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Is Language a Territorial Link?

Posted on Sep. 26, 2019

When in Rome, do as the Romans do.

In the case of Google, that advice translates into running online advertisements in Hungary in the Hungarian language – a reasonable business strategy that is now under scrutiny in a closely watched tax case before Europe’s highest court (Google Ireland Ltd. v. Hungary, C-482/18).

An offshore subsidiary – Google Ireland – generated the advertisements, but Hungary asserted that the activity was sufficient to bring the company within the scope of Hungary’s advertising tax, which taxes advertising revenue generated in Hungary irrespective of the company’s residence. Google Ireland failed to comply with the terms of the tax regime, specifically the requirement that foreign advertisers register in Hungary within 15 days of starting services. Now the company is facing a fine that is as much as 2,000 times the rate that would be imposed on a domestic company, and Google says the regime is discriminatory.

It’s a case that has made strange bedfellows of Google and the European Commission: They have long been at odds over the company’s tax activity in Europe, but in this case they are united against the seemingly disproportionate nature of the Hungarian regime. On September 12, an EU advocate general backed their position in an opinion advising the Court of Justice of the European Union to find that the regime infringes on foreign providers’ freedom to provide services, particularly because the fines are final and enforceable when notice is served.

To be clear, Advocate General Juliane Kokott does not have a problem with Hungary’s decision to tax nonresident advertisers — or even to impose harsh fines for noncompliance. Per the opinion, EU law does not preclude member states from taxing activity when the taxpayer is a nonresident or the taxed service is consumed outside the jurisdiction if there is another “territorial link.”

That leads to an interesting discussion about whether or not language can serve as a sufficient territorial link. Kokott thinks it can, and in this case her evaluation is fair:

If the internet had not been invented, the major share of that revenue could probably have been generated only by becoming established in Hungary, in which case Hungary could have simply levied income tax as appropriate. Should that competence cease to exist solely because technical progress creates new ways of generating revenue without being present in the Member State in question?

Multinationals that personalize their services to meet the needs of a particular market should be prepared to comply with the taxing or regulatory demands of a jurisdiction they have specially targeted.

As Kokott points out, doing business in a country’s official language provides a strong connection to that jurisdiction in principle. The fact that this language argument may not apply across the board (particularly if English is involved) certainly does not invalidate it; rather, it highlights the fact-specific nature of these sorts of cases and the territorial links in question in each case.

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