paying tax."

  Freeserve said it discovered the tax anomaly in a recent Merrill Lynch analyst report. According to Merrill, for every 100,000 U.K. customers who pay a flat rate for Net access, AOL earns $3.7 million more than its rivals by avoiding the tax. Over the last four years, Freeserve estimates that AOL has saved nearly $90 million by avoiding the tax.

  Freeserve contacted a law firm called Olswang, which determined that AOL has been able to skirt the tax thanks to a 1997 ruling by the customs and excise office. That ruling stipulated that a non-British ISP did not have to pay the VAT if it primarily offered content, rather than telecommunication services. A Freeserve spokeswoman labeled the ruling "out of date," arguing that both case law and European Union directives have superseded the ruling.

  Pluthero made it clear that he was not accusing AOL of any wrongdoing. "I don't blame them at all," he said. "I would have done exactly the same thing in their situation."

  In a statement, AOL Europe said that it "complies fully with all applicable laws in all territories." It added: "In keeping with the ruling of U.K. tax authorities, AOL is treated as a provider of information services from outside the European Union, a status available to any other similarly positioned service provider."

  Freeserve's charge against AOL comes amidst a fierce battle for customers. In a campaign running in British newspapers this week, AOL attacks Freeserve for not providing its users with a free help line. AOL has more than one million customers in the U.K., who pay a flat fee of about $21 a month; Freeserve has 2.1 million, who pay for services at differing rates.

  Pluthero said that he would be meeting with customs officials next week to follow up his complaint. If the situation was not resolved quickly, he said, he would pull up stakes and move his servers outside the EU. Late last year, the French ISP Wanadoo purchased Freeserve. Pluthero noted that Wanadoo has operations in many locations outside the EU, including Algeria and Morocco, and that he could provide services from there.