News

Luxembourg VAT move could lower Kindle e-book prices

Amazon's Kindle business could be handed a massive competitive advantage in the new year after Luxembourg said it would reduce value added tax charged on e-books from 15% to 3%. The move means Amazon will be able to reduce the price of Kindle content in comparison to other companies which sell e-books from within the UK attracting the full rate of VAT at 20%.

VAT on services is charged at the rate imposed by the country of the seller, not the buyer, and though this is due to change in 2015 to the country of the buyer, the development has raised fears that Amazon will be able to further drive down Kindle e-book prices and undermine competitors. According to tax specialists the change would also include e-books priced under agency agreements where Amazon acts as the agent for UK-based publishers, throwing a further anomaly into an already complicated pricing dynamic.

The Luxembourg authorities said they would apply a “super-reduced 3% VAT rate” on electronic books as of 1st January 2012. Amazon has previously told its customers that Kindle content is subject to VAT in the EU, and that all prices shown in the Kindle Store on Amazon.co.uk currently include Luxembourg VAT at a rate of 15%. When approached, Amazon was unable to comment to The Bookseller.

Luxembourg's move, which goes against EU regulations that don't allow e-books to be exempted from the full rate of VAT, mimics that of France, which will also apply the lower rate of VAT on e-books from the new year. French ministers have told publishers that the State will pay any fines levied by the EU.

Earlier this week, Labour MP Tom Blenkinsop asked the Chancellor of the Exchequer whether his department planned to introduce a zero rate of value added tax on e-books. In response Tory MP David Gauke (exchequer secretary) said it was not permissible: "Under EU law, VAT on electronic books must be charged at the standard rate. Existing agreements with our EU partners do not allow the UK or other member states to introduce a new zero-rate or extend an existing one to relieve e-books from VAT and they specifically exclude electronically supplied services, which includes e-books, from a reduced rate."

The EU has said that it intends to revise how VAT works across the single market, with an assessment set to run in 2012 and proposals to be made by the end of 2013. As part of that it has indicated that "similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the on-line and the physical environment is addressed”. It has already been agreed that VAT will be charged on where the buyer resides rather than where the content is sold from though it is not clear if the proposed date of change of 2015 is fixed, or whether it can be moved forwards in light of the Luxembourg decision.

James Daunt, m.d of Waterstone's, said: "We would prefer VAT to be lower or zero-rated for e-books but believe it is wrong to exploit loopholes such as this. It is confusing for the consumer and takes money out of the UK tax system, which I cannot believe is in the best interests of the trade or the indeed the country.”   

Julie Howkins, e-commerce manager at Gardners and who pioneered Hive, said: “I don’t know how significant it is going to be because Amazon already reduces the prices of e-books which aren’t governed by the agency model further than Hive. If it effects the agency model then that is a different scenario.”
 

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This is essential and is very welcome news. The current VAT often comes as a surprise to publishers moving into the Kindle market and makes competitive pricing extremely difficult.

Having read on I realise I may have misunderstood. I took it to mean that all publishers offering Kindle versions will have the lower rate of VAT applied to them because the seller is Amazon and a US based company. VAT on all ebooks really needs to come down.

It does need to come down. In the short term however it would be better if amz was not handed this advantage on a platter. FYI goods are charged at the rate where the customer is, services (including electronic) are paid at where the supplier is. This will change in 2015.

There is nothing to stop WHSmith, Waterstones or others setting up in Luxemborg and also selling ebooks at 3% VAT. It just happens to be where Amazon's European companies are registered.

In terms of equalisation you have to hope it does not go the other way, so the EU say that VAT must be paid on physical paper books, to bring them in line to ebooks.

Tax avoidance will always happen. Just look at what the Channel Island based CD and DVD sellers are looking at post 1/4/2012 when the tax free allowance disappears. Some are just looking to ship from Switzerland, which is where one of the UK sellers alreay ships some stuff from. Will give them back the £15 allowance, until the government remove it from all countries shipping to the UK outside the EU.

Yes, I see. As Kindles are electronic services this means UK publishers and authors selling them will benefit from the lower rate tax seeing as Amazon is a US based supplier, if I'm understanding right. So it's good news for authors and publishers, but annoying for booksellers. With the crisis in bookselling we do need VAT lowered sooner rather than later, and 2015 is a long way away during a recession.

