A recent opinion of the Attorney General Kokott in an ECJ case initiated by the Polish Constitutional Court sheds light on the contentious discrepancy in VAT rules between E-publications and printed ones. According to the Attorney General, the exclusion E –publications from lower-rate VAT does not distort the market, given the lower costs associated with e-publications. The view of the Attorney General is in contrast to the assessment by the European Commission which is currently reviewing the possibility to align the VAT rates applicable to the supply of electronically supplied and printed publications.

The VAT Directive has been a cause of controversy amongst Member States ever since its amendment in 2009. Much discontent arose on account of the Directive not encompassing e-newspapers and e-books in the list of publications that could benefit from lower-rate VAT despite doing so for digital books granted through “physical means of support” e.g. CD-ROMs. The latter was included to keep up with technical developments.

Nevertheless, the Directive remained unequivocal on the exclusion of electronically supplied services, which e-newspapers and e-books form part of. This led to many infringements by Member States that all revolved around the same issue; the granting of lower-rate VAT to e-publications on the premise that the Directive, in keeping in line with technical developments, permitted it. Still, this interpretation has been a constant source of debate and commentary. To that effect, a recent opinion pertaining to a request for preliminary ruling by the Polish Constitutional Court (“CCP”), Attorney General Kokott offered guidance as to why the exclusion from e-publications from lower-rate VAT is still justified in present times. The importance of this opinion lies in the fact that the Attorney General’s discourse went to the core of the Directive’s objectives and principles.

The question of the CCP

The CCP requested clarification, among other things, on the legality of the discrepancy in VAT treatment between e-publications, and other publications.

The court asked whether the list available for lower-rate VAT in conjunction with the exclusion of electronically supplied services was invalid on the grounds that it infringed the principle of fiscal neutrality to the extent to which it excluded the application of reduced tax rates to books published in digital format and other electronic publications.

The answer of the Attorney General

The Attorney General first clarified that the principle of fiscal neutrality could not be applied to assess the validity of a Directive provision. Fiscal neutrality was a test in the nature of secondary law, and could not, as such, contest the direct legal language of an instrument. The Attorney General proceeded to address the question under the principle of “equal treatment”, a principle which was ‘endowed with the character of primary law’. Equal treatment mandated that any comparability between the goods/services in question would have to be filtered through the objectives of the field in which the Directive operated in, the principles applied in the Directive, as well as the objectives of the specific rules in question.

The Attorney General found digital books supplied electronically (e-books), and those supplied through a physical medium (e.g. CD-Rom) to be comparable under all three considerations mentioned above.

The Attorney General noted that despite their comparability, the different treatment was justified. She concluded this by first looking at the reasons behind the exclusion when it was first inserted in the Directive and by breaking down the Directive into two periods:

  • The first period lasted up to the end of 2014, during which VAT was charged on an origin basis (i.e. at the VAT level of the e-supplier’s country) for EU-based e-suppliers, and on a destination basis (i.e. at the level of the consumer’s country) for non-EU e-suppliers.
  • The second period looked at the point in time after the beginning of 2015 when VAT was to be charged on a destination basis for all e-suppliers. At the same time, as of 2015 all e-suppliers could file their VAT duties in a single Member State.

She noted that the reasons behind the exclusion of e-publications were not clearly identified when it was first inserted in the Directive. Nevertheless, she held that for the period up to 31 of December 2014 “the aim of the prohibition of reduced tax rates for electronic services was, on the one hand, to simplify the tax obligations of taxable persons established outside the EU and, on the other hand, to prevent harmful tax competition between the Member States”. The latter offset any competitive disadvantage that both domestic and non-domestic suppliers of e-publications may have suffered as a result of the discrepancy in VAT treatment.

As of 1 January 2015, however, the Attorney General saw the abovementioned changes into the VAT system as legitimate and appropriate first steps given “the specific context of electronic services, which, in comparison with conventional trade in goods, are supplied on a cross-border basis almost effortlessly and, in addition, require only a minimal physical presence, making access difficult for the national tax authorities.” Moreover, she held that distortion of competition was unlikely as e-Books enjoyed lower costs in their distribution than the other form of digital books and hence could be offered at a lower price despite the higher VAT. Consequently, the distinction between e-books and digital books on a physical medium was justified given the objective of creating a coherent VAT system.

Lastly, the Attorney General considered the same question with regards to e-newspapers. She did not find e-newspapers to be comparable to either printed newspapers or digital books supported by a physical medium, and, as such, did not proceed to justify the difference in their treatment vis-à-vis VAT rates.

The Justification in present terms

The Attorney General gave a rational discourse in her opinion which concluded that the Directive did not breach the principle of equal treatment.

Be that as it may, viewed in a larger context, the provisions find themselves under scrutiny both from Member States but also by the European Commission. The latter recently initiated a public consultation in view of enlarging the list or perhaps even granting Member States full autonomy on applying reduced VAT rates (subject to certain safeguards). The European Commission believes that the Directive having been designed two decades ago, does not keep up to date with technological and economic developments. The European Commission does not believe that there would be any competition concerns between Member States, should the lower-rate be granted to e-publications because the VAT is charged on a destination basis for e-services.

Nevertheless, one must not exclude direct competition concerns between the different types of publications. If e-publications receive the lower-rate VAT, coupled with their lower associated distribution costs, they may be receiving a competitive advantage against their physical counterparts. Perhaps this can be squared with environmental factors i.e. less printed newspapers and books means less need for paper, which indeed feature in the Commission’s questionnaire.

In the end, given the fact that the Directive’s purpose was to guarantee, above all, the neutrality, simplicity and workability of the VAT system, while preventing any distortions in competition, it will be interesting to see the results of the public consultation and the Commission’s final decision on the matter. Until then, the contentious discrepancy between e-publications and printed ones remains the e-LEPHANT in the room.