Austria’s 5% tax on digital advertising revenue of companies like Alphabet Inc.'s Google and Facebook Inc., is likely to fall foul of EU competition rules, because part of the proceeds collected will be used to fund domestic businesses.
The levy will be applied to any company with 750 million euros ($826 million) in worldwide revenue and 25 million euros of digital advertising revenue in Austria, with effect from from Jan. 1, 2020.
But it could face challenges from the EU over its design, according to Leopoldo Parada, a professor of international tax law at the University of Turin, since EU rules don’t allow governments to implement measures—including tax rules—that would unfairly distort competition in the single market.
During its consultation earlier this year, the country projected it would collect 200 million euros annually from the tax but if it were to lose a state aid challenge, it would be forced to repay the revenue.
The high revenue threshold means that the tax will land mostly on foreign companies, Parada said. And “the fact that the tax is collected from foreign companies is bad enough, but part of the proceeds has been ring-fenced to aid local firms digitize,” he added.
The Austrian government didn’t immediately respond to a request for comment.
Austria had championed an EU-wide digital services tax targeting the revenue of digital giants like Apple Inc. and Amazon Inc. during its presidency of the single market in 2018. It argued that these companies were able to generate considerable revenue from jurisdictions digitally. But they paid little or no tax in the territories where they generated value because of a negligible tax presence.
However, when talks on the EU digital tax stalled in early 2019, a number of countries including Austria launched unilateral digital tax measures.
The U.S. has argued that the taxes, like one that France instituted this summer, unfairly target large American multinationals and has threatened retaliatory trade measures against countries that launch similar measures.
Unilateral or Multilateral?
In the meantime, the Organization for Economic Cooperation and Development on Oct. 9 proposed a unified way to improve taxation of the digital economy, part of single global effort to counter unilateral moves to tax tech companies.
The organization’s plan would mean global tech companies would see their profits reallocated to countries where there are high numbers of consumers but in which the multinationals traditionally paid little or no tax.
Uniquely, Austria’s tax doesn’t only target these companies but has some of the proceeds ring-fenced to help local companies compete with the foreign ones, according to Markus Vaishor, a tax partner at KPMG in Austria.
“I am certain that the lawmakers in the Ministry of Finance are aware of this issue. In the accompanying materials to the law, however, this aspect is not mentioned at all,” he said Oct. 10.
Taxpayers are required to withhold the tax on a monthly basis and pay the balance of tax as part of their September tax return in 2020.