Hungary Development Minister sheds light on crucial details about special taxes

Antal Rogán, the Minister in charge of the Prime Minister's Cabinet Office, said that the establishment of funds for the protection of low household utility bills and the defence force is necessary to ensure that the government's economic policy objectives are not threatened and that the army is ready to defend the country's territorial integrity in case of a problem. He pointed out that the two new funds to be set up in this year's budget and in the 2023 budget will technically function in a similar way to the existing pandemic fund.

He has also shed light on how foreign motorists will be banned from buying petrol in Hungary at a discount price.

Low utility bills for families 'sacred'

These funds need to have resources therefore the new taxes will be implemented within days, he said, adding that owing to the recently imposed state of danger the regulation does not need parliamentary approval, either. Once the state of danger is lifted, then MPs will have to vote on it. (The ruling Fidesz-KNDP coalition have legislative majority, so we should not have any doubt that the relevant bills would have been voted into law in any case.)

He went on listing the government's economic policy goals that must be protected: full employment, pensioners ("no price is too high"), family benefits, including the CSOK. In this context, he noted that it is not excluded that there will be changes in the structure of subsidies, which can be reconsidered, but that there will be no change in the total amount.

The fourth objective is to maintain the reduction in overheads. He added that it is a later decision of the government whether companies and state-owned companies will remain in this group. But he made it clear that

the current system of overhead reductions for families will be fully maintained.

He added, however, that in the short term the government does not plan any changes in the universal service sector (which is covered by the cuts).

Later, in response to a question from Portfolio, Minister of Economic Development Márton Nagy said that this year the reduction of overheads could cost HUF 400-500 billion in the universal service sector (the difference between the market price and the reduced price), but the government is putting HUF 700 billion in the utility bills protection fund, meaning that the difference between the two (HUF 200-300 billion) is compensation for the higher energy bills of the public sector.

He noted that even if there were no available funding for this in the utility bills protection fund, the extra expenditure would still be on the state budget side because the institutions would submit the higher energy bill.

"The new information about the utility bills protection fund is that it not only protects the consumption of the population, but also protects the consumption of the public sector, compensating these institutions," he said, summing up the essence of the fund's operation.

State cutting its own costs too

Márton Nagy also considered it important to note that the state will reduce expenditure in 2022 and 2023 in its operations and investments (opex and capex costs will be lowered simultaneously).

In this context, Antal Rogán pointed out that investments due in 2022 and 2023 that have not yet started will be put off to 2024 and 2025. Construction Minister János Lázár supports this, he noted.

"We are examining all expenditures in the budget, and the ministries must contribute, through their operations, to maintaining low overheads", Antal Rogán said. Later, Márton Nagy said that the ministries' annual expenditures are around HUF 8,000 billion, and if 5-10% can be saved here, it would be a HUF 400-800 billion improvement in the budget.

On investment, Márton Nagy pointed out that the Hungarian investment rate is 27%, of which the public sector is responsible for 5 percentage points. Private sector investment is not expected to change, and state incentives and programmes will remain in place, so support for foreign working capital inflows will not change.

In response to our question, the minister also said that there are strategic investments that are also economically valuable, which is why they need to look at them one by one.

Márton Nagy also said that this year's extra profit tax revenue of HUF 800 billion could rise further next year, as the tax base will also increase due to inflation and economic growth. He clarified the impact of the HUF 1,100-1,200 billion in spending cuts expected this year (postponement of investments, ministry spending cuts) on the 2023 budget.

He gave an example: if the amount budgeted for the first year of an investment is not spent, but is delayed to the second year, and the higher amount in the second year according to the original schedule is also delayed by one year, the budget situation will improve this year and next year compared to the current situation. Antal Rogán added that the impact of the investments postponed this year will be greater next year.

A message to investors

Rogán has also stressed that even with the changing overhead prices, the government expects to maintain its deficit target of 4.9% of GDP this year, and to reduce it to 3.5% next year.

We will keep the deficit and [public] debt under control, which is the government's stated aim,

he underlined.

In this context, Márton Nagy also said that the government could have surrendered the deficit target, citing the war and the surge in energy prices and inflation, but it did not.

He stressed that this package is not a budget stabilisation package, and that 60% of the measures are expenditure measures and 40% are tax measures.

Asked if the predominance of the expenditure side was due to the fact that investors mostly perceive the package as a market-friendly move, Márton Nagy replied that if this was a classic, across-the-board tax increase, the rule of thumb, which is also in the minds of investors, would be true.

But in his view, this is not a general tax hike, but the government is targeting the extra profits of certain sectors. He stressed that such a tax increase would minimise the impact on inflation (upward) and demand (downward).

Will the special tax be market-friendly?

