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Hungary to crack down on tax dodging firms to replace lost revenue

Hungary will crack down on tax-dodging companies in order to replace revenues lost after a new tax was ruled illegal, Economy Minister János Kóka said at a press conference Wednesday.

The constitutional court annulled the „expected tax” - one of the government's fiscal reform measures aimed at slashing the massive budget deficit - at the end of February. Estimates placed the loss to the budget at Ft 55 billion ($285.2 million ) for 2007, around 0.2% of GDP. Hungary's deficit target for 2007 is 6.7%, well down on last year's figure, which is expected to finally come in at around 10%.

While the finance ministry initially said it would revise the tax to allow it be brought into law, Kóka and his finance ministry counterpart János Veres said that instead more rigorous tax inspections would take place. The „expected tax” targeted companies who were dodging taxes by reporting a loss. Now the tax authorities will inspect those companies whose profit does not reach a minimum level. It has long been acknowledged that the black and grey economy is thriving in Hungary, yet the government has failed to tackle it. Veres said 118,000 out of the 315,000 firms registered in Hungary were loss making on paper and 16,000 reported neither loss nor a profit. Of the country's 321,000 private entrepreneurs, 210,000 do not pay taxes, he said.

Despite the apparent huge potential for drawing in revenue, Veres said he could not predict whether the new scheme would make up the shortfall in revenue caused by the cancellation of the expected tax. Veres said that the tax inspection authority (APEH) would not be capable of handling the increased workload in its current form and that changes would have to be made. (