TAX is Never a Level Playing Field in a Global Economy

All businesses large and small cry for a level playing field, a fair taxation system under which apples can compete with apples and where all contribute the community in which they earn their living. Unfortunately Utopia doesn’t exist and as trading communities spread, global trade increases and an individual consumer can buy direct from anywhere in the world with any business anywhere in the world the issue of tax just gets more complex.

The new digital and technology traders from outside the EU discovered what could be best described as sink holes in corporation taxation and VAT across Europe. Not only were the rates all over the table but many governments were happy to induce companies to set up operations in their own countries with generous allowances and breaks. As new markets such as digital media grew many screamed foul, others tried to imitate and no one actually sorted much out.

Jean-Claude Juncker, the European commission president is now facing increasing pressure as allegations mount which indicate that even he used questionable tactics when he was prime minister of Luxembourg to promote the country as the destination for multinational corporations such as Amazon.

Bob Comfort, the former head of tax for Amazon, has claimed Juncker helped Amazon secured a confidential deal from the local tax office. A deal which is now the subject of a formal investigation by the European commission itself. Since 2003 Luxembourg has become the VAT haven for the likes of Amazon, Kobo, Nook and others all wanting to benefit from their 3% digital VAT rate. Companies could buy digital wares at a VAT inclusive price from higher rated counties such as the UK (20%), sell at 3% and effectively cream off 17%. This was possible due to the VAT being incurred at the point of distribution and registered office.

European commission investigators claim that they believe the Amazon 2003 deal with Luxembourg is so generous as to amount to illegal state aid. Amazon EU Sarl, the company with which customers across much of EU do business when they buy online from the retailer, took €13.6bn (£10.7bn) in sales last year, up from €11.9bn in 2012.

In January The EU is changing the rules such that VAT will be paid at the point of consumption of digital product. This means that the previous VAT benefit is levelled and this should benefit local retailers but many question whether this is the case and whether the EU has made it even harder for smaller traders to compete as they have to now deal with potentially not one but 28 different rates of tax. This also applies to those authors and publishers who sell direct and may be too small in terms of VAT sales to be registered. The VAT threshold below which many small businesses do not have to register for or pay/claim back VAT will be entirely removed for those dealing in digital goods selling into the EU. All companies will be responsible for paying VAT on every digital product they sell, even if they only sell one. Sell one ebook at 99p directly to someone in the EU, fail to report, and you risk of an unlimited fine. To avoid the need to register in up to 28 different EU member states, sellers can opt for the Mini One-Stop Shop (MOSS) alternative: registering in its home jurisdiction only, and submitting only one return and payment.

The question as to whether the VAT change will result is higher ebook prices for many within the higher rated EU countries remains a strong reality. However those selling into businesses and education will remain unaffected. Where the goods supplied consist of physical product which is ‘bundled’ with a product that is accessed digitally, then the place of supply rule changes will only apply to the digital element of the supply if this is seen as a supply or the dominant part of the bundle.

We still have no answer over the drop in France’s ebook VAT rate to 5%, which was deemed illegal by the EU but remains despite protest. France has now been joined by which has lowered the VAT on e-Books from the standard 22% to 4% so it matches the rate imposed on printed books. Malta has also cut its VAT on e-books from 18% to 5%, also so it is in line with print. The rates in France, Luxembourg, Italy and |Malta now are at significant variance to the likes of the UK , Denmark and others. VAT harmonisation across the EU even on one product seems very unlikely and so the muddle will continue.

Corporation, or business tax, which is based on profits made within a trading community also remains in a mess with various different rates being applied in different countries across the EU. This prompts Apple to seek refuge in Ireland and others to channel funds through other countries or create high royalty payments to subsidiaries to offset tax. The UK has declared a “diverted profits tax”, or Google tax, which is aimed at targeting companies who shift profits out of the UK in artificial ways, with a punitive 25% tax rate from April next year. The question of how effective this will be remains as does the question of whether the EU will follow suit. What is clear is that many are demanding tax is paid where sales are made not in safe tax havens.

But change is not just about the EU and the Japanese government is introducing a new Consumption tax on digital good sold to Japanese consumers. This will mean that any digital media sold by vendors whose headquarters are located outside Japan will be subject to the new tax. This will include companies such as Amazon.com and even Kobo Inc., who despite being owned by Japanese retailer Rakuten is registered in Canada.

