What the CJEU’s Hungarian Cases Mean for Digital Taxes

Abstract

Last week, the Grand Chamber of the Court of Justice of the European Union (CJEU) rendered its judgment in two much-anticipated cases—Tesco-Global and Vodafone –that involve challenges to Hungarian turnover tax. Americans have closely watched these cases for what they may reveal about prospects for success of challenges U.S.-parented companies might bring against a growing set of European digital taxes. Both Hungarian cases involved challenges to the same “special tax,” a tax on net turnover from retail and digital advertising. Under Hungary's graduated special tax, all the businesses in zero bracket were Hungarian-owned, and all (or nearly all ) the companies in the highest bracket were foreign-owned.

These cases were closely watched because if the CJEU had ruled that the Hungarian special tax discriminated in violation of the fundamental freedoms, it would imply that digital taxes would suffer the same fate. On the other hand, wins for Hungary would imply that challenges to digital taxes would be unsuccessful. Hungary won both cases, which does not bode well for digital-tax challenges.

This article discusses the implications of the Hungarian cases for potential challenges to European digital taxes, and in particular for cases based on the argument I made with Leopoldo Parada in 2018 that unilateral digital taxes may violate the fundamental freedoms as discriminatory taxes because they disproportionately affect foreign companies. I conclude that, although the Hungarian cases could be criticized for being thinly reasoned and departing from precedent, and although digital taxes are distinguishable, Tesco-Global and Vodafone overwhelmingly signal that the CJEU will not be receptive to digital-tax challenges.

Keywords: digital tax, Hervis, Vodafone, CJEU, Tesco