Public Consultation on reduced VAT rates for electronically supplied publications

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1 Ernst & Young LLP Tel: More London PlaceFax: London ey.com SE1 2AF European Commission Directorate-General for Taxation and Customs Union VAT - Unit TAXUD/C1 Rue Joseph II 79, Office J79 05/065 B-1049 Brussels Belgium 19 September 2016 Your ref: Lepg349 Direct line: csanger@uk.ey.com Dear Sir/ Madam Public Consultation on reduced VAT rates for electronically supplied publications We are pleased to submit our comments on European Commission s consultation on the VAT treatment of electronic publications. In addressing the questions identified by the Commission, we have focused on those aspects, particularly in the field of tax policy, where we have the most relevant experience. In addition to addressing these questions, we have submitted a detailed policy note highlighting the key issues which need to be addressed to modernise the tax treatment of e-publications and to boost the EU s capacity to develop the Digital Single Market and compete globally. These are: The need to achieve a playing field of reduced rates for e-publications vis-à-vis print publications The need for the definition of e-books to be broad enough to embrace new technological developments (i.e. bundles, platform sharing contents, interactive e-books, and etcetera) which provide the same learning value The need to define the term e-book in a uniform way at EU level If you require any further information, please do not hesitate to contact me on or csanger@uk.ey.com. Yours faithfully Christopher Sanger Partner, Head of Tax Policy Ernst & Young LLP United Kingdom The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. A list of members names is available for inspection at 1 More London Place, London SE1 2AF, the firm s principal place of business and registered office. Ernst & Young LLP is a multidisciplinary practice and is authorised and regulated by the Institute of Chartered Accountants in England and Wales, the Solicitors Regulation Authority and other regulators. Further details can be found at

3 THE FUTURE VAT TREATMENT OF E-PUBLICATIONS The evolution of the VAT treatment for books In principle, a VAT system would operate at greatest efficiency if it operated on the basis of a single, standard rate applied across a broad tax base. In reality, it is recognised that there are strong social and cultural reasons for allowing reduced rates to apply to some goods and services. As the Commission noted in its 2010 Green Paper 1 the use of reduced rates as a policy instrument is often advocated notably for health, cultural and environmental reasons to provide easier and more equal access to educational and cultural content and incentives for innovation and knowledge-based resource efficient growth. As recently as 2015, the European Court confirmed that the EU legislature intended that essential commodities and goods and services having social or cultural objectives may be subject to a reduced rate of VAT 2 and as the EU VAT system has developed it has retained the capacity to apply such rates. Importantly for this consultation, this has included the application of reduced rates to books and printed matter. The original rationale for allowing reduced rates for books remains sound, and over the years the Commission has taken the opportunity to clarify and update the reference to books in light of technical progress. In the era of the Information Society and Lifelong Learning, it is more important than ever that EU citizens should not be excluded from access to information on economic grounds. This positon is supported by economic theory, where the case for lower tax for cultural goods can be based on a merit good argument, where the government intervenes by giving indirect support to broaden demand 3. In developing this approach, the framers of the Directive recognised that the treatment of printed materials needs to extend beyond books per se to encompass periodicals and newspapers. This reflects the fact that the cultural information and learning needs of the citizen extend to alternative formats and sources. The current treatment of e-books To date, the treatment of e-publications has been shaped by different factors. Self-evidently, when the VAT Directives were first framed, e-publications did not yet exist. Therefore, e-publications have emerged into a VAT system where the treatment of electronic services was not sufficiently differentiated to take into account the specific nature of e-publications as information and learning products. More generally, as the Commission s Action Plan notes, the current rules were designed at a time when, and in a context where, EU VAT was thought to be developing towards a definitive system based on the origin principle under which the existence of different VAT rates across Member States could have the effect of distorting the operation of the Single Market. Given that the future development of EU VAT is 1 COM(2010) 695 final 2 Case C-479/13 3 Copenhagen Economics, Study on reduced VAT applied to goods and services in the member states of the European Union. Final Report (21 June 2007).

