What is at issue?
Under EU VAT law, EU member states may, at their discretion, apply a reduced rate of VAT to books produced on ‘all physical means of support’ (Principal VAT Directive art 98 and Annex III). The term ‘all physical means of support’ has generally been interpreted to include all printed books, but to exclude audio books and all digital and electronic books (‘e-books’). There is also a prohibition under EU VAT law against applying a reduced rate of VAT to ‘electronically supplied services’ (art 98(2)). Accordingly, in the UK, for example, printed books are currently zero rated for VAT purposes (VATA 1994 Sch 8 Group 3), whilst the supply of e-books is treated as a supply of electronic services which is subject to VAT at the standard rate (i.e. 20%). However, how does this apparently discrepant treatment of similar products square with the principle of fiscal neutrality, according to which similar and competing products must be treated equally for EU VAT purposes?
What’s happened?
The CJEU has recently addressed this question in K Oy (C-219/13), regarding the application of different rates of VAT in Finland to printed books and e-books. The case was referred to the CJEU by the Finnish tax administration. The case is one of several brought before various courts regarding the application of reduced rates of VAT to e-books. Infringement proceedings are currently pending against France and Luxembourg regarding their application of a reduced rate of VAT to e-books, in relation to which proceedings the EU Commission has stated, unequivocally, that: ‘The provision of e-books is an electronically provided service and as such cannot benefit from a reduced rate.’
The present case was brought by K Oy, a publisher of e-books in Finland, arguing for the principle of fiscal neutrality, which has become a fundamental tenet of the common EU system of VAT, and which precludes treating similar goods or services – which are therefore in competition with each other – differently for VAT purposes. K Oy argued that printed books and e-books are similar goods with similar characteristics, which are in competition with each other. As such, it held that treating them differently for VAT purposes, by allowing Finnish tax legislation to apply a reduced rate of VAT to one but not to the other, is a breach of this principle.
What did the CJEU decide in the case?
The CJEU’s judgment followed the advocate general’s opinion issued in April. It confirmed that the Principal VAT Directive, which does not specifically deal with the VAT treatment of e-books, does not preclude national legislation from applying different rates of VAT to printed books and e-books, provided that such legislation complies with the principle of fiscal neutrality.
In the court’s view, whether such domestic legislation is compliant with the principle of fiscal neutrality is a question of fact for national courts to determine on a case by case basis. According to the judgment, to answer this question, national courts will have to consider the extent to which, from the perspective of an ‘average’ consumer in the applicable member state, the two kinds of book have similar characteristics and satisfy the same needs. In identifying who is an ‘average’ consumer, national courts must take into account the particular features of the market for the relevant goods in the applicable member state, such as the market penetration of e-books and the equipment needed to view them compared to printed books. However, the CJEU’s judgment says that ‘if what matters for that consumer is essentially the similar content of all books, regardless of their physical support or characteristics, the selective application of a reduced rate of VAT is not justified’.
In other words, if a national court concludes that printed books and e-books achieve substantially the same purpose, from the perspective of an average consumer in that member state, then the court will have no choice but to rule that the same VAT treatment must be applied to both.
So does the decision maintain the status quo?
The CJEU’s decision does not bring the VAT treatment of e-books into line with printed books; to that extent, it maintains the status quo.
However, in theory, it invites the national courts of EU member states to look again at the issue in the light of the principle of fiscal neutrality. In the CJEU’s view, it is up to national courts to decide whether, as a matter of fact, printed books and e-books are sufficiently different from each other to justify the selective application of a reduced rate of VAT to one, but not the other.
The court’s judgment appears to be significantly softer than the EU Commission’s view that VAT must be charged on e-books at the full rate.
What is the broader context?
It is important to bear in mind that, from 1 January 2015, EU-based businesses will need to charge VAT at the rate applicable in the member state of the consumer on most cross-border e-commerce services, including e-books (see Council Directive 2008/8/EC art 5(1) which amends the Principal VAT Directive art 58). This will be consistent with the rule currently applicable for businesses based outside the EU. Currently, EU-based businesses charge VAT on cross-border e-commerce services supplied to consumers at the rate applicable in the member state where the supplier is based, so member states which have reduced their rate of VAT on the supply of e-books have been able to obtain a competitive advantage by attracting businesses to their location. This potential advantage ends on 31 December 2014 and it seems unlikely that member states will find reasons to lower the rate of VAT on e-books if they gain no competitive advantage for their jurisdiction and merely reduce their tax revenues.
Any final thoughts?
The judgment also fails to address the tricky issue of how the principle of fiscal neutrality interacts with the express prohibition under the Principal VAT Directive against the application of a reduced rate of VAT to electronically supplied services.
