but some are more equal than others?’
Emma Linklater, European University Institute
Final Version appears in 2014 30 (3) Publishing Research Quarterly (DOI 10.1007/s12109-014-9374-3) available at
http://link.springer.com/article/10.1007%2Fs12109-014-9374-3
Abstract:
EU law currently distinguishes ‘physically embodied’ books and e-books for VAT purposes, even where their content is the same. This article explores the legal root of that difference and, employing the principle of ‘fiscal neutrality’ (a subset of equal treatment) it aims to shed light on the current cases pending before the Court of Justice of the EU against France and Luxembourg for their unilateral reductions in e-book rates. The last part of this article looks at another area of physical and e-book divergence, first sale, and considers what an equality based approach could have to say about this.
Keywords (suggested):
Europe, VAT, e-books, regulation, taxation, first sale, VAT Directive, fiscal neutrality.
Introduction
The phase ‘books are different’ has long been used to distinguish the market for books from other consumer goods [1, 44], justifying their special treatment as a matter of national policy within the greater EU sphere. However, it remains to be seen whether e-books are for this purpose to be considered as yet more different still.
This article looks at the current value added tax (VAT) situation of e-books in the EU as regards the non-application of reduced rates. VAT is a form of taxation that deducts tax paid on purchases from tax on sales: it is, as the name suggests, a tax on the value added. In the publishing supply chain all industry actors – from publishers to printers to booksellers – remit tax on the value they add to the end product, meaning VAT is borne ultimately by consumers on final sale. Remittance is to national governments, but where transactions involve more than one Member State the place of remittance can vary depending on the type of transaction (B2B or B2C) and the goods or services concerned.
This article is less concerned with the details of the VAT payment than with one specific feature of the EU system, developed in recognition of the value of the book as a cultural object. At present, national EU governments can choose to allow for reduced rates to be applied to print books, but are blocked by EU law from extending this benefit to e-books. The paper firstly
are, in most EU countries, applied to print books [31]. Secondly, it looks at the EU law situation that currently dictates that e-books cannot be subject to reduced rates. Following on from this, it considers the decisions of France and Luxembourg to apply reduced rates to e-books. With the currently pending cases brought by the European Commission against France and Luxembourg for this move now pending before the Court of Justice of the European Union (CJEU), some of the recent case law on ‘fiscal neutrality’, a subset of the principle of equal treatment, is considered. This principle is going to be determinant for deciding whether print book and e-books should be treated the same, however the outcome is by no means clear-cut from this perspective. Lastly, the article pans out to discuss more broadly how we should go about treating divergences in regulatory treatment between print and e-books, in particular paying attention to equal treatment as a general principle of EU law.
The motivation behind reduced rates
Reduced rates of VAT can be considered as an indirect cultural subsidy for the publishing sector. There are two main arguments used to support reduced rates [41]. Firstly, it can be argued that reduced rates are equity enhancing; by reducing end-prices for consumers they make products or services
available to low-income groups that would not otherwise have access to or participate in the market. This argument is particularly prominent in the cultural sectors, not just for books, but to also justify VAT reductions for cultural events (for example, reduced VAT on ticket prices). The motivation is that with a reduced price comes increased engagement by the consumer. This feeds into the second argument: reduced rates are efficiency enhancing and can increase productivity in a particular sector. This argument is used mainly in the services sectors, but also applies to books insofar as the knock-on effects of the reduced rate should improve the situatiknock-on of all actors in the supply chain and produce general interest benefits because book production will increase.
A reduction in VAT rates filters through the supply chain and decreases the VAT paid by industry players. In broad terms, a decrease in VAT rates has the following effects [42]:
-‐ For publishers, they can reduce the sale price, which leads to an increase in demand, meaning turnover is increased and improvements can be made to output. A central argument here is that publishers will be less risk averse and so will be more willing to publish a diverse range of titles and not just sure sellers.
conditions (including quality of services, and stock because they will be less risk averse).
-‐ For other actors in the supply chain (printers, editors…) the cost f their services will decrease, so the turnover of publishers’ will increase because of stimulated demand.
