Opponents of European digital services tax proposals may have a harder time successfully arguing that they unfairly target U.S. tech giants like Facebook Inc. and Alphabet Inc.'s Google after the European Commission lost a case over Hungary’s advertising tax.
The European Union General Court June 27 overturned a 2016 commission decision that Hungary’s tax on advertising revenue violated EU state aid rules because it captures companies based on the size of their turnover.
Critics of European proposals to tax the digital economy have argued that those efforts discriminate against large multinational tech companies. The June 27 decision, as well as a separate case six weeks earlier in which the same court overturned a similar decision against Poland’s retail turnover tax, might sweep aside that argument.
The decision is significant for the more than half a dozen European countries that have signaled interest in implementing digital taxes. France could be the first to collect digital taxes this year as lawmakers are poised pass a 3% tax on digital services later this summer. Companies wouldn’t be able to challenge the tax until they’re assessed later this year.
The June 27 decision could give comfort to countries fearing that digital taxes could be overturned by the EU in court, and more could start introducing legislation, said Luc De Broe, lawyer at Laga law firm and professor, EU tax, at KU Leuven.
“They now have a clearer view that they can single out—let’s say the online advertising sector— and tax it with a progressive rate on turnover,” De Broe said.
Neither judgment is final as the Commission can still appeal to the Court of Justice of the European Union, the EU’s top court.
Earlier this month, an adviser to the Court of Justice threw a damper on Vodafone’s lawsuit against the Hungarian tax administration, saying a special telecommunications tax imposed between 2010 and 2012 is valid and doesn’t violate EU state aid rules.
The recent judgments may make it more difficult for the European Commission to pursue other types of illegal state aid cases as they rewrite how these cases are assessed, Pieter Deré, a tax director and member of PwC’s International Tax and Transfer Pricing group in Belgium, told Bloomberg Tax June 27.
The June 27 decision didn’t resolve another potential legal challenge to the French tax: That it targets mainly foreign companies, giving an advantage to domestic ones.
French Finance Minister Bruno Le Maire has referred to the French measure as a “GAFA tax"—targeting Google, Amazon Inc., Facebook and Apple Inc.—and has said that very few of the roughly 30 companies likely hit by the tax would be French. The measure would tax the digital activities of companies making more than 750 million euros ($852 million) worldwide and 25 million euros in digital activities domestically.
The Hungarian tax “is not selective in terms of trying to target foreign companies—which is not the case with the DST,” said Robert van der Jagt, chair of KPMG’s EU Tax Centre. “The DST obviously tries to target, especially, tech companies, and many of those appear to be outside France,” he said. “So that is a difference.”