EU Warns Hungary On Sectoral Taxes
19 April 2013
Posted by: Author: Lorys Charalambous
Source: Lorys Charalambous
The European Commission has urged Hungary to reduce sectoral taxes, warning that "policy uncertainty" and sectoral surtaxes have "contributed to historically low investment and productivity growth rates."
The Commission's view was presented in a report published following a review of the country undertaken as part of an EU regulation on the prevention and correction of macroeconomic imbalances. The report describes the country's current growth potential as "very low," and highlights recent changes to corporation tax, the growing number of sectors subject to surtaxes, and the replacement of temporary sectoral taxes with permanent taxes despite earlier agreements.
The report suggests that taxes in the financial sector in particular should be lowered. A progressive surtax on the financial sector has become permanent despite an agreement for it to be halved in 2013 and lowered further in 2014, and there is also now a new insurance tax and a financial transaction duty.
The Commission argues that surtaxes have a negative effect on business incentives, "especially when inputs to production are not exempted," and that they discourage foreign investment. Further: "The introduction of specific sectoral taxes also tends to artificially reallocate capital inputs between sectors, creating economic inefficiencies."
The report further notes that some of the sectoral taxes may also discriminate against foreign-owned operators: "Taxes on retail and on telecommunications sectors have been subject to infringement procedures as the progressivity of the taxes – uniquely tailored and applicable to the respective sectors – were found to be disproportionally falling on foreign-owned operators."
Sectoral taxes currently represent 2.5% of Hungary's GDP, up from 0.5% in 2009, and counterbalance preferential corporate tax rates for SMEs and cuts in labour taxes.