Each country has taken a slightly different approach to the pandemic, including a health perspective and a financial perspective. Budapest has suggested implementing a restart or recovery tax to help with the fiduciary recovery efforts.
The Planned Tax
The tax plans in Budapest feature an increase in corporate taxes of 0.5 percent. This would increase the current 2 percent business tax rate to 2.5 percent for businesses with a tax base of more than 14 million EUR (5 billion forints).
Notably, the extra burden of taxation would only affect sectors and companies that have only had minimal adverse impacts from the crisis or none at all. Additionally, the industries and companies that would face increased taxation would only include those that benefited from the tax rules Budapest recently introduced. This would not affect any entity that is suffering due to the pandemic, nor individuals’ investments in trusts or real estate.
The additional revenue from this small tax hike would generate funds to pay municipal employees more. The idea is that those funds would make it easier for municipal companies to recover. It would assist them with overall foundation asset management.
The planned restart tax relies on the idea that those companies that are lucky enough to be unaffected by the same hardships as other businesses should contribute to the country’s common good.
Announcing the Tax
The proposed tax was first announced in early October. At that time, the mayor of Budapest, Gergely Karácsony, shared the information in a presentation for the Metropolitan Interest Coordination Council. That presentation was also broadcast on Facebook Live. Besides the tax, Karácsony mentioned that his administration hoped to renegotiate with the government regarding central withdrawals from the Budapest budget.
Reasons for the Tax
During the announcement, Karácsony said that Budapest’s overall functioning is the economic interest of the entire nation. As such, the government needed to consider temporary methods of reducing and sharing the burden on the public and those with Hungarian residency and passports.
Karácsony also outlined figures, including that Budapest was on track to lose tax revenue at a rate that is three times the central budget’s losses. This is important as out of all of Budapest’s revenue, 70 percent is from business taxes. More importantly, in 2019, those business taxes were 165 billion forints, but it has dropped to 139 billion. Karácsony also explained the extent of the budget problems at the moment. Budapest has a 300-billion-forint operating budget, but this year, it has a “hole” of 69 billion forints.
There was some good news, however, as Karácsony and his team expect the tight revenues will loosen up by 2022 to 2023. This is optimistic for private equity fund directors and managers.
Unions Support the Tax
The restart tax has had mixed support so far, with unions in favor of it. Twenty trade unions joined together to write and sign a declaration outlining their support for Budapest’s “restart tax.”
The Chamber of Commerce Opposes the Tax
Unsurprisingly, businesses have not shown strong support for the proposed restart tax. Laszlo Parragh, the Hungarian Chamber of Commerce and Industry’s (MKIK) head, told Magyar Nemzet that the chamber does not support this proposal. More importantly, he pointed out that Budapest did not consult the chamber or entrepreneur organizations before they created the proposal.
The arguments against the tariff mainly stem from the fact that it would increase costs for the few companies that are still functional. These companies are essential in keeping the economy afloat. There is an additional concern that increased taxes could result in the firing of employees. It could even influence a company to leave the city or even become international and leave the country for tax planning purposes. Shareholders may also be disappointed.
Additionally, to implement the restart tax, Budapest would have to amend the legislation. Changing the law could be a complicated process.
Parragh argued that instead of implementing this tax, Budapest should rely on its resources. This is because the proposed taxes would cover a wage increase, which is an operational cost.
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