The key here is that the savings must be passed on throughout the supply chain if there is to be a benefit. Perhaps remarkably, it seems that most of the time that this is the case: a 2007 Study on the effects of reduced rates found that ‘[t]he empirical evidence from major changes in VAT rates supports the conclusion that changes of VAT rates to a very large extent are passed on to consumers’ [7]1. This means that the consequence should be a
reduction in end prices, encouraging more people (even if they are largely a homogenous group) to purchase more books. Achieving the desired stimulation of consumer demand is essential for the system to work, because it is this that leads to increases in turnover, not the reduced rate itself.
As such, that there is a “limited and contingent argument for extending reduced VAT rates (or other subsides) to sectors that for some (good) reason are under-consumed” with the aim of making “cultural (merit) goods more
available for low income households or to stimulate consumption of goods with positive externalities” [7].
The EU Legal framework
Despite reduced rates being applied to books in the majority of EU Member States, it was only in 1987 – 20 years after the first EU VAT Directive [12] – that a dual system of standard and reduced rates was discussed in the EU [13]. Introduced into law in 1992, it also enabled MS to maintain existing reduced rates lower than the threshold contained in Art 99 of the VAT Directive so long as they are “in accordance with Community law” and “have been adopted for clearly defined social reasons and for the benefit of the final consumer”[11]. It is for this reason that Luxembourg and the UK continue to be able to apply rates lower than the 5% reduced rate threshold to books2.
Point 6 of (what is now) Annex III of the VAT Directive provided at its inception that the ‘supply, including on loan by libraries, of “books” could be subject to reduced rates [10]. Being left to the MS to define the scope of “books” (which may be delineated on the basis of academic, children’s books, etc. so long as due regard is paid to the principle of fiscal neutrality), the meaning of the word was not discussed at the EU level.
Needless to say that in 1992 the e-book was not readily envisaged. In the space of five years however, the landscape had come to look significantly different: the 1990s saw the rise of the Internet, digitization, e-commerce and a growing enthusiasm for online distance selling. Already by 1997, the growing importance of the “information society” and the impact this would have on reduced rates for books was being discussed. Although the wording of Annex III at this point simply referred to “books”, and it may therefore have been possible to include e-books, books on CD and audiobooks within this, the European Commission took the view that only printed books were covered [16]3. Partly, this was due to its ongoing concern about how to treat
new electronic and digital products: the Commission, backed by the Council [8], felt that digital and electronic transactions should be treated as ‘services’ and not goods [14]. With a 2002 Amendment to the VAT Directive, Art 98 thereof came to explicitly state that ‘electronically supplied services’ (ESS) could not benefit from reduced rates.
However the Directive at this point still did not exclude e-books explicitly; all it really said that ESS could not be subject to reduced rates without specifying that e-books (or even books on CDs) were ESS. However, a further amendment in 2009, which was actually intended to expand the scope of the “books” covered by Annex III to also include digitized books –
and arguably not only those on CDs4 – serves to block e-books from
benefitting from a reduced rate. This is because the current wording of Annex III as introduced by this amendment provides that only books on “physical means of support” may benefit from a reduced rate. While this would include any incarnations of book content – including audiobooks – contained on CD-ROMs, CDs, DVDs or tapes, it discounts any application of reduced rates to disembodied intangible e-books. This has been confirmed by a (non-legally binding) opinion of the VAT Committee which “unanimously confirm[ed]” that:
“[t]he supply of e-books […]qualifies as electronically supplied services to which the reduced rates shall not apply according to the second subparagraph of Article 98(2) of the VAT Directive” [10].
and as such:
“[T]he supply of books in electronic format, usually called ‘e-books’ (e.g.: in PDF files) or virtual books, which have to be downloaded from a Web site to be viewed on a desktop computer, laptop, Smartphone, e-book reader or any other reading system, as well as the supply of on-line newspapers and on-line periodicals, [do] not fall within the scope of category 6 of Annex III of the VAT Directive”[10].
