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Nov. 8 — The Hungarian government appears to be spoiling for a confrontation with Brussels after the European Commission concluded that the country’s advertisement tax regime violated EU rules preventing government aid.
Hungary has two months from the date of the ruling, Nov. 4, to come with a plan for recovering any undue advantages companies may have received.
The government in an announcement the same day said it is committed to retaining the current rules regarding the advertisement tax and “will do everything in order to protect this innovative Hungarian initiative which allows the state budget to collect the taxes that are due from global businesses engaged in advertising activities.”
Coolers heads in the government may prevail if it turns out that most of the smaller media companies and Internet service providers, which Hungary exempted from paying the tax, can actually invoke the “de minimis regulation,” which puts small aid amounts outside the scope of EU state aid control, local tax practitioners said.
Tibor Palszabo, direct tax partner at EY in Hungary, told Bloomberg BNA Nov. 7 that the government may decide to challenge the commission’s decision in court.
“That’s something we can pretty much expect. But I think there will be some thinking process before they actually go ahead with this challenge because the practical impact of the decision may not be that big,” said Palszabo.
The press department of Hungary’s Ministry for National Economy wouldn’t comment on what the government’s next move was likely to be.
“We are awaiting an official resolution of the Commission,” the ministry told Bloomberg BNA in a Nov. 8 e-mail. But it reiterated the government’s earlier stance that “the current advertisement tax regulations are in line with EU law.”
After it concluded an in-depth investigation, which started in March 2015, the commission said Nov. 4 that Hungary’s progressive advertisement tax gave companies with low turnovers an unfair economic advantage over competitors.
The commission said in a press release that amendments to the tax in July 2015 “took steps in the right direction,” mainly by replacing a turnover-based tax progression that ranged from 0 percent to 50 percent with a far more modest 5.3 percent rate applied to advertising incomes exceeding 100 million forint ($361 million). But it said these changes “did not fully address the commission’s concerns.”
For one thing, Hungary “maintains progressive rates based on turnover over a smaller range, 0 percent and 5.3 percent,” the commission wrote in the press release, and there is “still no objective justification for this differential treatment.”
Further, Hungary hasn’t changed a provision that allowed companies reporting losses for 2013 to use those losses and other losses carried forward to offset their advertisement tax obligations for 2014.
The Hungarian government, at loggerheads with the commission over a variety of taxation issues for some time now, was swift and defiant in its response.
“Hungary will not retroactively impose taxes of any kind on small businesses which enjoy exemption from the payment of the advertisement tax even at Brussels’ request,” the Nov. 4 document said. “The Hungarian Government will not allow global digital businesses which obtain significant revenues from advertising activities to avoid the obligation of paying taxes, thereby wronging the Hungarian state budget.”
It went further, calling the commission’s decision “contrary to EU law” and said that “progressive rates of the advertisement tax are not in violation of the state aid rules because businesses in the same position, or in other words, businesses with the same sales revenues are required to pay the same amount of tax.”
Consequently, the government added, “the rules in question cannot be selective as a matter of course, and cannot result in state aid.”
It went on to assert that the commission’s decision “does not only stand in violation of the member states’ tax sovereignty and EU law, but is also discriminatory against Hungary, given that the Brussels body does not find objectionable advertising tax regulations in other member states which differentiate on account of the different advertisement publishing methods.”
Palszabo said the government may take a different view after it realizes that the impact of the commission’s decision is likely to be limited.
“Under the de minimis rule, if the state aid that you get does not exceed 200,000 euro over a three-year period, then you don’t have to repay this benefit,” he said.
“Under the new tax rate, the tax is 5.3 percent, but it only kicks in at 100 million forint, that is about 330,000 euro. So the benefit you can get is somewhere around 16,000 euro per year, which is definitely below the de minimis threshold.”
Gabor Laki, a direct tax director at PricewaterhouseCoopers Hungary, agreed, saying that the only way companies with advertising incomes below 100 million forint could exceed the de minimis threshold is if they also received other types of aid.
“For me, it’s a first reaction, and once they analyze it, they will most probably realize that they can solve the problem using de minimis,” he told Bloomberg BNA in a Nov. 7 telephone interview.
“Of course, there could be some companies that actually need to repay it because they have already used up the de minimis limit,” Laki added.
It is unclear whether the government would go to court to only defend the provision that allowed companies to use losses carried forward to offset their advertisement tax obligations, according to Palszabo.
In these cases, the tax advantages received may have been larger than what the de minimis regulation stipulates, local tax practitioners said.
A commission spokesperson for competition told Bloomberg BNA Nov. 7 that the commission’s decision is “final” and “immediately effective” and that Hungary is now required “to remove the unjustified discrimination between companies” and “restore equal treatment in the market.”
Under standard rules, Hungary must present a plan on how to implement recovery of undue aid within two months and complete the recovery process within four months, the spokesperson said.
“The precise amounts of tax to be recovered from each company, if any, must now be determined by the Hungarian authorities on the basis of the methodology established in the commission decision,” the spokesperson said.
“Recovery can be avoided for a company if Hungary demonstrates that the advantage received meets the criteria of the de minimis Regulation.”
There was no immediate word from the government as to how it intended to proceed.
Any legal challenge will be lodged at the Court of Justice of the European Union, Balazs Lehoczki, spokesman for the court unit presiding over Hungary, the Czech Republic and Slovakia, told Bloomberg BNA Nov. 7.
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Text of the government press release is at http://www.kormany.hu/en/ministry-for-national-economy/news/government-to-protect-hungarian-google-tax-the-advertisement-tax.
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