Hungary thirsty for multinational blood - Here's how it hunts the "beasts"

The lawmaking factory has been in full swing for some time now. Not only had we been flooded by the usual bills (budget, tax package, laws creating the foundation of the budget), but also proposals by the government, MPs, and the Economy Minister himself that can turn whole sectors upside down.

These planned measures make it crystal clear that the government wants to

• overhaul tobacco wholesaling and
• food retailing

without any prior consultation with the affected industries. And there is one point where these two lines converge.

Retail sector battered

1. Brutal burden aimed at multinationals

Of the law amendments affecting the retail sector the focus was on the major hike to the supervision fee. This attention was justified for instead of its current uniform level of 0.1% of sales turnover, the fee in the future would be a progressive percentage of the previous year’s net turnover base for businesses selling everyday consumer items. This will hugely burden a few specific retailers as they will bear the bulk of the estimated HUF 30 bn “levy".

2. A measure against... everyone, really

It was kind of overlooked that the method of calculating the profit minimum in the case of corporate tax will also be different as of next year, according to the tax package. According to prevailing regulations, if the pre-tax profit of the company or its tax base, whichever is higher, fails to reach the income (profit) minimum, the taxpayer has the option to either: (i) make a statement on the cost structure in its tax return, or; (ii) apply the income minimum as the tax base and pay the tax on that. The income minimum is 2 percent of the modified total income. The modified total income must be calculated as follows: Total income (-) acquisition cost of purchased goods (-) value of intermediary services (+/-) modifying items. Currently, the corporate income tax is 10% of the positive tax base up to HUF 500 million, and 19% of the remaining portion of the tax base.

According to plans, however, neither the cost of goods nor the value of intermediary services may be deducted when the minimum profit is calculated. This means the corporate tax will be payable on 2% of total revenues, Sándor Hegedüs, partner at RSM DTM, explained to Portfolio. The head of the tax consulting at the company pointed out that the modification of how the minimum profit is calculated could be detrimental for the entire retail sector, but especially for those wholesalers that operate with low margins. Hegedüs also underlined that the companies are not obliged to apply the income minimum as the tax base, as they also have the option to make a statement on the cost structure in their tax return. He added, though, that the 2013 tax returns revealed that 130,000 businesses opted for the former solution and hardly more than 3,000 companies chose the latter option, primarily to avoid the risk of inspections by the tax authority (NAV), which appears to be the general consequence of this choice.

The government’s measure may be interpreted as yet another effort by the cabinet to combat tax fraudsters and VAT avoiders, as they apply minimal margins in the so-called supply chain transactions and in a bid to avoid a tax audit they rather opt to pay the tax, which in turn makes abuses costlier.

The victims of the battle

The above change to the calculation of the minimum profit will weigh down not only on wholesalers, including the seven largest multinational retailers, but also smaller companies. Just think about a petrol station, a pharmacy, a small convenience store or a travel agent. These all rely solely on their margin. That is their only source to pay wages, contributions, other taxes and pocket some profit - if anything is left that is. The government’s natural response to this may be that they could still opt for the statement. If they need a meticulous tax audit by the NAV, it might add.

The minimum profit rule is a serious tax policy dilemma in itself, as it raises several questions. Firstly, why the impression that the government assumes that businesses are a priori tax fraudsters and evaders? Secondly, how far can the government go in its fierce battle against tax fraudsters? Is it really necessary to go all out in this combat because the whole sector is “infected" throughout?

3. Not a new levy but should not be shrugged off

The calculation of the local business tax base changed as of 2013. This was virtually the successor of a progressive tax on the retail sector that was in effect for three years. Taxpayers were allowed to deduct from the local business tax base part of the cost of goods sold and part of the value of intermediary services as calculated based on brackets determined in relation to their annual sales revenues. In practice, this means that for taxpayers whose sales revenues exceed HUF 500 million, only a specific part of the above-mentioned tax base decreasing items are deductible from the local business tax base if the total amount of the cost of goods sold and the value of intermediary services exceeds 70% of the taxpayer’s sales revenues. Companies whose annual sales revenues do not reach HUF 500 million are allowed to deduct 100% of the above-mentioned tax base decreasing items from their sales revenues when determining their local business tax base in the future too.
It was clear already then that mostly the largest retail companies will be affected negatively by this measure.

Wait, there’s more!

On top of the above three measures local multinationals are expected to be hit by a proposal submitted to Parliament by the Christian Democratic People’s Party (KDNP), the minor ally of the ruling Fidesz party, that seeks to ban stores with a shopping area of over 400 square metres from opening on Sundays and holidays.

Economy Minister Mihály Varga has recently submitted another proposal that - if passed - will have retailers shut down if they report losses in two consecutive years and if their net revenues are over HUF 50 bn.

And here’s the exception

There are companies that are exempt from the rule of the progressive reduction of the local business tax, even presently. As an exception to the general rule, taxpayers are allowed to fully deduct from the net sales revenues the total amount of the cost of goods sold and the value of intermediated services related to export sales. Businesses also fall into this category if they sell publically subsidised drugs, conduct clearing house services or distribute natural gas or electricity.

The group of exempted entities will be expanded as of 1 May 2015. According to a proposal submitted by the National Development Minister about two weeks ago on the establishment of a national tobacco supplier also affects how the base for the local business tax is determined, as follows:

The new tobacco product supplier (middleman between the producers/wholesalers and retailers) will be able to reduce the sum of its net revenue with the total value of cost of goods sold, i.e. the tobacco products purchased for resale.This means that the company that will supply the national tobacco shops will not have to pay a sizeable local business tax, although it is still unclear whether this will be a state-owned company or one granted a concession by the state. This is where the levying of retail food chains and the new selective tobacco shop law converge.On the whole, we can say that the legislative changes and planned measures currently in the pipeline for the retail sector will deal a serious blow to the largest multinational players. In the meantime, these will be also detrimental to smaller companies that make a living on intermediary services and commercial activities. The big winners are not to be small companies, but the new tobacco product supplier.

Who will really win then?

According to the bill dubbed ‘Tobacco Shop Law 2.0’, the cabinet would set up a separate supplier which would be the only company to which tobacco manufacturers would be able to directly sell and from which retailers could buy tobacco products. It is not yet clear if this will be a state-owned company or one with a concession by the state. Opposition parties raised during the debate on the bill in Parliament that the bill is designed for one specific privately-owned company. A state secretary of the government, however, said it is too early to say which company could become this intermediary unit.

• Tags:
• tesco,
• spar,
• economy,
• tax,
• retail chain,
• auchan,
• multinational