Amazon’s e-book tax loophole could mean lower European prices, but that’s bad for UK competition

In January this year, Amazon.com announced that its Kindle e-books were outstripping sales of paperback books. This followed its announcement from the previously July that its digital books were already outselling hardbacks, so it was only a matter of time before the mammoth milestone was announced.

In May this year, Amazon.com announced that it was selling more e-books than both paperbacks and hardbacks combined. This key moment shouldn’t be underestimated – when Johannes Gutenberg invented the printing press way back in the fifteenth century, he changed the world forever.

The printing press paved the way for the mass circulation of newspapers, instructions, manuals, journals and, of course, books. But in a comparatively short period of time, books are suddenly giving way to, well, e-books. That’s no disaster though, as long as people are still reading, that’s the main thing.

As the world’s largest online book retailers, Amazon holds a lot of clout. It can guide trends, and control how people consume the written word, something it did first of all under its original e-commerce ‘delivery’ model, and reinvented yet again with its popularization of the downloadable e-book model.

But a little factoid may have escaped some Europeans this past week. Amazon’s decision to establish its European HQ in Luxembourg may prove to be very fruitful for the company, as the country is now slashing value-added tax (VAT) on e-books from 15% to 3%, meaning Amazon’s Kindle business could really be set to flourish in the UK.

At present, tax isn’t applicable to normal books in the UK, but the country’s current VAT rate of 20% does apply to e-books. This means that Amazon will, if it chooses to, be able to seriously undercut local e-book sellers. The reason that the UK has this tax difference in place between physical and electronic books is to do with EU regulations that stipulate e-books can’t be exempt from the full VAT rate.

Luxembourg’s e-book VAT change goes against EU regulations, and is in line with similar moves coming into effect in France in the new year which will see VAT on e-books lower to 7%. French Ministers have apparently told publishers that they’ll pick up the fines dished out by the EU.

The question, then, is whether Amazon will keep its prices as they are and take a bigger profit, or reduce the prices accordingly and pass the VAT savings onto its customers. Presumably it will be the latter though, and the changes will come into effect on the first day of 2012.

As The Bookseller reported, Tom Blenkinsop – a UK MP for the Labour Party – asked the Chancellor of the Exchequer whether there were similar plans to VAT on e-books. Tory MP David Gauke, the exchequer’s secretary, said:

“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.”

If Amazon does lower its prices under the new Luxembourg VAT regulations, this means that other online e-book sellers, such as Waterstones in the UK, will be at a clear disadvantage and may end up selling the same titles for more than £0.50 over the Amazon price. “We would prefer VAT to be lower or zero-rated for e-books but believe it is wrong to exploit loopholes such as this”, said James Daunt, MD of Waterstone’s to The Bookseller. “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.”

It does seem strange, however, to have one tax rule in place for physical books, and one for e-books. It really is about time the European Union brought all books under the same umbrella, it’s not as though Amazon needs the extra financial leverage it has just been given.