The European Commission has confirmed that it intends to force Luxembourg and France to raise the VAT rate applied to e-books on the grounds that it is incompatible with the current rules under the VAT directive. Both countries have 30 days to bring their legislation into compliance with EU law or risk being taken to the European Court of Justice.
Since 1 January 2012, a reduced rate of VAT to e-books has been applied in France (7%) and Luxembourg (3%), which is incompatible with the current rules under the VAT directive. Under the directive, e-books constitute electronically supplied services, and application of a reduced rate to this type of services is excluded.
This has given e-booksellers located in Luxembourg, including Amazon, Kobo, Barnes & Noble and Bilbary, a tax advantage over e-booksellers, such as Waterstones, located in the UK, where VAT on e-books is 20%.
Amazon was exposed by the Guardian this week of forcing British publishers to cover the cost of a 20% VAT charge on e-book sales even though the true VAT cost to the online retailer is a fraction of that.
Although the Commission did not make reference to the Amazon issue, it said the current situation 'is creating a serious distortion of competition to the disadvantage of operators in the 25 other Member States of the Union'.
In order to comply with EU law, Luxembourg and France must raise the VAT charged on digital services (including e-books) from 3% to 15% and 7% to 19.6% respectively.
The Commission has issued reasoned opinions to Luxembourg and France. This is the second stage in the infringement procedure. Both countries have one month in which to bring their legislation into compliance with EU law. Otherwise, the Commission may refer the matter to the European Court of Justice. The deadline for compliance is 30 November 2012.
VAT partner at Accordance, Andy Spencer, said: 'The issue can eventually be referred to the European Court of Justice which will decide whether the VAT rate has to be increased. Therefore, it is possible for Luxembourg to be forced to change their rate.
However, there is also an ongoing consultation on VAT on digital books. 'The Commission is consulting on the treatment of e-books as it recognises the difference in treatment with physical books but this does not allow Member States to pre-empt any changes that may be made in the future, adds Spencer.
