Tax & Accounting Blog

Hungary and EU spar over Internet VAT

Blog, Indirect Tax, ONESOURCE July 29, 2016

Hungary’s 2017 budget has proposed to reduce the VAT rate on internet access from the standard rate of 27% to a lower rate of 18%. The EU’s taxation commissioner has asked Hungary not to move forward this plan because internet access services are not among the items which are on the list of goods and services that member states are permitted. This forewarning from the Commissioner would indicate legal action will come in the Court of Justice if Hungary implements this change on 1 January 2017. This reduction in the Internet VAT is an interesting turn for the present Hungarian government which gained worldwide ire by attempting to extend telecommunication taxes to internet usage.

But this decision is at the heart of a bigger issue with the EU VAT directive: flexibility. Hungary’s decision regarding internet VAT rate is like decisions made by Luxembourg, France and Italy regarding electronic books where all three member states moved to lower the VAT rate on e-books from the standard rates to the same treatment as printed books. However, an ECJ ruling found France and Luxembourg in violation of the VAT directive for applying a reduced rate. At this time only Luxembourg has amended its treatment of VAT e-books after the court decision, France has still not yet changed the VAT rate on electronic books.

Although the EU wants to enforce the current rules in the VAT directive in Annex III,it has shown it wants to remove the obstacles to e-commerce in the Single Market and create more freedom for Member States on rate policy. It is not clear how long it will take for the EU to complete its Action Plan which could allow Hungary to successfully lower the VAT on internet access from 27% to 18%.

While flexibility can make things easier for consumers it can create major headaches for businesses. So under a future VAT regime there could be a harmony between digital and tangible goods and member states could be able to designate which items can have a reduced rate. However, this kind of mechanism can lead to added problems for businesses which operate globally because they will have to understand VAT treatments of their customers rather than being able to rely on some general principles.