Economy
Brussels prohibits Hungary from using progressive ad tax until end of probe
The cabinet has acknowledged later in the day that it may need to amend the relevant legislation "to some extent".
Government admits legislation may need to be changed "to some extent" - 16:06
Regarding the statement of the European Commissioner for Competition on the Hungarian advertising tax, the government said it “considers it important to underline that while it strives for dialogue, it will continue to stand up for the interests of Hungary."
The cabinet stressed in a statement published on its website that the EU Executive’s inquiry does not question Hungary’s right to levy an advertising tax and to determine the appropriate tax rates.
“Following consultations between the European Commission and relevant stakeholders, the Government has come to the conclusion that it may be necessary to amend the relevant legislation to some extent," the Government Information Centre said.
“The Cabinet will discuss possible amendments that would enable the advertising tax to remain within the Hungarian taxation system next week," it added.
EC prohibits applying progressive rates until end of probe - 12:16
In particular, the Commission has concerns that the progressive tax rates, ranging from 0 to 50%, could selectively favour certain companies and give them an unfair competitive advantage.
The Commission has therefore also taken a separate decision prohibiting Hungary from applying progressive rates until the Commission has finished its assessment (a so-called "suspension injunction"). The opening of an in-depth investigation gives interested third parties the opportunity to comment. It does not prejudge the outcome of the investigation.
"It is very important that we ensure a level playing field on media markets throughout Europe. Many media today rely on advertisement income to finance their operations," commented Commissioner Margrethe Vestager, in charge of competition policy.
“I welcome the signals from the Hungarian government that they intend to make changes to the advertisement tax. Our state aid investigation will look in detail both at how the advertisement tax applies currently as well as how it is amended, to make sure there is no unfair discrimination against certain media companies," she added.
Under Hungary's Advertisement Tax Act, companies are taxed at a rate depending on their advertisement turnover and companies with a higher advertisement turnover are subject to a significantly higher tax rate.
“At this stage, the Commission considers that this progressivity of the tax rates, ranging from 0% to 50%, selectively favours certain media companies, in breach of EU state aid rules," the EC said in a statement.
Due to the progressive rates, companies with a low advertisement turnover are liable to pay substantially less advertisement tax, even in proportion to their advertisement turnover, than companies with a higher advertisement turnover, the Commission noted.
“A progressive tax based on turnover places larger players at a disadvantage, unlike a progressive tax based on profits, which can be justified by the higher burden-bearing capacity of very profitable companies. At this stage, the Hungarian authorities have not presented any objective reason that would justify this."
“The Commission also has doubts if the provisions in the Act, which allow the deduction of previous losses from the taxable advertisement turnover, are in line with state aid rules. These rules seem to be inconsistent with the overall objective of the tax and their narrow application only to companies that were not profit-making in 2013 appears to grant a selective advantage to these companies."
The Commission stressed that its investigation “does not call into question Hungary's right to levy an advertisement tax or to determine the appropriate level of taxation."
However, the Commission has to verify that such a tax does not selectively favour certain companies over their competitors. Hungary and interested third parties can now submit their comments to the Commission.
Following the investigation the Commission will decide whether or not the advertisement tax gives rise to state aid to certain companies and if there is aid, whether it complies with EU rules.
Background
Hungary adopted the Advertisement Tax Act on 11 June 2014, with further amendments on 4 July and 18 November 2014. The Act creates a new special tax on advertisements published in the media in Hungary and applies to all media companies.
The tax for each company is based on the turnover derived from advertisement activities, without deduction of any costs. The tax is therefore not based on the profits generated from these activities. The tax base of affiliated companies is aggregated. The tax rate is progressive: companies with small or medium-sized advertisement turnover are either fully exempted or taxed at 1 %, whereas companies with high advertisement turnover are taxed at a progressive rate between 10% and 50%. For the tax year 2014, a transitional measure allows companies to deduct from the 2014 tax base 50% of the losses carried forward from previous years under corporate or personal income tax law. However, this possibility is limited to companies that were not profit-making in 2013.
In parallel, the Commission is also assessing the compatibility of the tax with other aspects of EU law, notably with the freedom of establishment as guaranteed by Article 49 TFEU in relation to whether the regime primarily affects Hungarian companies linked to companies with registered offices in other Member States. The Commission is currently in contact with the Hungarian authorities to establish all relevant facts.
Problem may be solved already
János Lázár, head of the Hungarian Prime Minister’s Office, said earlier this month that the government could propose to slash the rate of the advertising tax, the compatibility of which is being scrutinized by the European Commission both in taxation and competition aspects, to 5-10%.
He added that the highest rate in the European Union is 5%. The Commission said earlier the level of the tax must be affordable and if it is progressive, there cannot be a disproportionate difference between the brackets, he said.
Hungary’s ruling Fidesz party would like to exempt smaller-revenue companies from the advertising tax. In their case the levy would be unjustified and burden them with unnecessary bureaucratic costs, Antal Rogán, head of the Fidesz caucus, told public radio MR1 on 4 March.
Rogán also noted that the cabinet expects a confrontation with Brussels on this front because one of the EU offices want even the smallest companies with the smallest advertising revenues to be subject to the tax as well.
Rogán stressed that the revenue target of about HUF 7 billion must be achieved, and that is why at the committee meeting he spoke about a "3-5% intensity, which does not mean rate, as this is an intensity question with respect to all advertising revenues made in Hungary."
If the rates of the advertising tax are reduced then - in order to reach the revenue target - the group of those that are subjects to the tax will "obviously" need to be expanded" he said.
Prime Minister Viktor Orbán stressed in mid-February that the advertising tax and the revenues it generates are both necessary and that "we cannot lose this revenue." All other factors, e.g. how large is its rate, etc. are technical issues, he added.
