On turnover-based taxes and digital taxes: the EU Advocate General’s opinion in Vodafone

By Leopoldo Parada, University of Turin, Italy

On 13 June the provisional text of the Advocate General Kokott’s opinion in Vodafone Magyarország (C- 75/18) was released to the public, addressing the British telecommunications firm’s challenge to the Hungarian telecommunication tax.

The case is being watched with interest because it may have a bearing not only on the telecommunication tax but also on the legality other turnover-based taxes currently implemented by Member States, namely digital services taxes.

AG Kokott’s opinion comes also timely (and appears aligned with) the EU General Court decision of 16 May that annulled the EU Commission’s decisions concerning the Polish tax on the retail sector (Joined Cases T–836/16 and T–624/17). Here, the EU General Court also considered the legality under EU law of taxes based on turnover.

Advocate General opinion

In her opinion, the AG addressed three questions asked by the Hungarian national court in its request for a Court of Justice of the European Union (CJEU) preliminary ruling, namely:

1. whether freedom of establishment precludes the Hungarian telecommunication tax because the actual tax burden falls on foreign-owned taxable persons;
2.  whether the prohibition of state aid precludes a Member State from imposing tax on a progressive turnover when the effect of that legislation is that the actual tax burden, for the highest tax band, falls mainly on foreign-owned taxable persons; and
3.  whether the Hungarian law is an infringement of Article 401 of the VAT Directive, which generally prevents Member States from introducing new taxes if they are regarded as turnover taxes.

AG Kokott answers all these questions in the negative.

VAT directive & turnover taxes

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.

Freedom of Establishment

As to the question on a potential infringement to the freedom of establishment, AG Kokott reinforces her opinion in Hervis Sport (ECLI:EU:C:2013:531), arguing for a strict criterion to determine indirect or covert discrimination.

That is, the fact that the “majority” of non-resident/non-national companies are affected by a discriminatory tax would not be enough to determine indirect or covert discrimination. Instead, the correlation between the use of thresholds and the seat of undertakings must be identifiable in the “vast majority” of the cases.

Interestingly, AG Kokott also elaborates on the effects of intentional and specific disadvantages created by legislation, recognizing the relevance of legislative intent, an argument that Ruth Mason and I have raised specifically in the context of digital taxes, and more generally, under EU law non-discrimination theory (forthcoming publication).

In particular, AG Kokott argues that if the correlation between turnover and the location of companies is chosen intentionally to disadvantage foreign taxable persons, indirect discrimination may arise.

However, AG Kokott appears to still be skeptical of the argument, providing that the use of intent must be subject to strict conditions, especially in terms of proof.

State aid and turnover taxes

Finally, as to the prohibition of state aid, AG Kokott concludes that different taxation due to progressive tax rates applied on turnovers does not constitute a selective advantage for lower turnover undertakings and therefore does not violate the general prohibition on state aid.

AG Kokott also elaborates on a distinction between cases in which a reference framework is created for the first time and when is not to underline the distinction between Gibraltar and other state aid case law.

Perhaps she aims to reinforce the restrict application of a de facto selectivity theory as regards fiscal state aid.