On 13 June 2019, Advocat General KOKOTT gave its opinion in case C-75/18 (Vodafone Magyarország Mobil Távközlési Zrt.), which deals with the question if Hungary can levy a turnover tax similar to a VAT.
The case if not a ‘real’ VAT case, as it mainly focuses on questions regarding state aid and competition. But the question that is interesting for VAT, is if Hungary can levy a type of turnover tax, which has similarities with a VAT.
The AG starts its considerations with the broader perspective in which the questions are raised:
“In these proceedings the Court is concerned with questions relating to tax law and the rules on State aid which at the same time have particular importance for the turnover-based digital services tax currently being proposed by the European Commission. The question thus also arises in this case whether the taxation of a company’s revenue according to its turnover constitutes a turnover tax or whether such a tax is a direct income tax.”
Facts (simplified):
Vodafone Magyarország Mobil Távközlési Zrt. (‘Vodafone’), is a public limited company governed by Hungarian law. The sole shareholder is Vodafone Europe B.V., registered in the Netherlands.
Vodafone’s principal activity is on the telecommunications market. According to the referring court, it was the third largest undertaking on the Hungarian telecommunications market in the years at issue.
Vodafone paid a special tax, which is a turnover-based special tax for undertakings operating in certain sectors. According to the Hungarian tax authorities, Vodafone did not pay enough, and they raised an assessment.
The Hungarian court asked the following questions to the European Court of Justice:
‘(3) Must the special tax be considered a tax on turnover? In other words, is this tax compatible or not with the VAT Directive?’
Considerations:
27. According to the preamble to First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes, harmonisation of legislation concerning turnover taxes should make it possible to establish a common market within which there is healthy competition and whose characteristics are similar to those of a domestic market, by eliminating tax differences liable to distort competition and hinder trade. By the VAT Directive such a common system of value added tax was introduced.
31. It appears from case-law that there are four essential characteristics of VAT: (1) it applies generally to transactions relating to goods or services; (2) it is proportional to the price charged by the taxable person in return for the goods and services which he has supplied; (3) it is charged at each stage of the production and distribution process, including that of retail sale, irrespective of the number of transactions which have previously taken place; (4) the amounts paid during the preceding stages of the process are deducted from the tax payable by a taxable person, with the result that the tax applies, at any given stage, only to the value added at that stage and the final burden of the tax rests ultimately on the consumer.
32. First of all, the Hungarian special tax does not cover any transaction, but only specific transactions of telecommunications undertakings. It is not therefore a (general) turnover tax in accordance with the first criterion, but would be at best a special excise duty, which the Member States would not be permitted at present, however, only under the conditions laid down in Article 1(2) and (3) of Directive 2008/118/EC.
33. Second, it is not designed to be passed on to the consumer (fourth criterion). This cannot be taken to be the case simply because a tax has been reflected arithmetically in the price of the goods or services. That is more or less the case with any tax charge on an undertaking. Rather, if the consumer — as with the Hungarian special tax for telecommunications undertakings at issue — is not the person liable for payment, the tax must be designed to be passed on to the consumer specifically.
36. Tax is also not levied on each individual transaction according to its price but, according to Paragraphs 1 and 2 of the Law on the special tax, on the (net) total turnover from the supply of electronic communication services in the tax year from the threshold of HUF 500 million at an initial rate of 4.5% and from HUF 5 000 million at 6.5%. In this way too, the special corporate tax is similar in character to a special direct income tax. Unlike ‘normal’ direct income taxes, however, the taxable amount is not the profit generated — as the difference between two operating assets within a certain period — but the turnover generated within a certain period. Nevertheless, contrary to the view evidently taken by the Commission at the hearing, this does not affect its character as a direct tax.
37. Consequently, the Hungarian special tax constitutes a turnover-based special (direct) income tax which is intended to skim off the particular financial capacity of telecommunications undertakings. Therefore, as the Commission rightly states, it cannot be characterised as a turnover tax seeking to tax the consumer.
Conclusion:
The Advocate General gives the following opinion:
‘(3) The Hungarian special tax, as a turnover-based direct income tax, cannot be characterised as a turnover tax, with the result that it is not precluded by Article 401 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.’
Source: Curia
Other
As to the Hungarian telecommunication tax and its nature as a turnover tax, AG Kokott argues that the tax cannot be regarded as a turnover tax, but rather as a “turnover-based special (direct) income tax”. Thus, it would not infringe Article 401 of the VAT Directive.
Although the AG’s answer refers specifically to the application of the VAT directive, one can’t help but consider whether this line of reasoning would also apply to digital taxes (which are also turnover-based taxes) whose indirect tax nature excludes them –at least a priori– from the scope of tax treaties.
Source MNE Tax
