For e-book sellers, tax hike distorts field

Rakuten Canada unit, Amazon seen enjoying unfair advantage

Kyodo

Japanese publishers and distributors of electronic books are increasingly alarmed by the upcoming consumption tax hike in the absence of a system to tax e-books and other digital content purchased from overseas vendors such as the U.S.-based Internet giant Amazon.com Inc. and Japanese online vendor Rakuten Inc.’s Canada unit.

With the consumption tax to rise to 8 percent in April from 5 percent now, and to 10 percent in October 2015, concerns have been rising over the growing taxation disparity, which publishers see as a threat to fair competition.

At a public forum held in late November in Tokyo, Tsuguhiko Kadokawa, chairman of Kadokawa Corp., proposed that overseas companies involved in the Japanese market should also pay taxes. He was among about 100 people, including members of the Diet and online distributors, seeking “fair taxation” of overseas businesses.

“Online shoppers are sensitive to prices. One of the reasons that foreign vendors gained a large share in the Japanese market was the unfair environment regarding the consumption tax,” said an executive with bookstore operator Kinokuniya Co.

Under the current system, goods and services purchased in Japan, including items imported physically, are theoretically subject to the consumption tax.

E-books purchased through and downloaded from servers located overseas are considered transactions taking place outside the country, and consequently not subject to the tax.

Shoppers pay consumption tax if they purchase digital items from Japan-based vendors, but not if they purchase them from entities such as Amazon.com or online mall operator Rakuten Inc., which has acquired an e-book firm based in Canada.

According to estimates by Daiwa Institute of Research Holdings Ltd., the Japanese government “lost” around ¥25 billion in consumption tax receipts in 2012 alone from spending on online services overseas such as music downloads and advertising.

The government has been studying methods to levy the tax on foreign vendors, but completing research on transaction patterns and designing of taxation systems is expected to take time. It is unlikely that a measure will be introduced in time for next spring.

One e-book store is shouldering the consumption tax cost to compete with overseas companies. The eBook Japan store boasts one of the largest assortments of e-comics in the country.

“In order to compete with foreign firms on a level playing field, we want the government to respond more quickly,” said Hitoshi Koide, president of eBook Initiative Japan Co., which operates the online store. “Domestic companies also have a duty to protect Japanese culture, including manga.”

Jasper Cheung, president of Amazon.com‘s Japan unit, said the company will gladly follow Japanese rules if they are revised. Rakuten is also thought to hold the same position.

According to Yoshikazu Miki, a law professor at Aoyama Gakuin University, the European Union requires digital content sellers outside the single currency zone to register with the union in order to collect tax.

“At the time the consumption tax was introduced (in the late 1980s), few imagined that the Internet would develop this much. The Finance Ministry should start upgrading legislation to create a fair environment,” he said.