The European Commission has launched an "infringement procedure" against France and Luxembourg after the two countries unilaterally lowered their VAT rates on e-books.
The EC has accused the countries of "creating serious distortions of competition" that are damaging to competitors in other EU countries and has given them one month to respond.
The move could impact e-booksellers such as Amazon.co.uk, which sells Kindle editions out of Luxembourg, enabling it to apply the Luxembourg low rate of 3%—compared to the UK VAT on e-books of 20%.
The Commission has sent letters of "formal notice" to France and Luxembourg after they reduced rates on digital books as of 1st January 2012, thereby infringing EU law. The rates are 7% for France and 3% for Luxembourg. The two countries have one month to explain their positions, and could then be asked to change their laws, or face further "infringement procedures". France has previously said its government would pay any fine levied on it by the EC, though it has since had a change of administration.
Ironically, the commission itself is pushing for the kind of change the two countries have already put in place. In 2013 it will put forward proposals aimed at equalising the rate of VAT applied on traditional books and digital books, following general recognition that the current situation is an anomaly: under current law e-books are regarded as a service supplied electronically, which is not included in this list and cannot therefore be taxed at the reduced rate. A further change is scheduled for 2015, when VAT on e-books will be paid based on where the purchaser is, not where the company that sells those e-books is based.
An EC press statement said the "situation is creating serious distortions of competition that are damaging to economic operators in the other 25 member states".
It added that "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".