ITU Update for week ending 06 March 2015

1. © 2015 Grant Thornton UK LLP. All rights reserved.
ITU
Summary
Highlight of the week this week
is, undoubtedly, the CJEU's
judgment in the long-running
battle between the European
Commission and France and
Luxembourg.
The judgment is pretty
unequivocal. Both France and
Luxembourg's application of a
reduced rate of VAT to the
supply of e-books has been in
contravention of EU VAT law.
By confirming that the supply of
an e-book is the supply of a
service and not the supply of
goods, it seems that any hope of
the UK applying the zero-rate to
the supply of e-books (which
many have been campaigning
for) must, now, be dashed.
10 March 2015
When it is electronically supplied!
A few years ago, France and Luxembourg decided to apply a reduced rate of VAT to
the supply of e-books. France applied a rate of 5.5% and Luxembourg a super-reduced
rate of only 3%. At that time, suppliers were required to account for VAT on the sale
of e-books at the rate applicable in the country where they were established,
irrespective of where the customer was established. Many of the major sellers took
advantage of this rule and established themselves in either France or Luxembourg.
This move put them at a real competitive advantage over suppliers established in other
Member States of the EU because they could effectively undercut competitors by as
much as 17% (compared to a supplier established in the UK who was required to
account for VAT at 20%).
Following many complaints from competitors in the EU, the European Commission
began infraction proceedings against both France and Luxembourg culminating last
week in a judgment from the Court of Justice of the European Union (CJEU). The
Court has agreed with the Commission. In simple terms, the CJEU has confirmed that
the supply of an e-book is a supply of an electronic service and, as such, the Directive
specifically precludes the application of reduced rates. Both France and Luxembourg
tried to argue that the Directive did permit the supply of books "on all physical means
of support". However, the CJEU confirmed that, in determining the scope of a
provision of EU law, its wording, context and objectives must all be taken into
account. The supply of an e-book by itself, without any physical means of support
(such as an e-reader or computer) is not a supply of a book but is, simply, a supply of
electronic services. By applying a reduced rate, both France and Luxembourg have
failed to fulfil their respective obligations under Articles 96 and 98 of the VAT
Directive.
By these judgments, the CJEU has confirmed that the sale of physical books and e-
books are different – one being the supply of goods and the other a supply of services.
As such, they can legitimately be treated differently for VAT purposes without any
infringement of the principle of fiscal neutrality. The problem here is that, unless the
Court or the Commission can impose a sanction against France or Luxembourg for
their clear breach of community law, the Commission's victory is, to a large extent
quite meaningless. This is due to the change to the place of supply rules from 1 January
2015 for electronically delivered services which means that suppliers established in
France and Luxembourg must now account for VAT in the consumers member state
in any case.
Issue092015
When is a book not a book?
Indirect Tax Update

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GRT100456
Fuelling and provisioning ships
Fast Bunkering Klaipeda (case C-526/13)
The Advocate General has released her opinion in the above case which relates to supplies of fuel by
an intermediary supplier to an operator of a ship used on the high seas. The issue was whether the
exemption for supplies of fuel could be applied or whether exemption only applied to the final
supply in the supply chain. In this case, the supplier was an intermediary, it received orders for the
supply of fuel from its principal which, in turn, supplied the ship's operator. However, the principal
did not take delivery of the fuel as the intermediary supplier delivered it straight to the port where it
was loaded directly onto the ship. The intermediary would invoice the principal and the principal
would then invoice the ship's operator.
The intermediary argued that its supply of fuel to the principal should benefit from the exemption
provided for in Article 148 of the VAT Directive. This was on the basis that the fuel being supplied
was clearly for the use of a vessel used for navigation on the high seas. The Lithuanian tax authorities
argued, however, that the exemption should only apply to the final supply in the supply chain (ie the
supply by the principal to the ship's operator). It seems that the Advocate General has seen sense
and is recommending to the CJEU that, in circumstances such as these, where it is clear that the
supply is for the use of qualifying vessels, the exemption from VAT should be applied. It remains to
be seen whether the CJEU will follow that recommendation.
Comment
This case demonstrates
that, in certain
circumstances, the
exemptions allowed by
the VAT Directive can
be applied further back
in the supply chain and
not just to the final
supply. This could be
useful where the
payment of VAT
causes a strain on cash-
flow.
Lorry driver is not liable to excise duty on smuggled cigarettes
Comment
It just goes to show to
what lengths some
Member States will go
to boost their
Treasury's coffers.
Whilst Mr Prankl was
clearly involved in the
smuggling of the
cigarettes, did the
Austrian tax authorities
realistically believe that,
as a lorry driver, he had
the means to pay over
£1m of excise duty?
Ralph Prankl – Case C-175/14
Mr Prankl was the driver of an HGV lorry which was involved in the smuggling of a quantity of
cigarettes from Hungary. The lorry was driven through Hungary, Austria and finally the UK. The
quantity of cigarettes was quite staggering (some 12,650,000 (or 63,000 packs of 200)). However,
quantity aside, as the contraband had transited through Austria, the Vienna tax authorities claimed
that Austrian excise duty was payable and assessed the driver for payment of €1.25M (approximately
£1M).
The CJEU was asked to consider whether EU law relating to excise duty should be interpreted as
meaning that, where goods subject to excise duty that have been smuggled into the territory of a
Member State without the required accompanying documents and are then transported to another
Member State, the transit Member States are permitted also to levy excise duty on the driver?
No doubt to Mr Prankl's relief, the CJEU has ruled that, in the circumstances, the transit Member
State is not also able to levy excise duty. Duty became payable in the UK as this was the Member
State in which the cigarettes were actually released for consumption. Accordingly, the levying of
excise duty in another or even in several other Member States is not necessary to prevent abuse and
evasion.
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556
Richard Gilroy London & South East richard.gilroy@uk.gt.com (0)20 7728 3170