Authors Need eReward

We read that the EU is now considering harmonising VAT on ebooks across the community and that the likely solution is that they will become zero rated. This would also negate the need for tax to be levied at point of consumption in 2015 and remove one aspect of the Luxembourg magnet for digital distributors and retailers. We also are all aware that a further ratchet twist of UK ebook pricing is taking place between Sainsbury’s and Amazon, with front list ebook titles dropping to 99p. We also read about the emergence of ebook subscription models and services which would generate new revenue streams and services.

Some view the moves as being good for publishing, publishers and readers. However, does this mean that they are good for those key players, the authors?

Let’s look at the 99p best seller. Today any title distributed in the UK incurs a 20% VAT charge. If distributed from Luxemberg it incurs a 3% charge and the distributor effectively buys VAT inclusive at 20% and sells VAT inclusive at 3% and the 17% goes to…. The retailer takes say a 30% levy for the transaction and the rest goes to the publisher. The publisher then pays the agent say between 15 and 25% of their receipts. The agent takes off their say 15 to 20% fee and the author gets what is left. Not bad you may say when the starting figure was around £6 but not a lot when it plummets to 99p.

However, the price war is just temporary you may say, prices will revert upwards and not all ebooks are at 99p. Well we have seen the rapid reduction in prices over a relatively short period and it is fair to assume that when retailers start to create price points- they stick.

Recent figures demonstrated that consumers liked free, 0.99 and 2.99 but were unsure about 1.99 and their interest tailed off as prices rose. We are now seeing price point consumer perception and this will be hard to change. These are licence more than outright ownership sales and the price has to reflect this.

The move towards zero harmonisation is welcome by all, but will the money flow back to the; consumer in lower prices, the retailer through tighter margin negotiation, the publisher in retaining the RRP at zero rate, or flow back to the agent and author? We can’t assume anything other than many of the above will lay claim to it.

Finally, we have the emergence of the ebook subscription model.

Why would consumers commit to a subscription model when the pricing of ebooks is dropping and pricing is unstable? If prices were high and stable then a subscription model based on low consumption may have an appeal, but in the current climate and with relatively inconstant and low consumption rates, it makes little sense for ebooks unless the offer is coupled to other media or service subscriptions. It would make sense for someone like Sainsbury’s to tie subscriptions to other services and cross subsidise and offer a value added consumer proposition. But ebook subscriptions to remain by themselves.

Again the author will only get a slice of revenues generated for the material read. As we have pointed out earlier this week reading habits will could also hinder reads being recorded and paid out on.  

We can only speculate on the outcome of these three options, but we must remember that there are two critical people in the value chain, the reader and the author and that any pricing and model for must work at not just one, but both ends of the spectrum. 

So Who Will Pay The eBook VAT on 1st January 2015?

We are all aware that the EU VAT rules will change at the beginning of 2015 and that this will effectively end the offshore tax loophole operations of the ebook operators. This EU rule change will not impact the corporation tax loophole and so we will not see a mass migration from those countries who offer low corporation tax today, but it demonstrates that the EU as a block has the ability when pushed to change the rules.

The EU official statement is available on their taxation and customs site. http://ec.europa.eu/taxation_customs/taxation/vat/traders/e-commerce/

What it mean is that EU operators have to pay VAT at the point of consumption not at the point of dispatch and operations. They also no longer have to any VAT on consumption outside the EU which may be advantageous, but doesn’t not mean that the non EU country will not charge their own tax on digital services. Those supplying from outside the EU will be charged at point of consumption. A long overdue level playing field even though it is some 15 months away.

All operators will now have to amend their systems to operate and levy tax accordingly, which is not in itself a simple task.

This is going to be an interesting change to watch as those with a large customer base in a high VAT country will have to either pass on the hike in tax, absorb it or negotiate tighter supplier costs. We often automatically expect the cost increase to be passed onto the consumer but with digital ebooks this may not be as simple as that. As prices of ebooks continue to fall, we are clearly seeing the emergence of price points and once these start to be accepted by consumers, merely adding say 20% may not be palatable and it could trigger of a further hike in the price wars. Those with deeper pockets may elect to start to force a visible price difference and hurt the margins of others who don’t have the flexibility to part absorb this drop in profit, or the clout to get tighter cost prices.

