Banks Warn Hungary Over Financial Tax

by Ulrika Lomas, Tax-News.com, Brussels

12 July 2010

It has recently emerged that large international banks have addressed a letter to the International Monetary Fund (IMF) and to the Hungarian government protesting against Hungary’s plans to introduce a substantial tax on the country’s banks.

In the letter, the six foreign banks, which include Austrian banks Raiffeisen International, Erste Group and Bank Austria, Italian banks UniCredit and Intesa Sanpaolo and German bank BayernLB, warn that they may reconsider their investments in Hungary, if the government elects to press ahead with its plans. They also urge the IMF to endeavour to persuade the government against the proposed levy.

The banks’ decision to challenge the levy may well serve to jeopardize the “Vienna Initiative”, however, which played a crucial role in stabilizing countries in Eastern Europe during the financial crisis. In accordance with the initiative, foreign banks pledged not to reduce their investments in the region. Hungary’s decision to increase the fiscal burden on these banks may prove a step too far.

While the IMF undoubtedly has a pivotal role to play in the negotiations, Hungary’s Prime Minister Viktor Orban faces an almost impossible dilemma. Eager to fulfil his election promise to implement tax cuts in Hungary, Orban is nevertheless under an obligation from both the IMF and the European Union to achieve the country's budget deficit target of 3.8% of gross domestic product (GDP) this year. Orban had considered the idea of a bank tax as a panacea, enabling the government to reduce the fiscal burden while at the same time honouring the terms of its agreement.

Orban’s government recently unveiled plans to impose a 0.45% tax on the balances of banks – the highest banking levy as yet proposed. Under the government’s plans, the tax would not only affect the country’s banks but the whole of the financial sector, with insurers facing a 5.2% tax. The measure is expected to generate in the region of EUR650m a year in additional revenue for the state over a period of two years. Nevertheless, the rate of the proposed tax is significantly higher than that envisaged in other countries. In Austria, for example, the government intends to levy a 0.07% tax on its banks, and in the US, the government is considering a 0.15% tax. In Sweden, credit institutes pay only 0.036%.

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