Many EU member states apply zero or reduced VAT rates to paper publications. On the contrary, they charge the standard rate of VAT on e-books, subscription news websites or other electronic media which may be seen as “close substitutes” to such printed material, according to a “Retrospective evaluation of elements of the VAT system” drafted on the 1st of December 2011 by the Institute for Fiscal Studies upon request of the European Commission.

The report added that given the reduced rates available on traditional books, newspapers and magazines, there is “no clear reason” why close substitutes should be subject to different rates of VAT.

The European Commission underlines in a communication of the 6th of December 2011 that ‘similar goods and services should be subject to the same VAT rate and progress in technology should be taken into account in this respect, so that the challenge of convergence between the on-line and the physical environment is addressed.’

On the 14th of December 2011, the Luxembourgish VAT administration has seized this opportunity to declare in a circular letter that due to the fact that the notion of “books” is not construed similarly in the different EU Member States, a reduced VAT rate shall be applied to e-books. The administration pointed out that the given the identical use of books and e-books, a different rate is not justified.

Considering the Amazon’s European headquarters are located inLuxembourg, all Kindle e-books are sold with a VAT rate of 3% instead of the normal 15% rate applicable on other goods, giving Amazon a fairly large competitive advantage.

This rate is applicable from the 1st of January of this year, but this system can only last until the 1st of January 2015, considering the Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 implementing measures for Directive 2006/112/EC on the common system of value added tax. From 1st of January 2015, VAT on telecommunications, broadcasting and electronic services supplied to consumers will be charged at the rate in the country of the customer, not of the supplier, as is now the case.

After the matter came up in the UK Parliament on the 12th of December 2011, the UK has once again declined to lower the value-added tax on e-books, which currently stands at 20%. TheUK’s exchequer secretary, said theUK could not do this and remain in compliance with European Union law, which classes electronic media as services rather than goods and requires they be taxed at the higher rate.

Luxembourg’s move follows that of France, which also applies a lower rate from 19,6% to 7% on electronic print as of 1st of January 2012.

The lower VAT rate on e-books clearly illustrates a Luxembourgish tax policy turned to favouring foreign companies located in Luxembourg, inter alia in the electronic sector, having already attracted Skype and Netflix.

At the beginning of this year, the European Commission has drawnLuxembourgandFrance’s attention over the VAT Directive and the fact that lower rates can only be applied on goods listed in Annex 3. E-books being excluded of this list,FranceandLuxembourgdo not comply with the regime provided in the Directive.

Andreea Antonescu