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European Commission to Investigate EBook Sales Tax Distortions

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The European Commission has launched an infringement procedure against France and Luxembourg because the VAT rates they are applying to digital books are potentially incompatible with EU law.

Downloading of digital books is regarded as a service supplied electronically and cannot be taxed at the reduced rate.

In its Communication of December 2011 on the future of VAT, the Commission launched a debate on the possibility of moving towards convergence of the VAT rates applicable, on the one hand, to traditional books and, on the other, to digital books. The Commission will put forward proposals by the end of 2013. It is not possible, however, to ensure convergence towards the reduced rate currently applicable to traditional books without amending the VAT Directive.

France and Luxembourg nevertheless decided to apply reduced rates to digital books at the start of this year, thereby infringing EU law. The rates are 7% for France and 3% for Luxembourg.

The Commission said that this situation is creating serious distortions of competition that are damaging to economic operators in the other 25 Member States since digital books can easily be purchased in a State other than the one where the consumer resides and, under the current rules, the VAT rate applies is that of the provider's, not the customer's, Member State.

Without naming the company, it is clear that the Commission is keeping an eye on Amazon which deliberately based its European HQ in Luxembourg due to the preferential tax rates there.

The statement from the Commission said that smaller book retailers 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.

The Commission considers that these reductions might not be in line with European law and has decided to send letters of formal notice to both Member States.

This first stage allows the two countries to explain their positions. France and Luxembourg have one month to submit their comments. If the information provided is not regarded as sufficient, the Commission could formally state that there has been an infringement and send a reasoned opinion to the two countries asking them to change their laws, which is the second stage of the infringement procedure.

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Tags: european commission  ebook  amazon  Luxembourg  France