Home > Hungarian politics, Hungary > Tax fraud scandal in Hungary

Tax fraud scandal in Hungary

November 19, 2013

On November 8 a surveyor of taxes, András Horváth, turned to the prosecutor’s office to report a breach of fiduciary duties committed by the top leaders of NAV (Nemzeti Adó- és Vámhivatal/National Office of Taxation and Customs). During his press conference he stood between representatives of two civic groups, Levegő Munkacsoport, an environmental organization, and Vállakozók Érdekvédelmi Szövetsége (VÉSZ), basically a lobby group of small entrepreneurs.

Horváth claimed that large-scale cheating goes on with fictitious VAT reimbursement payments, especially in the case of large multinational and domestic companies. Since Horváth was mostly involved with agricultural products and foodstuffs in general, I assume that the companies he was talking about are mostly large food chains. He claimed that the loss incurred in just this sector of the Hungarian economy amounts to about 1.7 trillion forints per year, more than 10% of the country’s entire yearly budget of 15 trillion forints.

The interest was great at András Horváth initial press conference / Photo Ákos Stiller

The interest was great at András Horváth’s initial press conference
Photo Ákos Stiller

Horváth seems to be a naive soul because before his revelation he turned in his resignation and was expecting to sever relations with NAV only in two months’ time. I guess you will not be surprised to hear that Horváth was immediately dismissed from NAV and that currently NAV is in the process of pressing charges against him.

When Index asked for details from NAV, they were told that tax fraud is usually committed through complicated layers of phony companies and that therefore it is often impossible to find the culprits despite the concerted efforts of NAV’s employees. The spokesman for NAV emphasized that the more than one thousand large multinational and domestic companies actually provide 42% of all tax revenues. These companies are thoroughly investigated.

Yet NAV, either on its own or because of prodding from above, immediately announced an internal investigation. Keep in mind that NAV has 23,000 employees, and yet over the weekend in only two days’ time (November 9-10) the “investigation” turned up nothing. I have the feeling that the internal probe couldn’t have been too thorough.

On Tuesday, November 12, disappointed by the internal investigation of NAV, Horváth put all his trust in the government, emphasizing that he has no political motivations. He just wants the truth to surface. In fact, he was an early Fidesz party member and has old friends in the party from those days. He indicated that he knows two of the “highest dignitaries of the land.” I think he was talking about János Áder and László Kövér. He also said that he wrote two letters to leading politicians in the Prime Minister’s Office and he definitely knows that one reached the person for whom it was intended. I assume again that this was János Lázár. Exactly when Horváth wrote to the person in the Prime Minister’s Office is not clear, but we definitely know that he wrote a long letter to Antal Rogán, head of the Fidesz parliamentary caucus, back in November 2011.

Rogán didn’t seem to remember any such letter. His only recollection was that somebody stopped him in the corridor of the parliament and exchanged a few words with him. But then Horváth released his long, detailed letter which Átlátszó.hu, an investigative online paper, published in its entirety. At that point Rogán’s memory was jiggled, but he still claimed that the letter contained only generalities. It is true that Horváth didn’t mention any names, but he indicated that some of the high officials of NAV were getting paid off for their “leniency” and that some of them had become quite rich in the process.

The way the fraud was committed does look complicated, but in essence it entails a phantom supplier who gets reimbursed for VAT, which is the highest in the European Union. Thus a product for which the Hungarian company paid 100 forints to, let’s say, a Slovak company cost the Hungarian company only about 80 forints and thus its profit margin is about 20-25% higher than it would have been without the assistance of this phantom company. There is a drawing of the scheme in Index.

Fidesz naturally suspects political motives behind Horváth’s revelations. Mihály Varga, minister of economics, warned Horváth that he as a civil servant is not supposed to engage in political activities. Horváth insists that politics has nothing to do with it and that the law is on his side. After all, he says, the law is supposed to shield those who unveil corruption and fraud. But Horváth is in trouble because so far his case has not been taken up by the prosecutor’s office. They want additional information, which sounds like a diversionary tactic. Knowing the political orientation of the prosecutor’s office, I will be most surprised if Horváth’s case is ever taken up.

Meanwhile, of course, the case became thoroughly politicized. It couldn’t have been otherwise. András Schiffer’s LMP immediately moved into action. Next Friday the party will stage a demonstration for “the purity of the tax office and for the upstanding taxpayers.” At the same time, LMP and József Ángyán, formerly Fidesz but now an independent member of parliament, initiated the process to set up a parliamentary committee to investigate the NAV case.

