As recent statements by Hungarian government officials suggested, changes will be made to the advertising tax. The head of the Prime Minister’s Office told state news agency MTI that he proposes a flat-rate system instead of the progressive one currently in place. János Lázár added that this will be one of the issues to be discussed at a faction meeting of the ruling Fidesz party on Wednesday. He did not specify the new rate, but mentioned Austria as an example several times and the rate there is 5%. The reason for the amendment is that the European Commission has serious concerns about the current levy and German media group Bertelsmann has also made several points to be considered.
European Commission makes it fail
Lázár said the cabinet has been constantly receiving formal and informal indications about “the Directorate-General for Competition of the European Commission having serious qualms about Hungary’s advertising tax."
In a letter sent the end of January the body specifically objected to the progressivity of the levy, arguing that it creates selective economic advantage for businesses with small advertising revenues and it also found fault with its rate, saying that it “has the capacity also objectively to cause economic disadvantages," Lázár added.
The cabinet has also received “recommendations" from the EU that if the owner of RTL Klub, the Luxembourg-based Bertelsmann Group wants to consult on the issue, it should be accepted otherwise “Hungary may risk to be condemned," the minister noted.
Bertelsmann Group did make a suggestion worth considering for the resolution of the issue, which makes note that the highest advertising tax in EU member states, which is five percent is in effect in Austria, Lázár said, confirming that the government has been in talks with Bertelsmann in Luxembourg and Budapest since November 2014 on how to settle this matter out of court or without a Commission procedure.
He said the cabinet had to choose between “a legal dispute with an uncertain outcome or a good agreement."
More will pay
In view of the above, Lázár will inform the MPs of the Fidesz-KDNP coalition at a caucus meeting in Mezőkövesd on Wednesday and propose a reduction of the advertising tax and a revision of the progressive system of the levy.
The minister said that according to the government’s estimates, this will not necessarily lead to a decrease in budget revenues from the levy because “although the tax will be lower, more [companies] will be subject to it." He estimates advertising tax revenues to come in between HUF 6 billion and HUF 10 billion.
Lázár said it was good news that the EU executive did not criticise the implementation of the advertising tax itself. He underlined that “in every economic battle we fight with the European Commission we basically fight for special taxes."
He noted that a potential deal with Bertelsmann Group can significantly increase investor confidence in Hungary.
Lázár said the dispute over the advertising tax should be settled over the next three months, but he added that he finds it inconceivable that advertising tax already paid will be reimbursed.
A modification has been in the air
In view of leaked information and remarks by the owner of RTL Klub, it was already in the air that the cabinet will make modifications to regulations on the advertising tax. It was also a known fact that the EC has serious concerns about the tax and Bertelsman lodged an official complaint at the EU executive about the levy. So in this respect, the proposed amendment is no surprise.
Hungary’s advertising market was HUF 175 bn in 2013. Global players, such as Google and Facebook, will not be subject to the levy so a flat 5% rate (as in Austria) would result in about HUF 9 bn annual revenues for the budget. Lázár mentioned a plan for HUF 6-10 bn revenues (for 2015 the cabinet penciled in HUF 6 bn). Exact plans, however, are not yet known. We may only speculate about the rate of the tax or where the (annual revenue) threshold would be under which a company will be exempt from the tax. In 2014, a total of HUF 3.3 bn worth of advertising tax were paid (on a cash flow basis), as the first payment was due only in August.
It is certain that if a flat rate system were introduced with a rate of around 4-5%, the biggest media companies will benefit the most. In the current progressive system, media companies with annual advertising revenues of over HUF 25 bn have an obligation to pay HUF 5.5 bn advertising tax annually. With a 4-5% rate they would have to pay no more than HUF 1.0-1.25 bn
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