EU VAT Action Campaign—Written evidence (OPL0015)
Online Platforms and the Digital Single Market
Evidence submitted by Juliet E McKenna, on behalf of the EU VAT Action Campaign
1 The Commission correctly identifies a wide range of digital platforms, offering digital products and services from a wide range of suppliers through a recognised brand and website which becomes the customer’s principle point of contact and charges the supplier what is frequently a substantial fee for the benefits of such visibility.
2. It should be noted that almost all of these platforms are US based. Accordingly their corporate strategy will serve their own commercial interests and then American economic interests over and above European economic interests. It is vital for the well-being of the Digital Single Market that viable online platforms emerge which are based in the EU. This is more important than ever following the European Court of Justice ruling that transfer of EU citizens’ data to US companies under the ‘Safe Harbour’ agreement is unsafe.
3. Online gaming websites such as Steam are now significant platforms and must be considered alongside these listed.
4. This list focuses on business-to-consumer platforms. There are increasing numbers of companies providing online business-to-business services (Stripe, Braintree, WorldPay) to enable companies to trade with their customers. Any analysis or regulation of the Digital Single Market must take these companies into account, most particularly what they can and cannot offer their business customers, such as location data, and any restrictions they put on business access to their services through such measures as turnover thresholds.
5. A wide range of digital products and services have no such recognised or easily findable platforms to offer them 3rd party marketplaces – if they exist at all. Such digital wares include but are by no means limited to
• Niche interest publications and periodicals
• specialist photo/media archives
• agents and resellers for intellectual property such as plays, scripts, scores and music
• knowledge-based businesses offering professional and expert advice
• creative writing and other arts-based tutorials conducted online
• educational resources for teachers and students alike
• membership and subscription based services,
• website maintenance and website hosting
• standalone database solutions
6. Even the largest online platforms do not provide a global service. Google Play and Amazon Kindle only sell into 57 countries iTunes reaches 51 countries. All the major online platforms operate in a limited number of global majority languages.
7. It is vital that strategies for the Digital Single Market recognise and facilitate the substantial amount of direct ecommerce which is already being conducted between digital creators and customers visiting the creator’s own website.
8. Online platforms control and shape the online environment and the customer experience in almost all respects. The seller has little or no choice about website design or layout up to and including having rival products frequently offered for sale directly alongside their own.
9. The customer frequently has no choice over which proprietary format is used to supply the digital product they wish to purchase, locking them into that platform on an ongoing basis. The customer will also need to be fluent in one of a limited number of global majority languages to use the largest online platforms.
10. The benefits of using online marketplaces for digital sellers are vastly increased reach and visibility. Cloud backup and multiple-device usage which big platforms can offer are services which would be prohibitively complex and expensive for a small-scale seller to provide individually. Customers enjoy the advantages of one-stop shopping, able to choose from a wide range of products on a single site.
11. The disadvantages of using online platforms are substantial. The seller is committed to the platform’s non-negotiable Terms & Conditions which are subject to change at the platform’s discretion and such changes are invariably in the platform’s own commercial interest rather than the supplier’s. Some platforms (such as Times Educational Supplement) explicitly forbid sellers offering customers any of their own marketing material or even linking to other products they may have on the same platform.
12. Where a digital seller is trading below their own country’s VAT threshold, they lose all such benefit when selling through an online platform whose turnover exceeds such a threshold. The price the seller sets will be deemed to include VAT and the seller’s revenue reduced accordingly. A £4.99 ebook has an ex-UK VAT (20%) price of £4.15
13. Standard online platform fees frequently take a significant percentage of the product’s price (net of VAT/GST) – such as 30% (Amazon), 40% (Times Educational Supplement) 48% (Google Play). A £4.99 ebook with ex-UK VAT (20%) price of £4.15 earns an author £2.91 once Amazon deduct their fee.
14. Fee structures are often punitive, designed to force down the price of content, particularly for those platforms whose primarily commercial interest is in selling the hardware or software required to access that content, such as ereaders, tablets, ipods and their associated operating systems. An ebook priced at or below £9.99 on Amazon earns its author a 70% share of what remains after VAT/GST. An ebook priced at £10.00 only earns a 30% share of the net revenue.
