eBook Tax Rate in Europe: Latest Changes and Discussions

The standard tax rate on eBooks in this country is a recurring topic of discussion, both among consumers who prefer an eBook reader as their favorite reading device and among retailers. eBooks are considered a service in Europe and must therefore be taxed at the regular rate of the respective country. In Germany, this is 19 percent (Austria: 20 percent), while printed books are sold at a reduced rate of 7 percent (Austria: 10 percent).

If the reduced tax rate were to apply to eBooks, publishers could increase their profit margins or pass the savings on to customers.

The EU is Relying on the Destination Principle

In a broader context, it’s also essential to mention the actions of large international corporations such as Apple or Amazon. Due to varying tax rates within the EU, these companies, with official headquarters in Luxembourg, can apply the local tax rate of just 3 percent for eBooks as opposed to the 19 percent rate elsewhere. However, from 2015, the EU Commission is putting a stop to this.

Starting January 1, 2015, the destination principle will apply, meaning that the payable tax rate will be based on the buyer’s address instead of the company’s headquarters. So for a German customer, a 19 percent VAT must be paid, whereas a customer in Luxembourg would still pay 3 percent.

German eBook retailers are likely to cheer about the new directive, as it ensures fair competition conditions. This regulation applies not just to eBooks but to all digital services.

eBooks: Service or Book?

There is already debate about the next change in eBook taxation. On October 24, representatives from the EU met to discuss aligning eBook taxes with the reduced taxes on books.

France and Luxembourg have already lowered taxes on eBooks, contrary to the EU directive. In February 2013, proceedings were initiated against the two countries (see below), but no conclusion has been reached so far. In France, the reduced rate of 5.5 percent on eBooks is still in effect, and in Luxembourg, it’s 3 percent.

The question now arises whether the lawsuit will be overtaken by potentially soon-changing EU legislation. Insiders suggest that eBooks may also be subject to the reduced tax rate in the future. This change is a direct result of the unilateral actions of France and Luxembourg since the EU Commission could not convince these countries to increase their taxes.

The proceedings against France and Luxembourg appear to be nowhere near a conclusion, which might make a change in eBook taxation the fastest solution for other EU countries. The consultations on October 24 have yet to yield a result, and it is likely that it will take some time.

20.12.2011: UK: Will VAT on eBooks be Reduced?

eBooks in the UK currently face a similar issue as in other European countries: while printed editions are subject to reduced tax rates, eBooks incur the full 20% VAT. This quickly nullifies any price advantages granted due to the digital format and causes dissatisfaction among customers—no one wants to spend more on a virtual product than on its physical counterpart. This might result in a slowed growth of the eBook market, which could possibly gain traction with reduced VAT.

This is likely how British MP Tom Blenkinsop sees it, as he is pushing for a tax reduction on eBooks in the UK. The fact that this would currently be non-compliant with EU regulations does not bother him. He argues that both France and Luxembourg have already taken these steps and that customers would benefit from reduced eBook prices.

In my opinion, a reduction of the VAT on eBooks has been overdue for a long time—there’s no real compelling reason for the preferential treatment of printed editions. An EU review, which is expected to begin in 2012, might address this issue, as a recently drafted EU memo notes:

“A review of the VAT rates structure seems therefore to be justified. The Communication sets out the following guiding principles for such a review: […] Similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect.”

This could possibly also affect the eBook sector, which should fall under the category of similar goods. However, as an outcome is not expected until the end of 2013, other countries might first take matters into their own hands to unbind the chains of the eBook market early on.

22.12.2011: Luxembourg Lowers VAT on eBooks to 3 Percent

Following France, Luxembourg is also reducing the VAT on eBooks to the reduced rate of regular books—from 15 percent to 3 percent. According to Börsenblatt, the European Publishers Federation (FEP) fears that “Internet companies like Amazon and Apple, which operate their European business from Luxembourg, will be the main beneficiaries of this regulation.”

For content delivered electronically, which the end customer can purchase regardless of country of origin, the destination principle will not apply until 2015. By then, merchants must sell digital goods at the tax rate of the customer’s country of origin. Until then, Luxembourg companies can deliver eBooks to end customers at 3 percent VAT from 2012 onward. Meanwhile, German and Austrian retailers must continue to remit the regular VAT of 19 and 20 percent, respectively.

As the European Publishers Federation rightly fears, domestic retailers could be disadvantaged by this step. As a customer, you can certainly rejoice at the change. An eBook that previously cost 10 euros could now be sold for about 8.6 euros. The price differential to the paper book would thereby grow significantly. However, it’s open to question whether Amazon or Apple will actually exploit this opportunity to strengthen their market positions.

Now that both France and Luxembourg have lowered the VAT on eBooks in isolation and a debate has erupted in the UK as well, such a step could soon follow in Germany and Austria. Especially if local retailers are disadvantaged and tax revenues are leaking abroad, the responsible politicians might find themselves under pressure.

29.12.2011: Kindle Direct Publishing: VAT Drops from 15 to 3 Percent

We reported a few days ago that VAT on eBooks in Luxembourg will drop from 15 to 3 percent. This makes Luxembourg the second country in the EU (after France) to defy EU regulations and adjust the VAT on eBooks. This will take effect on January 1, 2012.

The European Publishers Federation (FEP) anticipated from the announcement of the cut that “Internet companies like Amazon and Apple, which operate their European business from Luxembourg, will be the main beneficiaries of this regulation.” And they were right.

Amazon is seizing the opportunity and adjusting the Kindle Direct Publishing (KDP) offerings in Europe. They are currently informing active KDP authors via email.

KDP is Amazon’s self-publishing platform, allowing anyone to publish their eBooks on Amazon. Authors can set their eBook prices, with Amazon adding the VAT to the author’s fixed price. With the tax cut, KDP prices are now falling too, as Amazon operates in Europe out of Luxembourg.

For other book offers from Germany, Austria, and other countries with fixed book pricing, nothing (yet) changes at the current moment. However, this might be the first step toward harmonizing eBook taxes in Europe at a lower rate.

08.07.2012: EU Commission Moves Against Reduced eBook VAT

As of January 1, 2012, the VAT on eBooks in France and Luxembourg was reduced to 7 and 3 percent, respectively. Since eBooks are considered a service in Europe, the standard tax rate is generally valid throughout the EU. In Germany and Austria, for example, this is 19 and 20 percent.

Even when France and Luxembourg announced the tax cuts on eBooks, there were speculations that this would bring the EU Commission into action. By January, both countries were required to explain their actions and reverse the changes – which did not happen. As a result, the EU Commission has now initiated infringement proceedings.

Both countries now have one month to respond and state their position. If Brussels is not satisfied with the arguments, they will demand the tax rates be raised again. The EU Commission sees the reduced VAT rate on eBooks as a distortion of competition, which is absurd considering that regular VAT rates differed massively within the EU anyway. However, it is probably not the small eBook retailers that are bothering the EU, but the US representations of Amazon and Apple, which now operate with a 3-percent VAT from Luxembourg and ultimately pay no taxes to the countries they operate in. The UK, Poland, and the Netherlands have also filed complaints for this reason.

The French reaction was swift. France argues that eBooks contain the same content as normal books, which means the same tax rate should apply. They also want to boost the market and ultimately are simply following the EU goal of taxing online offers lower. The first argument is likely the most significant, but whether the EU Commission sees it that way too, we will find out in a few weeks.