However, just because this wording has been adopted does not mean to say that it is not arbitrary in nature. If this is the case, the differentiation between print or audiobooks on CD and e-books based on their physical incarnation could go against the principles of equal treatment and fiscal neutrality. Indeed, while the Commission clearly believes that de jure e-books cannot benefit from the reduced rates this is not to say that it necessarily supports the continuation of this situation5. The issue was
consulted on directly in the 2013 large-scale consultation on the ‘Future of VAT,’ drawing responses that across the board seemed to indicate a change should be brought about [19]. At the time of writing, a Commission Proposal is eagerly awaited on this issue, with the Council having declared already that it commits itself to follow the Commission’s lead [9]. The European Parliament has also been active; the EP Report on the future of VAT calls for equal and favourable treatment of books in all formats; an EP oral question by MEP Gallo (France, EPP) and 42 other MEPs goes also in this direction; and not least an EP resolution on modernising VAT recommends reduced rates for online cultural products and redressing the discrimination [24, 25].
On the political front therefore, the resolution seems to be heading rather unanimously towards treating e-books as books for VAT purposes. Although
in the opinion of the present author this is the correct approach, this unanimity should perhaps be regarded with a hint of suspicion when considered in the context of the surrounding EU digital agenda. At the EU policy level, insofar as digital content markets are concerned, there seems to be a shift occurring away from the societal and cultural and towards the economic potential of the creative industries [18]. The Digital Agenda for Europe [17] “falls into the current trend of treating culture and culture industries as vehicles of economic growth” [6] and as such, making the digital market as competitive and appealing as possible for consumers and businesses, including from a VAT perspective, should be a priority. Reduced rates which differ between MS would not seem to contribute helpfully to this effort. However, the within the digital Agenda framework VAT is only mentioned in passing, and differing VAT rates for physical and electronic services are not mentioned at all. This has led one author to make comment that
“while the EU Commission seeks to complete a Digital Single Market by 2020, it does not consider the possible VAT obstacles to trade, such as inefficient collection mechanisms in an intangible environment. It is clear, however, that these inefficiencies constitute a major obstacle to making the digital market a reality, and that they should be tackled accordingly.” [36]
The unilateral e-book VAT reductions by France and Luxembourg
The current formulation of the EU VAT Directive, insofar as it blocks MS from applying reduced rates of VAT to e-books as they would print books, has been a source of dismay for many in the industry. Despite this blockage, the governments of Luxembourg and France6 both took steps to bring the
VAT treatment of e-books in line with print books in their respective countries, arguing that the overarching principle of neutrality – a special reflection of equal treatment in the field of VAT – justified this move. This is in stark contrast to other countries, such as the UK where it is accepted that they must simply wait it out for the situation to be resolved at the Council level. Having one of the most prominent publishing industries in Europe, lobbying in the UK was strongly focused on obtaining the desired zero rate for e-books also, however the government maintained that it was unable to reduce the rate for e-books unless moves were made at the EU level. In its view the only options to resolve the situation were to (a) apply equal treatment by increasing the VAT on print books to 20% (an option which, unsurprisingly, was not well received) or (b) risk an infringement action for failing to apply the VAT Directive. In Germany, discussions on this are critical, but as yet no decision to follow the French or Luxembourgish lead has been taken [39].
The European Commission was obliged to open proceedings against France and Luxembourg as the “Guardian of the Treaty” since the move clearly went against the word of the VAT Directive and created distortions of competition by favouring both countries as “VAT havens” for book sales7.
On the 3rd of July 2012, the Commission announced that it had taken the
step of sending a formal notice to both countries asking them to state their position [20]. In the associated press release, the Commission motivated its actions on the basis of competition concerns:
“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.” [20]
While it can be noted that the competition concerns will effectively be resolved as of January 2015 when ESS move to point-of-destination taxation (i.e. the VAT rate of the country in which the consumer is based will apply8),
the reduced rate to be applied to e-books also was strongly of the opinion that:
“The eBook and the physical book are two products that differ in their method of manufacturing and distribution alone. Applying to them different tax rates violates the principle of neutrality of VAT rates.” [28]
It is upon this principle that any resolution of the e-book reduced rates debate will hinge. As such, it is relevant to consider in more detail what fiscal neutrality is and does, and what it may mean for the ‘plight of the e-book’.