4 2 now moving in the direction of the destination principle, the principled argument against allowing variations in the rates applied to e-services recedes. There are three key problems arising from the current VAT treatment of e-publications: The different VAT treatment between printed materials and e-material creates a price difference which can deter poorer EU citizens (not only students but also, in the age of Lifelong Learning, older citizens living on fixed incomes) from accessing the richer learning resources offered by the more highly taxed e-publications. This VAT treatment also creates complexity, cost and administrative burdens for e-publication providers as they need to apply different treatment to different elements within their e-publication bundles (for example, where there is a reduced rate books as anchor to a standard rated assistive platform). Based on the current law, some e-publications have to be split for VAT purposes and the different parts have to be taxed with different VAT rates. This creates an unnecessary administrative burden for the publishers and the booksellers. Furthermore this VAT treatment is prone to unintended errors and can very easy lead to criminal tax proceedings and investigations. This complexity discourages publishers from developing new bundle products combining analogue and digital products. Definition of an e-book At the time when the VAT Directive was first framed the definition of books and other printed matter was not problematic. Since Gutenberg and Caxton there has been consensus on what constitutes a book, a newspaper or a periodical, and the legislator s task was relatively straightforward. Since then, the digital revolution has completely transformed the situation. Over time e-publications have become increasingly complex and diverse, ranging from the first electronic click-through links to visuals and graphics to today s modern assistive technologies. Rather than taking the form of discrete objects (such as a book or a newspaper) modern e-publications are increasingly likely to take the form of bundles linking together different learning and information resources for both educational and non-educational purposes. While these bundles may be anchored in a publication akin to a traditional book, they extend far beyond anything that would have been recognisable to Gutenberg or Caxton.

5 3 The following are examples of how books have developed into the digital environment. They are provided to illustrate the range of products which exists and should not be considered to be an exhaustive list. Enhanced e-books These have the same structure as the pure e-book but with adaptive tools built into the product. For example, for educational books in terms of the enhancements, the text has been formatted to show which sections are most important. The tools ask regular questions and allow the reader to rate their certainty on the answer, and also provides prompts and hints. It is designed to allow the student to learn as effectively as possible. There are also prompts about how the student is progressing and suggestions about the best way to learn. It will also build up an analysis of the student based on the answers to the questions, and refer the student back to the parts of the text or other material on areas where the student is struggling. Further examples exist such as enhanced e-books for novels, including many for children. Platform products These products are linked to a specific course at a University. The platform provides not only an e- book, in many cases the enhanced e-book version of the text, but also a platform that allows the Students and Course Instructor to interact, by messaging, as well as allowing course work to be set and uploaded and also other features like lecture capture plus other content and tools can be delivered. Again this is hosted and the charges are for an agreed period of time. Learning Ecosystems These are platforms which will host the courses sold by a provider. This upgraded platform will, over time, evolve to allow Instructors to mix and match the content they want to use to build their specific course. It will have the adaptive tools built in. Again this is hosted and charges are for a period of time. While the form taken by their modern publication varies radically from a book or a newspaper, e- publications play a fundamentally similar role as a means of entertaining and informing their users. Indeed their great flexibility and capacity for cross-fertilisation (for example an e-book and an e- periodical to offer different starting points leading to the same digital and assistive resources) is simply an evolution from what was already possible in the era when print media were dominant (and when for example, print newspapers would serialise novels). The characteristics of modern e-publications are such that, in order to sufficiently capture the intended policy rationale we need to extend the definition of an e-book for VAT purposes beyond the simple analogy between a printed book and the same text in an electronically readable form (for example on a Kindle). To do otherwise would fail to reflect the reality of how modern technology delivers the information that was once restricted to books and other printed publications. Given that the key to a successful reform will be arriving at a definition of e-publications which is sufficiently broad and flexible to cover both existing forms and new products developing in future, we

