“Courts don’t make laws” is a pretty strict rule that applies in most countries. The role of justices is limited to explaining existing laws – this separation of powers between the legislative function and the judicial function of a government (championed by Montesquieu in the mid-18th century) applies in most developed jurisdictions.
So once again the European Court of Justice (ECJ) issued a predictable ruling: there is no rule in the EU VAT legislation that allows EU member states to apply the reduced rate on electronic services, including e-books. And countries are not free to make their own VAT rules. Alas, people from Luxembourg and France, your e-books will be taxable at the standard rate.
By the way, Italy applies the reduced rate on e-books as well. They changed rates on January 1, 2015 (click here for more info), and were not included in the Commission infringement procedure against Luxembourg and France.
Luxembourg had been charging 3% VAT on e-books, which will now increase to 17%. France had been charging 5.5%, which will now increase to 20%. Italy’s new reduced rate for e-books was 4% and will now be the standard rate of 22%.
Two things will happen now:
1. Member states will push for adding e-books to the list of supplies that can be taxed at a reduced VAT rate. This is an “annex” to the VAT Directive. Reuters reports that a EU Commission spokeswoman said:
“The Commission appreciates that member states may want to define their own priorities, including on culture policy, in their taxation policy. This should be done within the EU legal framework. This is why the Commission will address this matter through the extensive overhaul of the VAT system which is currently being prepared. We hope to be able to communicate on this next year.”
2. France, Luxembourg and Italy will have to think about what to do with supplies of e-books that in the past have been incorrectly charged with the reduced rate. There is plenty precedent for businesses to successfully take the position that they could rely on communications by the local tax authority that the reduced rate applies.
So I don’t fear for the past e-booksellers’ profit margins – but from now on these e-businesses will either have to absorb the additional tax (14% additional in Luxembourg, 14.5% in France and 18% in Italy) as a cost, or they will have to increase their selling prices.
This change applies to US-based e-sellers as well. They too will now need to start charging the standard rate to their Luxembourg, French and Italian customers.
The ECJ decisions are below.
Download (PDF, 782KB)
Download (PDF, 782KB)