Poland’s Digital Advertising Tax is a Mistake

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Posted by Tomasz Wroblewski, Lorenzo Montanari on Wednesday, April 14th, 2021, 4:18 PM PERMALINK

Poland is moving in the wrong direction on taxes. In February the government decided -- against longstanding principles of international taxation -- to impose new taxes on digital advertising. This new levy, from 5% to 10% on digital ads, will affect the private digital media market in favor of the state-run pro-government media. This is a clear anti-market policy that will affect foreign direct investment and increase bias public spending.

In Poland, substantially raising tax revenue from private digital media businesses will enable the government to spend more on state media. For example: 

  • Television, radio, and cinema companies whose annual advertising revenue is between PLN 1,000,000 ($262,692 USD) and PLN 50,000,000 ($13,134,585 USD) will pay a 7.5% tax. Companies with higher advertising revenue will pay 10%. 
  • Newspapers reporting advertising revenue between PLN 15,000,000 ($3,940,375 USD) and PLN 30,000,000 ($7,880,751 USD) will pay a 2% tax, while newspapers earning more will pay 6%. 
  • A 5% tax on Internet advertising will be placed on any company exceeding EUR 5,000,000 ($5,955,250 USD) of advertising revenue.

When plans to impose a new tax were announced, almost all private media went on strike, suspending publication of any content. Although the strike lasted only one day, it was the first time since 1989 that the media in Poland––often of different ideological orientations––united in this way and on such a large scale.

An American bad example: Maryland

In the United States, starting on March 14, Maryland was the first state to impose a digital advertising tax.  Republican Governor Larry Hogan vetoed this bill in May 2020. The bill violates the Internet Tax Freedom Act, but the Maryland Senate, run by Democrats, ignored the Governor’s decision, as well as fierce opposition from many legal scholars and overrode the veto. This bill imposes a tax on digital advertising with a tax rate span from 2.5% to 10% which is applied to a company’s global annual gross revenue from digital advertising services in Maryland. The cost of the digital advertising service tax will ultimately be borne by Maryland-based employers and consumers in the form of higher prices and fewer options for advertising services, as companies that utilize online platforms will pass the added costs on to consumers. This will not come as a surprise, as companies like Amazon and Google had to adjust prices in response to similar measures in France, Spain, and other countries.  This tax will be paid by people and not by the companies the government is targeting.  The Maryland DST will not only affect the economy in the state but also undermine the powerful opposition of the USA's global position against digital service taxes.

A European bad example: Austria

But much closer to Poland, in Europe, is the Austrian digital advertisement tax.  Despite the initial commitment to wait for and find a solution during the ongoing OECD negotiations, Austria implemented a digital advertisement tax of 5% on digital advertising on revenue, effective on January 1st, 2020. This levy is applied to all companies that reach or exceed an annual global revenue of 750 million Euro and annual revenue of 25 million Euro or more on digital advertising services. By nature of the design of the scope of the tax, only American tech companies are subject to it. It is the most advanced unilateral attempt by a European government to target U.S. digital corporations such as Google, Amazon, Facebook, and Apple.  As consequence, the United States Trade Representative (USTR) launched an investigation into Austria's digital advertisement tax and concluded it was discriminatory against American companies.

New taxes – new normal? 

The imposition of a new tax on advertising is harmful. But at least in Poland’s case, there’s something more to this story. The Polish government has long moved away from a free-market economic model to a statist hybrid in which social spending, state-owned companies, and the national media are seen as parts of a single taxpayer-funded orchestra. And the demands of this orchestra are constantly increasing. The tax on advertising would already be the 35th  tax raised, or imposed, by the current government. It is worth remembering that as far as new "big" taxes are concerned, in 2016 the so-called bank tax among other things, was introduced, bringing an additional 4 billion zlotys ( more than 1 million USD) a year to the budget. Those Poles, whose income exceeds one million zlotys (more than260,000.00 USD), pay the solidarity levy, enriching the government by another 1.2 billion zlotys (more than 315,000,000.00 USD). In turn, revenues from the sugar levy imposed this year on all drinks containing sugar, sweeteners, and caffeine, taurine, and guarana are expected to amount to around 3 billion zlotys in 2021 (more than 780,000,000.00 USD). 

This year has also witnessed the introduction of the trade tax (i.e. tax on retail sales), which is expected to translate into an additional 1.5 billion zlotys (more than 390,000,000.00 USD) in the State coffers. The costs of new taxes are always passed on to the end customer. However, as far as manufacturers are concerned, they are not neutral either. Some new taxes are imposed on goods for which demand is highly elastic. Their producers raise prices, but at the same time are unable to maintain their former profitability. This translates into a reduction in the rate of investment in the economy, which is actually occurring in Poland, with the rate falling to 17.1 % in 2020 compared to 18.5 % in 2019. This is a rate 5 percent lower than the government's plan presented in 2016. (Strategy for Responsible Development). 

Taxes are not the answer

The decline in private investment cannot be indefinitely replaced by the investments subsidized by state-owned companies and the creation of new such entities. Unfortunately, new taxes stifle investment not only because of a reduction in their expected profitability but also because of the complexity of the fiscal and regulatory system they cause. In fact, all taxes on products and services introduced in Poland are based on complex and not entirely clear (even for tax advisors) mechanisms of calculation and collection. Moreover, even the solutions meant to simplify tax settlements, in practice they work exactly in the opposite direction (Slim Vat, Estonian Cit, JPK). As a result, Poland occupies distant places in the rankings assessing the operation of the tax system. For example, in the International Tax Competitiveness Index, Poland is ranked 3rd from last among the  OECD countries and penultimate in Europe (just behind Italy), and in the "Paying Taxes" category of the World Bank's "Doing Business" ranking, Poland is ranked as low as  77th - globally.  

A complicated tax system means that companies have to spend more and more money on legal services and consulting, which consumes resources away from productive activity. The smaller the company, the less capital it can devote to dealing with regulatory complexity, which translates into fewer innovative ideas: they are simply nipped in the bud. Another effect of growing fiscalization and the associated bureaucratization is the room for tax optimization or tax avoidance. The more regulations there are, the more space there is for various lobbying organizations to seek 'exemptions' from such taxes, with translates into stifling market competition. 

Poland has enjoyed years of prosperity and in order to maintain the right policy course that contributed to the country’s success, the time of the pandemic should be a time devoted to reviewing the State’s economic policy, aimed at reducing fiscalism and reducing the regulatory burden.

*President of the Warsaw Enterprise Institute (Poland)

Photo Credit: Giuseppe Milo

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