The European commission – which oversees European Union law as the EU\’s executive arm – on Wednesday gave Luxembourg 30 days to increase its VAT rate on digital services from 3% to 15%. This will close a tax loophole that has encouraged companies such as Amazon, Skype and Netflix to be based in Luxembourg to benefit from the 3% rate when selling throughout the EU.
Oh, well done. Well done indeed.
What a victory.
UK consumers now have to pay more to the Treasury of Luxembourg. A few more victories like that and we\’ll really have our economic problems licked, eh?
‘British authors and publishers are fearful that Amazon’s market dominance will send the industry into decline with consumers facing a smaller and less varied choice of books from fewer authors on sale in fewer retail outlets.’
LOL
Dear Mr Worstall
“Skype have been charging me 15% for years. Does this mean they’ve been ripping me off?
Outraged of Surbiton”*
Many years ago a senior politician came up with a brilliant plan to raise revenue – tax all foreigners living abroad. I heard him speaking on the current affairs programme I’m Sorry I’ll Read That Again.
Luxembourg seem to be putting this into practice.
DP
* Apart from the fact that Skype have been charging me 15%, I made that up – analysing the sums is interesting though. DP
UK consumers now have to pay more to the Treasury of Luxembourg.
Not just UK consumers: anyone who buys books via Amazon.co.uk, which is an awful lot of British expats. I might have to look at whether the increased VAT is now more than the foreign currency transaction fee my credit card company charges me if I buy from Amazon.com.
Isn’t VAT paid (for all but the tiniest of companies) in the country the consumer is resident in?
Tim adds: yes, except for goods delivered electronically.
It is not a loophole but France and Luxembourg not implementing the VAT Directive properly. The VAT Directive lists what goods and services can have a reduced rate of VAT applied to them and digital services are not on it.
Assuming they are still going ahead with things, this will be moot in a couple of years when the rules on accounting for digital sales changes to one of the VAT rate being set at the rate in the country of the consumer not the country of the seller.
You might be right in the short-term, Tim, but if taxation is distorting the market, which it is, we have to start somewhere, surely?
Sheer, arrogant imperialism. Funny how big countries/organisations ordering around small ones isn’t ALWAYS a terrible thing for the Left?
What are the penalties for Luxembourg if it fails to comply with the VAT rise? That 3% VAT on all Amazon’s digital sales in the EU must be worth a pretty penny to them; and increasing rapidly as ever more content shifts to digital delivery. Might it just be worth paying the fine?
@ Tim Newman
Actually I think amazon.co.uk is the international one. At least in Portugal and South Africa that’s what they use. I don’t think you can use .com outside the states
nautical nick // Oct 25, 2012 at 2:15 pm
You might be right in the short-term, Tim, but if taxation is distorting the market, which it is, we have to start somewhere, surely?
Good idea. Reducing the VAT rate to 3% Europe wide’d achieve that. So would zero rating.
I have done. This month in fact. Usually for books which are not, or not yet, published in the UK.
Mmmm… Well, maybe. Generally, Tim, you’re rather good at pointing out to rhe economically illiterate the longer-term effects of policies, once economic agents have time to rectify.
The position of the UK Government is that UK consumers should indeed pay more, and that the tax should go to the UK Treasury. Their position is also that at present this does not happen because companies relocate (in real or accounting terms) to Luxembourg because of low taxes. Higher taxes in Luxembourg remove this artificial incentive, so the problem is solved.
You might not agree with the objective, but the logic is sound. Saying we’ll all end paying more tax to Luxembourg is a bit like the Robin Hood campaigners who think their tax will raise an amount equal to the rate x current value of trades.
it is likely that companies will leave Luxembourg now if it loses its tax advantage. I’m sure their workforce are high quality, but the wages are also high. No reason to be there without the tax incentive.
The position of the UK Government is that UK consumers should indeed pay more, and that the tax should go to the UK Treasury.
That bit I get. But why dickheads in the UK who are not working for the government treasury would want it, I don’t know.
It also costs to move. Plus there can be other politicial and business considerations affecting a move – what advantage would a company have coming here rather than Luxembourg? What do we have to offer thats so good, thats simply better than elsewhere?
