On Tuesday, the European High Court gave a green light to tax laws that discriminate against big business. In Europe, that will have a disproportionate impact on the foreign Tech businesses, many of them American, which dominate the continent. Bloomberg Tax reports:
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.
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