The establishment of such a committee must be supported by 77 members of parliament. As it turned out, in addition to the seven-member LMP only a few independents, a handful of Együtt-PM, and Jobbik members signed the petition.  And that’s not enough. Without MSZP there can be no committee investigation of the case. DK members also refused to sign. The reason for both MSZP and DK holding back was the signatures of Jobbik members. They refuse to join any parliamentary action in which Jobbik is involved.

It is true that, even if the necessary number of signatures had been obtained, the investigative commission most likely wouldn’t have seen the light of day. Fidesz would have voted it down flat. But at least the charge couldn’t have been leveled against MSZP that they were reluctant to sign because they didn’t want their own part in the tax evasion scheme to be unearthed. Indeed, the reason for their refusal to sign doesn’t sound quite genuine, as some Együtt-PM members point out, because in the last three years MSZP members signed several documents on which one could find Jobbik names as well. Attila Mesterházy’s explanation for MSZP’s action (or lack of action) in this case is that the party decided to boycott Jobbik in parliament and elsewhere only recently.

I’m not sure whether refusing to collaborate with Jobbik in every instance is necessarily a smart political tactic. My feeling is that Mesterházy and others can explain their reasons until they are blue in the face, yet people who are inclined to equate the two parties when it comes to corruption will never believe them. And these are exactly the people whom Gordon Bajnai and Attila Mesterházy want to convince to vote for them. Of course, those who argue that nothing would have come of the investigative committee are right, but at least MSZP could have avoided another reason for labeling them a corrupt party, just as corrupt as the “mafia government” of Fidesz.

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  1. Glutty
    November 19, 2013 at 8:04 pm | #1

    Exactly, this refusal to sign the petition by MSZP is a fantastic opportunity for LMP and most importantly for Jobbik to point out that MSZP is still actually a co-conspirator with Fidesz in a grand conspiracy to rip off the nation (“f**ing communists, nothing changes”). First, it is not true, at best MSZP was a junior partner, but then it was entirely cut out of all business after 2010 (Orbán logically said that with 2/3s there is no longer need for any deal with small time players), secondly, this refusal only matters to wavering centrist voters. Right wingers, as we have seen from the poll numbers, do not care if Fidesz is acting mafia-like. They want Fidesz no matter what.

    The possibility of MSZP’s participation in a “grand conspiracy” only affects MSZP’s and the left’s potential voters. Unluckily for the left, their voters tend to be squeamish about corruption and are so righteous. The conservatives could not care less about these “intellectual cat fights”, they are committed.

    So yet again, this tax scandal story and the refusal to sign the petition only affected MSZP’s image (negatively).

    I am at awe, how opportunity after opportunity, MSZP always succeeds to take the politically wrong step. Even the “even the blind pig finds an acorn” does not apply to them. I am thinking that at one point Mesterhazy could be dismissed by MSZP (despite his entrenchment), he seems so inept, it’s almost strange to have so little political sense.

  2. November 19, 2013 at 8:11 pm | #2

    To Glutty, I just discovered this blog entr on the topic:

    http://gepnarancs.hu/2013/11/valasztast-nyert-az-mszp-a-fidesz-jobbik-koalicionak/

  3. November 19, 2013 at 8:30 pm | #3

    A brave man. (No matter how foolish or naïve some will label him, how many of us would have had the guts to do this?)

    It will be interesting to see how Fidesz manage to sweep this back under the carpet (or twist it round to put the blame on MSzP).

    I’m not sure even Orbán can put this genie entirely back in the bottle. After all, wasn’t one of his main economic arguments that Hungary could pay its way if only everyone paid their fair share of tax? How will he square that with the fact that so many of his friends in high places are doing the exact opposite?

    Or will it just not matter in the end, as people just don’t care?. As usual.

  4. November 19, 2013 at 8:32 pm | #4

    Interesting comparison between UK and Hungary here too – a similar situation in the UK would have resulted in the whistle blower being suspend or put on ‘gardening leave’, while the matter was investigated. They would never have dared sack him, as that would have made it look like he was right and they were guilty…

  5. Pete H.
    November 19, 2013 at 9:00 pm | #5

    If this report is correct, the prosecutor will take up the case.

    http://www.politics.hu/20131119/tax-inspectors-charges-to-be-examined-by-prosecutor-says-rogan/

  6. Pascal
    November 19, 2013 at 10:51 pm | #6

    Paul, whatever will happen, people angered by yet another scandal will not vote for the left because they are too timid and conformist (plus MSZP surely looks as if it was involved in it), this scandal will only help Jobbik which is the real radical protest party.

