Hungary to raise taxes to plug gaping hole in budget - Here are the details!

Read more about the "defence contribution" announced on Monday:

The so-called "anti-war action plan" concerns the extra profit tax and the financial transaction tax paid by banks.

Changes to the windfall profit tax

According to the government's decision,

banks can only reduce their liability to pay the extra profit tax in 2024 if they increase their total stock of government securities by buying government securities maturing after 2027.

"Therefore, the government's expectation is that instead of restructuring the government security portfolios, the sector should increase its total government security holdings by buying long-term government bonds," the Economy Ministry said in a statement.

In essence, this is what Máté Lóga, the ministry's state secretary, predicted in an article published last week by Portfolio.

"The government has also stipulated that in order to benefit from the 50% tax relief, the nominal value of the total stock of government securities must also increase, it is not enough to increase the nominal value of long-term government bonds, i.e. those maturing after 2027," the ministry said.

"As a result, for the year 2024, the tax reduction will be calculated taking into account both the total stock and the increase in the stock of government securities maturing after 2027.

"The period under review will be the daily average stock of government securities seen in the first 11 months of 2024 compared to the first 4 months of the previous year, i.e. 2023.

"In 2024, the extra profit tax is based on the adjusted pre-tax profit of 2022. In 2024, the total extra profit tax of the banking sector is planned to be HUF 260 billion, which can be reduced to HUF 130 billion with the 50% tax relief if the government security purchases comply with the requirements", the ministry detailed.

The Ministry of National Economy continues, "the government has decided that the bank extra profit tax will remain in force in 2025, with no reduction in its nominal value, and that the tax will be based on the adjusted pre-tax profit in 2023. Next year, for the increase in the stock of government securities, the period under review will be the first 11 months of 2025 compared to the first 11 months of 2024".

Changes to the transaction tax

With regard to the financial transaction tax (FTT), the government decided the following for the items currently in force:

• in general cases (including securities transactions), the levy will increase to 0.45% (from 0.3%), but will not exceed HUF 20,000 per payment transaction (up from HUF 10,000);
• the financial transaction tax on cash withdrawals will rise to 0.9% (from 0.6%).

The new regulation will come into force on 1 August 2024, and the government expects the measure to generate HUF 85 billion in additional revenue in 2024,

and HUF 200 billion in 2025 for the whole year.

In other words, the burden of the normal transaction tax will increase by one and a half times. And for larger transactions, we are talking about a doubling, as the upper limit will rise to HUF 20,000 from HUF 10,000 currently.

It is worth noting that the threshold to reach the HUF 10,000 limit was previously HUF 3.333 million, but now it will be 4.444 million for forint transactions and HUF 2.222 million for foreign exchange conversions.

The real surprise us the additional transaction duty

Compared to previous communications, the ministry's communication also provides important clarifying details on the transaction tax on conversion transactions.

In addition to the increase in the current financial transaction tax (FTT), an additional levy on transactions involving conversion will be introduced from 1 October, on top of the current FTT on the transactions concerned.

• Under the decision, if a transaction involves a conversion between different currencies (including foreign exchange swaps), the transaction will be subject to a higher transaction tax.
• The additional levy - in addition to the general transaction tax - is 0.45% per transaction and the HUF 20,000 limit also applies.

It is therefore our understanding that the new additional duty of 0.45% will be added to the current transaction duty of 0.3% (up to HUF 10,000) on currency exchange, increased to 0.45%. In other words, we are talking about a tax tripling in practice for currency conversion transactions.

"By way of derogation from the general rules, this additional levy also applies to transactions between accounts held by a domestic individual or corporate customer with the same payment service provider, to payment transactions made from accounts held with financial and investment firms, investment fund managers and investment funds other than credit institutions and central counterparties, but does not apply to credit card transactions," the statement reads.

Revenue from the additional transaction tax could reach HUF 7 billion in 2024 and HUF 30 billion in 2025

according to the ministry's statement.

The government has also taken separate decisions on the transaction tax, according to the ministry:

• In the future, the government will increase the duty-free limit for private transfers, postal payments and securities transactions by a factor of 2.5, from the current HUF 20,000 to HUF 50,000 per transaction.
• Credit card transactions are not subject to the additional transaction fee.
• There is a specific fee for bank cards, which is HUF 500 per year for contactless cards and HUF 800 for other cards. The government will not change the rate of the levy on credit card use, so it will remain very low.
• To prevent an increase in the financial burden, the government is introducing a freeze on fee increases for fees, charges and other payment obligations related to retail payment accounts. This means that until 31 December 2024, financial service providers will not be allowed to unilaterally increase charges on bank accounts for retail customers, either directly or indirectly. This prohibition applies to all fees related to a payment account, both for existing contracts and new contracts.

How large is the tax hike package?

If banks manage to use their improved liquidity situation to halve their extra profit tax burden, the government will not be able to collect an extra HUF 130 billion this year.

The increase in the transaction tax will bring HUF 85 billion to the state coffers, while the additional transaction tax will bring an extra HUF 7 billion in 2024, according to the ministry.

Based on the above,

in the base case, the tax increase on banks would generate an extra HUF 92 billion in revenue for the government (if banks are unable to halve their extra profit tax), and in the alternative scenario an extra HUF 222 billion.

This is a far cry from the HUF 400 billion balance improvement already announced on Monday, even if we include the additional payments from the energy sector.

It remains to be seen whether the government will include new measures in this year's HUF 400 billion package, or whether it will detail other announcements already made, as it has done in the case of the bank burden increases (no reduction in extra profit tax for multinationals, how the burden on the retail sector will change, what exactly the tax increase will do to the energy sector).

Since the publication of this article, we have looked at the expenditure cuts the related government decree contains. Here's what we have found:

Cover photo: MTI Photo/Róbert Hegedüs