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The taxed fight back

The crisis taxes introduced by the government to fill the gaping holes in the national budget has the players of the affected industries in an uproar. According to the BBJ's information, some of them have already instigated proceedings against the tax at the European Comission, but making their case heard will be a challenge.

It was to be expected that the targeted industries taking the brunt of the government’s stopgap efforts would not be happy for being singled out to shore up the national economy. Now, some of them are actually hoping that a court procedure can reverse the situation and reimburse the billions they would be losing.

As the Budapest Business Journal learned, some of the biggest Hungarian supermarket chains have already filed an official complaint with the European Commission about the crisis tax, citing it unfair and retroactive in nature. It was reportedly submitted to the Commission’s two Directorates-General (DGs), Taxation and Customs Union and Internal Market and Services. These institutions have the authority to take the matter further if necessary, even as high as the European Court of Justice, the rulings of which are binding on the Hungarian legal system.

All retailers are affected by the crisis tax, and they are officially represented by EuroCommerce, a Brussels-based international lobby organization representing trade sectors of Europe. EuroCommerce declined to confirm the information. The retailers asked by the BBJ likewise did not want to comment on the record. One of them said “it is not the right time to talk about it yet.” As another insider explained, they also have to consider additional legislative issues, such as the plan to keep all stores closed on Sundays. Given these tense conditions, the retailers see it best to “keep quiet” for the time being.

Nonetheless, if the DGs reached the conclusion that the matter falls within their jurisdiction, the written inquiry has already been received by the Hungarian state by this point. This is the first stage of Commission action. As the BBJ goes to print, the DGs have yet to confirm this.

The formal written exchange between the Commission and member states about such infringements is not public. According to the DGs’ procedure, the given government has two months to respond to the initial inquiry. If it fails to do so, the Commission may grant an additional two months for the state to present its case, but in this case, it also makes the matter public.

According to the BBJ’s sources, when the retailers started preparing the legal steps, they initiated cooperation with the similarly taxed players of the telecommunications and energy sectors, who decided not to get involved, at least not in this particular effort. Nonetheless, there are indications of further steps, especially by foreign parent companies. The Economist, for example, recently reported that “foreign shareholders are now preparing to challenge the taxes in foreign courts.”

An affected telecommunications company told the BBJ that parent companies are more motivated to orchestrate legal action as they have more options on an EU level. They can try to base their case against the tax on EU legislation, which says telecom companies can only be held to pay extra taxes for covering the costs of the sector’s legislation.

Deutsche Telekom board member Guido Kerkhoff recently told MTI that it will consider legal recourse after the Hungarian government delivers its stand on the matter as requested by the Commission. Magyar Telekom told the BBJ that the legal department of the parent company would probably cite the retroactive nature of the tax bill as the legal grounds of its challenge. The German telecoms giant is confident that the legislative changes enacted by the Hungarian government constitute a contractual breach of earlier defined terms and that the EC will launch a procedure despite the fact that Hungary will assume the EU presidency from January.

Even though the companies involved feel they are being taxed unjustly, when it comes to the law, they will likely find that their options for reparations are limited, if not nonexistent. Having curbed the jurisdiction of the Constitutional Court with a recently passed law, there is now very little room for those seeking legal remedy in tax-related and budgetary issues.

“As a result of the recent legislation, those companies that are affected by the introduction of the crisis taxes can not turn to the Constitutional Court, so basically they have no opportunity for remedy within Hungary,” Pál Jalsovszky, head of the Jalsovszky Law Office told the BBJ.

If a company or group of companies files a complaint with a regular court, citing the unconstitutional nature of the recently introduced taxes, the court can forward the claim to the Constitutional Court – but in this case, the Court only has the right to form an opinion.

“The question is whether this opinion would give enough ground to the ordinary court not to implement the tax rules that are apparently unconstitutional,” Jalsovszky said. “The ordinary court can not deviate from the law, therefore if the new tax legislation provides clear rules then the court most probably applies such rules regardless of the opinion of the Constitutional Court.”

Despite the deficiencies of the Hungarian legal system (which have further increased with the new limitations on the Constitutional Court), there are international legal forums that can be approached in such cases. But the situation is not simple in this scenario either. Although there is the European Court, Jalsovszky thinks that it would be difficult for the affected companies to find a solid ground for their case.

Then there is also ICSID, the World Bank’s institution for settling international investment disputes. ICSID was set up to provide facilities for conciliation and arbitration in international investment disputes between investors and states. Its website lists more than 200 concluded cases between investors and the more than 150 states contracted with ICSID, and there are some 120 further cases pending.

“It is binding but it is not executable,” said Jalsovszky about how the state would be affected by a ruling from ICSID. The institution (or any other international ruling body for that matter) has no means of forcing payment by Hungary (or any other state).

“If a verdict is reached by the Hungarian court and a payment obligation is decided, there are adequate executive bodies to collect the money from the bank accounts of individuals, companies or the state. For an international verdict, there is no such executive body,” Jalsovszky explained.

However, the Hungarian state has already fulfilled a financial obligation deriving from an ICSID ruling. In the fall of 2006, the Washington-based dispute-settling institution ordered the Hungarian state to pay some $84 million to Canadian airport developer ADC as compensation (the amount included the cost of the litigation as well). The Canadians turned to ICSID in 2003, after the Hungarian state breached their facility management contract regarding Ferihegy Airport a year earlier – although the contract was signed for 12 years.

“The Hungarian state dug into its pocket and paid the amount then. But due to the fact that ICSID has no means to collect the money, it is questionable whether Hungary would act the same way in the case of a negative outcome of a possible litigation this time,” said Gábor Bárdosi, senior associate at the Faludi Wolf Theiss law firm. “If the state is reluctant to pay, I can see only one way to enforce the ICSID order. If the claimants go to a Hungarian court with the order, it can order the state to pay, and it also has the means to collect the money from the state,” he said. (BBJ)