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Law360 (April 30, 2020, 8:17 PM EDT ) Hungary's government announced a plan to tax large retailers as part of a coronavirus pandemic bailout package, but it also said the measure would ultimately become a permanent part of the national tax system.
Legislation posted Tuesday on the website of the Hungarian National Assembly said that the tax is expected to generate 36 billion forints ($112 million) in revenue from the biggest retailers this year and more in subsequent full years as the economy recovers.
On April 14, Hungary's Finance Ministry issued a decree stating that an extraordinary tax was being planned for large companies to offset the pandemic's impact. The ministry indicated that the measure would be temporary, starting May 1 and continuing only as long as the state of emergency declared by Prime Minister Viktor Orbán. However, the bill submitted by Orbán's finance minister, Mihály Varga, makes clear that the new tax is to remain in effect beyond the current health crisis.
In the bill's introduction, the government said it was "committed to reducing taxes on labor and income, and strengthening economic growth."
"In order to preserve the budget balance, it intends to continue to place the focus of the tax system on sales and consumption taxes," the introduction said.
Taxing consumption is also of environmental significance, the government said, saying that higher consumption produces more negative environmental effects and higher emissions of greenhouse gases.
Companies with annual revenue of 500 million and 30 billion forints would pay 0.1% on net sales, while those with turnover of 30 billion and 100 billion forints would be taxed at 0.4%, according to the bill. Revenue above that would be taxed at 2.5%.
The tax won't apply to small retailers, the bill said. With few exceptions, only foreign companies are likely to be affected, the proposal stipulated. A tax liability would also apply to any retail activity involving a nonresident person or organization, regardless of whether it has a Hungarian branch or not, that sells goods delivered to a customer in Hungary.
"The purpose of this clause is not to give a competitive advantage to a shop or business without a Hungarian economic establishment — primarily on the internet — that sells retail goods in the same way as any company or branch established in Hungary," the bill's text said.
The tax is similar to one from 2010 that Orbán, months after first taking office, persuaded lawmakers to pass to plug a budget hole caused by the global financial crisis of the previous two years. The progressive tax forced retail companies with larger revenues to pay a higher tax rate, but it also said that the revenue should be those of the entire corporate group, not only its Hungarian entity.
U.K.-based supermarket chain Tesco PLC and telecommunications company Vodafone Hungary disputed the justification for the special tax in an appeal to the European Court of Justice. In March, the European Union's highest court ruled that there had been no discrimination against the companies, because the levy was truly progressive and reflected real economic conditions.
The levy was deemed compatible with the EU law on value-added tax as well as its principle of freedom of establishment, whereby companies operating in one EU country carry out stable or continuous economic activity in another.
The new bill now moves on to the National Assembly, which Orbán's far-right Fidesz party controls.
Gergely Gulyás, a top official in Orbán's cabinet and, as a member of the National Assembly, the prime minister's key legislative contact, was quoted by local media as saying it was right that multinational retail chains should contribute their fair share of Hungary's tax burden.
Gulyás cited the EU court ruling in Hungary's favor in saying there is no obstacle to the introduction of the new special retail tax. Explaining why the tax would remain after the end of the state of emergency, he said that although the pandemic justifies the measure, the government would have introduced it anyway.
Varga, the finance minister, has said the government is expecting a sharp decline of more than 3% in gross domestic product.
--Editing by Neil Cohen.
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