EU court ruling on e-books opens VAT Pandora’s Box

Books and e-books are subject to different levels of VAT. [Zhao !/Flickr]

A ruling this month by the EU’s top court on e-books taxation in France and Luxembourg has forced the European Commission to embark on a tricky reform of European VAT rules. EURACTIV France reports.

For the Court of Justice of the European Union (CJEU), the digital and print book sectors are not parts of the same animal.

Paper publications in France and Luxembourg benefit from reduced VAT rates of 5.5% and 3% respectively.

But the decision of the two countries to apply the same rate to electronic books is a contravention of the European VAT Directive, according to a judgement from the CJEU, published on 4 March.

>> Read: Brussels sets its sights on French electronic book market (in French)

The CJEU judgement met with hostility from the Culture ministers of France, Germany, Poland and Italy (but not Luxembourg) who wrote to the European Commission on 19 March, demanding a review of the VAT regulations, so they can align the tax levels for all books published in all forms.

Member states call for Urgent action

“We ask the European Commission to propose without delay an evolution in the European legislation to allow reduced tax rates of VAT for all books whether they are printed or digital,” the four ministers wrote. 

Luxembourg did not sign the joint declaration, even if the country’s “key messages on the Digital Single Market” reveal that it shares the same point of view.

An expert in Brussels said, “We cannot look solely at the subject of e-books, the whole VAT system needs to be reformed.”

The European Commission is already considering a broader reform. Vanessa Mock, the EU executive’s spokesperson for taxation, said that “The Commission intends to address to subject as part of the broader VAT reform that is currently being prepared. We hope to be able to give more details on it next year.”

Such highly controversial tax reforms are among the hardest changes to implement on a European level because they require unanimity among the 28 EU member countries.

For now, the judgment of the Court of Justice must be adhered to. At the Paris Book Fair on 20 March, Pierre Moscovici, the French Commissioner in charge of Economic and Financial Affairs, Taxation and Customs, announced that VAT on e-books in France would have to be brought back at 20% as of next year.

Varied application

Member states often raise concerns over the rules surrounding reduced rates of VAT in Europe. Online media, electronic books and even horse-riding centres in France benefit from low VAT levels judged illegal by the Court of Justice of the European Union.

>> Read: Equestrian sector rallies against Brussels’ tax hike (in French)

The European Directive on VAT very clearly delineates the sectors that may benefit from reduced VAT, such as water distribution, tickets for cultural and sporting events, spa treatments and funeral services.

“But the problem is that the member states each have different demands concerning reduced tax rates,” according to an expert. Different countries want to apply lower VAT rates in different sectors: during the last VAT review in 2009, Greece pushed for tax breaks for agricultural machinery and Belgium for the construction of schools.

The application of these reduced rates also varies greatly from one member state to another. In Bulgaria, for example, the only businesses to benefit from the reduced VAT rates authorised under European legislation are hotels. Luxembourg and Malta both offer tax breaks to night clubs.

Tax dumping

The member states, many of which support reform, feel that the rules concerning the application of reduced VAT rates should be more flexible in cases where tax competition between states is not an issue.

“The point of view of the member states is that the reduction of VAT in certain sectors has no impact on the internal market,” one expert told EURACTIV. “This makes the member states feel too restricted,” he added.

This analysis is certainly valid for certain sectors where tax competition between countries is all but non-existent: it is not always easy to buy cleaning or hairdressing services from another country in order to benefit from a lower rate of VAT.

But in digital services, the absence of competition is harder to demonstrate. “France was beaten at its own game with the reduction of VAT for electronic books, because they hoped to gain some market share from other member states, but Luxembourg cut VAT by even more than the French,” one expert said. It was for this reason, now no longer valid, that the American electronic books giant Amazon placed its European headquarters in Luxembourg. Since January 2015, VAT has been paid in the country of the purchaser, not the seller.

Negotiations on VAT reform look set to continue for a long time before all parties are satisfied, especially as any revisions to EU tax law have to be adopted unanimously by the 28 member states. It seems that digital publications will be subjected to normal rates of VAT for many years to come. 

The reduced rates of VAT authorised under European law are defined in Annex III of the 2006 VAT Directive.

But breaches of legislation are commonplace among the member states, who often ask for revisions to the EU's VAT system.

Any reform to tax law in the European Union requires the unanimous support of all 28 member states. 

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