TAX NEWS - 2010

European Banks Urge Hungary to Modify Finance Tax

The European Banking Federation called for "profound modification" of a planned Hungarian tax on financial institutions, saying the "discriminative" levy would push some lenders into the red and hamper economic growth.

The Hungarian government aims to raise 187 billion forint ($813 million) from the tax on banks, insurers and leasing companies this year as it seeks to hit a budget deficit target approved by the International Monetary Fund, the European Union and the World Bank.

The tax, which equates to about $88 for every Hungarian, may end up being the most punitive for bankers in central Europe, relative to the size of the country.

The cabinet of Prime Minister Viktor Orban still needs to reach agreement with commercial banks on the details of the tax, announced on June 8, a person close to the government said today. The parties are likely to agree soon, the person said.

The scope and discriminatory nature of the tax, combined with corporate tax and the existing solidarity tax, could push several Hungarian banks into losses as lenders' effective tax rate would exceed 60 percent, the banking federation said in a letter signed by Alessandro Profumo, its president, and obtained by Bloomberg.


'Impede Lending'

The tax will impede lending, depress economic expectations and deprive the budget of "a far greater" source of income, according to the letter.

The letter has been sent to Orban and Economy Minister Gyorgy Matolcsy, federation spokeswoman Florence Ranson said.

European Union leaders decided on June 17 to push for global taxes on banks and financial transactions, to clamp down on speculation. The Group of 20 nations will discuss banking regulation today. France, Germany and the U.K. may vary the terms of new taxes on banks depending on their economic situation, the governments said this week.

Hungary's banking industry is dominated by European lenders such as Intesa SanPaolo SpA, Erste Group Bank AG, Raiffeisen International Bank Holding AG and UniCredit SpA.

The government's proposed levy will be based on banks' total assets on Dec. 31, 2009, and will be between 0.4 and 0.5 percent, news website Index.hu reported today, without saying how it obtained the information. The tax, originally planned for three years, will be in effect for two, Economy Ministry State Secretary Zoltan Csefalvay told Hirszerzo today.


Worst Recession

Hungary's economy recovered from its worst recession in 19 years in the last quarter of 2009. Output was hurt by a decline in export orders from the euro region, which buys 60 percent of Hungary's products, and a slump in domestic demand, sapped by five consecutive years of fiscal austerity.

The country cut spending and raised taxes to meet the terms of a bailout led by the IMF.

OTP Bank Nyrt., the nation's most profitable bank, may be saddled with 25 percent of the tax burden should the levy be based on assets, or as much as 63 percent if it's related to pretax profit, Merrill Lynch's Cristina Marzea and Ivan Bokhmat wrote in a research note on June 14.

Budapest-based OTP was downgraded by Bank of America Merrill Lynch, UBS AG, Deutsche Bank AG and Citigroup Inc. because of the tax.