Much has been said and written about the Hungarian advertisement tax introduced in Hungary this past summer. Newspapers have published blank pages, televisions and radios have stopped broadcasts in protest, even the European Commission in Brussels has started to investigate the tax for discrimination and incompatible state aid. It did however remain almost unnoticed that after its adoption by the Parliament, but still before its entry into force, it was amended as to extend to practically all online advertisement services aimed at Hungary. Consequently, by the letter of the law, even Facebook's and Google's advertisement revenue from Hungary are now subject to the Hungarian tax.
But why did this not receive any significant media coverage? Because under the Hungarian rules, if the publisher does not make a written declaration that it is actually paying the Hungarian advertisement tax, the client itself also becomes liable to pay the tax. In such cases, the client has to pay an additional 20% on its advertisement spending. This led most market players to believe that the tax is paid and there is nothing more to do. They are however mistaken, since the service provider does in fact also remain liable to pay the taxes, resulting in a double taxation.
It is an open secret that most non-Hungarian advertisement publishers remain reluctant to pay the tax and that they have informally informed their Hungarian clients that they would not issue any declaration. This meant that virtually all advertisement spending on social media and other online services became 20% more expensive for Hungarian companies, significantly hurting their competitiveness in certain market segments.
The lawmakers did notice this and after a mere three months following its introduction significantly amended the tax as of January 1, 2015. Under the new rules, purchasers of advertisement may become exempt from paying the 20% tax even without the declaration, if they prove that they specifically asked for the declaration but have not received it and simultaneously also report the amount they spent and the name of the service provider to the tax authority.
In practice, this means that from the beginning of next year, nobody will pay the tax for online services. The service providers will not pay because they are located outside of Hungary and do not fear the Hungarian tax authority and their Hungarian clients because they become exempt from the tax by asking for the declaration and reporting to the authority. But then why not completely abolish the tax for these services?
The word is that the data from the reporting obligations are gathered into a huge database containing all Hungarian spending on social media and other online services. This information could later be used to initiate international enforcement against online service providers once the amount of enforceable tax becomes high enough. Considering that the tax rate is 50% for revenues above EUR 65 million, this could very soon be the case. It does of course remain questionable if the tax could actually be enforced based on international treaties, but considering the amounts in question, it may very well be worth a try.
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