MP's of governing party Fidesz submitted proposed changes to personal income tax, corporate tax and and also proposals that would levy extraordinary taxes on telecommunications companies, energy suppliers and retail chains to plug the country's deficit.
Business associations welcomed proposed changes about a flat-rate tax, but the reception by unions was tepid at best. Tax experts said it could result in a HUF 300-350 billion fall in budget revenue next year. The planned flat tax rate is likely to boost disposable incomes in Hungary but consumers will spend most of it on reducing FX debt exposure, starving the economy of much hoped-for extra demand, London-based emerging markets analysts said.
London is also sceptical about the extra tax measures on the telecom, energy and supermarket sectors, saying that to shore up public finances will help meet short-term fiscal targets but may significantly hurt growth and investments later. EU officials say crisis tax on telcos may even go against EU rules.
PERSONAL INCOME TAX PROPOSAL
The changes, to come into force from the start of 2011, would introduce a 16% flat-rate tax to be applied to all forms of personal income, including dividends and capital gains as well as wages. Currently, Hungarians pay a rate of 17% on personal income up to HUF 5 million and 32% on income over that. The amount of employer contributions added to the tax base would be halved in 2011 and eliminated in 2012. Family tax credits would be made available to those with one or more children. The state would also pay a HUF 10,000 subsidy per month on each child to families with one or two children. Families with more children would get more.
Business associations like the Hungarian Industrial Association, representative of small businesses IPOSZ, the Hungarian Chamber of Commerce and Industry and the association of entrepreneurs VOSZ all welcomed the planned measures. They said the flat-rate tax would improve employees' net income while making the distribution of tax burden more equitable and offers taxpayers a greater incentive to share the burden.
However, the National Confederation of Trade Unions and another association MOSZ said the flat-rate personal income tax would only benefit high-earners.
Tax experts added the flat-rate tax would reduce budget revenue of about HUF 300-350 billion next year. The changes will benefit middle and high-income Hungarians the most, those who earn more than HUF 4 million a year, experts say. A Hungarian who earns the average gross wage — HUF 198,000 a month, according to the latest data from the Central Statistics Office (KSH) — takes home about HUF 2,376,000 a year.
Commenting on the plans, analysts at BNP Paribas said over the weekend that the main beneficiaries of the personal income tax rate reduction are likely to be the more affluent households. However, they will not spend the bulk of additional income on consumer goods, as "the government seems to hope and which it probably sees as a major source for growth acceleration to 3.0% next year". This group of households is more exposed to mortgage loans, of which two thirds are in foreign currency, and the burden of which has significantly increased due to forint weakness in 2008-2010. Hence "we suspect that higher disposable income will be used instead to repay outstanding debt ... We thus believe that the difference between real disposable income and consumption growth will remain wide".
FLAT CORPORATE TAXES
Proposed changes submitted to Parliament by MPs of governing Fidesz would introduce a flat-rate 10% corporate tax from 2013, in the interest of making companies more competitive. The changes would allow companies whose tax base does not exceed HUF 500 million to avail themselves of a 10% preferential tax rate from 2011. Legislation approved mid-year in 2010 allows companies whose tax base does not exceed HUF 250 million in the second half of the calendar year to pay the preferential rate. Companies whose tax base is higher now pay a 19% corporate tax rate.
The proposals about extraordinary taxes levied on the telco companies, energy suppliers and retail chains are to raise a combined annual HUF 161 billion from companies in the three sectors in 2010-2012. Companies will have to pay the crisis taxes for 2010 on net revenue from 2009, by December 20, 2010. The crisis taxes were formulated in such a way that they will not destabilise companies or cause any to collapse, government spokesperson Anna Nagy said at a press conference on Saturday.
The crisis tax on retail companies is expected to generate HUF 30 billion a year. The Hungarian unit of UK-based Tesco could pay the most on the tax: HUF 12.1 billion, according to estimates. Spar would pay HUF 6.1 billion and French-owned Auchan HUF 3.4 billion.
London-based emerging market analyst Eurasia Group said of Friday that the plans make the deficit targets for 2010 and 2011 "credible and attainable", but the new levies "will surely impact" capital allocation plans of a number of large international firms that have heavily invested in these sectors in the coming years. In a separate comment, Royal Bank of Scotland (RBS) said that while the tax plans should help Hungary meet stated fiscal targets, "our concern is that the new taxes will only serve to compress already weak aggregate demand, which may end up making the government's tax revenue projections (for) the years ahead optimistic".
Answering a question on Friday, Jonathan Todd, spokesman for European Digital Agenda Commissioner Neelie Kroes, said that, under EU regulations, extraordinary taxes may only be levied on the telecommunications sector if the revenue from the taxes is used to cover the cost of regulating the industry. (BBJ)