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The European Union (“EU”) Court of Justice agreed to hear Google Ireland Limited’s (“Google”) appeal on June 4, 2019 against a new tax imposed by Hungary that targets companies that generate revenue from advertising in the country. If it remains in effect, companies such as Google will be required to pay an advertisement tax of 7.5% on all revenue generated from advertisements earned from Hungary-based customers or users.
Hungary’s Advertisement Tax: A Primer
Below is a high-level timeline summarizing developments associated with Hungary’s Advertisement Tax.
Google has argued against this tax on several fronts, including an argument that, even with its amendments, the advertisement tax unfairly discriminates against taxpayers that do not operate in Hungary. This is because the nature of the registration process is different for non-resident and resident companies and thus the penalty for noncompliance with the registration requirements is bigger for companies not operating in Hungary than companies operating within Hungary. Google in its argument stated penalties for non-residents can be 2,000 times greater than resident Hungary companies. Furthermore, the penalty may have the effect of serving as a barrier to entry for new advertising service companies that aren’t already established in Hungary.
Hungary’s advertisement or “Google tax” is one of a wave of digital sales taxes being proposed and imposed by jurisdictions within and outside of the European Union before a consensus is reached as part of the ongoing Organisation for Economic Cooperation and Development (“OECD”) Base Erosion and Profit Shifting (“BEPS”) project. Action 1 of the BEPS project specifically addresses the digital economy tax debate with the aim of reaching an international consensus on the way forward by 2020. Recently in this effort, the OECD released a public consultation document related to “Addressing the Tax Challenges of the Digitalisation of the Economy” on February 13, 2019. This paper offered three possible ways forward, one of which was to be chosen for further development. The OECD also released a policy note on tax and digitalization on March 2019.
The Google court date with the EU Court of Justice will offer insight on how the EU will handle new targeted digital tax measures within the EU legal framework and will be watched carefully by many governments and tax administrations as well as digital and digitizing companies.