As a total neophyte to the EU’s scheme for preventing protectionist and discriminatory taxes, I appreciated Ruth Mason’s recent work analyzing the current state of that scheme. Her forecast, though, is gloomy: recent decisions out of the Court of Justice of the European Union indicate that the EU is not prepared to get in the way of nations that impose digital taxes with discriminatory effects. What’s worse, in Mason’s telling, the CJEU appears willing to disregard precedent and engage in suspect reasoning to achieve this result of allowing protectionist taxes to remain in place.
In the recent Tesco-Global and Vodaphone cases challenging a Hungarian turnover tax, the CJEU considered whether the tax violated EU law by causing prohibited discriminatory effects based on nationality. The basic challenge was that the tax fell on non-Hungarian companies because of its rate structure, which consisted of increasing rate brackets beginning with a 0% bracket. In effect, only Hungarian taxpayers ended up in the 0% rate bracket, and almost no Hungarian taxpayers ended up in the highest rate brackets; instead, foreign taxpayers made up the population in the highest brackets.
The discriminatory effect of the Hungarian tax in practice was thus evident, but EU law does not necessarily prohibit such effects where the statute is not discriminatory on its face. Such practical discriminatory effects are permitted if there is a compelling state interest being achieved and the tax is crafted such that it is no more discriminatory than necessary to achieve that interest (in EU terms, the law is proportionate). As Mason astutely points out, the CJEU failed to meaningfully engage in either part of this analysis in the Tesco-Global and Vodaphone cases.
With respect to the interest of Hungary in imposing a tax with discriminatory effects, the CJEU relied on its finding that the tax was progressive and thus designed to achieve the certainly permissible goal of distributing the tax burden equitably among those with the ability to pay. Never mind, observes Mason, that the Court failed to establish that the tax actually was progressive in the sense of imposing higher burdens on those with greater ability to pay. In other words, one cannot consider rate structure alone when deciding whether a tax is progressive; one must also consider the tax base and whether it is an appropriate measure of progressivity (quick plug here for Manoj Viswanathan’s A Unified Theory of Tax Progressivity, which addresses the issues around the determination of progressivity in greater depth). The CJEU failed to think critically about the claim that the Hungarian tax was progressive, essentially creating a formalistic stamp of approval for taxes with hierarchical rate structures. With respect to the second part of the analysis—the proportionate analysis—the CJEU simply disregarded precedent and did not do the analysis; further strengthening this new stamp of approval.
Mason’s criticisms of the CJEU decision continue and are much sharper than recapped here, but her ultimate point is a powerful one: after Tesco-Global and Vodaphone, no one should expect the CJEU to strike down a digital tax with the obligatory hierarchical rate structure, regardless of the tax’s discriminatory effects. In fact, Mason stakes out a compelling position that the CJEU may have decided these cases the way it did to smooth the way for eventually permitting the imposition of digital taxes like the French Digital Services Tax. This result would leave aggrieved United States-based taxpayers and even taxpayers from other EU member states without much recourse—the CJEU cannot be expected to entertain challenges to such taxes, and local legislators are unlikely to be sympathetic.
Mason’s takedown of the CJEU’s decisions highlights the challenge in addressing taxes that are not facially discriminatory yet generate discriminatory effects. Namely, discerning a compelling state interest and determining whether that interest is being advanced in the least discriminatory manner available are difficult tasks for judges. As a state and local tax enthusiast, I read Mason’s piece looking for parallels in this area with common expressed principles and lessons for the state and local tax jurisprudence as the Pike balancing test for taxes with discriminatory effects on interstate commerce seems to be on the up-and-up after 2018’s Wayfair decision. Unfortunately, the only lesson I learned is that courts on both sides of the pond seem unwilling to engage with the difficult analysis of these kinds of taxes. In my view, the U.S. Supreme Court washed its hands of the issue in the 2006 DaimlerChrysler Corp. v. Cuno decision denying standing to taxpayers challenging geographic-based tax incentives. The CJEU appears to be washing its hands by avoiding meaningful analysis. From a comparative point of view, at least we end up with two approaches to consider.
As nations and states continue to grapple with how to tax the digital economy—something which may become even more important in the current quarantined world—more and more issues present themselves for consideration. Mason has does an admirable job of highlighting the potential for digital taxes to serve protectionist purposes; unfortunately, the CJEU appears not to have heeded the warning and, as a result, might effectuate a different form of isolation among the EU member states.