The EU's European Commission has confirmed that it intends to force Luxembourg and France to raise the VAT rate applied to e-books, giving both countries just 30 days to comply or risk being taken to the European Court of Justice.
Both countries unilaterally dropped their rates at the beginning of this year in order to equalize the tax charged on printed books with that imposed on digital books. But the moves meant e-booksellers located in Luxembourg, including Amazon, Kobo, Barnes & Noble and Bilbary, could enjoy a tax advantage over e-booksellers, such as Waterstones, located in the UK, where VAT on e-books remains at 20%.
Amazon was accused by the Guardian this week of using the tax loophole to seek additional discounts from publishers by insisting on publishers wholesale e-book prices being net of 20% VAT, rather than the 3% rate paid by Amazon to the Luxembourg State.
A memo put out by the European Commission said the situation was creating a "serious distortion of competition to the disadvantage of operators" in the 25 other countries that make up the EU, and said that it had received complaints from a number of finance ministers highlighting the negative effect on book sales in their domestic markets.
If Luxembourg and France do not comply then they risk being taken to the European Court of Justice, and could be fined. If they do comply then Luxembourg must raise the VAT charged on digital services (including e-books) from 3% to 15%, while France must raise its rate back to 19.6% from 7%.
Richard Asquith, global head of VAT, at TMF Group, said: "Countries across the EU have been breaking ranks by charging cut-rate VAT on services sold across borders. Luxembourg’s move at the start of 2012 to cut its e-book rate to only 3% to help attract and retain the media industry has been copied by France, and I expect Belgium to do the same. The UK has held out at the full 20% VAT rate, which has a detrimental impact on the UK industry. The EC’s move will seek to end these anomalies and tax competition amongst member states, and comes under pressure from member states’ Ministers of Finance."
Neither state has reacted to the threat, though France has previously indicated that it would pay any fines levied.