One lesson we could conclude from this and numerous other such issues is that high-tax statism and globalism are simply incompatible and one of them will have to go. I know which one I’d choose for the chop, but YMMV and all that.
I guess Amazon might be leaving
Lux then.
I gues its the EU’s history of brilliant governing, of which this is an example, that got them the nod for the latest Nobel.
Everyone: you realise this only refers to ebooks, right?
TN: You’re wrong here. The EU does not require companies to levy VAT on sales of electronic services to non-EU consumers.
SE: you’ve used the .com site for ebooks? Obviously, both sites will ship paper books to anywhere in the world, but AIUI the US site won’t sell you ebooks without a US postal address and means of payment.
FE: spot on. If Luxembourg is going to benefit from the EU’s single market, it also needs to play by the same rules as other EU members.
JB: no, it’s not. The wages in Luxembourg are pretty much irrelevant, because Amazon’s staff there consist of the finance and law department (and lawyers and accountants don’t get paid much less in London or Amsterdam than they do in Luxembourg) plus a few senior managers. And the company will still get corporation tax benefits. It incorporated in Luxembourg years before the ebook tax break was invented.
MD: southeast England has Europe’s highest concentration of IT, graphic design, marketing, professional services and legal services professionals, which is a strong advantage for anyone considering a startup.
TN: You’re wrong here. The EU does not require companies to levy VAT on sales of electronic services to non-EU consumers.
Maybe not. But for whatever reason, Amazon charges it anyway (my primary address and credit card address is in Thailand.) And this will now go from 3% to 15%. Great!
Does Southeast England have a high concentration of those professionals looking for a job? Or are they mostly employed already?
Tim: there’s no maybe about it. It is a fact that Amazon is not paying VAT on that download you buy. The decision to take an extra 12% margin, if that’s what they decide to do, will be entirely down to them, and nothing to do with the EU. Nice work if they can get it.
Martin: in general, well-funded startups of major international businesses prefer people who have jobs already (indeed, the nature of most of the industries in question is that there is little or no disjoint between “employed already” and “looking for a job”…)
Tim: there’s no maybe about it. It is a fact that Amazon is not paying VAT on that download you buy. The decision to take an extra 12% margin, if that’s what they decide to do, will be entirely down to them, and nothing to do with the EU. Nice work if they can get it.
Well, not quite. I expect that it is far more difficult and expensive for them to ascertain whether a customer is tax resident in the UK than it is to apply the VAT regulation across the board to all their customers in order to comply with EU law*. Whatever the costs of either approach, the customers will end up paying for it. And in the current instance, the costs turned out to be 3% per purchase and now the costs are 15%.
*Yes, I am pretty sure that if it were quick, cheap, and easy to distinguish between customers, I would not be paying VAT on such purchases. No, I don’t think this is a case of Amazon saying “fuck you, we’ll tax you and keep the money ourselves because we can”.
It is a fact that Amazon is not paying VAT on that download you buy.
And whilst we’re at it, how do you know this? Where is the evidence to show that Amazon is pocketing the VAT I have paid?
Gareth (#5) said: “France and Luxembourg not implement the VAT Directive properly. The VAT Directive lists what goods and services can have a reduced rate of VAT applied to them and digital services are not on it. ”
Not necessarily. The VAT Directive says “books”. Does “books” include e-books?
They didn’t exist when the Directive was written, and arguably the definition should cover all forms of delivery.
This should at least have gone to the ECJ for a judicial decision rather than a political / bureaucratic one.
Where is the evidence to show that Amazon is pocketing the VAT I have paid?
I don’t know about Luxembourg but in the UK, even if you’re charging VAT incorrectly (and it happened to me years ago when my company mistakenly charged the full rate of VAT on what, as it turned out, were zero-rated exports), you have to account to HMRC in respect of all the VAT charged (against which you can deduct the VAT suffered). So, in principle, if Amazon is charging 15% or 3% VAT on ex-EU goods and services this has to be paid over to the Luxembourg tax authorities.
Tim: do your Amazon.co.uk invoices actually specifically claim to be charging you 3% VAT, or are you just assuming that they’re charging you 3% VAT because they’re charging you the same price as EU consumers?
Because companies don’t need to ascertain your personal tax status to comply with the legislation: the fact that you’re buying it on a Thai card from a Thai address is considered sufficient evidence. Otherwise the exemption legislation would be completely meaningless.
