The European Commission yesterday gave Luxembourg and France one month to bring VAT up to each country’s standard rate or face significant fines.
Both countries apply reduced VAT rates on digital books of three and seven per cent respectively. This allows companies such as Amazon to pay less tax on ebook sales. Netflix and Skype also headquarter operations in Luxembourg.
Amazon has been criticised for agreeing ebook prices with publishers on the basis that it pays 20 per cent VAT.
“This situation is creating a serious distortion of competition to the disadvantage of operators in the 25 other member states of the union,” the commission said. “The commission has received complaints from a number of ministers highlighting the negative effect on book sales in their domestic markets.”
Richard Asquith, a VAT expert at accounting firm TMF Group, said the move was “in direct response to Amazon’s practice of selling its Kindle ebooks from Luxembourg at a three per cent VAT rate”.
Luxembourg’s standard rate of VAT is 15 per cent, so a rise in ebook tax to the standard level could add £1.16 to the price of a £10 ebook. However, Amazon may instead cut its margins in order to compete. “Raising prices is unlikely in our view,” Jon Payne, an analyst at research firm IHS Screen Digest, said, pointing out that Amazon tends to keep prices on Kindle books low in order to drive traffic to its website.
Amazon did not comment.