Originally Posted by hungover
"The VAT rate for Electronic Software Downloads or other Apple products classified as services under EU VAT law will be 23% as VAT is charged at the rate payable in the country where Apple Distribution International supplies such products, which is the Republic of Ireland"
iTunes downloads wouldn't be classified as services. This statement would refer to things like their financial services where VAT is charged on the repayments and controlled in part by Apple Distribution International in Ireland; not AppleCare though:
If iTunes supplied from Ireland, the receipts would say Ireland instead of Luxembourg. It's not a 3% VAT rate in Luxembourg for music though, it's 15% for music, 3% for ebooks. Amazon uses the same setup:
"Sales of digital products and services including Kindle content, Amazon Apps, Software & Digital Games (including prepaid gaming cards), MP3 downloads, Cloud Player, and Cloud Drive are shown inclusive of Luxembourg VAT rates of 15% (3% for e-books). For customers based in Iceland, Norway or Switzerland, Amazon will charge local VAT in line with local VAT legislation."
The reason to use Luxembourg is:
"Luxembourg has just half a million residents. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives. In 2011, iTunes S.à r.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.
The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.
“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets until 2007. “Downloads are different from tractors or steel because there’s nothing you can touch, so it doesn’t matter if your computer is in France or England. If you’re buying from Luxembourg, it’s a relationship with Luxembourg.”"
It's not clear if the agreement is over the VAT rate or the income tax rate or both but this doesn't have to affect the prices of the songs because VAT is already assumed to be included. If songs are priced at 0.99 euros and there's 1m euros worth of sales, with Luxembourg taxes, the assumption is that this 1m euros represents ex-tax revenue x 1.15 so ex-tax revenue would be 870k euros. With UK taxes, ex-tax revenue would be 833k euros. Apple's cut would be 261k and 250k respectively, a pretty small drop.
If Apple wanted to maintain their revenue, they can increase their 30% cut of ex-tax revenue (to say 32%) or just take a small amount less money. Apple already charges more for songs in the UK anyway. They are sold at £0.99 so if you deduct 15%, you get £0.86 = $1.42. I'm sure Apple can absorb the difference in tax and maintain £0.99. They still have to be competitive with Amazon and they'll face the same changes.