Tim: do your Amazon.co.uk invoices actually specifically claim to be charging you 3% VAT, or are you just assuming that they’re charging you 3% VAT because they’re charging you the same price as EU consumers?
It specifically says that the purchase is subject to VAT, and quotes it as a separate line item.
Because companies don’t need to ascertain your personal tax status to comply with the legislation: the fact that you’re buying it on a Thai card from a Thai address is considered sufficient evidence
By whom? If simply entering a non-EU address on their site – which is irrelevant to e-purchases – is a route to avoiding VAT, then everyone would be doing it. And my registering a British card at a foreign address has little bearing on my residency (for if I lived in France I would use the same setup).
Here we have one of two scenarios:
1. Amazon finds it too expensive to distinguish between EU and non-EU customers, so levies VAT on all of them. Non-EU customers lose out.
2. Amazon knows who is non-EU but charges them VAT anyway (having told them it is due), and doesn’t pass it on to the Luxembourg treasury. This is also known as fraud.
Which is the more likely scenario?
Ah, OK – British card. That makes complete sense.
I’m not sure how. All they have is the number, expiry date, and address of the card. Does Amazon identify the residency of its customers by the nationality of the card issuing company?
Richard said: “Not necessarily. The VAT Directive says “books”. Does “books” include e-books?”
They are classed as a digital service just like films, music and software over the internet so are VATable at the full rate. Ebooks *are* an anomaly though in that the physical version happens to be treated differently for VAT than the digital version but, that is not really the issue. The issue is France and Luxembourg not applying the VAT Directive properly and gaining an advantage over other member states by doing so.
Tim: if I were running the system, I’d have a three-way check: IF EU billing address = 0 AND EU delivery address = 0 AND EU credit card = 0 THEN apply zero VAT ELSE apply full VAT. The first six digits of the card are a unique identifier for the bank (the local company, not the parent), so this is easily done.
From memory, when I bought DVDs for delivery to Aus with my Aus credit card they weren’t VAT-ed.
Gareth (#31) says that e-books are “classed as a digital service”.
Yes, but that doesn’t stop them being books; the courts could easily apply a definition of “book” that included both physical goods and digital services.
Nor does being a digital service stop them being within the derogation (which covers both goods and services).
So far as I know the ECJ hasn’t ruled on this matter or given any ruling that would directly bear on it. But a lot of their VAT decisions are based on economic equivalence.
As to Amazon charging VAT to non-EU customers, it may be that in some cases it’s cheaper to charge it and pay it to Luxembourg rather than sort out who shouldn’t be charged (and risk back-taxes and penalties if they get it wrong).
I suspect that may be true at 3% but not true at 15%, so it’ll be interesting to see how things go down at this point.
As to Amazon charging VAT to non-EU customers, it may be that in some cases it’s cheaper to charge it and pay it to Luxembourg rather than sort out who shouldn’t be charged (and risk back-taxes and penalties if they get it wrong).
Exactly. And having just put in the details of a Nigerian debit card on my account, I still have to pay VAT. So it looks as though this is what they are doing.
Otherwise, it would be the first time in my life I had heard of somebody paying tax based on the location of the HQ of their credit card company.
Tim Newman (#36) said “Otherwise, it would be the first time in my life I had heard of somebody paying tax based on the location of the HQ of their credit card company.”
Just wait for the Financial Transactions Tax.
TN: not HQ of credit card company, nationality of credit card. Come on, you’re an expat, you know the difference. I’ve got an Australian Citi card, which is Australian, and a UK Amex, which is British.
On reflection, that was unfairly confrontational. Thanks for checking that one.
I’ve just done all of my Amazon receipts and it turns out I haven’t bought anything VAT-able in Aus since I’ve been here.
However, I did buy a print-book in English from amazon.co.uk to be posted to someone in France on a UK credit card, and got charged 5% VAT rather than 0%. So their systems can clearly handle all the shenanigans required. (I also bought her a DVD on which I was charged 20%).
Again, strongly suspect that 3% is a “pay it, fuck it, it’s easier than fighting it” tax, whilst 15% is a “let’s actually work out what incurs it and what doesn’t” tax. Arthur Laffer would be proud.