I agree, Malcy. Amazon isn't the only ebook seller with a US address. Book Depository also set up in the US even before the Amazon deal. There must be ways for other ebook sellers to take advantage of this lower rate VAT. We really need it. I don't think the VAT on paper books will be put up. It seems to me that the higher rate on ebooks as 'electronic services' is an error and will be rectified.

This is good news for campaigners who wanted to get the UK to abolish VAT on ebooks, which it can't do under EU law. Because Amazon.co.uk is tax registered in Luxemboug, this decision means that the VAT charged on UK publishers selling through Amazon will come down, and because Amazon.co.uk has roughly 85% of the UK ebook market, this means that at the very least the margins UK publishers earn on ebook sales will increase. With a bit of luck the lower costs might even be passed on to readers - at least in some cases.

Of course, longer term this is a massive impediment to the growth of UK e-tailers who choose to remain tax registered in the UK. Will we see a flight of these e-tailers to Luxembourg?

malcy is right that there is a threat that VAT equalisation at the EU level could possibly mean imposing VAT charges on printed books in Britain. As I have argued on my blog, longer term the answer is still to lobby the EU for a lower VAT on ebooks across the board. This means lobbying the European Federation of Publishers as well as your regional MEPs.

I think your analysis is right Damien, at least for agency publishers. Those publishers will continue to price ebooks across all websites at the same level under the MFN clause, but will gain extra margin from those ebooks sold via Amazon where the lower VAT rate applies. Whichever way you look at it it though, it favours Amazon which as the post from malcy implies just got lucky in its choice of location! Anyone, care to guess why Luxembourg has made this move . . .

Damien am I missing something but surely this VAT move on Kindle sales will only impact consumers ? and not publishers. They will get the same net price as before, but Amazon instead of adding 15% for Luxemborg VAT will only have to add 3%. Therefore prices on Amazon will drop.

As said above this will just push even more of the market to the kindle unless other ebook sellers move to low VAT countries.

Does anyone know what VAT is applied to the Kobo books at WHSmith. Is it the UK 20% or the US rate ? presume this is 0% ? as I would guess they are incorporated in a state with no sales tax the same as Amazon

As publishers we will certainly be using this to be able to set competitive prices. It has been hard so far. It also means being able to give the kind of royalties to authors that we want to give - with income equally shared between us and them. We are already doing this but it all adds up to a price we would like to lower slightly.

Malcy - this does have a big effect on publishers and authors because we take into account the total price to the customer including VAT, while trying to tempt them to buy. As publishers we desperately need to increase the number of customers buying ebooks, and this will help us price the books in a competitive way. We have to take into account the 30% commission to Amazon, this very high VAT, plus our desire to pay authors a fair royalty. It's a tight squeeze at the moment to do all this and price an ebook in a way that attracts customers.

Philip you answered the question in your original article. France has moved to lower VAT on ebooks, so Luxemborg followed. As both French speaking countries I guess that they did not want their whole market shifting to French sellers. Is then just a happy coincidence that Amazon are incorporated there.

Back to the earlier discussion on why not here in the UK as well. If France and Luxemborg are just ignoring EU law, why does the UK government say we can't as illegal. Just do the same as them. I think this is one reason the EU gets such bad press here as UK courts and governments always follow the letter of the law whilst many other EU countries just ignore the parts they don't like, and follow common sense / national interest.

Adele thanks for clarifying

Hi malcy. Print publishers are likely to pass savings on to consumers, as they don't want consumers to be paying more on Amazon than they would for a paperback - at least not for bad PR reasons (see the recent investigation into ebook price fixing).

But for those publishers who don't sell printed books - or who sell more ebooks than printed books - their prices are already likely to be lower than paperback, etc., so they don't have to lower prices in order to attract readers. For them this will increase margins. We might even see a boom in online-only publishers as a result of this because their production and distribution costs have just got lower still!

yes there seems no reason why the UK could not follow France and Luxembourg in applying the lower rate, though it is not allowed to add any further exemptions.

The profit margin is so tight at the moment if the ebook is priced competitively, and yet we really want to increase publication of ebooks. This will also benefit authors because we can consider more authors from other countries as they're easier to promote in ebook version (it can be hard to take a risk on them in print form as the initial investment is so expensive and they aren't around to help with launch events and promotion). We can also produce long novels which can become too expensive in print form, so debut novelists are also limited in the length of book they can submit to publishers. Ebooks are so important to let us open up all these opportunities.

