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The Japanese government is to end a loophole that allows digital content, such as e-books, to be downloaded from abroad to avoid tax.
Designed to plug the loss of ¥24.7bn worth of tax revenues on e-books alone and protect local publishers who pay the 5% consumption tax (due to rise to 10% by 2015), the new law is aimed at foreign publishers like Amazon, and at Japanese publishers such as Rakuten, selling e-books from abroad.
However as the tax will not be levied until late 2015, industry insiders say it will do little to halt Amazon's dominance of Japan's nascent e-book market.
"Even if Amazon's Japanese customers were paying the sales tax now, I have no doubt that Amazon would still be the market leader here," said Tokyo-based publisher Robin Birtle. "They have a huge general retail customer base that they push towards their Kindle store and the Kindle e-book experience is better than that of local competitors."
The move comes as Japan prepares to hike its consumption tax to 8% from 5% this April in an effort to deal with country's massive deficit and collosal borrowing requirements. Domestic publishers said the new tax levy would give foreign and overseas based booksellers, such as Rakuten, a further increased unfair price advantage over smaller publishers who do not have an overseas distributors to take advantage of the tax loophole. Japan has many small publishers. The new tax rules should have few implications for the major Japanese publishers who enjoy government-sanctioned fixed prices for all first-sale books.
"Currently Japan is unable to do anything about cross-border sales tax irregularities because international free trade policies have for a long time held that exports should be free of sales taxes, so as to encourage exports," said Tokyo-based financial analyst Terrie Lloyd in a report. "However, already in Europe online cross-border transactions between EU countries are tax-balanced."
Using EU practices as a reference, he said, Japan was never going to be far behind in revising regulations so that foreign companies selling e-content to Japanese consumers will have to register with the local tax authority and pay the levy. Japan's finance ministry will strike deals with tax agencies abroad so that the consumption tax is added on when sales are made.
Japan's e-book market is still tiny compared to the US's and growing only feebly. According to Tokyo-based IT media firm Impress Business Media Corp., Japan's e-book market generated sales of ¥72.9bn in fiscal 2012, compared to sales of paper books of about ¥1.7 trillion. According to Yano Research Institute, sales of e-books were ¥72.3bn in fiscal 2011, suggesting a very slow take up of digitised books indeed.
"Japan is still in the early days of e-book adoption (it has the feel of the US e-book market in 2008/2009) and so Amazon gets close to two more years of a having a tax advantage just as customers are getting locked in," said Birtle. "The smart move for Japanese industry participants wary of Amazon's lead would be to push hard for DRM-free distribution across the board but such a move is as unlikely as the new tax is probable."