The principle of fiscal neutrality
Even putting the e-books debate aside, the individual interpretation and delimitation of the scope of the categories in Annex III that allow reduced rates has always held the potential for non-neutral applications of these rates resulting in unequal treatment between similar goods or services. Such cases have appeared frequently before the European Court as well as
national ones: are deductible services to be treated the same as non-deductible ones? Are ‘snowballs’ cakes or confectionary? [2, 5, 32, 33].
In the international sphere and relating specifically to the electronic context, neutrality is the first of the five ‘broad taxation principles which should apply to electronic commerce’ set out at the OECD Ministerial Conference in 1998. The OECD Framework Conditions provide that:
“Taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation.” [38]
Rendahl views the OECD definition as a form of competition neutrality, which she also links to the Canadian GST terminology of ‘functional equivalency’ [39]. Indeed, fiscal neutrality in the EU has until recently foreseen that the VAT neutrality has as a central premise that the goods or services are in competition. The point of view for deciding if a provision was neutral or not was the VAT treatment itself: when goods or services are in competition then differing VAT treatment would drive consumers to one or another
economic rather than by tax considerations’) [23,26]. This ‘neutrality as comparable VAT treatment’ formulation of neutrality was used by the Court until recently, however the 2011 Rank Group [32] ruling has altered this to instead move the focus towards the interchangeability of the services themselves from the viewpoint of the consumer. In Rank Group the Court found that the existence of competition stems from the similarity of the services (or products) in question, rather than being a pre-requisite for the principle to apply [32]. In another ruling of February 2014, the Court reiterated that a regulation would have to be neutral in its application to two products or services if:
“they have similar characteristics and meet the same needs from the point of view of consumers […] and where the differences between them do not have a significant influence on the decision of the average consumer to use one […] or the other.” [33]
Neutrality between print and e-books
So what does this mean for the two e-books cases about to have their day in Luxembourg? Essentially, it means that the decisions about whether the differentiated treatment of e-books and print books will almost certainly
have a consumer use focus. This means that it will be all the more essential for France and Luxembourg to show that e-books and print books are substitutes. This is no mean feat, if for example we look at the recent Bertelsmann/Pearson/Penguin Random House merger in the EU where
“[T]he majority of responding customers consider that the vast majority of consumers would not switch from print books to e-books and vice-versa in case of a 5-10% increase in the retail price’ indicating that–although it left a precise market definition open–that ‘print books and e-books may constitute separate product markets.” [37]
This does not bode well for reducing e-book VAT as a matter of principle rather than politics. The market investigation equally found that print books and audio books are distinct for consumers and publishers, and that audio books are also distinct from e-books. They differ insofar as sales outlets, price, marketing and promotions are concerned. Differences between these three categories regards the mode of consumption and the types of consumer who use them were also noted.
Although economic-based studies into the levels of substitution between print and e-books are nascent, some do support this finding. We can for example point to the work of Hu and Smith, who use the two months at the
Amazon as a ‘natural experiment’ to test the extent to which sales of print books increase while e-book versions were unavailable [30]. Their results indicated that consumers often are relatively more tied to their mode of consumption (physical or digital) than they are to a particular product, contradicting the publishing industry belief that consumers want the content and are not concerned about the format in which they receive that content. Based on this, it appears that the material notion of a ‘book’ is separable from its content, thereby allowing us to distinguish a separate product market for ‘print books’ and ‘eBooks.’ Further, e-book substitution decisions require e-reader adoption, an additional technological consideration that is not cost free and may act as a deterrent for some consumers.
The Commission’s merger assessment is also supported by early literature, which notes that “[c]onsumers are uncomfortable with the idea of e-book reading and are not willing to consider reading with a strange device.” [43] However, the problem with such studies is that subjective opinions expressed by consumers do not paint the whole picture. A study undertaken in Germany by the Johannes Gutenberg Universität, Mainz, indicated that while consumers preferred reading print books to reading on e-books when asked, there was no major difference in comprehension levels whichever
format was read, and in fact digital texts may even increase ease of reading for certain categories of consumer [34]. Such works, it seems, can have results that can truly come out on either side of the fence.