So no one worried that Amazon are robbing the Exchequor of tax money that could be spent on schools, hospitals etc? If they are avoiding UK VAT on eBooks, what else are they avoiding it on?

Keep in mind that a lot of European countries have laws on book pricing, requiring fixed prices for some time. They do not apply to ebooks everwhere (e.g. not in the Netherlands), but in other places they do (e.g. Germany where the responsible law was worded specifically to include ebooks).
So, a lot of people will have to change prices on amazon and not even know it or find out before they're being sued for something they did not even know had to do.

Shadaik - we don't have to change anything to be sure the correct VAT is being paid. The VAT and Amazon commission are added by Amazon after we upload our Kindle conversions. They are the suppliers so they are responsible for that.

As for worrying about them not paying tax - well, we need to increase the amount of ebooks sold before there would be much tax on them. VAT needs to be lowered to make competitive ebook pricing possible.

Prince - I don't think this regulation is specifically about Amazon, but affects suppliers based outside the UK including them, so it's not about tax avoidance. With the bookselling crisis publishing companies are closing, and we need help to increase ebook sales as this could help publishers survive. Ebooks offer one possibility for expansion, but the way pricing works at the moment makes this difficult.

I'm more concerned about the 30% commission Amazon charges us for selling our Kindle books, if there's one thing I would want to criticise them for in the ebook market.

This is essential and is very welcome news. The current VAT often comes as a surprise to publishers moving into the Kindle market and makes competitive pricing extremely difficult.

Having read on I realise I may have misunderstood. I took it to mean that all publishers offering Kindle versions will have the lower rate of VAT applied to them because the seller is Amazon and a US based company. VAT on all ebooks really needs to come down.

It does need to come down. In the short term however it would be better if amz was not handed this advantage on a platter. FYI goods are charged at the rate where the customer is, services (including electronic) are paid at where the supplier is. This will change in 2015.

There is nothing to stop WHSmith, Waterstones or others setting up in Luxemborg and also selling ebooks at 3% VAT. It just happens to be where Amazon's European companies are registered.

In terms of equalisation you have to hope it does not go the other way, so the EU say that VAT must be paid on physical paper books, to bring them in line to ebooks.

Tax avoidance will always happen. Just look at what the Channel Island based CD and DVD sellers are looking at post 1/4/2012 when the tax free allowance disappears. Some are just looking to ship from Switzerland, which is where one of the UK sellers alreay ships some stuff from. Will give them back the £15 allowance, until the government remove it from all countries shipping to the UK outside the EU.

Yes, I see. As Kindles are electronic services this means UK publishers and authors selling them will benefit from the lower rate tax seeing as Amazon is a US based supplier, if I'm understanding right. So it's good news for authors and publishers, but annoying for booksellers. With the crisis in bookselling we do need VAT lowered sooner rather than later, and 2015 is a long way away during a recession.

I agree, Malcy. Amazon isn't the only ebook seller with a US address. Book Depository also set up in the US even before the Amazon deal. There must be ways for other ebook sellers to take advantage of this lower rate VAT. We really need it. I don't think the VAT on paper books will be put up. It seems to me that the higher rate on ebooks as 'electronic services' is an error and will be rectified.

This is good news for campaigners who wanted to get the UK to abolish VAT on ebooks, which it can't do under EU law. Because Amazon.co.uk is tax registered in Luxemboug, this decision means that the VAT charged on UK publishers selling through Amazon will come down, and because Amazon.co.uk has roughly 85% of the UK ebook market, this means that at the very least the margins UK publishers earn on ebook sales will increase. With a bit of luck the lower costs might even be passed on to readers - at least in some cases.

Of course, longer term this is a massive impediment to the growth of UK e-tailers who choose to remain tax registered in the UK. Will we see a flight of these e-tailers to Luxembourg?

malcy is right that there is a threat that VAT equalisation at the EU level could possibly mean imposing VAT charges on printed books in Britain. As I have argued on my blog, longer term the answer is still to lobby the EU for a lower VAT on ebooks across the board. This means lobbying the European Federation of Publishers as well as your regional MEPs.

I think your analysis is right Damien, at least for agency publishers. Those publishers will continue to price ebooks across all websites at the same level under the MFN clause, but will gain extra margin from those ebooks sold via Amazon where the lower VAT rate applies. Whichever way you look at it it though, it favours Amazon which as the post from malcy implies just got lucky in its choice of location! Anyone, care to guess why Luxembourg has made this move . . .

