Business 2 August 2016, 4:07pm

Tesco Hungary steps over government 'landmine'

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Having incurred losses of over 100 billion forints in 2013 and 2014, the Hungarian arm of UK retail chain Tesco has finally posted profit in FY2015. The turnaround was attributable to two key factors relating to accounting, but this does not make it any less important for Tesco because this way it managed to step over a landmine the government had planted for multinational retail chains.

Tesco Hungary incurred losses of HUF 43.1 billion in 2013 and HUF 68 bn in 2014, but it posted after-tax profit of HUF 13.2 bn in FY2015.

The improvement, however small (net turnover rose by merely 0.7% yr/yr), stemmed from two factors:

whereas the company booked nearly HUF 60 billion worth of special amortisation on property in the previous financial year, it booked less than HUF 9 bn on this row in the year ended on 29 February this year.
As a result of the positive financial result Tesco Hungary managed to swing back to profit on a pre-tax level too. Financial operations yielded HUF 15 bn profit, the biggest contribution to was made by Swiss activities, as a result of exchange rate gains made on revaluations and the rearrangement of loans.

Tesco was extremely fortunate with these two items, given that the government’s ‘annihilator’ enshrined into Act CLXIV of 2005 on Trade by Parliament two years ago enters into force on 1 January 2017.

9/A. Article 78 (1) Any commercial business that: a) generates more than half of its net revenues from the sale of FMCGs (fast-moving consumer goods)
b) has net sales revenues of any two consecutive business years of at least HUF 15 billion;
c) has zero or negative balance sheet earnings in both years defined under section b)
may not conduct retail activity of FMCGs after the approval of the earnings report of the second business year as defined in section b).
(2) The above rule is not applicable in the first four business years from the establishment of the commercial business.
(3) Compliance with the present Article is checked by the state tax administration.

Thus Tesco dodged this particular bullet - for now. The other loss-making retail chains may be confident too, as in February this year the European Commission opened infringement proceedings against Hungary over the ban on loss-making in the retail sector, in the form of a Formal Notice, arguing that it may restrict the freedom of establishment for businesses.