Apple, Amazon to Pay Correct VAT Rates in EU Countries?

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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…




8 replies
  1. Mikko Saari says:

    I’m going to have trouble with this… I’m selling Relevanssi, a WP plugin, and currently I either charge no VAT or the Finnish VAT. Next year I’ll have to start charging VAT based on the country of the buyer, and instead of making a single VAT payment report to Finnish tax officials, I’ll have to report to each and every country where I have a buyer.

    For me (and my accountant) the solution is simple: we will only sell VAT-inclusive sales to Finland, limiting EU sales to customers with a VAT number. That’s not good for business, but the alternative is too complicated for a small business like me.

    I heard of this from my accountant, so apparently it’s not just a UK decision.

    Reply
    • Kirk McElhearn says:

      Hmmm, that is complicated. It’s not an issue for me, since I only sell my services to businesses, and they have VAT numbers, but that sounds like it will harm a lot of small developers and retailers. Thanks for pointing that out.

      Reply
      • Mikko Saari says:

        Yeah, that’s what I’m afraid of – next year when I try to order something to Finland from a small web store, will I see “sorry, we’re not shipping to Finland”? For major online stores that’s not going to be a problem, but for smaller retailers, with maybe couple of sales to Finland per year, will they bother? I know my accountant told me she’s not particularly interested in filing the VAT reports to different countries, and with my level of business I don’t blame her for feeling that way.

        Reply
        • Kirk McElhearn says:

          If the accountant did file all those forms, you’d be paying for her time.

          I guess this is similar to what’s happening in the US, where mail-order companies will have to file sales tax returns for every state they sell to, and, of course, charge the respective rates for each state.

          Reply
        • Kirk McElhearn says:

          You know, your best bet is probably to go through a company that handles fulfillment. They can handle the VAT for you, I assume. (I’m thinking something like FastSpring or eSellerate.)

          Reply
          • Mikko Saari says:

            That does sound like a good option. It would cover the VAT problems, and while the 8.9% cost for FastSpring is higher than the PayPal fees I now pay, I’d save some money since my accountant would only have to handle one or two payments from FastSpring instead of dozens of individual payments from different countries. Thanks for the tip, I’ll have to investigate this.

            Reply
            • Sergio Garcia says:

              I think that was the main reason for the rule to be setup originally as that (source country rather than destination one), so SMEs didn’t have to worry about billing 30 different types of VAT. But as you say now digital tools and services make this a lot easier in an inexpensive way.

              Still, I wonder how clear-cut this really turn out to be in the end from EU-law perspective.

  2. Markerden says:

    VAT must be applied on the things which you are buying. It is a consumption tax after all, Then only a level of equality can be maintained between the VAT charges of products available online and offline. Of course, for this particular change in how EU VAT on digital services is collected the key is that it is now all about the location of your end consumer. However, you must also remember the Mini One Stop Shop whereby you register with one EU member state for tax returns – that EU member state then distributes all your VAT based on your sales in the EU. Thank you for this post.

    Reply

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