France Takes Tax-rate Lead Other Eu Governments, Bodies Support Stance On Record-sales Tax

The French government's recent stance in calling for a lower rate of VAT (value-added tax, or sales tax) on prerecorded music is receiving support from other governments and music-industry representatives across the European Union (EU).

In a Nov. 11 speech to the Council of the EU in Brussels, French minister of culture and communication Jean-Jacques Aillagon announced that the VAT issue is now of "prime importance" to the French government. The council comprises ministers representing each EU member state. Although there is only one council, its composition varies, with the ministers changing according to the specific topic (finance, culture, agriculture) discussed at each meeting.

At the Nov. 11 meeting, Aillagon invited his colleagues on the council to back a proposal to lower VAT rates on music. He also announced the appointment of a high-ranking politician, former minister of culture François Léotard—who in 1987 was instrumental in lowering France's VAT rate from 33.33% to 21%—as the country's envoy to the European Commission (EC) and EU member states, with the task of promoting France's position on VAT. A VAT reduction would require the unanimous agreement of all 15 EU members, and Léotard is scheduled to embark shortly on a visit to each of them to push the French case.

Aillagon stressed that a reduction in VAT would "preserve and develop European music industries" that have been made "fragile" by physical and online piracy. A lower tax rate, he said, could bring CD prices in Europe below the 15-euro ($15.12) mark. Aillagon called Léotard's appointment a sign of the "strategic importance of this issue for the French government." He also expressed the wish that the issue could be dealt with during 2003, before the scheduled enlargement of the EU. (Ten countries, mainly from Eastern Europe, are scheduled to join the existing EU members in early 2004.)

During the council meeting, EU Commissioner of Culture Viviane Reding noted that tax matters must be discussed with member states' finance ministers. But the newly elected German government's minister of culture, Christina Weiss, has supported France's call. Weiss says that works of art and books are already subject to a reduced "cultural goods" 7% VAT rate in Germany and that she is in favor of extending this to CDs.

Not surprisingly, record-industry reaction to the French move is positive. French labels body SNEP's director general, Hervé Rony, says: "It is a good thing that someone like Léotard is in charge—he really is a political heavyweight."

Frances Moore, the International Federation of the Phonographic Industry's Brussels-based regional director for Europe, says: "The French have been superb from the beginning [of the VAT campaign]." Léotard, she adds, will be able to "speak, at a level of peers, to member states and take the issue to the highest level. He has experience on culture, VAT, and finance issues; he will act as a catalyst and open doors, but we are aware it's going to be a difficult task." Moore is also "heartened" by the reaction of Weiss.

Predictably, the response from the EC tax affairs department was more lukewarm. (The EC is the executive body of the EU.) A department spokesman says: "We welcome the French contribution to the debate, as we welcome all contributions. Our review of the directive will examine whether it is worth proposing modifications. But it is too early to say if we will propose a change in the VAT levels on records."

France is now taking the political lead on an issue that has been long debated in that country. Its first governmental move was made July 24, when an official request was submitted to Frits Bolkestein, the European commissioner responsible for tax affairs, asking for prerecorded music to be registered in Appendix H of the EU's existing VAT Directive, which is due to be revised in early 2003. According to the EC, "The French proposal will be part of that [review]. However, we cannot say anything at this moment which might prejudge the results of that review."

Goods or services on Appendix H are eligible for a reduced VAT rate, although it remains at the discretion of each member state whether to apply the lower rate. But Rony points out that the EC has always preferred measures of fiscal harmonization, with a similar rate adopted by all EU countries, rather than different sets of rates.

Aillagon claims the lower VAT rate would have an impact on pricing and lead to higher sales—compensating for a loss in fiscal revenue—at a time when legitimate sales are being eroded by piracy. He also believes that this would incite labels to take more risks and invest in new music trends.

According to Aillagon, "For the countries that decide to lower VAT, the impact [on] fiscal revenue will be very limited, if not void, in the best cases."



Additional reporting by Leo Cendrowicz in Brussels and Wolfgang Spahr in Hamburg.