Germany’s Finance Ministry confirmed a report that it is reviewing whether a 15 percent withholding tax on royalties can be applied to payments received by foreign internet companies like Google and Facebook for online advertising.
Wirtschaftswoche, a weekly business news magazine, reported February 15 that the Ministry of Finance is evaluating whether German advertisers can be required to withhold tax on payments to the internet companies because the tax authority is unable to collect the tax directly from internet platforms that are based outside the country. “We are currently looking closely at this concrete implementation practice and are also exchanging views with the financial administrations of the regional states about it,” an MOF spokesman told Tax Notes.
Joachim Englisch, a professor of tax law at the University of Munster, said the idea of extending the existing withholding tax on royalties to payments for online advertising was possibly inspired by a court decision in India. In May 2018 an income tax tribunal in Bangalore ruled that the Indian tax administration had correctly assessed tax on Google India Pvt. Ltd. because payments made by the company to Google Ireland Ltd. for AdWords advertising services were royalties under the India-Ireland tax treaty and therefore subject to a 10 percent withholding tax.
“This approach is questionable because it comes close to a retrospective application of the law,” Englisch said. “So far, no one expected payments for online ads to be classified as royalties. It thus exposes the companies that made payments to Google or other online ad companies to the risk of subsequently incurring an additional 15 percent cost and it is far from certain that they could recover it from the online ad company.”
Matthias Luther, a tax lawyer with Kuffner Maunz Langner Zugmaier, said the move appears related to flagging efforts to impose a digital services tax at the EU level. The European Commission has proposed a 3 percent tax on the revenues of companies with a “significant digital presence” in EU member states. Progress on the proposal has been bogged down because of opposition from several smaller EU countries. “They will not be able to succeed with the digital services tax, or don’t think they will in the future, and it’s another attempt to tax the big corporations from the U.S.,” Luther said.
Englisch said a withholding tax on the income of online ad companies that is creditable by their countries of residence would be preferable to the excise tax approach complemented by the commission’s proposal for a digital services tax. “It might indeed well be one of the outcomes of the ongoing OECD deliberations on taxing the digitalized economy,” he said.
Luther said that if the withholding tax on royalties is applied to payments for advertising to foreign-based companies, it could face legal challenges. “I have great doubts that what they are planning to do would actually hold up in court, especially if they limit it to foreign operators,” he said. “That would infringe the fundamental freedoms of the European Union.”
Englisch said that, depending on the interpretation of the term “royalties” and the arguments advanced to classify ad payments as such, the withholding tax might be prohibited under the EU’s interest and royalties directive. “Of course, that would be relevant only if the beneficial recipient of the royalty payment is established within the EU,” he said.