In January, the Austrian government announced plans to update its advertising taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. to include digital ads in 2019. The proposal was to lower the current advertising tax from 5 percent to 3 percent and expand the tax to include digital advertising provided by large foreign companies. However, in an announcement this week, the government said that the applicable rate for the digital advertising tax would remain at 5 percent as for other advertising. Currently, the 5 percent advertising tax does not apply to online media, and Austrian media companies have argued that this tax creates an unfair advantage for online advertisers.
Austrian policymakers should carefully evaluate whether this tax is an appropriate way to raise revenue from digital companies because the incidence of the tax will not necessarily fall on the companies, but on businesses that rely on the advertising platforms to obtain new customers. Additionally, the tax would discriminate against foreign companies.
Current Advertising Tax
Austria adopted its advertising tax in 2000, and it is currently a 5 percent tax on traditional advertising sales. The tax liability is calculated as a share of value-added tax (VAT) liability on advertising sales. If a business sells an ad for €100 and pays the 20 percent Austrian VAT on that ad (€20), the advertising tax would be an additional €1 (5 percent of €20).
Because the policy is not neutral between traditional and online ad platforms, ad buyers are able to avoid the costs of the tax if they focus their marketing efforts to internet audiences. This can result in companies that are subject to the tax (traditional advertisers) having lower ad sales than they would otherwise.
This lack of neutrality lowers the profitability of traditional advertisers while incentivizing ad buyers to attract customers online. The incentive to purchase online advertising rather than traditional advertising is likely exacerbated by the growing trend of online advertising in recent years.
The New Digital Tax Measures
In response to the failure of an effort at the European Union to adopt an EU-wide digital advertising tax, Austria is moving forward with its plans to tax digital advertisers.
The current 5 percent advertising tax raised €107 million ($122 million U.S.) in 2016 according to data from the OECD, and the government expects the new policy to raise up to €200 million ($229 million U.S.) each year. This revenue is not only from the extension of the advertising tax to digital ads, but also due to new reporting requirements for booking platforms and the elimination of the €22 threshold for VAT liability for package deliveries from third countries.
Instead of applying to all digital firms that provide online advertising services, the new tax would only cover those companies that have at least €750 million ($860 million U.S.) in worldwide revenue and €25 million ($28 million U.S.) in revenue from sales in Austria. (The announcement in January had thresholds at €750 million and €10 million, respectively). These firms, in addition to the companies covered by the current policy, would owe a 5 percent tax on their advertising sales in Austria.
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SubscribePolicy Implications
According to data from the European Commission, 32 percent of Austrian businesses with more than 10 employees purchased online advertising in 2018. This was above the EU average of 26 percent of businesses. Additionally, 53 percent of Austrian businesses used some form of social media in 2017. Businesses that rely on social media or purchase online advertising could see their marketing costs rise if the new digital advertising tax is implemented.
Tax policy should be designed to be neutral, so it is understandable that the Austrian government would seek to make sure that the advertising tax does not unfairly penalize traditional advertising. However, the result of the expanded tax base and the revenue threshold for digital advertisers is that the Austrian proposal is like other digital services tax proposals, including the recent one from France. These taxes are discriminatory and likely harmful to small and growing firms that rely on digital advertising and digital platforms to reach their customers.
The digital advertising tax is therefore simply an extra tax of 5 percent on a small group of foreign businesses. As Chancellor Kurz said in January, the new tax will not hit any Austrian companies. This is only true in the sense that the legal liability for the tax will fall on foreign firms. The tax burden, however, could hit Austrian businesses in the form of higher advertising costs.
The policy specifies that €15 million ($16.9 million U.S.) of the revenue raised from the new measure will be used to modernize Austrian media companies. So, it is not only a tax on foreign firms, but it is also an industrial policy specifically designed to assist domestic firms.
The Broader Context
Several other countries are considering a new tax on digital companies, and the OECD is moving forward with work on reforming international tax rules motivated by the digital economy. Austria, meanwhile, is taking a relatively unique approach. Though the argument for a more neutral advertising tax regime can be made, the thresholds that exempt smaller digital advertising companies make the tax less neutral and discriminates against foreign firms.
In its 2019 report on foreign trade barriers, the U.S. Trade Representative (USTR) specifically identified digital services taxes as creating barriers to trade in digital services. Though it did not identify the Austrian proposal as problematic, the USTR did highlight the problems with proposals from the EU, France, Italy, Spain, the UK, and Chile. These proposals have a broader scope, but they are similar in nature to the Austrian proposal in that they set out a separate tax regime for digital firms.
As the work at the OECD to address challenges for taxation in the digital economy continues, it will be important for countries like Austria to be willing to focus on the broader effort and avoid creating a more complex tax environment that could work as a protectionist barrier against foreign firms.
Other OECD work on applying VAT regimes to sales from digital platforms and identifying ways to minimize complexity and avoidance is also critically important. Rather than narrowly extending tax policy to digital sales in ways that may be politically popular, countries should work to answer the hard questions of what it means to apply VAT to digital sales. Austria is taking a step in this direction with the new reporting requirements for booking platforms and requiring that VAT be paid for all transactions from third-country platforms.
Conclusion
The Austrian government has nearly arrived at an appropriate treatment of online advertising. However, instead of adopting a neutral approach that would treat domestic and foreign digital firms the same, it has targeted foreign firms. It is important for countries that are considering similar taxes to work toward adopting policies that do not specifically target foreign firms or particular industries. At the same time, countries should work to examine how their VAT might extend to digital sales in a manner that minimizes complexity and distortions.
Update (4/5/2019): Following the publication of the legislative details of the Austrian Digital Advertising Tax, it is clear that the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. for the new tax is not the same as the previous advertising tax. The new digital advertising tax will apply at a 5 percent rate on sales revenue from online ads for companies that have worldwide revenue of more than €750 million ($842 million U.S.) and Austrian revenue of more than €25 million ($28 million U.S.).
Taxes based on sales revenue (turnover) rather than income can result in marginal tax rates that are incredibly high for low-margin product lines. In Austrian corporate tax terms, a business that has a 20 percent profit margin from online ad sales would have a DST liability equal to corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. liability (if Austria’s 25 percent statutory corporate rate applied to income from those sales). The average U.S. firm has an overall profit margin of just 9 percent. For businesses with profit margins from online sales below 20 percent, the digital advertising tax liability would be higher than if the Austrian corporate tax applied to income from online sales. Because of this, the digital advertising tax is likely to be biased against firms that do not pay corporate tax in Austria but will instead owe tax on digital advertising sales.
Additional information also shows that €25 million ($28 million U.S.) of the revenue from the digital tax package will result from the digital advertising tax in 2020, reaching €34 million ($38 million U.S.) in 2023. Reporting obligations for online platforms is expected to raise €30 million ($34 million U.S.) in 2020. Putting the VAT liability for imports from third countries on online sales platforms instead of the importing businesses and taxing small deliveries from third countries from the very first cent (eliminating the former threshold of €22 ($25 U.S.) is expected to raise €150 million ($168 million U.S.) in 2021.
Separately, the current advertising tax (while still a tax on a tax) is calculated in the following way rather than as the original post described: If a business sells an ad for €100, the business would first pay the 5 percent advertising tax (€5) which would be included in the tax base for VAT purposes. The 20 percent VAT on the €105 tax base would result in a €21 VAT liability. In sum, the total tax liability from the advertising tax and VAT is €26.