The Korean antitrust authority has carried out a dawn raid on Apple offices in the city of Gangnam-gu. The raid was part of an investigation into claims that Apple effectively charges some developers even more than the 30% cut which has itself come under fire.
The same issue also sees small developers subjected to an effective commission of 16.5%, instead of Apple’s claimed 15% small business rate …
The issue arises because of the way Apple handles the local sales tax, known as VAT (value added tax), reports Foss Patents.
The mobile game developers who brought the complaint that gave rise to this dawn raid argue that Apple charges even more than 30% to developers with respect to the revenues they generate in South Korea.Apple charges 30% of the price paid by end users, which includes value added tax (VAT) and, therefore, is 10% higher than the ex-VAT amount on which Google bases its 30% commission. As a result, Korea’s Mobile Game Association is spot-on when it alleges that Apple actually collects 33% (30% of 110%), not the headline 30% rate.
The above example presumes that a developer doesn’t benefit from the 15% rate that applies to small businesses or to subscriptions after the first year. However, the vast majority of App Store revenues are still subject to the 30% (or, in Korea, 33%) tax, which is why it makes sense to focus on the 30%/33% scenario–and even where the reduced 15% rate would apply, it’s effectively 16.5% in South Korea because of Apple collecting a commission on the gross price (inclusive of VAT).
As the site notes, Korea is not the only country where Apple takes this approach. It points to the VAT-inclusive calculation meaning that the effective commission charged to large developers ranges from 31.2% in France to 35.25% in Turkey. The site encourages developers in all countries where VAT is charged to levy similar complaints with local antitrust regulators.
The Korean antitrust authority notes that Google’s app store, the Play Store, does not do the same. It first accounts for VAT (which is a tax paid by consumers and then handed over to tax authorities) and then deducts its commission from the net price of the app.
Separate Korean antitrust investigation still in play
This latest action is in addition to a separate antitrust investigation against Apple in Korea. The earlier one relates to Apple’s compliance with a law requiring Apple and Google to permit developers to use third-party payment systems.
Both companies say they complied with the law, but the regulator is unhappy with this reducing Apple’s headline commission from 30% to just 27%. Additionally, it is alleged that Apple did not meet the compliance deadline.
On the known facts so far, it would appear that the regulator is correct.
VAT is a tax which is levied on consumers, but not businesses. The way it works for consumer purchases is like this (taking the example of the UK):
- A Brit buys an iPhone 14 for £849
- This price comprises £707.50 to Apple, and £141.50 in VAT
- Apple keeps the £707.50, and pays the £141.50 to the government
This is one of two reasons why Apple’s prices seem higher than they really are in many countries.
But things work different for businesses, as they can reclaim any VAT they pay. This is to prevent VAT being added at multiple stages by the time consumers buy a product. Here’s the same example for a business:
- Apple buys an office chair for £849
- This price comprises £707.50 for the chair, and £141.50 in VAT
- Apple reclaims the £141.50 from the government, so really pays £707.50
When companies pay VAT on a purchase, they are able to reclaim that cost from the government. Because the VAT is in this case levied by Apple, developers have no way to reclaim it.