New Tax Rules in the EU Will Wipe Out Amazon’s Tax Loophole

New Tax Rules in the EU Will Wipe Out Amazon's Tax Loophole Taxes Starting in 2015 the European Union is going to change the rules for tax collection, and the new rules are probably going to help level the playing field in the European ebook markets.

According to the Luzme ebook blog (and confirmed on an official EU website), European web retailers are going to have to change how they collect VAT for electronic services (this includes ebooks) sold to EU customers. The retailer is now going to have to charge customers based on where the customer lives, and not where the retailer operates.

That is going to make things more complicated for a lot of small businesses by requiring that they track and collect numerous tax rates, but it is also going to eliminate one of Amazon's advantages in the European ebook markets.

As you probably know, Amazon has been running their EU ebook operations out of Luxembourg so they could take advantage of the low tax rate that the Grand Duchy collected on ebooks and digital services. Luxembourg only collects a 3% VAT on digital services like ebooks - far less that the 15% to 20% tax rate found in most EU member countries. This tax rate is in fact low enough that it has been described as illegal under EU regulations, though I don't know that any action has been taken against Luxembourg.

Amazon has been taking advantage of that tax loophole for a couple years now, and so have a number of other companies including Kobo, Apple, Google Play, Bilbary, etc. If the new rules take effect then they all will lose this advantage in another 15 months.

TBH I'm not sure Amazon will be impacted all that much; they'll just pass the costs along to customers. But Amazon's smaller competitors might feel the weight of extra paperwork. Luzme reflected on this, and they raised several good points:

And at the end of the VAT quarter, do we pay those amounts separately to each countries’ equivalent of our HMRC? Or pay it just to the UK HMRC? Who knows? Apparently, full guidance on this hasn’t been issued yet. Which makes it rather hard to implement…

What madness is this! Wasn’t the point of the EU to make it easier to do business with each other? not more complicated?

In which case, why have they decided to make it so much easier for a non-EU company to sell into the EU market; than for someone to do it from within?

Nate Hoffelder

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Nate Hoffelder is the founder and editor of The Digital Reader: He's here to chew bubble gum and fix broken websites, and he is all out of bubble gum. He has been blogging about indie authors since 2010 while learning new tech skills at the drop of a hat. He fixes author sites, and shares what he learns on The Digital Reader's blog. In his spare time, he fosters dogs for A Forever Home, a local rescue group.

18 Comments

  1. fjtorres18 September, 2013

    Amazon is prepared to deal with 5000 separate sales tax regimes in the US, each with separate reporting, auditing, and payment schedules. So dealing with 30 VAT regimes will be trivial for them.
    On the other hand, given the fragmented nature of ebook retailing in the EU regions, compliance costs will be a bigger burden to their smaller competitors.
    This move is strictly about trying to collect more taxes, not about competitive balance.
    If anything, Amazon and Kobo will welcome this move.

    Reply
  2. flyingtoastr18 September, 2013

    I love how everyone is always so worried about Amazon having to keep track of differently taxed areas as if websites like BN.com and Wal Mart haven’t been able to handle it for more than a decade.

    Reply
  3. Jussi Keinonen18 September, 2013

    As a sidenote, this also affects all Apple operations (technically located in Lux) in Europe, not just the iBookstore but iTunes and the AppStore as well. And Google Play.

    Reply
    1. Nate Hoffelder18 September, 2013

      That is worth noting in the post. Thanks!

      Reply
  4. Ralph Hummel18 September, 2013

    Actually the directives state that the tax will be collected by tax office where the merchant is incorporated. Each country then disperses the collected VAT to the appropriate member state.
    Each country can implement reporting and collection procedures as they see fit.
    So apart from knowing where a customer resides and including that information when paying the VAT to the local tax office, there does not seem to be too much paperwork involved. Nothing a good accounting package can’t handle.
    Even small merchants should be able to deal with that, the investment is relatively small compared to the set-up cost of their web-services, server charges, programming cost etc…

    Reply
    1. Nate Hoffelder18 September, 2013

      Luzme said that point wasn’t clear, and TBH I was befuddled by the bureaucratese, so thanks for the clarification.

      Reply
  5. Puzzled18 September, 2013

    I predict a massive increase in geoporation in the EU starting in 2015.