He noted that in his view these technical issues may be and should be subject to discussions, adding that several negotiations are in progress already.
Regarding the statement of the European Commissioner for Competition on the Hungarian advertising tax, the government said it “considers it important to underline that while it strives for dialogue, it will continue to stand up for the interests of Hungary."
The cabinet stressed in a statement published on its website that the EU Executive’s inquiry does not question Hungary’s right to levy an advertising tax and to determine the appropriate tax rates.
“Following consultations between the European Commission and relevant stakeholders, the Government has come to the conclusion that it may be necessary to amend the relevant legislation to some extent," the Government Information Centre said.
“The Cabinet will discuss possible amendments that would enable the advertising tax to remain within the Hungarian taxation system next week," it added.
EC prohibits applying progressive rates until end of probe - 12:16
In particular, the Commission has concerns that the progressive tax rates, ranging from 0 to 50%, could selectively favour certain companies and give them an unfair competitive advantage.
The Commission has therefore also taken a separate decision prohibiting Hungary from applying progressive rates until the Commission has finished its assessment (a so-called "suspension injunction"). The opening of an in-depth investigation gives interested third parties the opportunity to comment. It does not prejudge the outcome of the investigation.
"It is very important that we ensure a level playing field on media markets throughout Europe. Many media today rely on advertisement income to finance their operations," commented Commissioner Margrethe Vestager, in charge of competition policy.
“I welcome the signals from the Hungarian government that they intend to make changes to the advertisement tax. Our state aid investigation will look in detail both at how the advertisement tax applies currently as well as how it is amended, to make sure there is no unfair discrimination against certain media companies," she added.
Under Hungary's Advertisement Tax Act, companies are taxed at a rate depending on their advertisement turnover and companies with a higher advertisement turnover are subject to a significantly higher tax rate.
“At this stage, the Commission considers that this progressivity of the tax rates, ranging from 0% to 50%, selectively favours certain media companies, in breach of EU state aid rules," the EC said in a statement.
Due to the progressive rates, companies with a low advertisement turnover are liable to pay substantially less advertisement tax, even in proportion to their advertisement turnover, than companies with a higher advertisement turnover, the Commission noted.
“A progressive tax based on turnover places larger players at a disadvantage, unlike a progressive tax based on profits, which can be justified by the higher burden-bearing capacity of very profitable companies. At this stage, the Hungarian authorities have not presented any objective reason that would justify this."
“The Commission also has doubts if the provisions in the Act, which allow the deduction of previous losses from the taxable advertisement turnover, are in line with state aid rules. These rules seem to be inconsistent with the overall objective of the tax and their narrow application only to companies that were not profit-making in 2013 appears to grant a selective advantage to these companies."
The Commission stressed that its investigation “does not call into question Hungary's right to levy an advertisement tax or to determine the appropriate level of taxation."
However, the Commission has to verify that such a tax does not selectively favour certain companies over their competitors. Hungary and interested third parties can now submit their comments to the Commission.
Following the investigation the Commission will decide whether or not the advertisement tax gives rise to state aid to certain companies and if there is aid, whether it complies with EU rules.
Background
Hungary adopted the Advertisement Tax Act on 11 June 2014, with further amendments on 4 July and 18 November 2014. The Act creates a new special tax on advertisements published in the media in Hungary and applies to all media companies.
The tax for each company is based on the turnover derived from advertisement activities, without deduction of any costs. The tax is therefore not based on the profits generated from these activities. The tax base of affiliated companies is aggregated. The tax rate is progressive: companies with small or medium-sized advertisement turnover are either fully exempted or taxed at 1 %, whereas companies with high advertisement turnover are taxed at a progressive rate between 10% and 50%. For the tax year 2014, a transitional measure allows companies to deduct from the 2014 tax base 50% of the losses carried forward from previous years under corporate or personal income tax law. However, this possibility is limited to companies that were not profit-making in 2013.
In parallel, the Commission is also assessing the compatibility of the tax with other aspects of EU law, notably with the freedom of establishment as guaranteed by Article 49 TFEU in relation to whether the regime primarily affects Hungarian companies linked to companies with registered offices in other Member States. The Commission is currently in contact with the Hungarian authorities to establish all relevant facts.
Problem may be solved already
János Lázár, head of the Hungarian Prime Minister’s Office, said earlier this month that the government could propose to slash the rate of the advertising tax, the compatibility of which is being scrutinized by the European Commission both in taxation and competition aspects, to 5-10%.
He added that the highest rate in the European Union is 5%. The Commission said earlier the level of the tax must be affordable and if it is progressive, there cannot be a disproportionate difference between the brackets, he said.
Hungary’s ruling Fidesz party would like to exempt smaller-revenue companies from the advertising tax. In their case the levy would be unjustified and burden them with unnecessary bureaucratic costs, Antal Rogán, head of the Fidesz caucus, told public radio MR1 on 4 March.
Rogán also noted that the cabinet expects a confrontation with Brussels on this front because one of the EU offices want even the smallest companies with the smallest advertising revenues to be subject to the tax as well.
Rogán stressed that the revenue target of about HUF 7 billion must be achieved, and that is why at the committee meeting he spoke about a "3-5% intensity, which does not mean rate, as this is an intensity question with respect to all advertising revenues made in Hungary."
If the rates of the advertising tax are reduced then - in order to reach the revenue target - the group of those that are subjects to the tax will "obviously" need to be expanded" he said.
Prime Minister Viktor Orbán stressed in mid-February that the advertising tax and the revenues it generates are both necessary and that "we cannot lose this revenue." All other factors, e.g. how large is its rate, etc. are technical issues, he added.
He noted that in his view these technical issues may be and should be subject to discussions, adding that several negotiations are in progress already.
