An article in The Guardian this weekend claims that the recently announced UK budget includes a provision “making sure that internet downloads are taxed in the country where they are purchased, meaning web firms such as Amazon and Apple will have to charge the UK’s 20% rate of VAT. At the moment they are allowed to sell digital downloads through countries such as Luxembourg, where the tax rate is as low as 3%.”
Currently, all major companies that sell digital content in the EU siphon that money through the complicit little country of Luxembourg to save a lot on VAT. According to the budget document, “…the government will legislate to change the rules for the taxation of intra-EU business to consumer supplies of telecommunications, broadcasting and e-services. From 1 January 2015 these services will be taxed in the member state in which the consumer is located, ensuring these are taxed fairly and helping to protect revenue.”
There’s something I don’t get, however. As far as I understand EU taxes – and I collect and claim VAT for my professional expenses, so I do know how it works – no single country can decide what will happen in other countries. So if this change were to be made, it would have to be an EU decision, not one made by a single country.
Intra-EU goods are charged the rate of VAT of the country where a business is based, and there happen to be lots of businesses in Luxembourg. However, the 3% VAT rate in Luxembourg only applies to books; other digital items are taxed at 15%, and that rate is increasing to 17% in 2015. Amazon UK has a help page about VAT rates which states:
Sales of digital products and services including Kindle content, Amazon Apps, Software & Digital Games (including prepaid gaming cards), MP3 downloads, Cloud Player, and Cloud Drive are shown inclusive of Luxembourg VAT rates of 15% (3% for e-books).
Unfortunately, The Guardian chose to simply say “as low as 3%,” rather than to go into detail about the actual VAT rates charged.
So there’s no worry that music or apps will cost 20% more, as some news outlets are claiming. If anything, they may see a 5% increase, but it’s more likely that large companies, such as Amazon, will just eat the difference for now, to not disturb the round numbers they use as prices.
As for Apple, it’s a different story. They charge 23% VAT on certain purchases:
The VAT rate for Apple customers who purchase Electronic Software Downloads or other Apple products which are classified as services under EU VAT law will be 23% Irish VAT. This is because the place of supply of these products under EU VAT law is Ireland as the country from where Apple Distribution International makes these supplies.
However, this only applies to items Apple sells through their online Apple Store, not the iTunes Store, which is taxed via Luxembourg. For example, if you purchase a developer account, or iCloud storage space, you’ll be billed at 23% VAT. But all iTunes Store purchases get the Luxembourg rate; at least until next year, when they’ll be billed at the local rate.
It’s worth noting that Luxembourg is one of the countries with the lowest VAT rates on ebooks. Most countries – including the UK – charge VAT on ebooks as though they were apps or music, not the same rate they charge on physical books. However, ebooks should soon cost less in the UK. They currently get hit with 20% VAT, and an EU rule is harmonizing VAT rates for print and ebooks in the near future.
But it’s certainly a good thing that these companies will pay VAT in the countries where they make their sales. This is logical, and it should never have been otherwise. Now, if only governments can get these companies to pay income tax on the profits they make in each EU country…