Imposing a digital tax resembles a situation in which your bank unilaterally increases your interest rate tenfold after two years of your five-year interest fixation period. Even this comparison is not absolutely accurate since in case of digital tax, Slovakia acts as also as an executor. It forces all subjects paying money to digital platforms to withhold tax from this money, if these platforms have no permanent establishment in Slovakia, despite applicable international treaties prevent Slovakia from imposing tax on these incomes.
Nowadays, many people take out mortgages as they also believe that a bank will not increase their interest rate during the interest fixation period, or that applicable laws and regulations will prevent the banks from doing so. But what if such unilateral increase would be possible? How many people would still take out mortgage with this level of uncertainty? How many entrepreneurs would take out a business loan from a bank? Less. Although having less people indebted in the current situation may look positive at first sight, restricting the possibilities to gain capital for entrepreneurs is with no doubt lead to or accelerate the economic recession. Uncertainty decreases the level of trust and freezes economic activity. And our experience from 10 years ago showed us the impacts of such freezing on macroeconomic indices affecting the society.
Dating a playmate
Although we may consider unfair and immoral when UBER or Taxify do not pay taxes in Slovakia, fast track and non-systematic solutions to this situation do not shed a positive light. In doing business we prefer to work with reliable and fair business partners. With such partners on board we can be more certain that their behavior oscillates with low volatility. We may call it a “market standard” in contract relations and “legal certainty” in law. Respecting these principles contributes to effectiveness and accelerates the speed of economy. On the other side, when you are faced with higher level of uncertainty or non-standard, you ask for a risk charge. If you lease a building to an unknown lessee, you naturally charge a higher rent and deposit. If someone persuades you to invest in Zimbabwe, you require higher potential ROI. And if you want to date a playmate, you must stand a life on Instagram.
Priority of international law?
From the public international law perspective, Slovakia applies so called monistic doctrine, which in practice means that in Slovakia, international laws have strict priority over national laws. This principle was introduced into Slovak law only in 2001. We may theoretically imagine that in case of countries which have concluded a double tax treaty with Slovakia before this date, digital tax could be viewed as legitimate. But even this sort of scenario is very questionable. Already Section 1 of the Slovak income tax act, which sets forth the digital tax, reads that this law will apply only if applicable international agreement does not provide otherwise. And in case of digital tax, it provides otherwise.
It is not only investment law which recognizes a term legitimate expectation. If you invest lot of money in foreign country, you expect that such country will not taxes by 10% within a year. States indeed have full right to change their taxes at any time. Any dramatic changes to legislative environment, however, decrease trustworthiness of the state as investment partner and may by claimed in court by the investor, as they are in contradiction with its legitimate expectations. This is oscillation with high volatility. It is like preparing for your wedding for the whole year just to hear “no” from your partner in front of the altar. He or she could know earlier, right?
Imposition of digital tax by Slovakia is not only in contradiction with legitimate expectations. It is in breach of one of the essential principles of the international law - pacta sunt servanda – agreements must be kept. It is not only about your partner’s “no“ in front of the altar but also unilateral increase of the cancelation fee by your hotel. And its payment is enforced by the hotel from your guests, who are, under the threats of violence, forced to hand over the prepared envelopes to the called security service, since the wedding was cancelled.
Correct, truthful, fair and in line with legitimate expectations could be to force, by use of legal means, the companies, which are affected by the digital tax and which currently does business in Slovakia in breach of Slovak laws, to make their businesses compliant with Slovak laws. And that could be done even without the recent ruling of the Court of Justice of EU. Doing business in compliance with Slovak laws will most likely lead to obligation to pay taxes from profit in Slovakia. As a bonus, state would maybe protect UBER and Taxify drivers from facing criminal prosecution for unauthorized trading, which a vast majority of these drivers commits.
But why booking.com?
The state’s anger on some of digital platforms can be understood, but why digital tax should affect booking.com as well? Nature of it’s profits from Slovakia materially differ from profits incurred by UBER of Taxify from their activities in Slovakia. Whereas UBER and Taxify to a large extent define the scope of underlying service (summary was provided by advocate general Szpunartu), booking.com portal only publishes, in a more efficient way, offers of accommodation services. We may argue that booking.com does not make business in Slovakia. If Slovakia intends to tax booking.com, it must also impose taxes on reservation systems of hotel chains.
Very simply speaking, Slovakia has indicated that one may not really count on legal certainty in Slovakia. This was in fact confirmed by a recent ruling of the district court in case of Taxify, which materially differs from the ruling in UBER case, despite a major similarity of both services. In addition, Slovakia has shown that ministry of finance has not even tried to distinguish, in a more proper and complex way, between UBER digital platform and booking.com. Such missteps are absolutely needless, especially in politically neutral matters, like in case at hand.