Europe’s New Tax ‘Solution’ May Have Created a Big Problem for Indie Artists, Labels

Beginning this Thursday (Jan. 1), new changes in European Union tax regulations will mean that all businesses selling digital products in the EU, including music, audio and film downloads, eBooks, computer games and app purchases, will be forced to charge VAT (sales tax) based on the country where the consumer resides, rather than where the seller is based — regardless of whether or not the supplier is based in the EU.  

The change in law is being introduced to close a tax loophole that currently enables multinational web giants like Amazon, Google and Apple to charge lower rates of sales tax by basing operations in European countries such as Luxembourg, where rates are among the lowest in the European Union.

Both Amazon’s European headquarters and iTunes S.a.r.l, the Apple subsidiary which runs European iTunes online services, are based in Luxembourg, where the rate of VAT is 15% on music downloads and as low as 3% on e-books.

Regulators hope that that the closure of this tax loophole will create a level playing field for broadcasting, telecommunications and e-service businesses by removing the competitive advantage of EU member states with lower rates of VAT.

However, the changes also carry serious and potentially damaging ramifications for thousands of independent music artists and labels selling digital album and song downloads, as well as early-stage start-ups, who will now have to dedicate considerable time and resources to meet their revised tax obligations.

Under the new laws all businesses — no matter their size or revenue — supplying digital services direct to consumers in an EU member state (not including goods and non-digital products) will automatically forfeit their VAT exemption threshold (previously set at £81,000 in the United Kingdom) and be liable to charge VAT on each sale.

For example, if someone in Barcelona purchases a music download or access to a music subscription from a US company then that company must charge the customer Spanish VAT. From Jan 1, businesses supply digital services or products across EU borders are also required to obtain and keep two pieces of information that prove where the consumer lives and that the correct rate of VAT has been charged.

To avoid digital companies and sole traders — i.e. musicians selling downloads directly through their own website — having to become VAT registered in each member state in which it supplies services to customers, a ‘Mini One Stop Shop’  known as VAT MOSS has been created, which will forward VAT payments to the relevant member state or tax jurisdiction.

Although large businesses will be well-equipped to cope with the changes, the fear is that smaller operators will struggle to comply with the costs and administrative resources that VAT MOSS entails and that, contrary to creating a level playing field, it will actually strangle innovation and impede the development of start-up digital businesses.

In response, a petition has been set up in the U.K. campaigning against the EU regulations. Protestors have also taken to Twitter using the hashtags #VATMESS and #VATMOSS.

Source: Billboard