Printed Books vs. E-books in France and Luxembourg: European Commission Cries Unfair Advantage in Violation of the EU VAT Directive – Update to previous post.
Update 3/5/2015
Taxware, a Sovos Compliance Company (“Sovos”) has continued to monitor this issue very closely and would like to report on some major developments since our last blog posting. First, on December 22, 2014, the Italian Congress approved the 2015 budget law (Legge di Estabilita 2015). One of the enacted measures included the application of a second reduced rate of 4% to the sale of books sold on electronic format. This development in Italy was quite interesting in light of the on-going infringement procedures which were initiated by the EU Commission against France and Luxemburg, with an action brought before the European Court of Justice as described above. Next, in a highly anticipated judgment of the European Court of Justice on March 5, 2015, the Court ruled that electronic books (“ebooks”) cannot benefit from the same reduced rate of VAT as paper books. In its decision, the court argued that a reduced rate can only apply to physical books and that even though electronic books can be read on computers, tablets and smartphones, they should be considered electronically supplied services, not physical goods. The Court found that the EU VAT Directive excludes “any possibility of a reduced rate of VAT being applied to electronically supplied services” and as such, France and Luxembourg must comply with the Court’s judgment and raise their VAT rates on ebooks to the current standard rates of 20% and 17%, respectively. See http://curia.europa.eu/ for Judgment of the Court in cases C-479/13 and C-502/13. Whether France, Luxembourg, or even Italy will opt to comply is yet to be determined. The battle is not lost forever as the Commission plans to change the law through an extensive overhaul of the VAT Directive next year. Also, let’s not forget that a major tax loophole was recently closed regarding electronically supplied services in the European Union. Effective January 1, 2015, electronically supplied services, such as eBooks, provided to consumers are no longer taxed at the location of the seller but are now taxed at the location of the consumer, reducing the incentive for a seller to set up their business in a Member State with a lower VAT rate. Please stay tuned as we will be posting any major developments as they arise.
___ Orignially published on December 11, 2013 __________________________________
Printed Books vs. E-books in France and Luxembourg: European Commission Cries Unfair Advantage in Violation of the EU VAT Directive
Sin
ce the earliest days of the internet becoming used as a vehicle for commerce, the question of whether items transmitted exclusively through electronic means (e-books, e-music, e-movies, etc.) should be taxed identically to their tangible equivalents has been debated. In the US, most states have drafted official guidance on the taxation of what is commonly referred to as digital property or digital products. The clear trend is towards tax-parity. The latest jurisdiction to address this issue is the state of Ohio, wherein House Bill 59 specifies that effective July 1, 2014 the retail sale and rental of digital products will become subject to tax. The tax will apply to both temporary and permanent transfers but does not apply to items delivered via cable television.
This debate is by no means limited to the United States!
Those 28 countries that are Member States of the European Union (EU) are responsible for incorporating the terms of the EU VAT Directive into their national laws. Some terms of this Directive are required while others are optional. The overall idea is that the EU should operate as a single market. For example, no country is permitted to have a rate lower than 15%. Likewise, while member states can apply a reduced rate to printed books and other periodicals, no Member States may apply a reduced rate to electronically supplied services. Enforcement of compliance with the Directive is the responsibility of the European Commission (EC). They act as an executive body of the EU and are responsible for proposing legislation, implementing decisions, monitoring the day-to-day running of the EU, etc. If a country is deemed out of compliance with the Directive by the EC, an action is brought to the European Court of Justice (ECJ) demanding compliance.
Since January 2012, France and Luxembourg (both member states of the EU) have held that the reduced rates which already apply to printed publications (7%/5.5% and 3% respectively), also apply to e-books. France and Luxembourg currently have standard VAT rates of 19.6% and 15%, so needless to say these reduced rates have a fairly dramatic impact on the price of an e-book. As expected, litigation ensued in February 2013, the European Commission referred France and Luxembourg to the ECJ for applying, under their respective laws, reduced VAT rates to the provision of books in electronic format. The Commission takes the position that under the EU VAT Directive, e-books constitute electronically supplied services and as such, an application of a reduced rate is expressly prohibited. The Commission further contends that by applying a reduced rate of VAT to e-books, France and Luxembourg are violating the basic principle of European tax policy by creating unfair competition within the European Union. Since digital property is transmitted anywhere in the EU within nanoseconds, e-booksellers located in Luxembourg currently enjoy a pronounced tax advantage over e-booksellers located in places like the UK, where the VAT on e-books is 20%. The decision to refer the matter to the ECJ follows the failure by France and Luxembourg to change their law following the Commission’s reasoned opinion to both Member States indicating that their existing approach is in violation of the Directive. In other words, the Commission politely asked France and Luxembourg to change their law to comply with the Directive, and when they refused, they took them to court.
Here is a closer look at some key events relating to the on-going infringement proceedings against France and Luxembourg:
- July 2012: EC sends both countries a letter of formal notice.
- October 2012: EC requests that both countries amend their rates.
- February 2013: EC refers both countries to the ECJ based on infringement of the EU VAT Directive.
- September 2013: ECJ publishes references for the cases against France and Luxembourg (C-479/13 and C-502/13 respectively) and EC files requests for preliminary rulings and seeks costs from both countries. See http://curia.europa.eu/
Interestingly enough, this issue has received a lot of public attention, especially in France. That’s not surprising when you realize that France ranks first on the list of Nobel Prizes winners in literature by country. Likewise, the uproar from French booksellers (and the book buying public) when the Government increased the VAT rate on all books from 5.5% to 7% in April 2012 was so deafening that that within 9 months, the rate increase was rescinded.
Taxware is watching these proceedings very closely. Stay tuned for additional details.
