The European Commission has sought to close a legal loophole allowing Amazon to profit by paying Value-added Tax (VAT) at a lower rate than the European standard for eBooks sold on its site to European customers, while charging the standard rate to publishers.
The Commission recently ordered Luxembourg to increase its VAT rate on digital services from 3% to 15%, seeking to close the loophole that had enabled multinational companies such as Amazon, Skype and Netflix, registered in Luxembourg, to charge the lower rate on sales throughout the EU. Although VAT does not apply to sales of physical copies of books in the UK, VAT charged at the rate of 20% applies to sales of eBooks in the UK. Under EU law, VAT must be charged at the standard rate on eBook sales. According to the UK’s Guardian newspaper, Amazon has been forcing British publishers to pay the full 20% tax rate on eBook sales, while paying only 3% to the Luxembourg authorities.
An EU directive handed down in August 2012 required EU countries to set a standard VAT rate of 15%. But Luxemburg lowered its VAT rate from 15% to 3% in early 2012, to encourage the online publishing and media industry to set up shop in the tiny European country. The French government similarly lowered its VAT rate to 7%, and stated a willingness to accept any fines that may be imposed by the EU as a result. If Luxembourg refuses to increase its VAT rate, the matter may be referred to the European Court of Justice, which can impose significant fines.
The EU had given Luxembourg 30 days to increase its VAT rate to bring it into line with the rest of the EU, or risk facing an action in the European Court of Justice. That deadline passed in late November 2012. Luxembourg’s Finance Minister Luc Frieden has since stated in parliament that the government has no plans to change the country’s VAT rate.
 Ian Griffiths, “Amazon to be stripped of tax advantage on sale of ebooks”, Guardian Newspaper (Online) 24 October 2012.
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