(Adds details) The European Commission has initiated infringement proceedings against Hungary over the new telephone tax imposed in the summer of 2012, Bruxinfo repoted on Thursday. The launch of the proceedings is a warning sign for Hungary’s budget, but the cabinet should not have concerns about the short-term impacts, because the procedure could be a lengthy one, dragging out for years.
First stage: Letter of Formal Notice
The European Commission has on Thursday sent a Letter of Formal Notice to Hungarian authorities over the telephone tax, by which it has formally launched infringement proceedings against the country over the new tax levied on 1 July 2012.
Commission experts told BruxInfo that the concerns of Brussels in this respect are no different from those expressed in relation to the temporary tax imposed on the telecom sector in the autumn of 2010. That case is already at the European Court of Justice, i.e. in the third and final stage of the infringement procedure launched against Hungary at the end of 2010.
According to the EU’s Authorisation Directive governments of the member states have the right to impose so-called administrative charges on telecom service providers, but the proceeds may be spent on nothing else but on the infrastructure and network, i.e. the operation of the sector.
The EC, however, is convinced that the collected levy - just like in the case of the previous telecom sector tax - is spent not on the development of the sector but on other purposes, which is not permitted by the Authorisation Directive. Sources talking to the portal said this means the government imposed the levy to improve the budget balance.
The government was given two months to respond to the Commission’s remarks or to modify the law introducing the telephone tax to be in harmony with EU rules.
EC experts told BruxInfó “they are convinced that Hungarian authorities made a mistake because the telephone tax burdens directly the telecommunications sector." The did not question the cabinet’s right to levy taxes but stressed that “this is not a general tax, in this case the special regulations of the sector must be observed,"
The Economy Ministry said the telephone tax is fully in line with EU law, because it is not a charge, but a levy and so it does not violate the Authorisation Directive.
If Hungary’s formal response is not accepted or it fails to comply with the EC’s request, the EU executive will send Budapest a Reasoned Opinion, which is the next step in the infringement proceedings. The case will be moved to the third and final stage, the ECJ, if the response to the Reasoned Opinion is found unsatisfactory.
What to expect?
In order to have an idea about the length of such proceedings we should take a look at Hungary’s still ongoing previous telecom tax case.
The EC said in October 2010 that Hungary's crisis tax on telecom sector may infringe EU rules.
Under prevailing EU rules, a country may impose a special tax on the telecommunications sector only with the objective of using the proceeds on expenses arising from regulatory changes implemented in the segment, said Neelie Kroes, Vice-President of the European Union responsible for the bloc’s Digital Agenda.
In March 2011, the Commission C sent a request for information to Hungary over the new special tax, saying it had “concerns that this tax is incompatible with EU telecoms rules, which require specific charges on telecoms operators to be directly related to covering the costs of regulating the telecoms sector."
A year later, in March 2012, the EU executive referred Hungary to the EU's Court of Justice, saying it “considers this tax to be illegal, because EU telecoms rules allow sector-specific charges only to cover the specific costs of regulating the sector, and not to generate additional revenue for the central budget.
The case reached its third and final stage in October 2012 when the EC actually took its case against Hungary to the ECJ.
Hungary’s Fiscal Responsibility Institute (KFIB) has said in its latest analysis that the telecom tax case that is currently before the ECJ poses risks to the budget, as the state would need to repay some HUF 200 billion (including interest).
What is this tax?
Under pressure to keep the budget deficit below 3.0% of gross domestic product and finally get out of the EU’s Excessive Deficit Procedure (EDP), Hungary’s government imposed a new levy on the telecom sector as of 1 July 2012 for a temporary but unspecified period. It targeted HUF 25-30 billion revenues for last year and HUF 44 bn for 2013.
The tax is payable by the telcos based on their fixed-line and mobile voice services and SMS/MMS traffic. The rate of the tax is HUF 2 per minute for voice services and HUF 2 per SMS and MMS.
The tax was capped for retail customers (per subscription) at HUF 400 a month and the ceiling for other calling numbers was set to HUF 1,400 per month for 2012. The respective caps in 2013 are HUF 700 and HUF 2,500 (for companies).
The telcos - Vodafone, Telenor and Magyar Telekom - responded immediately by raising their tariffs, partly passing on their increased burdens to their subscribers.
As the Economy Ministry underlined in its budget report in October, the first time the telecom companies paid the new levy was in September (on August) and these payments boosted the state’s consumption tax revenues.
According to detailed figures, a total of HUF 12 bn telephone tax were paid into state coffers in the last four months of 2012.
Over the past few years, Magyar Telekom faced all sorts of extra burdens. It is now subject to the special tax on the telecom sector, the telephone tax and the levy on utility infrastructure. It has been paying the sectoral tax since 2010. Although this gets phased out in 2013 it will be “replaced" by the utility infrastructure tax. Since last year, the company’s profit is burdened also by the telephone tax. In 2012, MTel paid slightly more than HUF 8 bn in the form of this levy and this year it is expected to pay nearly HUF 20 bn. A part of this tax, however, will be passed on to customers.
MTel’s share price did not show any meaningful reaction to the announcement and is up 0.5% presently.
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