Amazon makes UK publishers pay 20% VAT on ebook sales Amazon is forcing British publishers to cover 20% VAT on ebook sales, even though the company must only pay 3% to Luxembourg where it is based. Amazon is forcing British publishers to cover the cost of a 20% VAT charge on ebook sales - even though the true VAT cost to the online retailer is only a fraction of that amount under its generous Luxembourg-based tax regime. The firm is able to wield such power over publishers because it has a near monopoly of the UK digital book publishing market. According to reliable estimates, it sells nine out of 10 ebooks in the UK, while using its Luxembourg tax status to wring more profitable terms from publishers. Companies such as Amazon collect the VAT levy from consumers before passing it on to governments. In the case of Amazon's UK ebook sales, it only has to pass 3% to Luxembourg. If it was based in the UK it would have to hand over 20%. According to a contract seen by the Guardian, Amazon starts negotiations with its publishers on the basis that the UK VAT rate of 20% must be knocked off the cost price. However, its base in Luxembourg allows it to benefit from a European tax anomaly and pay only 3% VAT on digital books sold to UK readers. Subsequently, Amazon charges the difference between the UK VAT levy imposed on publishers and the actual 3% that it pays, which amounts to an extra £1.38 of profit every time it sells a £10 ebook in this country. It then negotiates further substantial discounts on top of the VAT subsidy, which in some cases can result in publishers receiving less than 10% of the price paid by the online customer. Publishers that do n0t fall into line can be dealt with summarily. "These are not pleasant people to do business with," one senior publishing executive said. "They have no compunction in shutting down the buy button on their site on our titles if we step out of line," a practice that can be carried out in seconds. The publisher asked not to be named for fear of permanent damage to their commercial relationship with Amazon. According to another unnamed publisher who negotiated an ebook deal for a well-known figure, Amazon sought a deal that would have resulted in a 92% discount. The publisher refused the terms, which would have seen them receive just 80p on an ebook selling for £10 on Amazon's UK website. The contract seen by the Guardian is couched in legal language that confirms Amazon's considerable commercial power. The section that spells out the fact that Amazon's starting price for discount negotiations is exclusive of 20% VAT says: "Base price is the digital list price exclusive of the standard statutory rate applicable to ebooks in the United Kingdom." This means a publisher signing up with Amazon would have to agree to a starting price of £8.33 for an ebook retailing at £10 - the digital list price - to reflect the 20% VAT any UK-based ebook retailer would have to pay. But if it were based on the true 3% rate paid by Amazon, that starting price should be £9.71 - meaning the publisher is already giving the online retailer a £1.38 discount even before it agrees to a wholesale discount that can run as high as 90%. Typically, however, Amazon seeks a discount of up to 65% on ebooks including the phantom VAT charge. The contract also bars the publisher from offering a better deal to a rival retailer without automatically giving the same discount to Amazon. The contract says: "If the base price exceeds the base price ... provided to a similar service then ... the base price hereunder will be deemed to be equal to such lower price, effective as of the date such lower price comes into effect." Effectively, the contract mandates that no other bookseller can undercut Amazon. Amazon's grip on the ebook market, via the Kindle device and a large digital catalogue, has ensured that the publishing industry has not suffered the same trauma as the music industry from digital piracy. It is unclear whether Amazon passes on any of the gains from the VAT charge to consumers. In private, British authors and publishers express fears that Amazon's dominance will send the industry into further decline. They fear that turning the screw on price will force smaller and medium-sized publishers out of business, reducing the choice of books and authors and creating more problems for the already struggling high street book retailers. Amazon has a reputation for using its global scale to seek the most competitive arrangements possible. None of its arrangements are illegal. Amazon would not answer specific questions about its market share, contracts with publishers, VAT, and its business practices. It said: "Our goal is to make it easy for readers to discover and read the books they love by expanding access to millions of books in both digital and print. We've been able to do this by focusing on innovation, as exemplified by Kindle, and by offering customers the widest selection at the best possible prices and service. Earlier this year the Guardian revealed that Amazon generated sales of more than £3.3bn via its UK website last year but paid no corporation tax on any of the profits from that income. Security and Exchange Commission filings, highlighted by Bookseller magazine, show that in the past three years, Amazon generated sales of more than £7.6bn in the UK without attracting any corporation tax on the profits from those sales.