Background
Hervis is a household name as sport stores of the chain are in a lot of shopping centres. Fewer people are however aware of the fact that Hervis is in the ownership of Spar Österreichische Warendhandles AG. The special retail tax introduced in 2010 had a more detrimental effect on retail units belonging to groups than on the retailers performing similar activities independently or in a franchise system. According to the legal regulation, the sales revenue of the companies of a group had to be considered on an aggregate basis and the tax liability had to be determined based on the aggregate amount and divided between the domestic members of the group. This alone would not have been a problem if no brackets had been introduced in the system of special retail tax or the tax had been introduced without the strong progressivity shown on the following chart.
As described above, Hervis had to calculate its sales revenue on an aggregate basis with the Spar supermarkets having substantially higher sales revenue from the retail trading of food. A part of the tax liability of Hervis was obviously taxed at the highest rate due to the progressive tax brackets. Taking into account the retail activity’s low (0-5 percent) profit earning capacity relative to its sales revenue, it is easy to see that the progressive tax paid based on sales revenue robbed Hervis of most of its profit and the company suffered a substantial competitive disadvantage on its peers paying tax at a much lower rate.
For the above reasons, Hervis filed a request with the Hungarian Tax and Customs Authority (NAV) for the elimination of discrimination. NAV rejected the request with reference to the relevant legal regulation after which Hervis filed an action with the Court of Székesfehérvár. During the court procedure, the Hungarian court referred to the Court of Justice of the European Union for a preliminary ruling.
What is a preliminary ruling procedure about?
If a national court has to apply provisions of EU law in a dispute in progress in front of it, it may suspend the procedure and refer to the Court of Justice of the European Union asking whether the relevant legal act issued by EU bodies is in force and/or how it and the EU agreements have to be interpreted. In his petition, the national judge formulates the legal question that is answered by the court in a decision of binding force and not as an opinion. Still, the preliminary ruling decision is not aimed at settling the dispute. It is only a part of the procedure initiated and to be closed at the national court. The procedure is an opportunity for national courts to have conflicts of national law with EU law reviewed and to primarily apply the directly applicable EU law in the case of conflicts of law.
What next?
Based on the decision of the court, the special retail tax may contradict both the principle of the freedom of establishment and the principle of equal treatment if it is established that the taxable persons belonging to groups of companies and falling in the highest bracket of the special tax are mostly enterprises of companies having their seat in other member states. This will be up to the Hungarian judge to decide. The relevant data are available in the authority records. However, we have to wait for the final outcome as the matter may only be decided based on accurate analysis and the decision is far from predictable.
Is the tax refundable?
If it is proven that the special retail tax was in fact discriminative, it is most likely that not the entire legal regulation will be annulled but only the provisions deriving from the discriminative regulation. We must note, however, that the arising tax refund will not only be payable to Hervis but to all taxable persons concerned. The refund is not automatic, however, and the persons concerned should not just wait for the extra tax to be credited to their tax current accounts. They should act!
What do we have to do if tax is refundable?
If the Court of Justice of the European Union determines the contradiction of the legal regulation imposing the tax payment obligation with the mandatory legal act of the European union with retroactive effect and the taxable person has a refund claim based on this decision, the tax authority of first instance will refund the relevant amount at the taxpayer’s request in accordance with the relevant provisions. It is important that taxpayers must file their refund requests within 180 days of the promulgation or receipt of the decision of the European Court of Justice. The effective decision of the Hungarian court will prevail in the given case. Special attention should be paid to the 180-day deadline as the right lapses after this deadline and no refund requests may be filed after it. If the taxpayer’s refund request is justified, interest at the central bank base rate is also payable to the taxpayer for the period from the date of payment of the tax to the date of the resolution on the refunding of the tax.
Problems elsewhere also?
Based on the above, a thought may be given to whether the business tax and the insurance tax replacing the special retail tax in 2013 and in which brackets were also introduced will have the same outcome. We should, however, not think so far ahead. We first have to see how the case of Hervis turns out!