    Jobbik and its supporters want to grab the wealth of foreigners like people wanted to grab the wealth of Jews pre-WWII, they see such wealth as unjust compared to their own situation, plus Jobbik is loud and agry, well-positioned to benefit from this.

  7. Tyrker
    November 20, 2013 at 4:15 am | #7

    “The reason for both MSZP and DK holding back was the signatures of Jobbik members. They refuse to join any parliamentary action in which Jobbik is involved.”

    This is not simply stupid, it’s downright scandalous. MPs have been sent to parliament to work, not to act like primadonnas. If they find this possible fraud to be an important case, they ought to support the committee regardless of who else has joined the initiative

  8. tappanch
    November 20, 2013 at 5:06 am | #8

    Fidesz has changed the parliamentary rules. An investigative committee can ONLY be set up, if the democratic opposition AND Jobbik all want it.

    If there is such an agreement, the democratic opposition is blamed for being in coalition with Jobbik, which makes it easier for Fidesz to form a silent coalition with Jobbik in 2014.

    If there is not an agreement for the committee, then MSzP is accused of being in cahoots with the corrupt Fidesz.

    So I do not blame Mesterhazy of MSzP this time for not able to solve this Fidesz-created catch-22 situation.

    http://index.hu/belfold/2013/11/18/ezert_nem_vizsgalhatja_az_ellenzek_a_nav-botranyt/

  9. Cafe Latte
    November 20, 2013 at 7:38 am | #9

    Tappanch: “which makes it easier for Fidesz to form a silent coalition with Jobbik in 2014″.

    I don’t get it. Nobody thinks on any side that just because MSZP, LMP and Jobbik agree on one particular issue (to investigate a nation-wide mutyi) then they would be similar in any substantial way.

    I don’t see why such an ad hoc effort could have hurt the left in any way, the left has plenty of anti-extreme right wing credentials for those to whom this is important (as if it mattered, anti-extremism is not exactly a sexy, popular issue with which one can win masses).

    The political loss of MSZP on this particular issue is much-much bigger than the loss would have been because of a “cooperation” with Jobbik. Especially as MSZP is much more of a rejected party than Jobbik is among the general population (more people say that they certainly won’t vote for MSZP than they say it re Jobbik) and the wavering middle are extremely self-righteous (much more than they are anti-fascists) to be associated with a mutyi party. They rather won’t vote than to vote for the same-old communist mutyi nomenclature. This is again a case of either corruption of stupidity just like with the Baja-video. One is better for Fidesz than the other.

    Fidesz will anyway form a silent coalition with Jobbik, as Jobbik voters are even more fervently “anti-communists” than are Fidesz’ voters (if that is a possibility), so they will vote for Fidesz’ local candidate, as otherwise their local vote will be lost entirely (would be tantamount to have been cast for the communists). There is no need for much overt cooperation between the Fidesz and Jobbik, voters will behave given the right incentives (and they have been given). In any case, the two parties cooperate just fine all over Hungary in municipal governments.

    The decision of MSZP to not vote for the committee was a mistake (“it was worse than a crime, it was a mistake”) and whoever is responsible for it, displayed an astonishing lack of political sense. Mesterhazy deserves the blame fully for yet another blunder. That is because at the end of the day this was a small stake issue (although it was about the 10th issue in a row at which Mesterhazy failed), while there will be surely huge political dilemmas and problems in government, how can one expect a smart solution then if one so sorely lacks political acumen.

  10. tappanch
    November 20, 2013 at 9:28 am | #10

    Winners and losers – examination of the flat tax:

    http://www.asz.hu/penzugyi-szemle-cikkek/2013/nyertesek-es-vesztesek-a-magyar-egykulcsos-adoreform-vizsgalata-mikroszimulacios-modszerrel/toth-virvacz-2013-4.pdf

    I hope Mr Virovácz will not be fired from Századvég for this article

    Change in yearly taxes, 2013 vs 2010

    richest decile: -500.7 billion HUF
    2nd decile: – 71.6
    3rd+ 4th decile, 20%: + 2.2
    poorest 60%: +126.3

    total: -443.8

  11. November 20, 2013 at 9:38 am | #11

    tappanch :