Nagy said the tax will burden sectors that "should not have this profit", adding that in many cases, these companies "do not really want to make this profit", and achieve them "only as a result of the extraordinary situation." He stressed that the government is expropriating only a part of these extra profits that stem from "other than normal operation".

These are "windfall gains" in the eight sectors to be affected, said the Economic Development Minister. Given that these extra profits have never been in their business plans, the tax cannot possibly upset any business plan for the corporations do not need to adjust to the situation. By this he implied that if they pass the new burden on, it is in fact their extra profits that the companies concerned are clinging on to.

In response to the market reactions seen yesterday and today, Márton Nagy said that market participants are not waiting for the details and the actual content of the measures. Investors are not interested in what makes the extra profit tax different from the special taxes, he added, predicting that once this becomes clear for them, markets will calm down.

In response to our question, Nagy explained that they are not concerned about a response by credit rating agencies because it is the right set of measures.

New details on the "extra profit tax"

Márton Nagy also pointed out that these new taxes will be collected by the state on top of the special taxes and will be retroactive for the whole of this year, despite the fact that it is now May. The government has dealt with this before.

The bank tax currently amounts to HUF 64 billion, paid by banks based on their balance sheet total. On top of this, a new tax of HUF 250 billion will be paid by credit institutions based on their interest income.

Márton Nagy also explained how banks make extra profit. Rising interest rates benefit banks because interest rates on the asset side are repriced, while on the liability side, such as demand deposits, interest rates are sticky and do not move, so the difference between the two interest rates, the interest margin, widens, which increases banks' interest income.

He also pointed out that Hungarian banks are now paying an average interest rate of 0.3% on retail deposits, which now amount to nearly HUF 13 billion. Meanwhile, on the asset side of banks' balance sheets, the benchmark rate is 6.45%, close to 7%, while banks are lending at market rates (personal loans, corporate loans) which are even higher. But the risk-free is the 7%, let’s accept that, said Nagy.

On this basis, we can calculate that the interest margin is 6.7% (7-0.3%), which if we multiply by the 13,000 billion forints, we have an interest gain of HUF 700 billion, that is the profit, but we should not consider this extra profit, because this is what the bank operates on. Therefore, you have to find the justified part of the profit, and what is above that is extra profit.

To determine the justified interest margin, the ministry used the average interest margin of the Hungarian banking sector over the last 22 years, which was 2.5%. On this basis, if we subtract the 2.5% resulting from the average of 22 years from the current interest margin of 6.7%, we could even arrive at the extra margin. If we simplify the calculation saying the excess margin is 4% (6.7%-2.5%) and multiply it by the HUF 13,000 billion in deposits, we get HUF 520 billion.

This, Nagy stressed, is still not the extra profit, because it is also worth looking at how much the margin is in a similarly high inflation environment. Such was the period between 2003 and 2010, when the average interest margin was 3.5%.

If we accept that this is a reasonable margin, then the difference between an interest margin of 6.7% and 3.5% is around 3%. This adds up to HUF 400 billion, and that is very close to extra profit the government was looking for. Based on this, the government estimates an extra profit of HUF 350 billion forints, but it is still taking away "only two thirds of it", the minister explained, who also detailed how the government is taking it away and by what technique.

He recalled that the current special tax is proportional to the balance sheet total, but this is not good for determining the extra profit, because the extra profit is generated on the interest income. The government has taken into account the net interest income and the amount of fees and commission income of each bank and will distribute the HUF 250 billion extra tax among the banking sector on this basis.

According to the government's calculations, the net interest income of the banking sector was HUF 2,300 billion in 2021, and this is the source of the HUF 250 billion extra profit tax, which represents net interest income taxed at a rate of 11-12%.

He also talked about how much of the HUF 250 billion is paid by which players and mentioned that those with more retail deposits pay more proportionally than if the extra burden was distributed according to the balance sheet total. On this basis, the largest Hungarian bank (OTP) is to bear 33% of the total HUF 250 billion extra bank profit tax, while Márton Nagy said it pays 25% of the extra bank tax in proportion to its balance sheet total.

The new burden for OTP could therefore amount to HUF 82.5 billion (one third of HUF 250 billion) in the light of the methodology explained by the Minister. Before Márton Nagy's explanation, we estimated that OTP could pay HUF 86 billion in new extra tax. In other words, our estimate is not far from the government's expectations.

The new tax will be levied on the basis of 2021 data, and if banks adapt, the tax rate could be adjusted, he said. Asked for clarification, Márton Nagy said that credit institutions, i.e. banks, will be affected by the new special tax.