Far from damaging Amazon this could damage others and in fact strengthen Amazon’s grip on suppliers and appeal to consumers. 

The Untouchables

Globalisation and Technology has introduced a new breed of corporation who ‘see no evil, hear no evil and speak no evil, do no evil’, but sail very close to the wind in their approach to many moral aspects of business.

We have all heard the lengths that they go to avoid tax and ensure that they operate at maximum profit. The list of companies that play the game and operate within the tax laws but with questionable moral,s is not just restricted to the big technology companies we read about. The hall of abdication includes; Google, who have  a preferred lower rate in Ireland than the Irish companies, Amazon, who have the weird situation where they earn more out of government subsidies than they pay in taxes in the UK, Apple whose tax regime is ‘complex’. There are many others, such as the ticket company, The Trailine and UK rail operator, First Great Western, which are hardly international companies, but find it good to be based in Luxemburg.

Then we have the VAT games which apply to those who operate in lower EU tax countries and sell into higher rate countries and gain the obvious windfall VAT as a result. Of course the EU are going to fix this in 2015 but that doesn’t stop 'hay being made while the sun shines' today and traditional businesses suffering a governmental penalty for paying their appropriate tax. Most of the major digital media operators look to use the Luxemburg VAT haven; Amazon, Kobo, Nook. There should be a simple windfall tax levied against this organisations and they should be made to realise that there is a moral conduct of practice even if they can skirt around the legal one. 

All this is without the social network and technology services that are constantly pushing the privacy boundaries and being challenged by authorities and social rights groups when they make changes. Here we often see the old, 'act first and think later’ approach being adopted.

We also have CEOs who sit in front of being questioning and merely state they operate within the law. Its like listening to a suspect being questioned and them merely saying, ‘No Comment’ to every question. Some such as Google’s Schmidt have the bare faced arrogance to claim, that as they employ workers in a country and the workers’ pay tax then that should taken into consideration.

One of the biggest commercial challenges we face is the global corporate's ability to become untouchable. They want to reap the benefits of doing business in one country whilst paying their reduced dues in another. They want to have an unfair advantage over traditional and indigenous business who pay their taxes in the country they do business. They want to offset huge revenues to Intellectual Property companies sitting in some far off tax haven.  

If politicians are to earn the consumer respect they need to tackle this plague of locust before they truly become untouchable. 

Mr Osborne Stand Up Against Tax Abusers

This week, George Osborne stands in front of the UK parliament and delivers his Autumn Report. As the UK economy continues to ‘flat line’ some will say this is his most important report. It is his opportunity to make a tremendous bold moral statement on tax avoidance that will do much more for UK moral and business than tweeking the odd penny on personal taxes and duty. It will also send a clear message to those who avoid UK tax and play EU registration games, that enough is enough. We may be split over Leverson and the press solution but we are as one on the morals of some of the tax avoidance moves currently in play. We are all going through hard times and tax avoidance is fast becoming immoral and tax abuse.

When Banks and Oil companies have made massive profits in the past, they were subject to potential windfall taxes. These were often one off excess tax demands to level the playing field. So why not apply the same logic to those that have benefited significantly by raising huge revenues in the UK, but  then scurried off to hide behind the skirt of some other EU country in order to avoid paying their fair contribution to the people and country that made their wealth possible.

Luxemburg is now the ebook and digital media capital of Europe. It probably makes very little sales there but also pays relatively little in VAT there. So the larger economies of UK , Germany and France where they actually do business suffer as they have higher VAT rates and no VAT revenues. VAT is applied across the supply chain at the appropriate rate for the goods and services, but in this case it nose dives in Luxemburg. The EU promises to address the issue, but the EU is often full of promises and delayed timelines and also tax standardisation is a minefield within a Federal Europe.

So why not accept the status quo and let Luxemburg keep their 3%,  but introduce an additional annual tax on the difference as a windfall tax? This would apply to all sales and services sold into the UK from companies registered for VAT in other EU countries. In the case of ebooks it would raise excise on 17% of Amazon, Kobo and Barnes and Noble’s UK sales. There may be some countries where the their rate is higher than the UK and the company is based here, but in those cases the UK economy will still raise 20% and it will be up to others what they do.

