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Apps, ebooks, and album downloads are about to get more expensive in Europe

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New legislation is making internet companies fork out more tax, and consumers will likely pay the price

Sweeping changes to EU tax law could see the price of apps, ebooks, and MP3s raised throughout Europe by an average of 6.5 percent. The new legislation — known as Directive 2008/8/EC — comes into force on January 1st and is intended to shut down a tax loophole being used by big firms to charge less VAT (value added tax) on digital goods. Although not many individuals will be happy about the prospect of paying more for their games and movies, proponents of the bill say it will level the playing field between small and large companies and create a fairer market. Critics reply that the compliance costs will ruin small businesses.

Big internet firms currently book their sales from low-tax countries

As the law currently stands, businesses selling digital goods in Europe only have to charge customers the VAT of the country the firms are based in. This allows companies like Amazon, Microsoft, Apple, and Google to set up small offices in countries with favorable VAT rates and register all their European sales there.

Luxembourg, for example, is a tiny nation just 82 kilometers long, but its low VAT rates on ebooks (just 3 percent) mean that it’s home to Amazon’s European "headquarters." The company's 500 Luxembourg staff may pale in comparison to the size of its London operation (where it is currently building a 600,000 sq ft office with a planned capacity of 5,000) but all Amazon sales made in Europe are nonetheless routed through Luxembourg. By forcing the retailer to charge VAT on ebooks at local rates (20 percent in the UK for example), the EU says it's making it easier for smaller, local companies to compete with the American giant.

It's expected that companies will simply pass the costs on to consumers

Google Play, iTunes, and all of Amazon's digital stores will be affected by the changes, but it will be up to individual rights holders — that could be developers, music labels, or movie studios — to decide what to do with their prices. Although there's no consensus about what will happen, it's broadly expected that it's the customers that will have to absorb the new VAT rates. A cartoon appearing in the Financial Times in February summed up the business world's likely reaction: "This is either going to cost us, or the consumer. Give me a nanosecond to decide which..."

An album download that currently costs £11.99 ($18.65) based on Luxembourg's 15 percent VAT rate will cost £13.78 ($21.44) when adjusted to the UK's local rate of 20 percent. This 5 percent increase is only slightly below the average. Only Malta, Cyprus, and Germany are lower (18 percent, 19 percent, and 19 percent respectively) and most countries charge nearer to 22 percent, with Hungary home to the highest rates (27 percent). Some shoppers however, might be in for a pleasant surprise: Google's digital stores are based in Ireland where VAT is 23 percent.

Google Play might actually get cheaper for some shoppers — it's currently based in Ireland where VAT is 23 percent

A multitude of rates is not going to affect consumers, but many small business owners and sole traders say that the costs and administrative burdens will be crippling, with some 34,000 businesses affected in the UK alone. However, the EU directive also stipulates that governments set up "one-stop shops" to deal with the admin for these companies. In the UK, micro-businesses have complained that this means losing their VAT-exempt status (applicable if they sell less than £81,000 annually) but the government has replied that they can avoid this if they split their businesses to EU and UK-only divisions. It seems that there is no way of avoiding some administrative burden for companies of all sizes — but at least it can be tackled in one go. For customers, however, it might be a while longer until the full effect of the changes are felt.