TAX NEWS - June 2010

Hungary bank tax plan harmful - Hungarian Banking Association

BUDAPEST, June 8 (Reuters) - Some Hungarian banks could post losses this year if the government goes ahead with a big special tariff on the financial sector in its effort to raise funds for the budget, the country's top commercial banker said on Tuesday.

Hungarian Prime Minister Viktor Orban proposed a special bank tax, planned to siphon 200 billion forints ($1.02 bln) into the budget from banks' coffers this year, a move that Hungarian Banking Association chairman Tamas Erdei said would have a "shocking effect" on the banking sector.

"I'm convinced that would be such a drastic tax on the Hungarian banking system, it would cause great harm," Erdei told Reuters in an interview after the prime minister unveiled plans of the tax on Tuesday.

He added that the association would start immediate negotiations with the government because some details remained unclear, such as the proposed three-year duration of the extra tax, and whether it would be levied on revenues or profits, before or after corporate taxes.

Hungary has committed to a budget deficit of 3.8 percent of gross domestic product with international lenders, and needs to raise funds or cut costs amounting to about 1.0-1.5 percent of GDP to meet the deficit goal, Economy Minister Gyorgy Matolcsy has said.

The new centre-right government of the Fidesz party took office on May 29 after an election victory in April that was based on a promise of tax cuts and job creation.

They have pledged to stick to the deficit target after confusing comments last week that sent Hungary's assets tumbling and set off global market turmoil, but scrambled to find the extra revenue sources to keep the budget in check.

The planned tax level of 200 billion forints compares to 306 billion in pretax profits in the sector in 2009 - most of which came from financial operations and not the core business, which struggled as the economy was mired in a deep recession.

It is therefore unlikely that the banking sector would come out of such taxation unharmed, said Norbert Harcsa, an analyst at Ipopema Securities in Budapest.

"Most of last year's profits came from the bond market," Harcsa said. "We can forget about further (central bank) interest rate cuts this year, so no profits there. Plus the interest rate margins the sector has got used to are presumably unsustainable as well."

Erdei said the bank tax would reduce banks' ability and willingness to lend at a time when they are preparing for tough capital adequacy regulations likely to be introduced under the Basel III criteria.

"Our owners will not raise capital just so we pay them as taxes into the budget," he said. "The pool of capital is set, and each bank will see, once they paid all the dues, how much they can maintain their lending activity, or how much they need to cut it."

He said that taxes of about 30 to 40 billion forints per year paid to the budget could be acceptable.

He also said a planned ban on foreign currency mortgage lending looked acceptable.

"The forint market is awfully volatile," he said. "From this respect (the plan) that mortgages could only be taken out in forints is acceptable, there is no problem with that."