The message this would send out to Europe may be a difficult one for some to swallow, but it would be good for the UK, UK businesses and may even help apply a brake to some of the crazy ebook discounting that some can afford to do more than others. It will certainly send a message to the EU commission that VAT is a mess.

Corporation tax is more taxing and today we have the likes of Google and Apple hiding in Ireland where they pay some 50% less than they would in the UK. We also have one coffee company flying below the radar in the Isle of Man, but making all their revenues in the UK. We have others such as Starbucks with such complex trading accounts and cross country movements that they appear to make no money and are serving coffee in the UK for nothing!

A straight forward windfall tax should be applied to corporation tax avoiders on the same basis as the VAT top up.

Some will say the UK can’t do it and the EU would block any such taxes. However, the alternative is everyone registering for business elsewhere in exploiting tax differences within a common trading community, which surely goes against the essence of the EU.

Mr Osborne, we must not just sit back and tax the tax payers but step forward and tackle the causes of tax abuse.

Tax Avoidance Can Be Morally Taxing

What started off as questions about individual’s offshore investments has swiftly moved onto corporate use of global tax bolt holes in order to avoid tax. Tax-friendly countries aren't new and international companies have been exploiting them for many years. Even the use of Luxemburg by the likes of Google, Yahoo and Amazon has been know for a long time. We wrote about the variance in VAT rates and Luxemburg loophole in late 2011 and its not as if any MP didn't know about it, as it is heavily embroiled in the whole question of VAT and EU tax standardisation. The US Sales tax debate has also been ongoing and has been well documented for years. So why has it been raised now and where is it going?

Following the appearance of Google, Starbucks and Amazon executives before a committee of UK MPs last week, UK BUSINESS Secretary Vince Cable,has now urged authorities to clamp down on the “completely unacceptable” corporate tax avoidance and called for international cooperation over any reforms. To some that is like him suddenly having a revelation when caught with his pants down and it is somewhat ironic that he calls for others to reform when he himself is in fact the ‘UK Business Secretary’.

If we look at the companies under the current spotlight we see Starbucks, which is thought to have paid just £8.6m in corporation tax since 1999, despite last year sales of £400m. Their movement of liabilities across their total business is what most would expect, but the result is now morally unacceptable to others who may not share the same ability and believe that they are being unduly penalised. The coffee cup is no better for Caffe Nero, whose parent company is based in that heavily populated and coffee shop haven, the Isle of Man. Last year they made a profit of nearly £40 million, but paid no corporation tax in the UK. Caffe Nero is not breaking the law, but are “taking advantage of the rules in place in relation to ‘capital allowances, deferred losses and interest payments’.

Another tax avoidance which has now been addressed allowed broadcaster BSkyB to mix VAT and non VAT services within the same subscription. They had been saving an estimated £30 to £40 million a year in VAT by charging satellite customers £2.20 a month for the Sky magazine, which was zero-rated for VAT. This allowed them to avoid VAT of around £3 to £4 per subscriber, which given Sky's 10 million subscribers provides revenues not to be ignored. In 2005 UK courts had ruled that cable companies were allowed to deduct VAT on "cable guide" magazines, if the customers received a product from a separate company and at a fair price. However in 2005 Sky relaunched BSkyB Publications and took production of Sky magazine in-house and also began distributing Sky Sports and Movies magazines. BSkyB Publications' accounts claimed that the majority of the income from the magazine was recycled back to Sky TV. They described it as payments for "customer data" and "support services". In 2010, the Treasury announced among a number of anti-tax avoidance measures, legislation against VAT "supply-splitting" and in 2011 BSkyB announced it would be ceasing publication of Sky Movies and Sports magazines and downsizing Sky magazine.

The question is whether the authorities will go back to BSkyB and reclaim the monies apparently due?

Apple and Google are based in Ireland and enjoy their low corporation tax benefit. Google uses Ireland for revenues that end up being costed to Bermuda where its intellectual property is registered. We then come to Amazon who like its smaller rival Kobo, have their European headquarters in Luxembourg. It begs the question if any big multinational has their European financial base in the UK? 

The Guardian claims that Amazon generated sales of more than £3.3bn via its UK website last year but paid no corporation tax on any of the profits from that income and the Security and Exchange Commission show that in the past three years, although Amazon generated sales of over £7.6bn in the UK, they paid no corporation tax on these.

