Will new bank tax kill the recovery?

Contributed by Gárdos Füredi Mosonyi Tomori

July 30 2010

On July 22 2010 Parliament passed a new law that imposes a heavy additional tax on

the financial sector - a move that has been sharply criticised by economists and legal

experts.

Hungary's general election in April 2010 resulted in a landslide victory for the

opposition's centre-right party Fidesz. The new government took office in early June. On

June 8 2010 Prime Minister Viktor Orbán announced the government's first action plan,

which centred on the retention of the budget deficit target of 3.8% agreed with the

International Monetary Fund and the European Union at the end of 2008 (for further

details please see

"IMF, European Union and World Bank support credit crisis relief measures"). This

represented a significant shift away from Fidesz's earlier promises to introduce tax cuts

and support businesses in order to create new jobs. One of the key elements of the

action plan is the imposition of a special tax on banks, insurers and financial leasing

companies, which is projected to raise an extra Ft187 billion (around €660 million) in

2010. Unlike the proposals being discussed at EU level, the new tax is not a direct

government response to the financial crisis. Hungarian banks were not bailed out by

the government and the revenue from the additional tax will not be paid into an

emergency government fund for helping distressed banks in future. Rather, it is simply

an attempt to cover this year's deficit target. This explains the fundamental opposition -

from the IMF as well as the European Union - to the idea of such a tax.

Despite criticism, in early July 2010 the government submitted the bill to Parliament,

where it was extensively debated. The bill proposed that all financial institutions should

pay an additional tax; however, it set a different basis and a different rate for various

types of financial institution. The tax on banks will be levied at a rate of 0.15% on their

2009 total assets below Ft50 billion (around €176 million) and at a rate of 0.5% on their

assets above this amount. In comparison, insurers will be taxed on their 2009 earned

premiums at a rate of 6.2%, while other financial institutions will be taxed on their

2009 net revenues at a rate of 5.6%. The tax will be payable in two equal instalments,

which fall due on September 10 2010 and December 10 2010.

Many economists, as well as the IMF, have joined the banks in their criticism of the

plan, arguing that the tax will be detrimental to the financial sector, curbing lending

activity and thus hindering economic growth. This projection has recently been

confirmed by the Hungarian Budget Council, a national supervisory body on fiscal

policy. The magnitude of the new fiscal burden becomes clear when compared to the

after-tax profit of Hungary's banks: it amounted to Ft300 billion (around €1.06 billion) in

2008, but only Ft215 million (around €758,000) in 2009. Although the projections for

2010 are more optimistic, the tax on banks is likely to prove onerous for the sector,

cutting banks' average profits by around one-third. However, insurers are likely to be

even more dramatically affected; the Association of Hungarian Insurers fears that the

tax may push some insurers to the brink of bankruptcy.

The main legal problem is that although the new tax will be introduced in 2010, it is

based on the targeted institutions' total assets, premiums and revenues for 2009. This

contradicts the fundamental requirement that new legislation may not have retroactive

effect, particularly if it creates a new burden for private individuals or businesses.

Therefore, the new act is likely to be challenged before the Constitutional Court. If the

court decides that the new law is unconstitutional, it will repeal it, but a decision may

take months or even years. As long as the court had not ruled against it, the law will

remain in force and financial institutions will have to pay the tax.

For further information on this topic please contact András Rácz at Gárdos, Füredi,

Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email 

(racz.andras@gfmt.hu).

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