Economy 9 May 2012, 3:12pm

Hungary gov't approves new taxes (2)

Portfolio

(Updates with new info, Portfolio.hu viewpoint)
Hungary’s government has on Wednesday approved the new tax measures that are included in the Széll Kálmán Plan 2.0, i.e. the telecom tax, the financial transaction tax and the unified tax for insurance companies, government spokesman András Giró-Szász told a press conference today.

The new telecom tax, which is to be minute-based, will be implemented as of 1 July 2013. The financial transaction tax will go live next January, but contrary to what the cabinet said in the SzKP 2.0, it will not have an upper limit. There will be three corporate income tax brackets instead of the current two, as a 30% rate will be applied on energy service providers and public utility companies. Details may change during discussions with the industry players and the parliamentary debate, the minister added.

The decisions have been made

Economy Minister György Matolcsy reminded that the crisis taxes - levies on profitable sectors, such as energy, retail and telecom - and the bank tax had been implemented only temporarily in 2010. These will be now replaced by the new taxes.

The bank tax will be halved as of next year and will be phased out by 2014. Should there be an EU-wide bank levy by then, Hungary will consider implementing it. The rest of the crisis taxes will be phased out as of 1 January 2013, the minister said.

Further hikes at income type taxes are not expected, he added. "We have reached the level from where taxes can only drop," Matolcsy said.

Based on this remark we can say the cabinet sticks to the flat-rate personal income tax system and is not ready to change it in any way (by raising the single rate or making it more progressive.Matolcsy emphasised that the cabinet will keep the budget deficit stably below 3% of GDP in the coming decades.

Economy Minister György Matolcsy speaks about the details of the planned tax changes that were first revealed in the Széll Kálmán Plan 2.0 at a press conference in Parliament on 9 May 2012.

New taxes

There were 58 taxes in Hungary in 2010, ten of which were removed by the current government after it came to power. During the “revolutionary rush" at the end of last year, however, the total number of taxes grew back to 54, Matolcsy said. This time six will be eliminated and three new will be added, so as of 2013 Hungary will have 51 types of taxes.

The three new taxes are the telecom tax, the financial transaction tax and a unified levy for insurance companies, Matolcsy said.

Discussions will continue about creating a third rate in the corporate tax system, Matolcsy said. A third 30% rate will be added to the existing 10% and 19% rates and it will be applied on energy providers and public utility companies, he added. “So we will implement a third rate for the energy sector and public utility companies."

Hungary's planned 30% tax rate on energy and utility companies will include the normal 19% corporate tax and a 11% "Robin Hood" tax levied on the sector's companies, an Economy Ministry official explained.

"19% is the corporate tax rate and 11% is the Robin Hood tax, which makes up the 30%," Reuters cited Deputy State Secretary Ádám Balog as telling reporters.

The Robin Hood tax was launched years ago, but its rate has been increased now, from 8%.

About the telecom tax

The minister has confirmed the press reports about the telecom tax were accurate.

The new levy will be paid by the telecom companies, i.e. the subject of the tax are the companies, Matolcsy stressed. The levy will not be charged up to ten minutes of telephone conversation and it will be capped at HUF 700 per month for retail users and at HUF 2,500 for businesses, he confirmed previously leaked information.

The new tax will be implemented on 1 July, while there have been reports that it could be delayed until the end of August. The government hopes to collect HUF 30 bn from the tax this year and HUF 50-60 bn in f 2013. The official target has been HUF 52 bn annual from 2013 onward.

Matolcsy said that as a result of the new tax about a quarter of the telephone users will talk less than ten minutes per month (especially grannies and undergraduates). When asked who will pay the tax above the HUF 700 per month cap (for private users), the minister responded that it will need to be “swallowed" by someone, probably hinting at the service providers. Explaining this further government spokesman Giró-Szász noted that “the new tax will burden the average user, or rather the service provider by HUF 300."

There is ample manoeuvring room to discuss the details, he responded to another question.

This means the cabinet shrugged off the telecom service providers’ concept and the proposal by the mobile carriers that instead of the originally planned minute- and SMS/MMS-based tax the levy should be imposed per subscriber.