However the Amazon issue is not just about the corporation tax but also about is the uneven playing field and market advantage that the 3% VAT rate of Luxemburg gives it against the 20% rate of the UK. The challenge does not just effect the UK , but any country in the EU that has a VAT rate higher than Luxemburg. Amazon effectively does not pass on this windfall benefit to the publishers, who have to cover the whole 20% VAT in their pricing negotiations with Amazon and effectively pockets 17%. This obviously gives them a clear margin benefit over their UK domestic rivals who have to pay the 20%. The EU is moving, albeit slowly, to close down this loophole but it is more than just a tax loophole but how Amazon buys and sells and makes 17% without getting out of bed!

Amazon also has challenges with its highly successful third-party Marketplace, where the VAT status of its resellers can lead to misleading prices. Depending on the reseller's VAT status, products sold on Marketplace can be listed either with or without the tax added. Some resellers don't supply the VAT receipts, that prohibits these small businesses from claiming VAT. This doesn't impact small ticket items, but can heavily impact a small company buying expensive PCs and other VAT-able goods. The current situation means non-VAT registered companies can make their items look more attractive by keeping prices below larger competitors and in effect create a false market.

However, tax avoidance is now becoming a high risk activity as the media draws the spotlight on the issues and the companies involved now face damaging their public reputations. For government ministers and civil servants to act surprised at the revelations and point fingers at each other, is perhaps indicative of the often ungoverned society we often now find ourselves. We often find ourselves in a world where the likes of twitter and Facebook can draw more attention to issues and we wait until that logic and moral tipping point. The stance and comments from the likes of John Lewis’s MD, Andy Street, and the UK Booksellers Association’s tax and lobbying messages start to raise awareness to the issues. The press has certainly raised the issue of tax avoidance, but perhaps the only real moral test is if the consumer says ‘no’ to the likes of Amazon, Caffe Nero, Starbucks. Imagine a one month ‘say no’ campaign and the impact and message that would send to shareholders of the companies.

Perhaps the greatest challenge is to harness the public opinion and convert it into concerted action. A few posters isn’t going to do it. Lots of bad press can often be weathered, but stopping the cash-flow really can send the message home. Perhaps we have to wait until after Christmas and we have bought all our presents from them and drunk their coffee to keep warm!  

Santa Delivers VAT Present?

The rules on VAT on ebooks is about to become very interesting. In 2015 EU consumers will pay the VAT rate based on the country they live in, but until then and under the current EU rules, European consumers pay VAT based on the country the vendor is based. The spanner in the works comes not from the UK, France , Germany but from the European home of Amazon, Luxembourg.

Some will question what difference this makes to retailers and whether Amazon pricing just got very competitive and attractive. The difference between the UK and Luxemberg will be a massive 17% and 2015 is a lond way off in ebook years!

However there are opportunities in this for publishers as well as consumers.

Today many price their book as VAT inclusive, but if they were to price them VAT exclusive then the VAT difference of 17% could be up for grabs with some creative juggling. One major European publisher recently changed its pricing terms with Amazon to take advantage of this opportunity.

Interesting times and an early Christmas present for some and maybe the act that will force the some countries to think twice about their high tax rates on ebooks and the great gulf between reading the same material on two different platforms.

Techradar source document

The Times Are a Changin'

Today we have two different stories which by themselves are newsworthy. Together these demonstrate that the booktrade is not in full control of its own destiny and that changes can happen from outside that will change what is developed, sold and how it is sold.

Firstly, we have long believed that ebook sales are going to move from downloads as we know them today to online cloud based rentals. They are many who see this as a huge threat, whilst there others like ourselves, who see it as a huge opportunity. However, can such a change be controlled by the existing big players, or will we see a shift in market power driven by consumer demand, in the same way that Nasper, iTunes, Pandora and Spotify have changed music and YouTibe and Netflix video?

Verdict Research claims that consumers are spending 21% less on films, video games and music than they were in 2008, down from £7.7 billion to £6.1 billion. It would appear that they prefer free services such as YouTube, Spotify , BBC’s iPlayer and the mass of free app downloads for mobiles, over traditional home entertainment. The current economic downturn is also obviously fuelling the trend. So is the move towards an increased demand for ‘free’ in other media sectors a blip, or a real trend and will books be different?

