Top EU Court Rules E-Books not Eligible for Lower VAT: An Article Authored by Paul Oliveira, CPA from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island

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Top EU Court Rules E-Books not Eligible for Lower VAT

posted May 4, 2015 by Paul Oliveira, CPA

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France and Luxembourg lost their battle to apply reduced value-added tax (VAT) to e-books when the Court of Justice of the European Union ruled that only paper books qualify for lower rates. But the European Commission (EC) signaled it may allow equal taxation of books in any form in 2016.

European Union (EU) rules allow member states to set lower VAT on printed books but the EC decided two years ago that Luxembourg’s 5.5% rate and France’s 3% rate on electronic books breached the law because reduced VAT did not apply to e-books, as they were an electronically provided service and not on the list of goods and services granted this privilege.
At the time, Amazon.com Inc., which has operations in Luxembourg, was applying the 3% rate to e-books it sold throughout Europe. Amazon, which dominates the e-books market in Europe, has said that lower priced e-books sell more and ultimately generate more revenue and more royalties for authors.

Since January, VAT for e-services has been levied based on the country where the customer is located. The vast majority of the EU bloc countries levy VAT ranging from 18% to 25%, according to Commission data.

Failing to fulfill obligations

The EU Court upheld the EC’s charge that Luxembourg and France had failed to fulfill their obligations under the VAT Directive. According to the court, a reduced VAT may apply only to physical books and that, even though e-books can be read on tablets and computers, they should be considered “electronically supplied services,” not goods.

The court concluded that the reduced VAT is applicable to a transaction consisting of the supply of a book found on a physical medium. While such physical support as a computer is required to read an e-book, the support is not included in the supply of the e-books. Therefore, the supply of e-books is not within the scope of Annex III of the VAT directive. Annex III refers to the “supply of books ... on all physical means of support.”

Moreover, the court stated that, under the VAT Directive, a reduced VAT rate may not be applied to “electronically supplied services.” It rejected the argument that the supply of e-books should be treated as a supply of goods. Only the physical support enabling an e-book to be read may qualify as “tangible property,” but that support is not part of the supply of e-books.

Down the road

France and Luxembourg said that they will comply with the verdict, but will push for an overhaul of EU rules on VAT to align rates between physical books and e-books.

French publishers and booksellers said the policy of having higher VAT rates for e-books than for printed books runs counter to the goal of encouraging e-reading and urged the EC to change the rules.
The EC, meanwhile, said it “appreciates that member states may want to define their own priorities, including on culture policy, in their taxation policy. This should be done within the EU legal framework,” commission spokeswoman Vanessa Mock said in a statement.

The commission has presented its tax transparency package as part of its continuing efforts to tackle corporate tax avoidance and harmful tax competition in the EU. A key element is a legislative proposal that would obligate the automatic exchange of cross-border rulings between EU member states every three months. Currently, it is at the discretion of an EU Member State to decide whether a cross-border tax ruling might be relevant to another EU country.

The legislative proposals will be submitted to the European Parliament for consultation and European Council for adoption. It is expected that EU Member States will agree on the tax ruling proposal by the end of 2015, so that it would enter into force on Jan. 1, 2016.

Because the European Council asked the EC to make such a proposal in December of 2014, full political commitment to reach a timely agreement is expected, said the EC.