LUXEMBOURG (CN) — Polish and Hungarian taxes on businesses based on how much money they taken in rather than profit do not violate EU regulations, an adviser to the union’s top court said on Thursday.
European Court of Justice Advocate General Juliane Kokott found that progressive taxes levied in Hungary and Poland on turnover instead of the profit it earns do not disproportionately benefit smaller companies and thus do not qualify as state aid, which is illegal under European Union law.
“It is not inconsistent [with EU law] to create a turnover-based income tax,” Kokott wrote in her opinion in the Hungary case. That decision and the Poland opinion are both nonbinding advisory rulings.
Following an international trend, Hungary introduced a tax on advertising in 2014, which charged 5.3% on advertising purchases in newspapers, television and billboards for companies with an annual advertising turnover of more than 100 million Hungarian forints ($320,000) per year.
Two years later, Poland passed a law requiring retailers to pay a tax on their monthly turnover, in lieu of an income tax. Starting in 2016, companies must pay 0.8% on sales of 17 million Polish złoty ($4.4 million) to 170 million Polish złoty ($43.7 million) and 1.4% on turnover above that.
In 2016 and 2017, the European Commission, the 27 EU member states’ executive body, found that the thresholds for the taxes were too high, which benefits smaller companies and constituted state aid. Under EU regulations creating a common market, countries cannot provide financial benefits to businesses operating within their borders.
“The Commission fails to understand that the theory of marginal utility is an economic theory and not a rule of law. Because ‘utility’ cannot be measured, it has not been possible thus far to infer from that theory any definitive (legal) statements regarding the correct tax rate,” Kokott wrote.
The benefits of turnover taxes are debated. Business lobbying groups argue that such taxes don’t reflect the profitability of a company and disproportionately benefit companies with lower fixed costs, like online retailers, over companies with higher costs, such as restaurants. Advocates say the taxes are simpler and easier and prevent large corporations from taking advantage of tax loopholes.
“The Commission’s criticism…is based [on] the incorrect view that turnover-based progressive taxes are per se aid requiring justification,” Kokott found.
The Court of Justice has previously ruled that progressive tax rates are in line with EU regulations. In March, the court ruled that a Hungarian tax on phone companies was permitted.
“Around the world turnover-based income taxes are on the rise, as is shown by the Commission’s proposed digital services tax. This uses annual turnover as the basis for the taxation of undertakings. The Hungarian advertisement tax and the planned EU digital services tax are no different in this respect,” Kokott said, referring to a 2018 proposal by the commission to levy a similar tax on digital service providers.
The court agrees with the legal reasoning of its magistrates around 80% of the time and is expected to issue a final ruling in the case in the coming months.