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

EuropeFlag[1]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?

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fjtorres September 18, 2013 um 12:41 pm

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.

flyingtoastr September 18, 2013 um 1:55 pm

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

Jussi Keinonen September 18, 2013 um 3:27 pm

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.

Nate Hoffelder September 18, 2013 um 3:41 pm

That is worth noting in the post. Thanks!

Ralph Hummel September 18, 2013 um 4:52 pm

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…

Nate Hoffelder September 18, 2013 um 5:09 pm

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

Puzzled September 18, 2013 um 5:48 pm

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.

fjtorres September 18, 2013 um 5:53 pm

ebook tourism…

Samantha September 18, 2013 um 8:33 pm

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.

Nate Hoffelder September 18, 2013 um 8:43 pm

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

fjtorres September 19, 2013 um 12:43 am

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.

Mike Perry September 19, 2013 um 10:39 am

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.

Ralph Hummel September 19, 2013 um 11:35 am

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

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