    Winners and losers – examination of the flat tax:

    http://www.asz.hu/penzugyi-szemle-cikkek/2013/nyertesek-es-vesztesek-a-magyar-egykulcsos-adoreform-vizsgalata-mikroszimulacios-modszerrel/toth-virvacz-2013-4.pdf

    I hope Mr Virovácz will not be fired from Századvég for this article

    Change in yearly taxes, 2013 vs 2010

    richest decile: -500.7 billion HUF
    2nd decile: – 71.6
    3rd+ 4th decile, 20%: + 2.2
    poorest 60%: +126.3

    total: -443.8

    He may be fires. Századvég already announced that these results have nothing to do with the firm. It is simply private opinion.

  12. tappanch
    November 20, 2013 at 10:04 am | #12

    Employment is stagnant in enterprises, declining in non-profits, growing in government
    millions of people, Sept 2013 vs Sept 2012

    Enterprises: 1.830; 1.831; -0.1%
    Government: 0.675; 0.658; +2.6%
    Public workers: 0.130; 0.097; +3.4%
    Non-profits: 0.090; 0.109; -8.3%
    ————————————————–
    Total: 2.725; 2.705; +0.7%

    http://www.ksh.hu/docs/hun/xftp/gyor/let/let21309.pdf

  13. tappanch
    November 20, 2013 at 10:12 am | #13

    I meant to say:

    Public workers: 0.130; 0.097; +34.0%

  14. tappanch
    November 20, 2013 at 10:15 am | #14

    The dean of the university ELTE BTK banned a public forum today where the whistle-blowing former tax official would have spoken:

    http://index.hu/belfold/2013/11/20/betiltottak_a_nav-os_forumot_az_elte-n/

  15. Mutt
    November 20, 2013 at 1:11 pm | #15

    If Orban wins in 2014 he will introduce a degressive taxing system. I mean, come on … Why would he pay 50 times more taxes when he doesn’t have 50 times more children or doesn’t drive 50 times more on the road. Justice to the rich! Vote Orban!

  16. Istvan
    November 20, 2013 at 2:03 pm | #16

    It seems that the determination today by the Hungarian Competition Authority (GVH) that 11 banks representing a combined market share of nearly 91% in the country had been levied with a combined HUF 9.5 billion in fines for cartel activity during an early payback scheme for borrowers with foreign currency-denominated loans that ran from late 2011 to early 2012 is possibly a story of greater significance than VAT scandal. I have little doubt that the fines are relatively insignificant in relation to the gross profits of these 11 banks, in the USA we just saw that happen in relation to Chase Bank which was fined $14 billion for fraud in relationship to the marketing of mortgage backed securities. While the $14 billion seemed huge, in reality it constituted only 50% of the profit of that bank in 2012. But given the relative importance of these banks in Hungary this story seems significant and the “mafia government” of Fidesz may have done something relatively appropriately. Or are there more complex issues here?

  17. An
    November 20, 2013 at 3:30 pm | #17

    @Istvan: The Hungarian and the American situation are very different, though banks are not angels anywhere. As the Orban government routinely uses banks as scapegoats for political reasons, it is hard to know whether the charge against them this time by the competition office was justified or was just another part of a power play to put pressure on the banks.

    If you read Hungarian, this article is about this case, and how Fidesz is using its political influence in the competition office.
    http://magyarnarancs.hu/belpol/gyanus-kartellgyanu-87317

  18. Kirsten
    November 20, 2013 at 4:08 pm | #18

    Tyrker: “MPs have been sent to parliament to work, not to act like primadonnas. If they find this possible fraud to be an important case, they ought to support the committee regardless of who else has joined the initiative.”

    Very good. Could that be made known also to the Fidesz MPs…?

  19. Kirsten
    November 20, 2013 at 4:30 pm | #19

    Éva: “Horváth claimed that large-scale cheating goes on with fictitious VAT reimbursement payments, especially in the case of large multinational and domestic companies.”

    Since we do not know anything about what type of multinationals this should be, I wonder whether this could not be seen as part of the anti-Western multinationals campaign. But in general I find this story very strange. I mean the number of people who have had rather important positions in the state or public institutions and who resigned out of whatever reasons is increasing, as is the number of people who do not benefit from OV. But apparently most of them are “retiring” from the public – instead of joining some more organised opposition group. Mr. Horvath goes to the press with “representatives of two civic groups, Levegő Munkacsoport, an environmental organization, and Vállakozók Érdekvédelmi Szövetsége (VÉSZ), basically a lobby group of small entrepreneurs” as if this were “pressure” and Hungary a “standard” democracy. Hopefully a number of people will notice on this occasion that there is no “standard” judiciary or parliament that could handle this within the current system. It can be handled only by wide-spread protests of the broad public and a willingness on the part of those opposed to the “system” to find some common ground, personally and ideologically.