    The number of ebook buying Luxembourgers will be a vast multiple of its actual population of 500,000.

    Reply
    1. fjtorres18 September, 2013

      Heh.
      ebook tourism…

      Reply
  6. Samantha18 September, 2013

    Wouldn’t this hurt smaller retailers more than Amazon? Amazon has the infrastructure and money to deal with this. It’s the smaller businesses that will struggle with it. I don’t see how it will level the playing field–clear the playing field for Amazon, maybe.

    Reply
    1. Nate Hoffelder18 September, 2013

      It will raise the prices Amazon will have to charge, which is supposed to give their smaller competition a better chance.

      Reply
      1. fjtorres19 September, 2013

        You know, that is just an assumption.
        Amazon might just eat the extra cost (it won’t amount to much once their beancounters earn their keep).
        In my old neighborhood the county passed a special “sin tax” on alcoholic beverages to be added to the sales tax to help fund a local boondoggle project and discourage boozing.
        Neighboring counties didn’t have the sin tax so drinkers just jumped the county line. After a few months, the in-county liquor stores started advertising “We pay the sin tax for you”. After a year or so of eating the sin tax, most stores just cut staff. A study of the new balance found the county barely broke even; the loss of income tax offset the sin tax.
        The law of unintended consequences shows up in the oddest ways.

        Reply
  7. Mike Perry19 September, 2013

    Unfortunately, this will do nothing to encourage European countries to reduce their high and hidden-to-consumer VAT. I’ve been told that it’s illegal for a retailer to even tell a customer how much of their purchase price is VAT. It’d tick people off.

    If it wanted, the EU could reduce the burden of this on small business. They could set up an online service where those businesses’ software would query EU servers with “I have an X-type product being sold of Y Euros to someone in Z country. What is the VAT?” The laws would also hold them harmless if the EU server returns the wrong answer to what is often a very complicated question.

    Will the EU regulators do that? I doubt it. Most politicians and bureaucrats, both here and in Europe, know almost nothing about all the hassles of running a business.

    Reply
    1. Ralph Hummel19 September, 2013

      Err, it’s actually illegal for a vemdore to tag your prices WITHOUT VAT. And the VAT rate as well as the actual amount of VAT included in the price is required by law to be on your receipt and/or invoice. So it’s by no means hidden to consumers. Unfortunately not all vendors apply this rule as they should.

      The EU directive concerning the new VAT rules actually makes a clear mention that the VAT calculation will be handled by via a web-portal (i.e. server) and collected by the local tax-office in the country of incorporation of the vendor. This will make it “realatively” easy to set up if one wishes to sell to a European customer.
      According to what I have read vendors not incorporated in the EU zone are required to collect the VAT on digital goods and pay them to the appropropriate tax office. I suppose that this will be handled by the same web-portal with some kind of clearing function for the funds to be funelled to the relevant country.
      It is only fair that the member states get their dues on commerce with residents of their country rather than those taxes not being collected or at lower rates by incorporating in low VAT tax countries (such as Luxembourg .i.e like Apple and Amazon).
      My 2 Cents

      Reply
  8. […] to be charging right now). The new EU tax laws will also require retailers to collect taxes based on the customer’s location and not based on where the retailer is […]

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  9. Gracey spurek8 May, 2014

    E-books are causing some serious problems within the corridors of power in the EU at the moment. Germany is eyeing up a reduction in VAT on e-books even though the European Commission has already instigated legal proceedings against France and Luxembourg for their super reduced VAT rates for e-books. It’s all the more interesting as all 28 EU Member States agreed to the 2015 VAT Directive in October 2013. The Directive labelled e-books as an electronic service and VAT should be collected based on where the consumer of the service is located. No special exemptions for e-books were included in the Directive.

    Reply
  10. […] similar move and thus were put at a disadvantage, but this tax loophole is at best a fleeting one. Starting in January 2015, a change in EU tax regulations will close the loophole. eBook retailers will be required to […]

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  11. […] topic of taxes on ebooks is becoming a pressing issue as the new year approaches. Thanks to a change in EU tax law, retailers will soon have to start collecting taxes based on where the customer is located in the […]

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  12. […] to be charging right now). The new EU tax laws will also require retailers to collect taxes based on the customer's location and not based on where the retailer is […]

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