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18th Jan 2020

Row between EU ministers halts e-book tax rate

  • Under EU law at present, member states can apply reduced VAT rates to "physical" books and newspapers, but not to their electronic equivalents. (Photo: Zhao !)

An EU plan to reduce VAT rates for e-books and e-publications is under threat after the Czech Republic blocked it on Friday (16 June), in a move described as "hostage taking" by EU officials and diplomats.

They said that Prague was trying to gain some leeway on another unrelated VAT issue: the setting-up of a specific system - derogating from EU tax rules - to fight VAT fraud.

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Both files were already agreed to at the technical level, and EU finance ministers were only expected to give their official approval at a meeting in Luxembourg.

The e-books bill blocked by the Czech Republic aims at solving the current unequal situation – at present, under EU law, member states can apply reduced VAT rates to physical books and newspapers, but not to their electronic equivalents.

Last November, the European Commission proposed to amend the VAT directive in order to allow member states to apply the same rate to online publications.

France, in particular, is pushing for reduced e-book VAT rates because it already applies a low rate for online publications – 5.5 percent.

In March 2015, the European Court of Justice ruled that "by applying a reduced rate of VAT on the supply of digital books (or e-books), the French Republic has failed to fulfil its obligations" to EU law.

On Friday, France reacted to the Czech move by blocking another piece of legislation on VAT, the so-called reverse charge mechanism, which has been pushed by the Czech republic.

Czech issue

In the EU, VAT is generally collected along the supply chain, with the last amount being collected when the goods are sold to the final consumer.

Prague - under the command of its former finance minister, Andrej Babis, a businessman - claimed for a long time that VAT fraud could be tackled better by only collecting VAT at the final sale – the reverse charge mechanism.

The country had asked the European Commission to allow member states to conduct "pilot projects," to test out reverse charging.

The EU executive agreed, but under strict conditions. It said that the pilot project cannot last more than five years, whereas the Czechs wanted the limit to be extended to 10 years.

The commission, which is expected to present a new VAT regime later this year, also said that the pilot scheme must stop when the new plan comes into force.

Don't waste my time

The Czech blockade on Friday caused some anger among ministers.

"My patience is running out, and I am annoyed", said Dutch finance minister and Eurogroup president Jeroen Dijsselbloem during the discussion. "Different colleagues around the table are simply being unreasonable."

"I don't think we should waste our time in this way", he added.

"It's blackmail", one diplomat said of the Czech government's actions.

"We can't trust them", added another source, suggesting that allowing for the Czech 10-year demand would lead to other blockades in the future if they eventually wanted to make the system permanent.

The Czech government used the same tactic last year, when it threatened to block an anti-tax-avoidance directive if the EU commission didn't propose a plan on the reverse charge mechanism.

Uncertain future

The future of both pieces of legislation - on VAT for e-books, and on reverse charges - is unclear.

Diplomats stressed that the problem was mainly between France and the Czech Republic, and that it was up to them to solve it.

"It is not a technical issue, it is a political discussion", said Maltese finance minister Edward Scicluna, who was chairing the meeting.

EU commission takes on VAT fraud

Under an action plan presented Thursday, cross-border transactions would be better monitored. EU countries would also have more autonomy to fix rates.

Anti-EU rhetoric props up Czech election race

The recent decision to stop taking asylum seekers is the latest sign of growing euroscepticism ahead of elections in October, with billionaire Andrej Babis as favourite.

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