6 4 would recommend that the Commission follows up the current consultation with a detailed technical consultation focusing on this issue. E-publications and the Digital Single Market When considering the position of e-publications it is necessary to see them in the wider context of the emerging Digital Single Market. The development of a successful and competitive e-publication sector in the EU is a key component in building the EU s capacity to thrive in the modern globalised economy. With the rapid expansion of the demand for effective assistive technologies in the emerging markets, the EU has a real opportunity to develop a competitive advantage in this sector. Ensuring that e-publications can benefit from the same reduced rates as physical publications will be a step towards supporting cross border e-commerce and creating a strong single market digital economy. Moreover, the EU s capacity to expand and enrich the Digital Single Market will be crucially constrained by its capacity to produce a highly skilled and digitally literate workforce. The EU s internal policies, including the VAT regime, need to ensure that access to the benefits delivered by modern e-publications is not restricted and that the EU s poorer citizens are not excluded from the benefits of the information and learning revolution - indeed Algirdas Šemeta, then EC commissioner for taxation, said: Taxation must not be an obstacle to all that is good about the digital revolution. Reform and simplification of the current legislation is required to better support the single market and facilitate cross border trade. The current system means that EU firms are at a competitive disadvantage because certain non EU traders can import VAT free goods to the EU. Ensuring that e-publications can benefit from the same reduced rates as physical publications will be a step towards supporting cross border e-commerce and creating a strong single market digital economy. Rationale for reform The current discrepancy between the treatment of VAT on printed publications and e-publications creates a barrier for the e-publication sector to flourish in the EU and is directly opposed to the EU s principle of Lifelong Learning and not restricting access of online educational material across society. In the current economic climate and global world of technological advancement, a successful digital sector plays a key part in keeping the EU competitive. E-publications are also a crucial information and cultural tool to help citizens navigate their way through the digital economy. To boost the EU digital economy and enable its citizens greater access to information for the economic betterment of society the EU needs to update its legislation, aligning it with the Commission s proposals on a connected Digital Single Market; namely by modernising and simplifying consumer rules for online and digital purchase which should go hand-in-hand with efforts to boost digital skills and learning across society and to facilitate the creation of innovative start-ups. 4 4 EC A Digital Single Market Strategy for Europe (2015)

7 5 Reforming VAT Reforming the VAT treatment of e-publications offers an opportunity to address current problems within the VAT treatment in a way which will support the further development of the e-publication sector, and will ensure wider access for the EU s citizens to the advances in learning technology. Reduced VAT rates for e-publications have the potential to hold back the learning potential of the EU s poorer citizens while also holding back the potential of the e-publication sector to expand and develop into a global leader. Options for reform Against this background, the key characteristics of a reformed VAT treatment for e-publications would be: The maintenance of a reduced rate for books and printed matter A single and equal treatment across all e-publication markets (i.e. books, newspapers and periodicals) An equal treatment as between print publications and e-publications A single framework applying across the Digital Single Market. A wide and robust definition of e-publications to allow for future innovation Of the options considered in the Commission Action Plan, the one more likely to achieve the dual objectives of opening up access to e-publications to all of the EU s citizens while supporting the growth and development of the e-publications sector within the Digital Single Market, would be Option 1. By providing a clear EU framework which explicitly recognised e-publications as being eligible for a reduced rate of VAT, this option would offer the most effective means of delivering an effective and modern VAT treatment for these products. Conclusions In terms of supporting the future development of a thriving and competitive e-publication sector within the Digital Single Market, the best policy outcome to the current consultation would be to arrive at a position where the VAT treatment of e-publications was aligned to the treatment currently given to printed books. In order to arrive at that solution, it will be necessary to develop a flexible and workable definition of e-publications, capable of maintaining a level playing field between printed and e-publications into the future. The key next step in developing this policy should, therefore, be a focused technical discussion aimed at generating an effective and sustainable definition.

Our ref. Contact. In the following pages we address the questions contained in the consultation paper.

Our ref. Contact. In the following pages we address the questions contained in the consultation paper. s Tel +44 (0) 20 7311 1000 15 Canada Square Fax +44 (0) 20 7311 3311 London E14 5GL United Kingdom European Securities and Markets Authority CS 60747 103 rue de Grenelle 75345 Paris Cedex 07 France Our