Digital-Revenue Taxes Face Easier Path With EU Court Rulings

Opponents of European digital services taxes may have lost one avenue of attack after Europe’s highest court ruled that progressive revenue taxes aren’t discriminatory.

The Court of Justice of the European Union ruled Tuesday in two cases—involving Hungarian subsidiaries of Vodafone Group Plc and Tesco Plc—that Hungarian measures that taxed bigger companies more heavily than smaller ones weren’t discriminatory, even if they ended up mostly hitting foreign companies.

The judgments may have dealt a blow to companies hoping to challenge the growing number of digital services taxes such as those imposed or being considered in France, Italy, Spain, and the Czech Republic. Those measures have included revenue thresholds, so that they apply only to the largest tech companies like Facebook Inc. and Amazon.com Inc. That often means foreign companies—many of them American—bear the brunt of the tax.

“If I was an adviser to someone considering a challenge against a DST, I’d say these decisions significantly decrease your chances of success,” said Gergely Sera, senior manager of tax litigation at EY Hungary.

Some tax practitioners and academics have suggested that the revenue thresholds that trigger some of Europe’s digital services taxes could constitute discrimination under EU law.

France’s digital services tax, for example, applies to companies with more than 750 million euros ($838 million) in annual revenue and more than 25 million euros in France of revenue from specific digital activities.

The French tax is in effect but isn’t being collected until after this year, after France and the U.S. reached a cease-fire in an escalating trade war. The U.S. was considering retaliatory tariffs and arguing the revenue thresholds showed the tax was discriminatory in applying mostly to non-French companies.

‘Economic Reality’

Tuesday’s judgments mean it may be harder for companies to make the argument that such taxes constitute discrimination or selectivity under EU law.

“I think it seems to open the way” for levies like France’s digital tax, said Eszter Kalman, senior counsel and head of tax at CMS Budapest. The court had previously ruled that turnover, or revenue taxes, with progressive elements don’t violate EU rules, “but this one goes further and says that even a steeply progressive tax is still not discriminatory,” Kalman said.

A progressive tax that mainly hits foreign companies—because they are bigger than domestic ones—"reflects the economic reality of those markets and does not constitute discrimination against those undertakings,” the EU’s high court wrote in a press release Tuesday announcing the two verdicts.

Opponents of the digital taxes could have considered challenging them as selective under EU state aid rules or discriminatory under the EU’s fundamental freedoms treaties—but the new judgments mean these arguments are far less likely to succeed, said Robert van der Jagt, chairman of KPMG’s EU tax center in Amsterdam.

EU state aid rules prohibit a country from giving selective advantage to one company or set of companies over another. The European Commission has the authority to bring state aid investigations. But it’s much harder for an individual taxpayer to raise a state aid challenge, and such a challenge to a progressive revenue tax would not likely succeed, Sera said.

The courts could still view the digital taxes as selective or discriminatory if they take into account the context of the measures, such as politicians talking about the taxes being specifically aimed at tech giants, van der Jagt said.

“The purpose and the background is very different” between the Hungarian taxes and measures like the French DST, he said.

Vodafone, Tesco Cases

Vodafone had argued that Hungary violated EU state aid law with a measure that imposed a progressive tax rate on the turnover of telecommunications companies, with higher rates for companies that earn more revenue. Tesco, the British grocery chain, had questioned the legality of a separate progressive turnover tax, this one aimed at the revenue of retail companies in Hungary.

“If you looked at how the Hungarian retail market was structured then, you could only conclude that the retail turnover tax targeted foreign companies,” Kalman said. But because a Hungarian company could be hit by the tax once it grew large enough, the court ruled that the tax wasn’t discriminatory, she added.

Neither tax is still in effect.

The rulings are final and binding for all EU courts, and can’t be appealed, a press officer for the court said. The ultimate decision in the Vodafone and Tesco disputes remains with the Hungarian courts.

A spokesperson for Vodafone Hungary told Bloomberg Tax in an email Tuesday that the company paid the tax continuously and in full, even though it disputed the measure. A spokesperson for Tesco Hungary said the company doesn’t comment on details of ongoing legal matters, and that Tesco sees the payment of tax “as a fundamental responsibility for all businesses and take our tax payment responsibilities very seriously.”

The court also sided with Google Tuesday in a case that challenged penalties linked to a different revenue tax. Google Ireland Ltd. had brought a legal case after Hungary fined the company for failing to register for and pay a tax on digital advertising revenue.

The cases are: C-323/18, Tesco-Global Aruhazak Zrt. v. Nemzeti Ado- es Vamhivatal Fellebbviteli Igazgatosaga, C‑75/18, Vodafone Magyarorszag Mobil Tavkoezlesi Zrt. v. Nemzeti Ado- es Vamhivatal Fellebbviteli Igazgatosaga, and C-482/18, Google Ireland Limited v. Nemzeti Ado- es Vamhivatal Fellebbviteli Igazgatosaga