EU firms nervous about new Hungarian laws, taxes

Budapest Danube Picnik.jpg

Fifteen large European firms have filed a complaint to the European Commission about hastily-adopted taxes in Hungary which they say threatens their activities in the country taking over the rotating EU Presidency. EURACTIV.hu reports from Budapest.

Faced with a mounting debt problem, the centre-right ruling party Fidesz has pledged to cut the country's budget deficit below 3% of GDP in 2011, making it appear as a top performer in the EU.

But the methods used to achieve this goal have stirred controversy inside the country and now also at European level.

To get the budget within EU limits in 2011, the government is relying on unorthodox, one-off revenues, making markets fearful the fiscal gap will bulge again after 2012 unless more durable measures are introduced.

Bank taxes, "special taxes", "temporary taxes", nationalisation of private pension funds and levies on foreign businesses are all seen with growing scepticism by both public opinion and financial markets.

CEOs file joint EU complaint

In December, the CEOs of 15 large European and Western firms filed a joint complaint to the European Commission. The signatories include leading German and Austrian energy companies such as Aegon NV, Allianz SE, ING Group NV, RWE AG, EnBW AG, E.ON AG, Deutsche Telekom AG and OMV AG.

The letter warned about "a trend towards using selected sectors and foreign companies in particular to balance the state budget."

"This harms investments as well as the credibility in Hungary's commitment to the European internal market," said the letter, quoted by Reuters.

Asked by EURACTIV to comment, Marlene Holzner, spokesperson for Energy Commissioner Günter Oettinger, only confirmed that the Commission had received the joint letter.

Bank taxes

The first "special taxes" were levied on the banking and insurance sector in the summer.

György Matolcsy, Hungary's Economy Minister, appealed on national solidarity to replenish empty state coffers and proposed a consultation to determine how banks could contribute their share. The objective was to raise 200 billion Hungarian forints (€734 million) within a year.

By the third quarter of 2010, 17 banks out of the 39 chartered in Hungary, all foreign-owned, reported a loss after they paid the new tax.

Based on third quarter results, the new tax is expected to eat up 90% of the profit base in the banking sector, and may impose an even worse toll on the insurance industry, EURACTIV Hungary reports.

The finance sector is expected to pay 182 billion forints (€646 million) in 2010, despite the fact that the new tax was introduced only in July 2010, and that none of the Hungarian banks had been bailed out by the government during the financial crisis.

Crisis taxes

In October, after a short parliamentary debate, new "crisis taxes" were introduced in an act of the parliament that was immediately signed into law by the country’s President Pál Schmitt. 

The new taxes are imposed on all retail stores, telecommunication and energy distribution activities. They are retroactive and have to be paid in 2010 although they were enacted only two months before the end of the year. They are payable from 1 October 2010, with a first instalment due on 20 December.

In an explanatory paper, the Hungarian Economy Ministry defends the crisis tax as an emergency measure, which the government had to take in order to fill in a 500-700 billion forint (€1.810-2.534 billion) gap left by the previous Socialist government.

"As the financial sector had already shared some of the burden of the crisis, now the same has been expected from telecom companies, the energy sector and retail companies," the document reads.

"Because of their influence, market position and last but not least because of the advantages offered by the state these sectors have been accumulating profits enabling them to play a greater role in stabilising the country’s budget situation."

The tax base chosen is not the adjusted accounting profit of the companies but the net sales revenue derived from their activities. Given that in these sectors the profit is earned on a relatively wide customer and revenue base, the smallish figures can take double-digit percentage points of the total profit base, and even loss-making entities must pay them. 

The energy and telecom sectors are expected to pay approximately 56 billion forint (€200 million) this year, even though the act was signed only in late October, while retailers will cough up about 26 billion forint (€ 94 millions).

In all sectors, the biggest players are foreign owned and will end up shouldering the bulk of the burden. Jobbik, a far-right party, which was campaigning for heavier taxes on foreigners, supported the act.

Energy traders seem less hit by the new taxes, but they already suffered another blow on 1 July when the new supermajority suspended price regulation in Hungary, appointed a new energy regulator and prohibited all energy price hikes.

As Hungary is heavily dependant on imported natural gas – part of the electricity and a large part of district heating relies on gas as well as a majority of households –, these companies were already forced to make losses.

The reasoning behind these so-called "temporary" measures was that the sector had been subject to lax price regulation during the Socialist government.

Nationalisation of private pension schemes

A third wave of special levies was introduced on the insurance business when Hungary effectively nationalised part of its private pension system, triggering a row with the European Commission.

Hungarians had collected two entitlements, one in a pay-as-you-go system that fuels pensions from a monthly levy on active workers and another one based on a prefunded system accumulating savings on private insurance accounts. The government labelled the second industry as an "insurance casino" and proposed a bill to deal with this "evil".

Accordingly, all citizens must "volunteer" to give up one of their entitlements: either give up their saving account to the government in return of further "entitlements" in the pay-as-you-go system, or continue to pay 24% of their personal income into the pay-as-you-go system, without collecting entitlements and keeping their private account.

The bill also provides for a spending cap on management costs. A maximum 4.5% of management fees – including collection, call centers, portfolio management, compliance and other activities – were capped at 0.2%, making the pension companies loss-making themselves.

The pension companies were managing 3 million accounts with a total accumulated portfolio of about 10% of the Hungarian GDP, a relatively small portfolio for such a client base.

Almost all analysts agree that most companies will go out of business next year.

In an explanatory paper, the Hungary Economy Ministry defended the move, arguing that without extra measures, the existing pension system would have deteriorated the Hungarian budget until 2040.

Retribution?

At another point, the government introduced a new tax, which aimed at reclaiming 98% of severance payments made to public sector workers who were laid off immediately before and after Fidesz seized power. The tax was instituted with a retroactive effect, with the ruling majority claiming that no justice will be made in the country until the government re-collects the "wasteful spending" of "Socialist-appointed cronies".

Hungary’s Constitutional Court disallowed the tax, ruling it illegal. But within a year, using its supermajority, Fidesz changed the constitution and disallowed the Constitutional Court from repealing budgetary and tax-related laws. J

ános Bencsik, State Secretary at the Economic and Finance Ministry was the first official who publicly linked this issue to the new taxes and to the privatisation of pension funds. He lamented that in Hungary’s "economic emergency," the new majority had not temporarily suspended the Constitutional Court.

Positions

Background

Hungary was severely hit by the global financial turmoil, becoming the first EU country to benefit from an EU-IMF bailout facility worth €20 billion to address the economic crisis.

The Socialist-led government paid a high price for the crisis. Following general elections on April 2010, Fidesz and its sister party, KDNP, both of centre-right affiliation, won a supermajority in the Hungarian parliament, enabling them to change the constitution. Since then, Fidesz-KDNP have amended the country’s constitution ten times.

According to some analysts, the Hungarian ruling coalition resembles in its policies and rhetoric to Berlusconi’s Forza Italia and even Putin’s United Russia.

Fidesz-KDNP have often referred to foreign investors as having corrupted the previous Socialist government to gain cheaper access to the Hungarian market and to obtain favourable privatisation deals and tax treatment.

"Special taxes" are not a new phenomenon for Hungary. The previous Socialist governments had levied "temporary" taxes on the banking and energy sectors. However, it did this on a different basis and on amounts much smaller than its successor.

Timeline

Further Reading

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