A hugely important article crossed my Twitter stream this morning, thanks to Sacha Heck. It said that Luxembourg plans to apply its reduced 3% VAT to ebooks [fr]. At first glance, you might think it shouldn't matter a whole lot how the tiny country taxes ebooks, but it turns out that the rule in Europe is that VAT is applied according to the seller's country (not the buyer's). That means that any company who sells ebooks from Luxembourg will only have to collect 3% VAT.
Next consider that although the reduced rate VAT is applied to print books across the EU, up til now they have insisted on classifying ebooks as services and applying the regular rate. That regular rate ranges anywhere from a current low of 15% (in Luxembourg, surprise!) to 25% in Sweden. The Huffington Post cites this application of the regular VAT rate on ebooks as one of the major reasons Why the UK is behind America for Ebook and E-reader Adoption.
This has two major effects. First, it makes it harder for publishers to deliver ebooks at competitive prices with respect to their print books. And second, ebook sellers in countries with lower VAT will have a huge competitive advantage over local sellers in countries with higher VAT. Sometimes the difference between print VAT and ebook VAT is as much as 20%.
Take Spain for example. The regular VAT is 18%. So an ebook that "costs" 20€ without VAT will cost 23.60€ including VAT. But if you buy that same book in (or from!) Luxembourg, it'll only cost you 20.60€. That's a big difference. Add that to the fact that many (most?) European countries have fixed pricing rules on books and you get a significant competitive advantage.
France has been threatening to lower the VAT rate for ebooks for months, promising to bring it down to 5.5% in January. But in the UK, just yesterday in an article in The Register Treasury Minister David Gauke said their hands were tied: “Under EU law, VAT on electronic books must be charged at the standard rate.”
Luxembourg doesn't seem to think so. But who's going to sell books from Luxembourg? Shoot, where is Luxembourg*? The answer is Amazon and Apple, of course, who already have their European headquarters (and tax homes) there and anyone else who wants an immediate advantage over their competitors. Amazon has made a fortune in the US by carefully avoiding having to charge customers sales tax. (In the US, you don't have to charge sales tax to residents of states where you don't have a tax presence yourself.) It clearly hopes to follow the same strategy in Europe.
(Photo by Wesley Oostvogels, used with Creative Commons permissions.)
Luxembourg, of course, is in the center of Europe, occupying about 1000 square miles, and home to half a million people.