Telecom industry experts told Portfolio.hu that the companies would need at least six months to make their IT systems ready to manage the new tax. This means that for about four months the telcos will be unable to pass the extra costs onto their customers. Considering the official revenue target of HUF 30 bn this would create HUF 5 bn tax revenue for state coffers a month, which means the telecom sector will have to swallow a HUF 20 bn bitter pill. The share of Magyar Telekom alone would be about 40-50% of this.

The revenue target of the cabinet is HUF 50-60 bn in 2013 and it expects the service providers to lower their tariffs, i.e. swallow a big part of the tax. The cabinet will discuss the details with the telecom companies. 2. About the financial transaction tax

Matolcsy labelled the new levy to be implemented next year as a tax that “brought on a breakthrough". Everyone suggested it should be implemented on the broadest possible base with the lowest possible rate, that is why the rate was set to 0.1%, he explained.

The key question is how the new tax will affect Hungarian families, he went on. For instance, if someone transfers 100,000 forints from his bank account than it will cost the bank 100 forints, he said, practically saying it will be the financial institutions and not the customers who will have to shoulder this new levy.

Matolcsy noted that of the HUF 600,000 billion total financial transactions the new tax will affect HUF 130,000 bn worth of deals, hence the cabinet’s target to collect HUF 130 bn from the new tax at a 0.1% rate.

The financial institutions will be the subject of the transaction tax, but some transactions will be exempt, e.g. those of the Treasury and the central bank (NBH). Transfers made between the different accounts of the same private individual will not be charged either.

At the proposal of the Hungarian Chamber of Commerce and Industry, corporates will be obliged to use bank transfer between financial institutions if they want to move funds in excess of HUF 5 million. There was another proposal to set this limit to HUF 1 million, but the cabinet rejected that, he added. It was also considered that this rule will be applicable on private individuals too, but the government has not approved that notion. Matolcsy said it was the Hungarian Banking Association that came up with this idea, but the Association denied it in an emailed statement later in the day.

When asked whether the subjects of the tax will not pass on the new burden to customers, Matolcsy responded that due to the cut-throat competition the banks and insurers will not be able to pass the bulk of the new taxes onto their clients.

What is certain at this point is that the crisis taxes will be eliminated and the new levies will be implemented. Other details may be subject to discussions later, Matolcsy added.

Answering another question he said later that contrary to the original idea of the government as written in the SzKP 2.0 there will be no upper limit in this case. Every cap would be distorting, Matolcsy explained.

It was not clear even in the SzKP 2.0 what size of revenues the cabinet expects the financial transaction tax will generate, but the picture has jut got more blurred in this sense. Erasing the cap on the tax indicates that revenues could be higher than indicated in the programme, but it could also boost tax evasion (finding ways to go around transfers between financial institutions), which would lead to smaller-than-planned revenues. The government is apparently prepared to fend off these kind of negative impacts that is why it is making compulsory to transfer funds over HUF 5 million between financial institutions.About the insurance tax

With regard to the unified tax for insurance companies Matolcsy noted that the new levy will replace three old ones, the so-called “accident tax", the crisis tax and the fire protection contribution. The new tax is to bring state coffers HUF 15 bn more than the other three would have, he added.

Who’s going to pay the new taxes?

When asked whether the subjects of the tax will not pass on the new burden to clients, Matolcsy responded that due to the cut-throat competition the banks and insurers will not be able to pass the bulk of the new taxes onto their clients. They will try, but the same thing will happen as in the case of the accident tax and the bank tax, he explained.

What is certain at this point is that the crisis taxes will be eliminated and the new levies will be implemented. Other details may be subject to discussions later, Matolcsy added.

Irrespectively of what the government is communicating it is not certain at all that the new taxes will need to be paid in full by the companies. At this point we assume that at a yet uncalculated proportion the burdens will be shared between the service providers, insurers, banks and households. A lot depends on what price/tariff competition the new taxes will spark and what will be the final framework of the specific levies.