  20. tappanch
    November 20, 2013 at 5:34 pm | #20

    The Hungarian Foreign Ministry berated the Turkish ambassador today for permitting a Norwegian researcher to publish an article in a Turkish publication that contained:

    “As it stands, it is impossible to characterise Hungary as pluralist, much less as democratic in the usual sense of the word”

    So the Fidesz government feels entitled to have a writing of a Norwegian in a Turkish publication banned. Incredible. Orban wants to export his autocracy.

    http://www.kormany.hu/hu/kulugyminiszterium/biztonsagpolitikaert-felelos-helyettes-allamtitkarsag/hirek/takacs-szabolcs-talalkozoja-torokorszag-budapesti-nagykovetevel

  21. Jean P
    November 21, 2013 at 3:02 am | #21

    tappanch: “The Hungarian Foreign Ministry berated the Turkish ambassador today for permitting a Norwegian researcher to publish an article in a Turkish publication that contained:
    “As it stands, it is impossible to characterise Hungary as pluralist, much less as democratic in the usual sense of the word””

    Pretty lame stuff compared to what you can read in HS on a daily basis.

  22. tappanch
    November 21, 2013 at 5:05 am | #22

    Horvath’s detailed description of the VAT fraud can be found here:

    http://atlatszo.hu/2013/11/08/horvath-andras-az-adocsalo-halozatok-elleni-fellepes-helyzete-magyarorszagon/

    The textbook version for beginners is here:

    444. hu/2013/11/21/igy-lehet-hatalmasat-csalnia-a-kozerteknek/

  23. tappanch
    November 21, 2013 at 5:26 am | #23

    Atlatszo.hu was kind enough to provide an English translation of Horvath’s essay:

    http://atlatszo.hu/wp-content/uploads/2013/11/VAT_corruption_Hungary_2013Oct_details.pdf

  24. November 21, 2013 at 7:33 am | #24

    tappanch :
    Winners and losers – examination of the flat tax:
    http://www.asz.hu/penzugyi-szemle-cikkek/2013/nyertesek-es-vesztesek-a-magyar-egykulcsos-adoreform-vizsgalata-mikroszimulacios-modszerrel/toth-virvacz-2013-4.pdf
    I hope Mr Virovácz will not be fired from Századvég for this article
    Change in yearly taxes, 2013 vs 2010
    richest decile: -500.7 billion HUF
    2nd decile: – 71.6
    3rd+ 4th decile, 20%: + 2.2
    poorest 60%: +126.3
    total: -443.8

    For those of us who don’t read Hungarian, a little more explanation would be appreciated.

  25. tappanch
    November 21, 2013 at 10:58 am | #25

    Dear Paul,

    The authors of the article calculated the net effect of the flat tax at the different income levels. I summarized their results. The top 20% gained on the flat tax, the next 20% came out unchanged, the bottom 60% and the budget of the country lost money on the deal.

    One of the authors is an employee of the Fidesz think tank “Szazadveg”, so I am worried about his job.

  26. tappanch
    November 21, 2013 at 2:37 pm | #26

    Live stream of Horvath’s banned “townhall” meeting:

    http://atlatszooktatas.blog.hu/2013/11/21/elo_videostream_a_betiltott_nav-os_forumrol

  27. Mutt
    November 21, 2013 at 3:54 pm | #27

    tappanch :
    Live stream of Horvath’s banned “townhall” meeting:
    http://atlatszooktatas.blog.hu/2013/11/21/elo_videostream_a_betiltott_nav-os_forumrol

    Take a look at this article below. A screenshot was taken from an iPhone at the meeting. The second SSID (wireless network identifier) is TEK Surveillance. TEK is Orban’s Praetorian Guard.

    http://444.hu/2013/11/21/a-tek-is-ott-van-horvath-andras-nav-dezertor-foruman

  28. HiBoM
    November 21, 2013 at 5:13 pm | #28

    Mmmm, is it really credible that TEK would announce itself this way? Great story if true, though!

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