Secondly, the current economic turmoil in Europe is significant and is now in danger of engulfing major countries such as Italy, Spain and according to the ex UK PM Gordon Brown, even France. Austerity has a funny way of driving both consumer habits on spending and government measures on taxation. What we assume is safe can become unsafe overnight and only a fool would believe that books are and will always be viewed as different.

The French government has announced that VAT rate on books will rise from the current 5.5% to 7% from 1st January. This is still a reduced rate compared to the standard rate of VAT in France of 19.6% but is a clear sign that in times of austerity the gloves come off when governments have to reduce public debt.

We all are acutely aware of the disparity on VAT between EU states and also of the tax disparity between physical and digital renditions. We should not assume that this will remain as is in difficult times and that any harmonisation has to be to the lowest common denominator.

So we see consumer consumption changing in other media sectors and taxation changes being taken to reign in state debt. We can’t assume tomorrow will be the same as today and that we have full control over our destiny.

eBooks Can Be So Taxing

A group of some 42 MPs have signed a House of Commons motion by Glagow Labour MP Tom Harris advocating the scrapping of VAT on ebooks. The premise of the motion is that the UK publishers are being held back by VAT levied on ebooks and this is being exacerbated by the increase of VAT from 17.5% to 20%. It claims that e-books in some other ‘jurisdictions’ are not subject to similar taxes and this places the UK at a ‘huge’ competitive disadvantage.

It’s an interesting development when UK physical books are VAT exempt and although seeking synergistic taxation on all books makes sense, citing other jurisdictions and inequality on ebook VAT makes little sense. Every country has its own VAT approach to both pbooks and ebooks and although the EU who would love to see some VAT harmonisation of a range of products and services we have to be careful what we wish for. Harmonisation could expose the position on physical books and is not guaranteed to do a lot as there are others who share a similar ‘disadvantage’. EU rules prevent member states from extending zero-rating but Harris wants the UK government to aim for that and in the interim lower the rate to the UK's permitted reduced rate of 5%.

We should remember that we are talking English language books and therefore the comparison should be the US, Australasia etc not Europe. It could be argued also that currency exchange also can place some at advantage, or disadvantage and there is little we can do there. We should also recognise that we have to clarify exactly what is a book, a digital service, or multi media and we look forward to that challenge.

So we find ourselves asking exactly what is the point of all this huff and puff? Is it about disparity in tax, harmonisation of VAT, the increase 2.5% increase, promoting reading or MP trying to do his best for his constituent?

Interestingly, we could see an argument based on counter balancing the library closure programme with a reduction of VAT to promote reading but some would suggest that may prove equally taxing to get across.

source Computing

Tax Can Be So Taxing

When austerity is all around, many fundamental givens start to get reviewed and often what we all took as a universal practice may appear to be a luxury too far.

Books in Ireland have enjoyed a zero rate of VAT but as part of the country’s recently announced four-year plan this is now under threat. Digital book editions which are already subject to VAT at 21% but could now also face an increase to 23% by 2014. On page 97 of their economic plan they say, ‘The Government will also examine further rebalancing of the VAT system and zero rated VAT items within the context of wider and ongoing EU level consideration of the matter.’

The French Senate has opted to try to amend the 2011 draft budget and reduce VAT on e-books from 19.6% to the reduced rate of 5.5% enjoyed by print. It is envisaged that the lower rate would help develop legal downloads and should be applied to all cultural products sold online. So where does this leave the European Union which has very little unity on VAT rates on e-books?

Looking further afield The South Africa parliament appears ready to force Treasury to scrap VAT on books in a bid to improve levels of education in the country. This move could amend the Value Added Tax Act, removing the current 14% tax on books and result in a drop of R247million in state revenue.

So as that increase to 20% draws ever closer, where does this leave the UK who are also currently fighting sweeping library cuts?

A report by the Institute for Fiscal Studies (IFS) led by Sir james Mirrlees has made a number of sweeping suggestions as part of a review of the UK's tax and benefits system. Probably the most sensitive recommendation is that VAT should be extended to food, baby clothes and books. They claim that the zero rate of VAT is "an expensive and highly inefficient" way of helping people on low incomes.

The reviw chair and Nobel laureate, Sir James Mirrlees, said, "Some of the recommended reforms involve tweaks to current policy; others involve radical change and are probably for the longer term. It is undeniable that some of the proposed changes would be politically difficult. But failure to reform imposes enduring costs."

