As reported previously here, here, and here, France and Luxembourg have unilaterally decided to tax e-books at a (super)reduced VAT rate. They decided to tax them as “normal” books instead as e-services as they should be treated by the letter of the EU VAT Directive. This gave e-book traders established in France and Luxembourg a considerable advantage when selling e-books to their EU customers compared to e-book traders in other EU countries as it made the e-books in France and Luxembourg approx. 12% cheaper than before (reduction to a 3% super-reduced VAT rate instead of the standard rate of 15% in Luxembourg and to 7% instead of 19.6% in France).
Due to the tax savings and/or better prices the e-book traders are more likely to choose France or Luxembourg as a country where to setup their EU regional sales hubs. This puts those two countries in a better position to attract the e-book trading industry compared to the rest of the EU.
The EU Commission regards this as an unfair competition between the various EU member states and has officially started actions against the decision of France and Luxembourg by initiating the infringement process against those two countries. The Commission has very clearly explained its position in the recent press release:
This situation is creating serious distortions of competition that are damaging to economic operators in the other 25 Member States […] Local actors in the electronic book market have complained that some of the dominant players in this market have reorganised their distribution channels to benefit from these reduced rates, which has apparently had a serious effect on the sale of books (both digital and traditional) in the other Member States in the first quarter of 2012.
The position of the EU Commission is known: e-books are e-services and must be taxed at the standard VAT rate. Only if the current EU VAT legislation is amended to allow for a different tax treatment, a different taxation of e-books will be possible (see also the answer given by the Commission to questions regarding the VAT treatment of digital newspapers – which is essentially the same issue).
Future developments and speculations
After receiving the formal letters Luxembourg and France will have to explain their position within a month and if they do not manage to convince the Commission that they have acted correctly (or remove the reduce VAT rates for e-books), the Commission will most probably initiate a formal court procedure in the front of the ECJ. It is likely that France and Luxembourg will maintain their current position – at least based on their past statements.
French position is peculiar – its seems that France is well aware how the e-books should be taxed according to the EU VAT Directive and wants to lobby to officially introduce the option for the reduced rate in the EU and has also expressed the willingness to face and pay penalties for introducing the reduced VAT rate without the approval of the EU Commission and other EU member states.
Even if the European Commission fines France for introducing the cut without the approval of its EU partners, […] culture minister Frédéric Mitterrand had assured […] that the state would pay any fine […].
Of course this position might change under the newly elected French government – or the new government might even further reduce the VAT rate to 5,5%. The French decision could go either way.
The Luxembourg authorities have on the other hand claimed that they have based their decision on the Resolution of the European Parliament on the future of VAT stating as one of the guiding principles that “that all books, newspapers and magazines regardless of format should be treated in exactly the same way, which means that downloadable and streamed books, newspapers and magazines should be subject to the same VAT treatment as books, newspapers and magazines on physical means of support.” They have issued a Circular stating that no distinction should be made between books on physical and electronic means.
Regardless of the final outcome of the e-book rates issue Luxembourg continues to look attractive as an EU e-hub for e-book traders. Even if the super-reduced VAT rate would be abolished Luxembourg still has the lowest standard VAT rate in the whole EU. What will happen after 1 January 2015, when the new EU VAT B2C rules for e-services will become effective remains to be seen.
What does this mean for you?
Some companies in the e-book trading business have already profited from the reduced VAT rates in France and Luxembourg by setting up sales companies there. For them it is irrelevant if Luxembourg and France were allowed to introduce the reduced VAT rates or not – they can apply the reduced VAT rates in any case. However the question is if all other countries will share this opinion and how will they react to such a reorganization of business structure for what are essentially pure tax benefits.
Another question is how long will this benefit last. The EU Commission has been known to move fast if desired and the ECJ can make a final decision quite fast, too. Still, it will take them at least some more months to process this properly – this is if they act efficiently.
If they are not efficient, the new EU VAT B2C rules for e-services will become effective on 1 January 2015 rendering this discussion de facto irrelevant (as of 2015 the e-books will be taxed at the VAT rate of the country where the consumer lives and no longer at the VAT rate of the country where the trader is established).