Net Results/Jamie Smyth: Collecting taxes is never a simple process in Ireland as Ray Burke's appearance at Dublin Circuit Criminal Court this week demonstrated.

And judging by the scores of names published quarterly in the Revenue Commissioners "name and shame" publication Iris Oifigiúil, tax dodging remains a problem throughout the State.

In the face of this reluctance to pay tax (a fact which many commentators blame on our postcolonial past or excessive tax rates set in the early 1980s) it is small wonder that the tax authorities have turned to technology to encourage greater compliance.

The Revenue Commissioners spent €31 million last year on IT systems and the expansion of its tax payments site, www.ros.ie, has been a huge success. The theory is that by making it easier to pay taxes, the Revenue will encourage companies and people to cough up.

Since going online in September 2000 the www.ros.ie service has processed €15 billion in taxes for the Exchequer. But although the www.ros.ie system is considered to be among the best in the EU, it is failing to tap into one potential honeypot of new revenue: VAT collected by US firms selling digital goods into the EU.

Firms based outside the EU that sell digital products such as music or software to European citizens have been forced to levy VAT on sales since July 2003 under a new European directive.

The directive is an attempt to level the playing field between US e-commerce firms - who were not previously forced to levy VAT for European sales - and firms based in the EU who were.

To some extent it has worked by forcing more than 150 non-EU firms - the vast majority of which are American - to register for VAT in at least one EU State. By enforcing this, the EU has removed an unfair situation whereby firms, such as AOL, did not charge VAT to its British ISP customers, whereas Freeserve, which is based in the EU, did.

This is clearly good news for European e-commerce firms but it also offered the Irish Government an opportunity to build on its policy of becoming an "e-hub" by actively pursuing US firms to register for VAT in this State.

Ireland is well placed to serve as the processing house for VAT due to the Revenue's advanced IT infrastructure, our use of English and the presence here of many US firms' finance units.

But all these advantages have so far failed to persuade non-EU firms to locate their business-to- consumer operations in Ireland and register for VAT. Just eight firms have registered in Ireland since the directive came into force as multinationals choose alternatives as their e-commerce hubs.

In a worrying development for Ireland Inc, Microsoft recently chose Luxembourg as its centre for all business-to-consumer transactions in Europe.

Mr Joe Macri, Microsoft Ireland's chief executive, makes no bones about it - Ireland lost out primarily due to the high rates of VAT charged in the Republic.

Ireland's 21 per cent VAT rate is considerably higher than the 15 per cent rate levied on digital sales in Luxembourg. It is also higher than rates in Germany (16 per cent), Spain (16 per cent), Portugal (17 per cent), Britain (17.5 per cent) Netherlands (19 per cent) and France (19.6 per cent).

Under the terms of the new VAT directive for digital goods, non-EU firms have the option of charging consumers the VAT rate that is appropriate in their State or to register in a particular country and charge its VAT rate.

Many firms are choosing the latter option. Not surprisingly Luxembourg with its low VAT rates is now a favourite location for US firms that are eager to achieve competitive advantages over rivals.

The Enterprise Strategy Group recently highlighted that this makes Ireland less attractive to foreign firms that distribute business-to-consumer services electronically - a key sector identified by the IDA Ireland for its growth potential.

The new EU directive on VAT also unfairly penalises Irish e-commerce businesses, which must levy VAT at 21 per cent for sales to the EU when their US rivals can levy just 15 per cent if they are registered in Luxembourg.

Marking up digital products by 6 per cent is clearly not viable in the borderless electronic world of the web where consumers can choose any website to buy from.

The Enterprise Strategy Group recommends lobbying the EU to have business-to-consumer transactions charged at the standard rate in the consumer's location.

This is an obvious solution to the problem and one that the technocrats in the Commission probably should have written into the original directive. But it is a solution that will take years of negotiation at European level before it is implemented. And in the intervening years it is likely that Ireland will have lost any chance of becoming a genuine hub for consumer ecommerce.

Instead, the Government should take an aggressive stance on VAT on digital goods in the budget and propose reducing the rate to 15 per cent until a common EU platform can be agreed upon.

This approach is not without precedent given the decision by Minister for Finance, Mr McCreevy, to reduce VAT rates from 21 per cent to 20 per cent for a single year in 2001. At the time the reduction was proposed as a way of promoting e-commerce.

Any move to reduce the rates for digital goods may increase the amount of VAT collected by the Exchequer by attracting more US firms to Ireland. A decision to do nothing could undermine the State's policy to build a real e-hub.