Hungary Raises Advertisement Tax to Overcome State Aid Issues

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By Jan Stojaspal

The Hungarian parliament has approved an increase in the advertisement tax rate from 5.3 percent to 7.5 percent while appearing to overcome illegal state aid objections of the European Commission and continuing to shield smaller media companies from the tax.

The bill, which the Hungarian parliament approved May 16, maintains a 100 million forint ($360,000) revenue threshold at which the advertisement tax—7.5 percent as of July 1, 2017—kicks in.

Luxembourg-based RTL Group, which in Hungary operates two commercial television channels and six cable channels, is one of the largest foreign media companies to be affected by the tax, which is expected to be in place for about four years.

The legislation explicitly says that any tax advantage companies below the 100 million forint threshold are to receive falls within the European Union’s “de minimis” regulation, which holds that state support doesn’t violate EU state aid rules provided it remains below 200,000 euros ($222,000) over a three-year period.

Also, instead of trying to recover any undue tax advantage companies below the 100 million forint threshold may have received since 2014, when the advertisement tax was first introduced, the bill says that taxpayers will receive a refund of taxes already paid.

‘In Line With EU Rules’

“The new bill is in line with EU rules, I would say, because the exempted amount must be treated as a de minimis subsidy,” Gábor Laki, a tax director at PwC Hungary, told Bloomberg BNA in a May 17 telephone interview. “There are no specific exemptions or hidden interpretations. The rate is also not as high as in the past, when it was up to 50 percent.“

According to Laki, refunds of the advertisement tax will total 23.1 billion forint.

Zoltan Titusz Fekete, tax manager at Budapest-based RSM Hungary Tax and Financial Advisory Services, agreed that the bill likely puts disputes with the European Commission to rest.

“Maybe it’s not the best solution, the clearest solution what’s in this bill, but in the end it will be matched with EU regulations,” he told Bloomberg BNA in a May 17 telephone interview.

Can’t Rule Out Challenge

It can’t be ruled out, however, that “the media sector will not challenge the tax in its new form because it entails almost a 50 percent raise in the tax, and they are arguing that they don’t have such margins as to cover this increase,” Laki added.

After concluding an in-depth investigation last year, the European Commission said Nov. 4, 2016, 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 July 2015 amendments to the tax, which was first introduced in 2014, “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.

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.”

Loss Carryforward Provision

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 Commission argued.

According to Titusz Fekete, the bill attempts to overcome the first objection by stating that incomes below 100 million forint are tax-exempt, as opposed to being subject to a zero percent tax rate. And with Hungary intending to refund the tax already collected, the second objection is a moot point, according to Laki.

“The Commission has not taken any position on the law since it has not been notified,” a European Commission spokesperson for competition told Bloomberg BNA in a May 17 email. “It is for Member States to notify measures to the Commission if they involve state aid.”

But, according to the spokesperson, an undue advantage can be removed either by recovering taxes or by ensuring that everyone receives the same benefit.

To contact the reporter on this story: Jan Stojaspal in Prague at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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