However, we can all breath easy as this is not a government review, nor are many of its other recommendations widely accepted today. In a global economy it is often hard to grapple with local taxation and what is even more harder to understand is the vast range of taxation applied to books, the difference of approach between physical and digital when the content is often identical and how a European Union can have so many different rates and approaches for the book.

The ePrice is not Right

The news this week that Sony want UK ebook pricing to come down demonstrates that the issue of ebook pricing has many vested interests. We can’t assume that these perspectives are shared and in many cases are in fact pulling in different directions.

What is clear is that there is no standard epricing approach. Most publishers choose to align the digital price to the recommended retail price (RRP) of the physical rendition, but even here there is inconsistency. Do they choose the hardback, the paperback or start with the hardback and then flip it to the paperback when it is released? Go they hold back its release and release it alongside the paperback? If the price remains aligned to the physical rendition does this mean that when a reprint is produced with a higher RRP the ebook price rises too? Audiobook pricing has long stood by itself and has not been aligned to the physical rendition, so why do it to ebooks? The big question remains - How does the consumer feel about different pricing for what is exactly the same product?

Some believe that a staggered release similar to that used in the film industry is the best way of avoiding the cannibalising of hardback sales. This may work for a few but the content isn’t any different and the experience is much the same and deliberately denying consumers access is an open invitation to the digital pirates who plague the film industry and feed off this staggered release policy.

Some argue that the publishers have given away control of price but others would suggest they never really had it and their only action was to raise prices to offset discounts but maintain margin.

We must also remember that audio books and ebooks incur tax. In the UK physical books are tax free or zero rate whilst digital is at full rate 15%. In other countries the rates differ between the physical digital renditions and across Europe there is little standardisation on VAT. An ebook to a Dublin reseller will not cost the same as it does to a London reseller, but they may well sell for the same price. As all books are sold VAT inclusive, the consumer is often unaware of the tax incurred and only sees the price paid. However, unlike other products, here we have an identical product where VAT is charged differently based on whether its digital or physical. We all see the stupidity, but we must not assume that cash strapped governments will level them at the lower rate.

Then we have the retailers who want to create a price incentive and some big players are prepared to discount at a loss. We have ebook device manufacturers who like Sony only understand volume sales and want cheap books so they can sell more devices.
Finally, we must also not forget the author who is struggling to establish a living based on royalties that can appear to be a moving target. If the ebook becomes a cheap rendition how will the author be rewarded? Where do they want the price to be set?

We already have royalty contractual issues on ebooks. Should these remain as a fixed percentage of RRP, should it be a % of net receipts, should digital be fee based, should they be treated as special sales?

Its understandable to reduce the price of ebooks, to sell them at a fixed price point, even give them away as promotional leaders but the author must be included in the mix. Today we read that Smashwords, a self publishing operator is to supply B&N with their titles. They publish some 2,600 titles per year and give the author 82% of the sale. Is it now time for more authors to wake up and smell the self-publishing coffee?

What we believe is important is that each perspective is understood, but that the industry is not seduced by new entrants with different drivers and works to bring some sanity to this new market opportunity that will enable it to grow whilst rewarding everyone who adds value.

EU votes for e-books VAT cut

The fact that VAT is payable on digital books and audiobooks but not raised on physical ones has always been one of those seemingly silly taxation rules. Same content and it terms of ebooks the experience is exactly the same but in this case the device and the content are taxed. It often also made more difficult when physical and digital content is bundled and even if the digital rendition is ‘free’ VAT is due albeit at a reduced rate.

The Bookseller brought us some great news last week regarding the potential reduction of VAT on audio books and e-books. European Union ministers voted to allow all member states to charge the low rate VAT on books that have a "physical means of support" and now the UK Publishers Association has picked up the challenge to make it happen.
VAT rates fluctuate across the EU states with the UK making physical books zero rated but ebooks full rate at 15% whereas other countries such as Holland charge a low rate for physical books and a whooping great 19% on ebooks. Under the directive UK rates could be reduced to 5%.

A reduction in VAT rates is not an obligation; merely an option and it will be interesting to see governmental reaction across Europe.

We would like to see VAT taken off books full stop but that is highly unlikely.