Philip you answered the question in your original article. France has moved to lower VAT on ebooks, so Luxemborg followed. As both French speaking countries I guess that they did not want their whole market shifting to French sellers. Is then just a happy coincidence that Amazon are incorporated there.

Back to the earlier discussion on why not here in the UK as well. If France and Luxemborg are just ignoring EU law, why does the UK government say we can't as illegal. Just do the same as them. I think this is one reason the EU gets such bad press here as UK courts and governments always follow the letter of the law whilst many other EU countries just ignore the parts they don't like, and follow common sense / national interest.

yes there seems no reason why the UK could not follow France and Luxembourg in applying the lower rate, though it is not allowed to add any further exemptions.

Damien am I missing something but surely this VAT move on Kindle sales will only impact consumers ? and not publishers. They will get the same net price as before, but Amazon instead of adding 15% for Luxemborg VAT will only have to add 3%. Therefore prices on Amazon will drop.

As said above this will just push even more of the market to the kindle unless other ebook sellers move to low VAT countries.

Does anyone know what VAT is applied to the Kobo books at WHSmith. Is it the UK 20% or the US rate ? presume this is 0% ? as I would guess they are incorporated in a state with no sales tax the same as Amazon

As publishers we will certainly be using this to be able to set competitive prices. It has been hard so far. It also means being able to give the kind of royalties to authors that we want to give - with income equally shared between us and them. We are already doing this but it all adds up to a price we would like to lower slightly.

Malcy - this does have a big effect on publishers and authors because we take into account the total price to the customer including VAT, while trying to tempt them to buy. As publishers we desperately need to increase the number of customers buying ebooks, and this will help us price the books in a competitive way. We have to take into account the 30% commission to Amazon, this very high VAT, plus our desire to pay authors a fair royalty. It's a tight squeeze at the moment to do all this and price an ebook in a way that attracts customers.

Adele thanks for clarifying

Hi malcy. Print publishers are likely to pass savings on to consumers, as they don't want consumers to be paying more on Amazon than they would for a paperback - at least not for bad PR reasons (see the recent investigation into ebook price fixing).

But for those publishers who don't sell printed books - or who sell more ebooks than printed books - their prices are already likely to be lower than paperback, etc., so they don't have to lower prices in order to attract readers. For them this will increase margins. We might even see a boom in online-only publishers as a result of this because their production and distribution costs have just got lower still!

The profit margin is so tight at the moment if the ebook is priced competitively, and yet we really want to increase publication of ebooks. This will also benefit authors because we can consider more authors from other countries as they're easier to promote in ebook version (it can be hard to take a risk on them in print form as the initial investment is so expensive and they aren't around to help with launch events and promotion). We can also produce long novels which can become too expensive in print form, so debut novelists are also limited in the length of book they can submit to publishers. Ebooks are so important to let us open up all these opportunities.

So no one worried that Amazon are robbing the Exchequor of tax money that could be spent on schools, hospitals etc? If they are avoiding UK VAT on eBooks, what else are they avoiding it on?

Keep in mind that a lot of European countries have laws on book pricing, requiring fixed prices for some time. They do not apply to ebooks everwhere (e.g. not in the Netherlands), but in other places they do (e.g. Germany where the responsible law was worded specifically to include ebooks).
So, a lot of people will have to change prices on amazon and not even know it or find out before they're being sued for something they did not even know had to do.

Shadaik - we don't have to change anything to be sure the correct VAT is being paid. The VAT and Amazon commission are added by Amazon after we upload our Kindle conversions. They are the suppliers so they are responsible for that.

As for worrying about them not paying tax - well, we need to increase the amount of ebooks sold before there would be much tax on them. VAT needs to be lowered to make competitive ebook pricing possible.

Prince - I don't think this regulation is specifically about Amazon, but affects suppliers based outside the UK including them, so it's not about tax avoidance. With the bookselling crisis publishing companies are closing, and we need help to increase ebook sales as this could help publishers survive. Ebooks offer one possibility for expansion, but the way pricing works at the moment makes this difficult.

I'm more concerned about the 30% commission Amazon charges us for selling our Kindle books, if there's one thing I would want to criticise them for in the ebook market.