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64 • Fifty Shades of Tax Dodging EU solutions Together with the governments of France and Italy, the German government sent a letter to the European Commission at the end of 2014, urging it to prioritise the fight against tax dodging and to come up with a legislative proposal to counter the erosion of tax bases across Europe. 575 In Council discussions, the German government has reportedly been very supportive of a speedy implementation of the automatic exchange of tax rulings in the EU, and has also stressed the need for a reform of the Code of Conduct on Business Taxation. 576 As noted, the government has also played a strong role in trying to stem the negative effects of patent boxes in the EU. Despite these positive efforts, Germany has often played a less constructive role when it comes to corporate transparency measures at the EU level. As noted, Germany reportedly did not play a progressive role during the negotiations of the EU AMLD. Similarly with regard to country by country reporting, the German government has previously hindered EU action in the negotiations for stricter reporting requirements for companies in the extractive industries. 577 It was (unsuccessful) against the reporting for banks, and in discussions seems reluctant to extend the reporting to all sectors such as through the Shareholders Rights Directive. The German government’s position on the introduction of an EU-wide Common Consolidated Corporate Tax Base (CCCTB) is not easy to assess. While it openly rejected this proposal some years ago, 578 the government now might be more open to the concept and have at least committed to the “Common Tax Base” as a first step in the coalition treaty. 579 However, in talks with the government, reservations about the consolidation have been expressed (e.g. regarding depreciation of pensions) and particularly on the formula apportionment, arguing that it is very difficult to reach agreement on. Global solutions In a response to the European Commission, the government states that the fight against illicit financial flows is one of its three priorities in relation to Policy Coherence for Development. The government further states that, in order to be successful in the fight against these flows, there is need for “a close cooperation between different governmental departments as well as between developing, emerging and developed countries.” 580 Despite this, Germany clearly believes that standard setting or regulation of international tax matters should remain at EU and OECD levels. Consequently, Germany has been opposing the upgrade of the Committee of Experts on International Cooperation in Tax Matters – which it has been supporting financially beyond its assessed contributions to the regular budget of the UN – to an intergovernmental body for some years, 581 including during the Financing for Development negotiations in July 2015. Conclusion Germany is publicly committed to fighting tax fraud and avoidance. As a strong supporter of EU coordination against what it perceives as harmful tax practices, Germany has been quite active relative to other EU Member States. However, on further transparency and some initiatives to fight tax dodging at the EU level, the government has played a less constructive role. Germany also upholds secrecy practices such as the trust structure (Treuhand funds). As developments in 2015 once again revealed, the fight against tax dodging in Germany is intrinsically linked to its large financial sector, which the government seems reluctant to regulate properly. On the positive side, 2015 seems to have brought increased pressure on the banks from regulators, which have initiated new investigations and have had an important victory on a long-running case on tax dodging. Overall, the government seems more engaged in terms of tackling the tax avoidance of companies after the Luxembourg Leaks (LuxLeaks). However, judging by its reluctance to support an inclusive global process for international tax reform and its embracing of solutions that exclude developing countries such as in its move towards the OECD BEPS recommendations on country by country reporting and non-public registers of beneficial owners, the German government seems to ignore the interests of developing countries.
Fifty Shades of Tax Dodging • 65 Hungary “We can say to Spar and to Philip Morris that if you won’t pay this tax [the sector specific tax on tobacco and retail], then you’ll pay another, but one way or another, you’ll pay … You can go complain to the EU, but then you’ll just pay more.” Janos Lazar, Minister of Prime Minister’s Office, Hungary 582 General overview Hungary’s tax regime, although rarely discussed, offers a number of opportunities that make it ideal for international tax planning. Among these are the lack of withholding taxes, a flexible and tax neutral regime for Special Purpose Entities (SPEs), a patent box 583 and limited registration requirements for owners of foreign companies and partnerships. 584 According to an international tax consultancy firm, while Hungary has none of the harmful connotations of an offshore tax haven, it can be a safe harbour for investors seeking the most tax optimal structure without the risks to their brand or heat from tax administrations in other countries. 585 The relatively high flow of foreign direct investment (FDI) through Hungary’s sizeable sector of SPEs 586 suggests that Hungary does indeed play a role in international tax planning. In recent years, Hungary has been through large rounds of budget cuts on social security, social protection and education. 587 In an effort to cut its widening budget deficit, Hungary has introduced nine different sector-specific taxes (some of which have since been modified) over the past five years, including a tax on advertisement, telecommunications and financial institutions. 588 These new taxes were heavily criticised for placing extra burdens on banks, multinational companies or individual actors, in the case of the advertisement tax, and also for the manner in which they were introduced – often in an ad hoc manner, according to critics both in Hungary and the EU. 589 Hungary’s National Tax and Customs Authority (NAV) itself was at the centre of a scandal. The US Chargé d’Affaires in Hungary announced that government officials, including the then president of NAV, Ildikó Vida, had been banned from entering the US due to allegations of involvement in corruption. 590 This diplomatic scandal came after claims in 2013 from former NAV employee and whistleblower András Horváth about systemic deficiencies in NAV’s oversight, which had resulted in as much as HUF 1 trillion (€3.4 billion 591 ) being lost to value added tax (VAT) fraud annually. 592 While an internal audit at NAV (supervised by Ildikó Vida herself) found no systemic malpractice in the organisation, 593 an unrelated investigation by the State Audit Office – which looked into activities of the Tax Authority from 2009 to 2013 – revealed a number of deficiencies in the rules and regulations of the organisation and pointed out that, in several instances, NAV had not adhered to its own policies on oversight. 594 Tax policies In certain respects, Hungary’s tax system is quite unique in the EU. While most European countries have in place a progressive personal income tax system combined with a flat-rate corporate income tax, Hungary has the reverse. It has a flat-rate personal income tax rate of 16 per cent, the third lowest rate in the EU. 595 Its corporate income tax is progressive, with a low 10 per cent rate applied to the tax base up until €1.62 million and a 19 per cent rate above this threshold, with an additional local business tax of up to 2 per cent. 596 Not surprisingly, in 2012, corporate income taxes contributed only 1.3 per cent of GDP (€1.2 billion), with only Greece capturing less (1.1 per cent of GDP) in the EU. 597 Hungary has introduced special tax schemes for micro-, small- and medium-sized enterprises, offering lump-sum tax options, depending on the number of employees and annual revenue: these are EVA (simplified enterprise tax); KATA (small taxpayers’ lump sum tax); and KIVA (small business tax). 598 In stark contrast to the relatively low corporate income tax, Hungary has the highest VAT rate in the EU at 27 per cent. 599 The Hungarian government offers various tax incentives for investment and R&D; it provides so-called VIP cash grants to large investments, obtained through a discretionary government decision 600 that varies across regions, and depends on the amount of the investment and the number of jobs created. 601 Other types of incentives include the development tax allowance, 602 which is a tax credit that is available for up to ten years to decrease corporate income tax liability. 603 Cash grants and super deduction, corporate tax credit, reduction in social security contributions and up to 50 per cent corporate tax exemption on income from royalties are offered specifically for R&D activity. 604 After 2010, Hungary implemented a range of sector-specific taxes, targeting advertisement, tobacco, finance, energy, telecommunications and retail. These sector-specific taxes are expected to bring in a projected boost to government revenue of 1.9 per cent of GDP in 2015, with 1.2 per cent of this being accounted for by the new taxes on financial institutions. 605
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Contents Glossary 4 Executive summa
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