15. Content made available through platforms such as Spotify earn the creator very little revenue, amounting to pence per play.
16. The seller has no control over, and very little recourse, when their products are delisted. Amazon has suspended books dealing with gay, lesbian and other perfectly legal subject matter when some special interest group has stirred up negative publicity. When Kobo attempted to purge their catalogue of e-books featuring incest, rape and bestiality, small presses and independent authors found their own blameless books delisted as a result of over-broad definitions in the automated search for obscenity. Getting books re-approved takes weeks and costs countless lost sales. In such circumstances, the ability to make direct sales from a seller’s own website is essential for the business’s survival.
17. Online platforms solely focused on offering cheap content do not offer an optimum marketplace for those creating and selling premium digital products. They do not best serve those customers willing to pay for premium digital products created by experts and for specialist interests and businesses. Such sellers and customers both benefit far more with purchases made directly from such businesses’ own websites, found through personal recommendation and knowledge shared online.
18. Knowledge and skills-based businesses in particular rely on building personal, on-going relationships with their customers to encourage repeat custom. Direct customer feedback is also central to the process of developing and improving many digital products such as software tools and games. Detailed feedback is extremely difficult to obtain, if not impossible, when selling via online platforms.
19. The customer can face significant difficulties when comparing digital products offered by online platforms. Space for the creators to outline the specific benefits they offer for particular needs is usually limited and there’s little or no facility for the customer to ask detailed questions. Online reviews are of limited use as these are rarely checked for validity by the big platforms whose review systems are frequently abused.
20. New digital technologies and business opportunities are proving invaluable for those working from home. The disabled can and do run successful businesses because they’re able to work on their own terms and for the hours that suit them. Stay-at-home parents can continue to earn and develop their careers while looking after children. Others may be caring for a chronically ill relative or for an elderly parent. Digital work allows older people to continue working after retirement, to supplement a pension and to share the skills and experience gained from a lifetime’s work. However the fees demanded by online platforms substantially reduce such businesses’ revenue at best and at worst, make such enterprises uneconomic, removing hope of economic independence and guaranteeing long-term reliance on state welfare benefits.
21. Charities and organisations providing specialist services to the disabled lose a significant percentage of their income when selling through online platforms and this arms-length relationship limits the potentially vital help they can offer. Such bodies are far better served by direct links and sales made through their own websites.
22. The digital revolution has seen less economically developed countries use digital technology to overcome the limitations of outdated wired infrastructures as well as the challenges of great distances and inadequate transportation links in non-industrialised countries. Access to educational resources and to knowledge and skills-based information now makes a significant contribution to people improving their situation, reducing reliance on international aid. However, using an online platform simply isn’t an option for large parts of the world, either for buying or selling. These people rely on direct transactions with online companies who can meet their needs. Where ecommerce is limited to the global corporations who already dominating digital markets, the practical effect is profoundly discriminatory.
23. With global online platforms ignoring minority languages, which are actually spoken by tens of millions of people, the growth of online services and opportunities in such languages is effectively stifled.
24. The European Commission is right to be concerned about the monopolistic and monopsonistic practises of the largest online platforms. Their explicit intention is to become the only places people go to buy and the only place people go to sell. Their dominance is already so well entrenched that expecting any rival platforms to emerge is highly optimistic.
25. The legislation introduced in January 2015 requiring VAT to be charged on digital products at the customer’s location rate has substantially increased the largest online platforms’ control of the Digital Single Market and substantially reduced the ability of small scale sellers to trade directly with their customers. Although this was never the intention, the practical effect of this new legislation has been massively anti-competitive and will have ongoing negative consequences.
26. Global corporations require customers to set up accounts for ongoing service relationships that give them location data. Small scale direct sellers using payment processors such as PayPal for one-time-only transactions never needed location data before the introduction of this legislation. Now that this data is required, accessing it through PayPal is impossible for those using the lowest tier of service options and incomplete at best even for those businesses opting for more costly payment solutions. Unless the customer chooses to create a PayPal account, no location data is provided. Without this information, a business cannot satisfy the requirements of the new VATMOSS systems.
