Czech tax on digital advertising to be at 3-5%

The tax on digital advertising, the so-called digital tax, may be set at a rate between 3% and 5% and could bring between CZK1bn and CZK3bn, according to information of Hospodarske Noviny, a newspaper. The information comes from finance ministry and party sources, and partially from finance minister Alena Schillerova, who spoke to the newspaper. Schillerova herself didn’t provide specific details, as the finance ministry intends to elaborate a proposal by the end of May. However, she said that there were three things that needed to be decided – which companies will be subject to that tax (i.e. revenue and profit thresholds), what services exactly will be covered (digital advertising is certain, but others may be added), and at what the rate the tax should be set. The latter question has received an answer the fastest, as reportedly the discussed rates were between 3% and 5%. ANO, the CSSD and the KSCM all support the idea, though the CSSD and the KSCM are apparently pushing for the higher rate, i.e. 5%. KSCM president Vojtech Filip told Hospodarske Noviny that he initially insisted on a 7% tax, but he would agree on a 5% rate as well.

There is less clarity on what services will be covered, but the finance ministry seems to be converging to the Austrian model, which suggests that online advertising revenues in the Czech Republic will be taxed. ANO is reportedly not very certain about it, but the CSSD and the KSCM are pushing hard for it. Finally, there is the issue with which companies should be covered, as setting the bar too low could have a counter effect, while setting it too high would lead to very low proceeds. Previous information has pointed towards a level similar to that in Austria, which apart from global web giants like Amazon, Apple, Facebook and Google, will also include firms like AirBnB and Uber in the mix. Google has already started lobbying in the Czech Republic against the tax, arguing that Google was already paying a lot of taxes. In 2018, Google paid CZK8bn in taxes, compared to CZK4bn that was paid by Seznam.cz, the largest Czech web portal. However, Google is paying tax mostly for business consulting services and nothing on its web-based operations.

Given the political consensus that such tax is needed, we expect it to be introduced as of 2020. A bill may be ready by the end of June, with a preliminary proposal to come in May. We are not very certain that the planned proceeds of CZK1-3bn are worth the tax, given that it will affect primarily US companies, thus drawing the ire of the Donald Trump administration. We remind that the Czech automotive industry remains vulnerable to US import tariffs on European cars, not directly because Czech producers export a minimal amount to the US, but through German partners, which do export a lot to the United States. In our opinion, this tax will erase the good will the Czech government has gained with Trump over blocking Huawei from public procurement in the Czech Republic.

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