The government plans to raise an additional HUF 50 billion from the amendment of the financial transaction tax, but postal and treasury transactions will not be affected. The FTT will be extended to securities transactions and the maximum fee will be raised from HUF 6,000 to 10,000. The minister highlighted that the current rate of 0.3% will apply to all transactions from a securities account, even between securities accounts, unless the securities account is held with the State Treasury and the securities held with the Post Office will not be debited, either.

The government WOULD LIKE TO make sure ' REVOLUT AND TRANSFERWISE cannot dodge THIS TAX, he added.

In the case of insurance tax, the tax base will not change, but the government will increase the rate, so that HUF 170 billion will be collected from this sector instead of HUF 120 billion.

In the energy sector, two sectors really benefit extra from the current situation: extractors and energy producers. In extraction, the picture is like this:

• In the extraction of oil and gas, the companies concerned are subject to the mining royalty, and here the government is tripling the hydrocarbon mining royalty, so instead of HUF 65 billion, the companies concerned will pay HUF 180 billion, which means an extra HUF 120 billion. He noted that the way the mining fee is calculated will also change.
• In the case of refining, Mol makes a margin of $35 on the Brent-Ural differential. The Százhalombatta refinery has an output capacity of 7 million tonnes of oil, and the government will be taking away 25%. As long as there is this spread between the price of the two types of oil, the government will keep taking it away. This will give the state an additional revenue of HUF 120-130 billion. In response to a question, the minister also said that the way the mining fee is calculated will also change, as there will be a fixed part to be paid depending on the volume of production.
• In addition, bioethanol producers, biofuel producers and starch producers will be subject to the higher tax, which the government expects to generate an extra HUF 50 billion. Márton Nagy also mentioned specific company names here, Hungrana and Pannonia Bio.

All in all, he noted that of the additional burden on the energy sector, HUF 250 billion will be borne by Mol as a result of the special taxes described above.

As regards the retail sector, the government will adjust the rates in the different brackets, as announced on Thursday:

• Above HUF 100 billion in revenue, the current rate of 2.7% will be upped to 4.1%,
• Between revenues of HUF 30-100 billion the 0.4% tax is rising to 1%,
• For revenues between HUF 500 million and HUF 30 billion, the tax rate remains unchanged

Last year, the sector paid HUF 80 billion in special tax, this year this could rise to HUF 90 billion due to the increase in turnover, and on top of that the hike to the tax rates will generate HUF 60 billion in additional revenue for the state. The special tax will be based on the current year's turnover, i.e. 2022.

The special tax on the telecoms sector will be a turnover type tax, with a new tax base to be considered by the government. The details of this are still being worked out, but it is expected to be levied on roaming, internet and cable TV traffic, with the turnover of all these being added together across the sector, and the government will take HUF 35 billion from this.

The tax on airlines is also known as a departure fee or check-in fee, and Márton Nagy said that several countries in Europe have one, for example, Germany, Sweden, the Netherlands, France and Norway. In all cases this tax is charged to the airline, all airlines pay the fee per departing passenger, some depending on the length of the journey, so it is also considered a green tax in some places. The Hungarian government imposes the tax on ground handling (Celebi in this case) and they collect it from the airlines. The airlines can pass the charge on. It is €10 per passenger, but it's mostly foreign passengers who, once they arrive here, take off and pay the fee. As well as calling it an extra profit tax, the minister also called it a creative tax.

The tax payable by distributors of pharmaceutical products affects operators other than pharmacies. These pharmaceutical companies do not have production (e.g. Sanofi, Bayer, Glaxo Smithkline) and the two wholesalers that will also be subject to the tax are Hungaropharma and Phoenix. The tax will be based on the refundable social security contributions, on which the operators concerned now pay 20%, and the rate will be upped to 24%.

As regards the advertising tax, Márton Nagy reminded that it was never really abolished, it was just suspended by the government following a decision of the European Union and this suspension will end at the end of 2022, so this tax will be reintroduced. His reasoning was that it can be seen as an extra-profit tax in the current environment because companies are advertising more on media platforms, and at the same time there is more use of digital devices, people are reading more and clicking more on content.

The net turnover is the tax base for the part of the tax exceeding HUF 2.5 billion. This year, the current financial year, will be the basis for this year's tax.

On top of this, the government will collect an extra HUF 100 billion through other tax hikes:

• From the increase in company car tax, which now costs an average of HUF 10,000 to 12,000 a month, but has been unchanged for the last ten years.
• The government is also increasing the simplified employment tax, and mentioned seasonal agricultural workers who could be affected.
• An increase in excise duty on tobacco and alcohol.
• An increase in the public health product tax.

Cover photo: Minister of Economic Development Márton Nagy at the Government Info press conference in the press room of the Prime Minister's Office in Garibaldi Street, 26 May 2022. Source: MTI/Zoltán Balogh