16 Aug 2014
Perhaps the most intriguing loopholes in the e-commerce world is the widely varied way that sales taxes are applied. In much of North America, purchases made from a business located outside of the country or, in many cases, even outside the same state or province, are exempted from sales tax in either location. In the EU, the situation is slightly different, with Value Added Tax (VAT) being calculated based on where the seller is located. This has had significant impact on where many corporations choose to establish their home offices, with Luxembourg being one of the most popular choices thanks to its relatively minor corporate taxes and low VAT rates, which allows companies to offer lower overall prices to the consumer. However, recent changes to how VAT is applied to digital products stand to shake up the current system, and put millions into the tax coffers of nations that have so far been shortchanged.
The new rules, which apply to the retail prices of digital products such as telecommunications and digital products such as apps, e-books, and even cloud-based data storage services, will shift the location where VAT is applied from the company's location to that of the consumer. While these changes have been in the works for some time, many companies have taken full advantage of lower VAT rates, among them tech giants such as Apple, Microsoft and Amazon.
Interestingly, one of the most affected markets may be a surprising one: e-books. E-book retailers are almost exclusively located in Luxembourg, thanks to a VAT rate on the product that is as little as 3%. Just considering the e-book sales made by Amazon alone, the VAT reform would net the government in the United Kingdom upwards of tens of millions of pounds. In the other affected markets, the impact will be significantly less, as the VAT rates of the two countries vary by much smaller margins, averaging near 5% difference. Both Microsoft's XBox games division and Apple's iTunes division are also both based in Luxembourg, however those markets are yet to come close to the current scope of e-book sales.
Unfortunately, of course, most companies aren't likely to take the VAT hit to their profit margins lying down, and will wind up passing on some or all of the adjusted cost to the customer. However, it's likely to give a boost to companies that don't have the luxury of locating themselves in a particularly low VAT jurisdiction, allowing them to compete more fairly in the marketplace of retail prices.