The European Commission is to give France one month to raise the VAT rate applied to e-books or face the European Court of Justice. The move is likely to have significant implications for fellow e-book rogue member Luxembourg and therefore for those e-booksellers, such as Amazon, Barnes & Noble, Kobo and Bilbary, who have located their servers in that country in order to take advantage of the lower rates.
The development comes as the EC has admitted that the definition of an e-book could be "controversial", as it looks to equalize the rates of VAT charged on digital books with the rate placed on printed books.
The EC threat dates back to the beginning of this year, when both Luxembourg and France decided to apply a reduced rate of VAT to e-books despite the fact that EU did not allow it. In Luxembourg this meant the rate applied fell to 3% from 15%, while in France it dropped from 19.6% to 7%. In the UK, the equivalent rate is 20%, with printed books exempt.
The European Commission warned France and Luxembourg that it was formally investigating their moves back in July, and according to a report in French newspaper Les Echos, Brussels will tomorrow (Wednesday 24th October) issue an ultimatum to France, giving the country one month to raise the rate or risk heavy fines via the ECJ. Tax experts expect the EC to issue the same threat to Luxembourg. France has previously said it will pay any fines, but insists that it sees no reason why printed books should attract the lower rate while e-books do not. The European Union has already stated that it hopes to address the anomaly as part of wider investigation into VAT, that it continues to consult over. In the meantime, it says member states need to respect the law.
According to Les Echos, a European source said: "This is a problem but in EU law, we do not solve problems by going against the law."
The move adds to what is already a difficult and confusing situation. E-book VAT hit the headlines this week, after the Guardian reported that Amazon was starting negotiations with UK publishers net of VAT, but using the 20% figure rather than the 3% it effectively pays through Luxembourg. According to the article, this means Amazon is able to gain extra margin from e-book sales.
In 2015 e-booksellers such as Amazon will be forced to apply the VAT rate of the territory in which the buyer resides, rather than where the selling company places its servers, which will erode Amazon's current tax advantage. However, it does not resolve the problem over differential rates.
In the UK, the issue is further complicated as the zero rate applied to printed books in the UK is itself an anomaly (dating back to 1991), and is part of the review that the EC hopes will lead to "definitive VAT arrangements".
A recent EU consultation document, put out two weeks ago and asking for submissions by 4th January 2013, reiterated the EC view that similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect. But the European body is now questioning what an e-book is, when compared to a print book.
The consultation document stated: "Defining e-books for the purpose of qualifying for a reduced VAT rate is likely to be controversial as increased functionality (music, videos, live links, etc.) becomes more prevalent. Considering the increasing development of new technologies, the level of similarity between printed and electronic publications seems difficult to predict."
Proposals following this review are likely to be floated "by the end of 2013".