WRITTEN QUESTION E-3841/02

by Walter Veltroni (PSE) to the Commission

(9 January 2003)

Subject: VAT on compact discs

The market in audiovisual and multi-media products has always been subject to a high rate of taxation.

This sets off a chain reaction which, because of high prices, discourages people from buying recordings, especially of music. The low demand affects royalties, discourages creativity and has a negative impact on the potential of a market which would otherwise be much more vibrant and profitable, since the number of copies sold would increase.

This situation induces many potential purchasers to buy goods obtained by unlawful means.

The market in pirate discs and the availability of music via the Internet, made possible by peer-to-peer systems, further discourage sales by offering an alternative product, often of adequate quality, to most potential purchasers of music CD's. In addition, illicit and alternative markets are flourishing, often using sales networks operated by illegal immigrants.

In view of the frequent requests it receives to apply a lower rate of taxation to multi-media such a CD's, CD-ROMs and DVD's and to activities in the cultural and audiovisual sphere in the broad sense, does the Commission intend, in the context of the forthcoming revision of Directive 77/388/EEC(1) on VAT, to commit itself to proposing a change in the provisions of the Directive with a view to decisively lowering the rate of taxation on cultural goods and services and including CD's in Annex H (which already covers other cultural products such as books), in order to promote the full enjoyment of means of disseminating culture throughout Europe and discourage the unlawful parallel market?

(1) OJ L 145, 13.6.1977, p. 1.

Answer given by Mr Bolkestein on behalf of the Commission

(28 February 2003)

The Sixth VAT Directive(1) currently stipulates that only the standard rate may be charged on compact discs in all Member States. This already ensures a degree of harmonisation in practice of the taxation of CDs throughout the Community (in fact the standard rate varies between Member States from 15 % to 25 %). However, the lower rates are optional for Member States and introducing this option on CDs would only accentuate the differences between the rates applied in the Community.

Lowering the rate of VAT is often cited as a way of tackling the serious problems confronting the music industry, caused mainly by piracy and the growth of illicit and alternative markets, a worsening phenomenon throughout the world in recent years.

Nevertheless, it should be borne in mind that lowering the rate of VAT may not be sufficient to combat organised piracy effectively at the international level.

In many cases a reduction in the rate of VAT is not fully passed on in the final price to the consumer. Even when it is passed on, the effect is normally only transitory and disappears in time. And even if the reduction were passed on completely, the price would still be higher than the black market price.

On the specific question of computer piracy by downloading from the Internet, lowering the rate of VAT is unlikely to prevent consumers from continuing the practice. The equipment required for copying is sold freely and only a truly deterrent measure would be capable of changing habits. The application of taxes specifically for this purpose on the equipment and the blank CDs, as some countries already do on audio cassettes, would probably have a more beneficial effect and help not only offset the loss of royalties but also penalise the counterfeiters.

As regards the Commission's intentions, they have not yet been finally decided. Once the evaluation report on the experimental reduction of the rate on labour-intensive services has been finalised, the Commission will present an overall report and a proposal for a directive on the field of application of reduced rates at the end of the first half of 2003.

(1) Sixth Council Directive 77/388/EEC of 17 May 1977, as last amended by Council Directive 2002/93/EC of 3 December 2002, to extend the facility allowing Member States to apply reduced rates of VAT to certain labour-intensive services, OJ L 331, 7.12.2002.