It should also be noted that although the market investigation of the Commission indicated that consumer uses of e-books differed between print and e-books, publishers did not seem to place such emphasis on these differences. They on the other hand argued that e-books were a competitive constraint on print books and vice-versa because the content of the title was the same [37]. As far as production was concerned, switching from print and e-book outputs was reported as being relatively easy, with new titles creating e-books as a “by-product” from the print file [37].
The polarized difference between consumer and producer perspectives is a difficult one to reconcile, and in the opinion of the present author the current emphasis of the Court on consumer use in fiscal neutrality cases is problematic, although perhaps predictable given the increasingly consumer centric nature of EU secondary legislation [45]. A clear disadvantage of consumer welfare is however the focus it places on today’s buyers, perhaps to the disadvantage of future consumers. This is emphasized when we consider that applying the current standard for neutrality to e-books tells us only that consumers in the here and now consider e-books and print books
current application of legislation which may restrict the use of one and promote the use of another9. In this respect, consumer use is not a stable or
revealing standard upon which the similarity of books and e-books should be judged. Rather, in the view of the current author a standard which takes into account the objectives of the print book regulation and then determines if these can be translated into the e-book situation is more effective for protecting the balance between use and protection that underpins the sector.
Could neutrality in the form of equal treatment solve other p- vs e- regulation disputes?
The final section of this paper will briefly look into the use of such an equality based standard in a wholly different context, but one which is nonetheless important for the publishing sector: the question of e-book resale. This subject itself could form the basis for an entirely separate article, however in this paper the analysis will be focused only on the Court’s reference to equal treatment in its 2012 UsedSoft decision, relating to the resale of downloaded computer software [4]. This shows that outside of the fiscal realm the Court pays less attention to consumer use and more
attention to the underlying purpose of the traditional rule which it seeks to protect.
Equal treatment, or ‘equivalence’, has long been viewed as a starting point for technology regulation. However, without elaboration these phrases are simply normative assertions of a policy statement that new-technology digital or online activities should be treated the same as old-technology, analogue or offline activities where they meet an (unstated) standard of ‘likeness’. This general starting point alone is not very helpful because we don’t know when books and e-books are alike, or how to tell if they are alike: should we look at their physicality? Their color? Their content? Fiscal neutrality is a more elaborated statement in this respect: it tells us that when from consumer perspective books and e-books are considered to be alike, we should treat them the same under regulation (conversely, where they are not of a sufficient likeness, they should be treated differently). However, this consumer focus has not been so prominent outside the realm of taxation; elsewhere, using the broader principle of equal treatment the CJEU has employed what seems to be a much more workable approach. In UsedSoft [4], a case related to digital exhaustion it instead focused on the economics of the transaction and the balance that the exhaustion principle for physical goods tries to achieve in this respect. Exhaustion serves “to avoid partitioning of markets, to limit restrictions of the distribution of those
intellectual property concerned” and to call something a licence rather than a sale to get around this would “divest [the doctrine] of all scope” [4].10
In the view of the current author this ‘rule-objective’ approach is a better way to dealing with questions about how to treat new technologies with offline counterparts at the regulatory level. This is not to say, however, that the existing rule should be applied in toto. As demonstrated by the CJEU in UsedSoft, the exhaustion doctrine as applied to physical goods was the starting point from which the Court could define an outcome to be achieved. It determined that this same outcome should be reached in the intangible situation, but that this did not necessitate the application of exactly the same rule-set. Instead, because of the differences in functioning between physical CD-ROMs and downloads –in particular their capacity for copying and sharing – the Court incorporated a ‘forward and delete’ rule to qualify this. As such, the resale of downloaded software is subject to a higher standard before it can be carried out, and although this is more burdensome it is necessary to neutralize the quantitative differences between the physical and the intangible. The fact that resale can be carried out as a result of the ruling is the consequence of an application of equal treatment, with a view to ensuring functional (outcome) equality. While this is commendable from a legal perspective, the reality of the situation is that
monitoring deletion is no easy task. As such, it remains to be seen whether what appears to have been achieved on paper can actually translate into a purposeful outcome in reality.
