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European Tax Regimes Stymie Growth Of Digital Media, Say Advisors

by Robert Lee,, London

04 May 2007

The failure of direct and indirect tax regimes to proactively address the seismic shifts taking place in the media sector may discourage development in this critically important arm of the EU economy, according to professional services firm, KPMG.

David Nickson, Media Tax Partner for KPMG in the UK suggested that: “For companies on the cutting edge of developing and delivering digitised products and services, particularly those fuelling the growth in internet businesses, it is becoming increasingly difficult to align these new ways of doing business with international tax principles."

“The challenges presented to national tax laws are principally those of intangible borders. The immediate reaction from fiscal authorities to the changing environment has been to try to counter the potential for tax leakage, however, it would be wrong to focus solely on the potential for tax loss, as taxpayers simply seeking to meet their obligations will find it increasingly difficult to do so when tax systems fail to proactively address the way profits are generated in the online world.”

“In addition, by shoehorning new forms of economic activity into existing tax frameworks, there is a serious risk that governments’ underlying objectives, such as stimulating business activity and consumer spending in certain sectors could be inhibited.”

Amanda Tickel, Indirect Tax Partner with KPMG in the UK added: “The 2003 changes for VAT in Europe are a good example – at the same time a tax leakage for electronic services sold in to the EU was addressed, EU tax authorities limited the extent of zero or reduced VAT rates, and instead taxed all media published electronically. Now there is a stark difference between VAT payable on printed books and books sold in any other form – audio, digital and downloadable. For the publishing industry, these changes amount to real tax increases and are not simply measures to counter the threat of potential tax leakage.”

The rates levied on digital media throughout Europe average four times those on traditional media such as books and newspapers. In the UK, the difference is between zero percent for traditional media, and 17.5% for digital.

Ms Tickel continued: “Because the focus of the 2003 VAT law changes was on internet based services, there was little public debate, or lobbying activity across the publishing industry in Europe. In retrospect, some governments, notably the French, are now questioning this decision. For the publishers, four years on, the technological capability to read books digitally is only just becoming reality – and choices for new product development mean realisation of the VAT impact."

“Publishers can now reach a wider audience – notably generation Y who prefer digital to printed media. But to reach these consumers the publishers need to invest in technology platforms and build new distribution models. For many countries the addition of VAT completely wipes out the standard profit margin – typically 16% - and there can be little doubt this tax cost presents a further barrier for electronic media."

“The question is, whether the success of European business in the digital space is suffering as a result and whether the original socioeconomic reasons for reducing VAT rates, namely to encourage reading and learning, are being ignored."

“It appears the tax authorities anticipated the future of publishing in the years preceding 2003. Now it is time to readdress this decision with the full attention of those affected, to make an informed choice of how VAT law should apply to the written word in Europe, and to positively encourage digital reading and learning.”

David Nickson concluded: “Tax authorities need to keep pace with the media sector and start collaborating in real time on policy development in this important area, and not just focus their efforts on policing.”

TAGS: Italy

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