Special tax on financial companies, financial transaction duty, telecommunication tax, public utilities’ tax, energy providers’ tax, insurance tax, accident tax, public health product tax, advertising tax – these are just some of the special taxes introduced in the past few years. It’s difficult even to remember the names of the many new taxes. We could rightly ask how important these taxes are in terms of the revenue they provide for the Hungarian budget, and whether their impact distorting the profitability of a given industry does not cause a greater competitive disadvantage for Hungary than the beneficial effect of the resultant revenues in balancing the budget.
As shown in the table above, the four largest items (corporate tax, VAT, excise tax and personal income tax) account for HUF 7,104 billion (approx. EUR 23 billion) or almost 87% of total tax receipts. By contrast, the six largest special sector taxes (special tax on financial organisations, income tax on energy providers, telecommunication tax, public utilities’ tax, insurance tax, gaming tax) generate revenue of only HUF 291 billion (approx. EUR 1 billion), or 3.6% of tax receipts for the budget.
Of course, I am not suggesting this as a tax amendment proposal, but looking at the personal income tax revenue figure of HUF 1,793 billion (approx. EUR 6 billion) we can conclude that raising the rate of personal income tax from 15% to 18% would mean all the special sector taxes could be abolished. The same applies for a one percentage point increase in the VAT rate, were it not for the fact that Hungary already leads the way in Europe in terms of its VAT rate. These examples simply prove that the sector special taxes are not significant from the perspective of budget revenues.
What is the damage caused by special taxes in the industries concerned?
If we add the special tax to the corporate tax paid by companies operating in sectors that are subject to a special tax, then in most cases they face an effective tax burden in excess of 50%, but in some cases it can be more than 80%. Alongside a tax burden of this size there is almost no point in conducting any business activity at all, while the only thing really keeping these investors in Hungary is that under such taxation conditions they would only recover a fraction of their invested capital were they to sell up and leave. And waiting for the appearance of new market players in industries subject to a special tax is most certainly a fruitless endeavour.
Unfortunately, the negative impact of special taxes is significant from another perspective as well: they adversely affect other taxes too.
Let us take the case of telecommunication tax, generating HUF 54 billion (approx. EUR 173 million) in revenue for the budget each year:
Our assumption is that the telecommunication tax creates an extra expense of around HUF 10 billion (approx. EUR 32 million) for one of the telecommunication companies operating in Hungary. The company does not charge this tax to its customers, for the simple reason that it would no longer be competitive on the market.
Since the owners do not want to inject any additional capital, the company has to fund this extra expense from its own cash flow. For this reason, the company decides to reduce its budget for the planned transmission line modernisation by HUF 7 billion (approx. EUR 23 million). It saves HUF 900 million (approx. EUR 3 million) in corporate tax (9%), and HUF 2.1 billion (approx. EUR 7 million) in other ways.
The supplier of this company that would have built these transmission lines hence expects a HUF 7 billion approx. EUR 23 million) reduction in sales revenues. They would have earned a profit of 12.5% on the business, paying 9% corporate tax (approx. HUF 80 million – EUR 260,000) and roughly 10% local business tax (HUF 90 million approx. EUR 290,000). Furthermore, this company does not employ the people who would have carried out the work. These employees would have generated a staff cost of HUF 2 billion (approx. EUR 6 million) for the company each year: almost half of this cost (HUF 900 million approx. EUR 3 million) is personal income tax, employee contributions and employer social security contributions, which would have boosted budget revenues in Hungary.
The cable manufacturer that would have supplied the supplier company with cables worth HUF 4 billion (approx. EUR 13 million) also suffers a reduction in sales revenue.
I will spare you the “joy” of continuing down this chain reaction. While it is likely that the missed revenue from taxes and other levies will be lower than the HUF 10 billion (approx. EUR 32 million) earned from the telecommunications tax, the non-payment of these taxes and levies clearly means that the budget will only have a fraction of the much hoped-for extra income at its disposal. Moreover, we do not know exactly where these revenues are missing. All we see is that the economic growth could be faster.
Retail is currently not subject to a special tax because its reintroduction was dropped a few weeks ago by the ministry, but the introduction of special taxes or fears that this may happen is not conducive to positive investor sentiment. Potential investors may well opt to invest in another region because of the prevailing uncertainty.