27. Other solutions to capture customer location data require substantial reformatting of websites and payment procedures costing thousands of pounds and significantly interrupting trade while businesses are offline for restructuring. Even then, such solutions are problematic. Where extra steps are introduced into the purchase process, the rate of uncompleted sales (known as ‘cart abandonment’) increases with every successive step. Where businesses opt to manually process orders, the customer loses the speed and convenience of purchasing via direct download. All of this hands global online platforms who can still offer one-click and direct download transactions a significant commercial advantage.
28. These new overheads make offering many free or low-cost, entry-level digital products uneconomic for small companies. Customers lose access to such products and services, giving them the choice of buying more expensive options or going without. Moreover a key element of digital business marketing strategy is lost; offering a low-risk first experience to prove the quality of their offering and thus encourage potential customers to buy premium products and services.
29. Where the costs and administrative burden of restructuring to enable compliance with these new regulations is prohibitive, not least because this does nothing to increase sales but merely enables tax remittance via VATMOSS systems, businesses have either closed or opted to block all cross-border sales. This limits customer access to digital products and limits business access to online resources. This all runs counter to the stated aims of the Digital Single Market.
30. These new regulations create a substantial barrier to entry to online commerce for digital entrepreneurs. The need to set up a business with a VATMOSS compliant sales and payment system is now an expensive precondition, required even before an entrepreneur knows what the level of cross-border sales might be since there is a zero turnover threshold for liability. Far from creating conditions where digital products and service can flourish, this new legislation is now stifling the growth of independent trade within the European Digital Economy. The prospects of any new online platforms emerging to create genuinely competitive markets is substantially reduced.
31. Access to payment services offered by major credit card providers requires a level of turnover which most direct ecommerce retailers and digital microbusinesses will never attain. Payment services for SMEs include PCI requirements which are so complex and obscure (even the simplified ones) that it’s difficult for most microbusinesses to even understand and answer the questions appropriately. Consequently, such businesses use PayPal because there is simply no alternative for small scale sales and because their customers now routinely expect it. A major aspect of this customer requirement is PayPal’s guarantee that personal data will be securely held and sensitive information such as their address and credit card details are explicitly not shared with the retailer who is an unknown third party.
32. PayPal have an effective monopoly on processing payments for businesses with turnover of or below €100,000. EU VAT Action have conducted an extensive and robust quantitative survey showing 92% of such businesses use PayPal’s ‘Buy Now Button’ facility. However this does not supply the customer location data necessary to charge cross-border VAT at the correct rates and to remit such taxes via VATMOSS systems. PayPal have demonstrated a complete lack of interest in helping their customers to comply with these new law by supplying a simple country code for all transactions. But small scale sellers have nowhere else to go.
33. PayPal set their own currency exchange rates without regard to for example, the ECB rates. This causes confusion for customers and disadvantages sellers. Consequently the Paypal monopoly is anti-competitive on many levels in the micro business sector.
34. Audible (owned by Amazon) has an effective 90% of the digital audiobook market and according to the German and British Booksellers’ Associations, uses this effective monopoly to force publishers to accept unreasonable conditions in return for selling their digital products. With regard to ebooks, Amazon’s contracts with mass market publishers include clauses which require those publishers to inform Amazon about more favourable or alternative terms offered to Amazon's competitors, otherwise known as ‘Most Favoured Nation’ (MFN) clauses.
35. When dealing with smaller and independent publishers, Amazon, Apple and Google offer substantially worse terms than they offer the big publishers. This makes it extremely difficult for such businesses to compete with the big publishers on price without reducing their net income to uneconomic levels. Exactly what those contracts might be is hard to establish. If the contracts Amazon issues to authors who publish direct through Amazon’s own imprints are any guide, it’s highly likely these agreements include strict non-disclosure agreements.
36. Where Amazon decides a product runs counter to its own commercial interests, it can and will simply stop selling it. Most recently it stopped selling Chromecast and Apple TV hardware. Now customers wanting easy access to online and streaming services via their smart TV will only be offered Amazon’s own Fire TV device, accessing only whatever services Amazon has secured deals form, using its substantial market share as leverage in negotiations.
