The European Commission is to refer France and Luxembourg to the European Court of Justice (ECJ) for applying reduced rates of VAT to e-books.
Since 1 January 2012, France and Luxembourg have applied reduced rates to digital books at 7% and 3% respectively. Under the directive, e-books constitute electronically supplied services, and application of a reduced rate to this type of services is excluded. Both countries were asked to raise the VAT charged e-book from 7% to 19.6% and 3% to 15% respectively. The requested changes have not been made.
The Commission says failure to comply with this legislation by France and Luxembourg results in serious distortions of competition to the detriment of traders from other EU member states. This goes against the basic principle of European tax policy: fair competition within the internal market. The effects of the unfair competition are felt in member states that apply the VAT Directive correctly.
Several finance ministers and representatives of the book and e-publishing industries have voiced their concerns and pointed out the negative effect on sales of books in their domestic markets.
Commissioner Aemeta, responsible for taxation said: 'Questions concerning the tax treatment of physical books and e-books must certainly be tackled. And this is exactly what the Commission is doing as part of the wider review of reduced VAT rates.
'However, in the meantime, the member states must play fair. Infringement of the VAT rules for e-books distorts the single market and runs counter to the fundamental EU principle of fair tax competition.'
One of the principles of the ongoing revision of VAT rates is that similar goods and services should be subject to VAT at the same rates and that technological progress should be taken into account.
The Commission is to issue proposals by the end of 2013 under the new VAT strategy and the entry into force of the rules on VAT on e-services from 2015.
The Commission first began infringement procedures against France and Luxembourg in July 2012. The referral to the ECJ is the last step in the procedure.
