Changes to EU VAT lead to changes in Kindle contract

ATTENTION KDP authors: As was discussed in the third edition of The Global Indie Author, and in my recent public lectures, on January 1st the whole of the EU changes from a seller-based system to a consumer-based system with regards to VAT on ebooks, with what is known as the destination principle.

The destination principle is intended to close the loophole whereby companies such as Amazon, Apple, Google, et cetera registered themselves in the EU in Luxembourg where VAT on ebooks is the lowest in the EU, at 3%. This gave these global players a huge advantage over national retailers who, because they are registered in their respective countries, have to charge the higher national VAT to consumers. By moving to the destination-based model, the playing field will now be leveled: regardless of where the seller is located, the consumer must pay the rate of their national tax. A consumer in the UK, for example, will have to pay 20% VAT regardless of whether they buy from Amazon or WH Smith.

VAT rates in the EU range from Luxembourg’s 3% to a high of 27% in Hungary. It was my expectation that KDP, to accommodate such variability, would move from a VAT-exclusive pricing model to a VAT-inclusive model. Today, in a lengthy email to authors and on the KDP message board, KDP announced exactly that. They have, as was also anticipated, made adjustments to the pricing band to protect their favoured €9,99/£9.99 pricing band.

In anticipation of the changes, on January 1st Amazon will make a one-time adjustment to your existing EU prices to include VAT, but if doing so pushes your ebook out of your previously selected royalty option, Amazon will adjust your price up or down to keep your pricing within the royalty price band you previously selected.

Authors need to be aware that this change means one of two things: you will have to increase your price or accept lower revenues.

For example, say you priced your KDP ebook at £3.87 to achieve a sale price of £3.99 in the UK (£3.87 + 3% VAT = £3.99). If you maintain the price of £3.99 after VAT changes to 20% for the UK, your pre-tax price will now be £3.32. Your 70% royalty will therefore fall from £2.71 to £2.32, a decrease in revenue of about 14%. If, on the other hand, you want to maintain your previous revenue of £2.71, your tax-inclusive sale price will have to be increased from £3.99 to £4.66.

Amazon’s change to a VAT-inclusive model means that charm pricing will still be possible on Amazon despite the variable rates. It also means that Amazon will likely now have to include in their reports the country where the sale took place, not just on which site the sale took place. This provides authors with more detailed and therefore more useful sales data.

 

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