The advantage to online content is that global distribution is logistically easier and far cheaper than any other medium. However, there are still laws, payment processing and marketing considerations to take into account when expanding into international markets. In this Laws & Regulations briefing, we discuss three factors critical to selling subscriptions in the UK and Europe — Value Added Tax, Direct Debit and marketing differences. Plus, find out what laws and regulations may be changing that could affect your bottom line.

Related Resources

Technically, US companies selling digital goods to UK and European audiences are mandated to collect value added tax (VAT). Collecting and remitting this tax to governing bodies can be complicated, yet there is also little regulatory enforcement on US companies at this time. Nevertheless, we felt it was important to introduce Insider members to the regulations surrounding VAT so that they could begin to adjust their payment collection and pricing for UK and European subscribers accordingly.

The VAT is a “consumption tax” that’s been remarkably absent from U.S. commerce despite its presence in more than a hundred countries. It operates much like a sales tax in that, ultimately, only the end consumer is taxed. However, a sales tax is charged only once — after a consumer pays for a product. With VAT, however, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.

In other words, each business in the supply chain — from the manufacturer to the retailer, through wholesalers and distributors — charges VAT on its sales (output VAT) and pays VAT on its purchase (input VAT). Traders set off what they have received in VAT against what they have paid out and submit the surplus to the local VAT authority. If their payments outstrip their receipts, they receive the difference. As a result, the tax on value added is imposed at each stage of the production process and the final consumer (who is not registered for VAT) absorbs the tax as part of the purchase price. (For a deeper understanding, see this example comparing sales and value added taxes.)

VAT rates can vary by country (see this Wikipedia chart for the most updated information). The most important thing for paid content sites to keep in mind is that while VAT is not applied to print subscriptions, it is applied to digital subscriptions. (Deloitte recently published a handy PDF on VAT implications for US businesses, which offers a number of examples on how digital content creators can be affected.)

This can make pricing difficult for UK and EU audiences, especially when bundling. For example, how do you apply VAT to a digital and print bundle? The complicated answer is that you must split the bundle, and the digital portion incurs a VAT charge. But other companies choose to make the entire bundle subject to VAT (which can be a 20% charge in the UK).

And since the VAT is collected each time a business in a supply chain purchases a product, it can really eat into revenues. For example, if a company based in the US delivers a mobile app to a UK customer, they will need to collect the VAT (which is 20%). But if they sell the same app through iTunes, Apple will also need to collect a VAT, and will also take a 30% commission.

Companies selling digital goods (also known as Electronically-Supplied Services, or ESS) to UK or EU audiences can maintain VAT compliance by:

1. Setting up a permanent establishment in one of the EU Member States and apply the rate of VAT applicable in that Member State to all their ESS sales to customers within the EU
2. Registering for VAT in each Member State where they make sales to non-business customers and collect VAT at the rate applicable at the rate applicable in those Member States, therefore making separate returns to each national VAT authority.
3. Use the Directive’s Special Scheme that allows companies to register towards a single VAT authority of their choice and charge different rated of VAT depending on where their customers are based. In this case, VAT returns are submitted to a single authority.
4. Sell ESS through local EU-based distributors by redirecting potential customers to their website. The distributor would apply the local rate of VAT applicable in its country and handle VAT administration with the local authorities.
5. Outsource electronic transactions to an E-commerce Service Provider including VAT collection and administration, among other services.

Obviously, paid content executives should seek out legal advice before initiating any of those above options. They will also need to coordinate with payment processors to collect and remit VAT.

Payment preferences can vary significantly in other countries. As our 2013 Online Subscription Benchmark Report found, direct debit is particularly popular in the UK and some European countries, like Germany:

Direct debit, also known as direct withdrawal, allows a merchant to directly withdraw an agreed-upon monthly subscription rate from a customer’s bank account. Before the payer’s banker will allow the transaction to take place, the payer must have advised the bank that he or she has authorized the payee to directly draw the funds.

The ability to directly debit a bank account for ongoing billing has long been a source of envy for many US publishers.  But there’s a caution: Direct debit popularity varies widely across Europe so it’s not as straightforward as you might think.  For example, this chart illustrates differences in payment preferences within the Scandanavian countries, Denmark, Finland, Norway and Sweden:

So, subscription sites are ill-advised to assume payment symmetry across multiple European countries, even if they all belong to the EU. Doing so could significantly reduce your bottom line profits, as unpopular payment options will likely decrease conversion rates.

In the UK, direct debit payments can be set up via these methods:

• paper-based forms which require a signature
• via the telephone
• via the internet using an online application form which has been approved by a bank
• using a telephone keypad to enter data to an automated menu system
• through interactive services on digital television
• face-to-face, where the payer keys their account data directly into the originator’s computer system

Direct debit also has its own rules regarding fraudulent claims and cancellations. Most notably, a customer can contact a bank and ask for a refund on a charge. It is then the merchant’s obligation to contact the customer and ask for payment if the cancellation is disputed. And finally, if a direct debit hasn’t been withdrawn in 13 months, then the bank will cancel the direct debit mandate. This means that sites with annual subscriptions must collect payment and resolve any problems within one month of renewal.

The most fascinating aspect of marketing overseas is how marketing aesthetics can vary.

For example, look at how the Harry Potter novels were given different covers: The first one was for US audiences and the second was for UK audience.

Periodicals, such as TIME magazine, are also known to employ different covers for US and international editions of the same magazine.

And marketing channels vary by location and revenue stream as well. For example, events are a profitable revenue stream for many content sites, and some have launched international events. But telemarketing has historically been used to sell tickets to UK audiences, whereas US audiences prefer to be notified by email first.

This is not to say you shouldn’t take advantage of the easy distribution the Internet provides to market internationally, particularly to communities and audiences that match a certain psychographic profile but are geographically scattered (e.g., the market for American television is not confined to the US, just as the market for Hindi films is scattered across the globe). But just be aware that you may need to tweak your marketing efforts according to regional preferences and fundamental differences.

While the possibilities for cultural deafness are nearly limitless, one of my favorite examples is striking for its simplicity. It actually comes from a nonprofit media company I worked for that was launching an educational site for children across the world. The marketing department wanted to promote the October launch with “Coming this fall!” The research department had to remind them that it’s only autumn in the Northern hemisphere at that time.

Just like the US, laws regulating digital goods and eCommerce in the UK and EU are constantly changing, and unfortunately, not always in the same direction as the US. Here are some recent examples:

• In September of 2012, the UK government called paywalls “deeply unhealthy” for scientific journals and announced plans to make all research publications “open-access  in order to promote knowledge sharing and scientific advancements.
• EU Courts disregarded “licensing” copy in EULAs and will allow consumers to resell digital products. However, the law is still in the courts, and may be repealed.
• In addition, there are differences in copyright laws and protection of personal data in many European countries. For example, sites that use cookies are required to inform visitors, and visitors must be allowed to opt-in or opt-out of accepting cookies.

We’ll be providing you with more actionable information about the differences between in laws, regulations and marketing abroad versus in the US over the next few months. In the meantime, take a look at these Related Resources.

Value-Added Tax (VAT) and the U.S. Digital Business Caught in transmission (PDF published by Deloitte).
HM Revenue & Customs Website (UK government site)
US Commercial Service (US government site)
Taxation and Customs Union on “How VAT Works” (EU government site)
Wikipedia on VAT (with examples)