Conclusion
The focus of this article was on the question of whether the principle of fiscal neutrality requires e-books, like print books, can be subject to a reduced rate of VAT. The case law of the CJEU which will be of great import in deciding the cases against France and Luxembourg has indicated that the consumer perspective is at the heart of the concept of neutrality, and as such whether the principle is infringed or not will depend on consumer views. Looking at the Penguin Random House merger investigation, it appears that print and e-books are not substitutable, however other literature has contradicted this. As such, relying too much on consumer use has the potential to create unpredictable outcomes, which would go against the most basic aim of equality or neutrality: to create more rational and consistent legislation. In this respect, the rule-objective focused standard for equal treatment employed by the Court in UsedSoft seems to be more stable in nature. This involves looking at the purpose of the offline rule, determining if this ‘translates’ into the digital context, and then adapting the rule to achieve a functionally equivalent outcome. Although this provides a
more suitable for solving regulatory issues where the treatment of print and e-books diverge and could be applied, for example, where questions are raised about e-exhaustion or e-book lending.
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Notes
1 This study gives the examples of a 10% VAT rise for periodicals in Italy in 2002, which led
to a price rise of 14% and the 19% VAT reduction on print books in Sweden in 2001 which led to a reduction in prices of 12%. The study notes that “This corresponds to a pass-through to prices of 134 and 80 % respectively. Given the uncertainty involved in the estimations, this is close to a full pass-through.”
2 Luxembourg applies a super-reduced rate to books (3%) and the UK and Ireland apply a
zero rate to books. In the pending case against Luxembourg, there is as such an issue as to whether e-books are included in the ‘existing’ rate (a question which is not pertinent to the French case). It is interesting to note that questions have been raised about whether Scotland – should the country choose to become independent as a result of the September 2014 referendum vote – would continue to be able to benefit from the UK exception [3].
3 One reason for the Commission’s scepticism as regards a more expansive scope is to
be found in the general dislike for reduced rates in the scheme of EU internal market completion3: reduced rates, which due to political divergence in the field of cultural
policy remain both optional and varied in nature, are a source of divergence that does not fit neatly into the EU portrait.
4 It is being argued by the Government of Luxembourg in the pending CJEU case that the
EP was not consulted on the adopted version of the 2009 Directive. Indeed, the Commission’s original proposed wording was wider, with less emphasis on the physicality on the medium (“Supply […] of books […] as well as audio books, CD, CD-ROMs or any similar physical support that predominantly reproduce the same information content as printed books”) [14]. It can be noted that the EP and EESC were consistently critical of a
narrow technology based approach, with the EP in 1998 calling for an extension to “CD-ROMs with content identical or analogous to that of books” [20, 21].
5 “[The] intention is for the subsequent system to align VAT rates applied to print books
and eBooks. But – as with all tax decisions – member states will need to agree, unanimously. I think such a change would be good for our publishing sector; good for an education system increasingly trying to go digital; and good to remove artificial market distortions. After all, it is common sense that the same rules should apply to same products. I support such a consistent, non-discriminatory tax regime for paper and e-publications; so does the OECD; I hope you will too.” [34].
6 For Luxembourg, their fiscal definition was wide enough so as to allow for an
interpretation of their reduced rates annex that included e-book [29]. France on the other hand had to update its definition, which it did by way of an update to the definition in its law, which had previously specified that books were “printed works”. Article 25 of the French Finance law for 2011 extended Art. 278-0 bis of the French Code général des impôts [27, 28] so that it now provides in point 3 for the reduced rate of VAT (5.5%) to apply to “books, including their loan… on all types of physical support, including those supplied via download”.
7 Amazon and Apple for example both use Luxembourg as their European place of
establishment.
8 For many readers of e-books this will mean a hefty price hike: A customer in the UK used
to buying on Amazon will see the VAT increase from 3% (the Luxembourg rate) to 20% (the UK rate) literally overnight.
9 This is of course independent of price, since the SSNIP test is essentially a price-induced
switching test. Here we may consider for example the situation of e-books and their lack of resale capacity; if consumers wish to be able to share their books with others, or sell them on once read, e-books are no substitute.