37. The single most important way to counter further monopolistic abuse by global online platforms is to protect and defend the ability of all sellers, however large or small, to trade directly with their customers via their own websites. It is vital that businesses always have the option to walk away from unreasonable practises, terms and conditions, and to offer customers a choice of purchase options. Unfortunately the new cross-border Digital VAT regulations now impose such high costs and administrative burdens of compliance with VATMOSS systems that direct ecommerce is now uneconomic for small-scale and start-up enterprises, if not wholly impossible due to lack of access to customer location data.
38. Data collection and analysis is central to an online platform’s marketing and growth strategies. This enables them to tempt customers with targeted offers for further purchases. Customers have no access to and very limited control over such data collection unless they use some proxy or anonymising service – which may prevent them from completing a purchase. Sellers using online platforms as 3rd party marketplaces have no access to such data, severely restricting their ability to analyse sales and performance in ways which could potentially encourage them to focus on and increase direct sales from their own websites instead.
39. If the current situation with regard to EU digital VAT compliance by 3rd party marketplaces is any indication, government understanding and oversight of data collection by online platforms is woefully inadequate. Amazon, Apple and Google were all given sufficient advance notice of this to be prepared and advised their users of changes to their non-negotiable terms and conditions towards the end of 2014. However online platforms for the craft sector such as Etsy, Ravelry or LoveKnitting were not even considered, still less consulted and where wholly unprepared to implement these new rules on 1st January 2015, as were Bandcamp and similar sites for musicians. Nine months later exactly how such platforms are enabling sellers to comply with the legislation, or how they’re handling it themselves, remains unclear in most instances.
40. Sellers who are aware of the new regulations routinely see their direct competitors, especially from the US, making no attempt to comply with the 2015 EU digital VAT legislation. This puts compliant sellers at a significant commercial disadvantage.
41. Platforms such as Udemy now require sellers to indemnify them against any and all claims by any tax authority for any underpayment of VAT, and any penalties and/or interest thereon.
42. Crowdfunding site Patreon initially denied their liability for handling VAT on the basis of advice from their accountants PwC, proving that even international financial services companies could misunderstand this legislation entirely. After nine months Patreon have accepted their liability but seem to only be charging VAT on new projects and there is considerable doubt that they are doing so correctly since patrons supporting creators with donations and not receiving any digital product in return are also being charged VAT.
44. There is no indication that any tax authority intends to pursue online sellers who are not complying with the new digital VAT legislation. There is no mechanism for traders to report non-compliant rivals other than sending an email to a catch-all address.
45. However, thousands of small businesses who have been trying to comply with VATMOSS systems have been challenged over discrepancies in their returns for as little as 5 pence. They have received entirely erroneous letters insisting that they owe thousands of Euro in unpaid tax or that they must now deal with foreign tax offices direct and that country’s native language rather than their own.
46. Online platforms should certainly be required to offer more information about the data they collect and the use they make of it. Customers should have some options to limit what platforms learn while sellers should have access to commercially useful data about their own products. How this could possibly be achieved is an extremely challenging question.
47. Provided that barriers to entry are kept as low as possible, the collaborative online, digital economy offers immense opportunities. Someone with a good idea for a digital product or service can invest time rather than money in perfecting it and then take it to a global market at very little cost using free or cheap web services and software tools to create a website.
48. The biggest challenge is visibility; letting potential customers know that this new product is available for purchase. This is where online platforms offering marketplaces with global reach and recognition are invaluable as one element of an effective sales and publicity strategy. However it is vital that digital enterprises are also still able to sell direct in order to maximise profits and customer interaction in order to further develop their products and increase their turnover. Otherwise the challenge becomes escaping the stranglehold of global corporations’ online platforms and whatever terms, conditions and costs they choose to impose.
49. Intended to curb global corporations’ abuses of different VAT regimes, the 2015 regulations on cross-border digital VAT have significantly damaged online traders’ ability to sell direct. The problems created by this legislation urgently need addressing, in order to prevent affected enterprises from being forced out of business during the two to five years it will take for the European Commission to rewrite the legislation, as it now accepts it must.
50. Interim actions recommended by the EU VAT Action Campaign, after extensive consultation with thousands of businesses, tax experts and accountants are as follows:
15 October 2015