iTunes Royalties and VAT-Inclusive Pricing

Yesterday I wrote about Amazon KDP royalties and how the changes in VAT in the EU would affect author and publisher income from Kindle sales.  Today, let’s tackle iTunes Royalties and VAT-inclusive pricing.

You may not know this, but Apple’s prices have always been VAT-inclusive at a rate of 3%. This means that your eBook prices on Apple should have been 3% higher than they were at Amazon and, if they weren’t, you were making less per eBook sold than on Amazon.  Now that both Amazon and iTunes will be pricing VAT-inclusive, Amazon will be the winner, because Amazon offers greater pricing flexibility than iTunes, though it may mean that your iTunes royalties will be higher per sale because your price on iTunes will be higher.

Changes in EU VAT structure could lower authors' iTunes Royalties.

On December 5th, Apple sent out a modest email on the subject of the VAT changes, including a link to more information.  Here’s what you get when you click the link:

Why are value-added tax (VAT) rates changing, and when?
The European Union approved changes to VAT legislation impacting the applicable VAT rate for the sale of digital goods, including electronic books. Previously, VAT rates for electronic books in the European Union (EU) were based on the retailer’s country. Beginning January 1, 2015, the applicable VAT rates in EU territories will be based on the country in which a customer is resident.

VAT rates for customers in non-EU countries like Norway (25%) and Switzerland (8%) will remain unchanged.

Contact your tax or legal advisor for further information about these changes.

How are VAT rates changing?
Before January 1, 2015, iTunes has applied the electronic book VAT rate for its country of residence,  Luxembourg (3%), for all sales in the European Union.

Beginning January 1, 2015, the following VAT rates (current as of November 30, 2014), based on the customer’s country of residence, will be applied:

Country VAT Rate Applied to eBooks
Austria 20%
Belgium 21%
Bulgaria 20%
Croatia 25%
Cyprus 19%
Czech Republic 21%
Denmark 25%
Estonia 20%
Finland 24%
France 5.50%
Germany 19%
Greece 23%
Hungary 27%
Ireland 23%
Italy 22%
Latvia 21%
Lithuania 21%
Luxembourg 3%
Malta 18%
Netherlands 21%
Poland 23%
Portugal 23%
Romania 24%
Slovakia 20%
Slovenia 22%
Spain 21%
Sweden 25%
UK 20%

Note that VAT rates in EU member states may change at any time depending on relevant legislation. The standard VAT rate is used for all EU countries except France and Luxembourg, which have authorized a lower electronic book VAT rate.

Who is affected by these VAT changes?
Publishers who sell books on iBooks in the European Union will be affected.

How do the changes affect me?
The customer prices you deliver to iBooks are customer facing prices which include VAT, while Apple’s commission and the publisher’s proceeds are calculated after VAT is deducted. We will not be making any automatic adjustments to your prices to reflect any new VAT rates. Unless you update your prices on iBooks, your proceeds for some book sales in the EU may change. {Emphasis mine.}

For example, here is a comparison of how VAT calculations may change for a book you priced at € 9.99 in two different territories:

Customer’s country of residence EU Spain France
iBooks book price in country being sold €9.99 €9.99 €9.99
Year book was sold 2014 2015 2015
VAT rate 3% 21% 5.5%
VAT total €0.29 €1.73 €0.52
Amount after VAT deducted €9.70 €8.26 €9.47
Apple’s commission (30%)* €2.91 €2.48 €2.84
Publisher’s proceeds (70%)* €6.79 €5.78 €6.63

{Whoa! I’ll make a full Euro less in Spain???!!}

*Apple’s commission and Publisher’s proceeds are calculated after VAT has been deducted from the selling price on iBooks.

 If you want to change the price of your books, you can schedule a price change to take effect on or after January 1, 2015.

In a way, I give Apple a bit more credit than Amazon for explaining what is happening.  And while it would be nice if they increased the prices across the board for all books to reflect the new VAT, Apple has an advantage over Amazon because it allows you to schedule the price change to take effect when the new rates take effect.

That said, Apple should be making the change because it can do so programmatically and far more easily than any one author or small publisher.  There are 28 countries in that list.  Whereas you could previously log onto and change the US price and have that cascade down through all 51 of Apple’s iTunes stores, you will now have to manually update 28 of the 51 prices.  If you have a couple of dozen or more titles, this is quickly going to become a nightmare.

Also, Apple’s application of tiers is going to limit you some and ultimately make all of your books more expensive on iTunes than other sites.  For example, on Amazon a $2.99 book that goes from VAT-exclusive to VAT-inclusive needs to rise in price somewhere between 16¢ and 75¢.  But Apple’s tiers are generally $1.00 apart.  So if you are selling on Amazon, you can individually price your books in a number of EU countries more precisely than you can on Apple.  And your titles on Apple are going to end up being more expensive.

Take the UK, for example.  Apple’s chart says the VAT there is 20%.  On Amazon, your £2.99 book can be priced at £3.59, an increase of exactly 20%.  But on Apple, where the tiers restrict you, you have to go up a full Pound to $3.99, thus your titles on iTunes will be priced higher than on Amazon,, or Kobo, always, it seems.

I’ve contacted Apple and brought this to their attention.  The big question is, will they do anything about it?

In the meantime, independent publishers need to pay careful attention to their pricing to ensure that all markets are now priced accordingly, or face a nasty surprise with the first royalty reports of the new year.


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