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Government backs Hungarian-friendly taxes

Special levies impacting supermarket chains and tobacco sellers are being challenged at a European level, with critics saying they single out foreign firms. But the government says it’s OK to target foreigners, and insists it will fight to preserve the levies.

Cabinet chief János Lázár speaks at his weekly press conference. Spokesman András Giró-Szász is in the background.

Even as the European Commission investigates new sectoral taxes levied against supermarkets and tobacco companies, the Hungarian government is not denying claims by critics that these taxes may be harder on foreign companies than their domestic competitors.

“Hungary suffered considerable losses between 1990 and 2010; we gave up our own national markets and interests to a great extent, and the task and mission of this government is to recapture the markets in Hungary for Hungarian businesses, to send foreigners out of Hungary, and enhance Hungary’s national industry, economy and trade as much as possible,” János Lázár, head of the Prime Minister’s Office said at a July 16 press conference.

Interviewed by the Budapest Business Journal on July 24, another government spokesperson sought to refine those comments: “Hungary does not intend – and has never intended – to oust multinational companies from Hungary; it is, however, the firm intention of the government to re-distribute the disproportionate and unfair excess rights and privileges in a fair manner which is beneficial for Hungarian society,” the spokesperson said.

The EC launched two separate probes in mid-July: One regarding the supermarket chain supervisory fee and the other, the healthcare contribution payable by tobacco companies. The two companies that brought their complaints to the Commission, Spar and Philip Morris International, consider the taxes steeply progressive and discriminatory.

The EC has frozen the collection of the levies until the investigation is complete, a move that could cost the government tens of billions of forints. The government spokesperson told the BBJ that these actions were “unlawful”, given that the “Commission did not observe the relevant procedural requirements”. Still, the government has agreed, for the time being, to honor the EC’s decision and will suspend the collection of the levies until the end of the investigation, which, according to the spokesperson, could take up to one year.

In the end, though, the spokesperson interviewed by this publication said the firms targeted by the new levies will be taxed: “If the European Union wishes to eliminate this tax, it will be replaced with another one which will permit the collection of a tax revenue at the planned rate from the tobacco industry and retail chains.”

Supermarket fee

Spar brought a case against the progressive supervisory fee on supermarket chains, passed last year and used to finance food chain safety and the activities of the food chain authority. It took effect from the beginning of this year, and those companies with high turnover, many of them foreign-owned chains such as Spar, Auchan and Tesco, were the hardest hit.

The progressively increasing fee regime means that those companies must pay 6% of all turnover exceeding HUF 300 billion. This fee was previously set at 0.1% of turnover. Spar has said the fee means the chain’s yearly expenditures have gone from HUF 900 million to HUF 9 bln. It sees the measure as a real blow, given its strong presence in Hungary over the past 23 years and investments in the country amounting to a net EUR 500 mln.

Critics have noted that the law provides a loophole to chains that have a company structure which gives ownership to franchise holders. This allows CBA, a Hungarian supermarket chain whose owner is a major donor to the ruling Fidesz party, to remain in the lowest bracket.

The EC also had a problem with the supervisory fee. “The progressivity of the rates based on turnover provides companies with a low turnover a selective advantage over their competitors, in breach of EU state aid rules,” the Commission said in its press release of July 15. The suspension in the case of the supervisory fee would create a HUF 23 bln deficit in the budget, cabinet chief Lázár said.

Health tax on tobacco firms

Philip Morris’ complaint to the EC was regarding the one-time healthcare contribution payable by large tobacco companies doing business in Hungary. The measure, which came into force in February of this year, is also steeply progressive, and companies must pay a contribution of 4.5% on revenue exceeding HUF 60 bln.

Philip Morris declined to comment, saying that the investigation is in progress. But Lóránt Dezső, executive director of Imperial Tobacco, said that “Hungarian firm Continental Zrt., after a rebate on investments, hardly has to pay any contribution at all, while Philip Morris, which is eight times larger with a turnover of HUF 183.8 bln, will have a burden of HUF 6.3 bln, in other words, more than 130 times that of the Hungarian firm.”

According to Lázár, “Philip Morris’ largest grievance is that it is paying the most. Undoubtedly, if Hungarians smoke cigarettes, most of them consume cigarettes produced by Philip Morris.”

The government’s most prevalent argument for imposing what critics are calling a highly discriminatory tax is that the funds amassed from the healthcare contribution are needed to pay for the construction of a new hospital in Budapest.

At the July 16 press conference, spokesperson András Giró-Szász echoed the cabinet chief’s sentiment that the damaging effects of smoking on one’s health warrant the extraordinarily high tax.

“Philip Morris’ Hungarian activities cause a loss of HUF 60 bln a year to the Hungarian state,” Giró-Szász said, but he did not say how these figures were obtained or how the burden was solely the responsibility of the tobacco industry.

According to the EC press release, the Commission “has doubts that the effects of tobacco products on public health increase progressively with the turnover of companies selling them”.

Revenue is clearly a factor in the government’s effort to preserve these taxes, as all budget allocations have been confirmed for this year, and the government has made it clear that it intends to get this money one way or another.

Lázár even threatened those who took matters to the EC with an additional fine for complaining about the issue. “They will have to pay more and the fee will be increased by an amount that will discourage these companies from prosecuting us next time around,” Lázár said.