taxes

The asphalt tax: Lajos Simicska is not taking it lying down

A few days ago 444 reported that the government is planning to levy extra taxes on companies that have received large government contracts for road construction over the past few years. The reason for these new taxes is a large fine that the Hungarian government is expecting from the European Union. Apparently, ever since 2007  Hungarian governments have insisted that only construction companies that had asphalt mixing plants close to the job sites could bid for contracts. The European Union objected to this constraint which, in their opinion, restricts free competition.

The argument between Budapest and Brussels has been going on for some time, and it looks as if the Hungarian government has reconciled itself to the fact that it will have to pay a heavy fine, perhaps as much as 100 billion forints. Although the current Hungarian government spends money quite freely, it either doesn’t have the money for such a fine or doesn’t feel like paying it from funds it would rather spend on stadiums or the purchase of private enterprises. In any case, the government came up with a splendid idea: let the companies pay for something that is clearly the Hungarian government’s fault.

Although the public usually hears only about Lajos Simicska’s company Közgép, the firm that receives most of the government orders, there are others. Apparently, there is a company called Duna Aszfalt that lately has become a true competitor to Közgép. In addition, there is a French company called Colas, the Austrian Strabag and Swietelsky Magyarország, Magyar Aszfalt, and Hídépìtő Group. Each of these companies has had more than 100 billion forints worth of government orders and thus would be obligated to pay a 15% tax on its gross income.

According to an article that appeared in HVGKözgép was the greatest beneficiary of the Orbán government’s largesse. Since 2007 it won bids for projects to the tune of 132 billion forints, which would mean a retroactive tax of 20 billion. But in the last two years Duna Aszfalt–which is in fact situated in Tiszakécske–has grown tremendously. In 2012 it received government work amounting to 28 billion forints, whereas in 2013 this amount was 54 billion and its profits almost quadrupled. The two owners received 1.8 billion forints in dividends. It was Duna Aszfalt that built the road from Makó to the Serbian border.

road construction

Soon after the first report of the possibility of an extra levy on these companies, the Hungarian government denied any such plan. The denial, however, was carefully worded. On HírTV János Lázár said only that “in the last few months the topic has not even been mentioned in cabinet meetings.” That is not a categorical denial of the existence of such a plan, especially since Lázár during the same interview admitted that Brussels “has formulated doubts and misgivings concerning road construction worth about 500 billion forints.” He added that “it was probable that Hungary will have to pay a significant fine.” For the time being Lázár couldn’t say how and to what extent this fine will affect the companies that were the beneficiaries of the contracts, but he claimed that the “Hungarian government will defend the Hungarian people and the Hungarian companies.” He added that “this defense will not be extended to foreign companies.”

That is clear enough. The Hungarians will not have to pay or will have to pay less while the Austrians and the French will pay through the nose. Therefore, it might seem surprising that Magyar Nemzet today wrote a scathing article against the government’s plan in defense of the construction companies. One must keep in mind, however, that Lajos Simicska and Zsolt Nyerges, his close business partner, have a stake in the newspaper. The publisher of Magyar Nemzet is Nemzet Kft, which used to be called Mahir Kft; this was Simicska’s first business venture.

The title of the article is: “How will a 100 billion forint tax become a 1.2 trillion deficit?” The article claims that if the companies have to pay such a large amount, their own future business activities will be in jeopardy. The contention is that the companies’ profit margin is nowhere near 15%. In fact, the spokesman for Strabag talked about a 3% profit margin on road construction. The author thus calculates that the loss to these companies would be unbearable. Moreover, these companies haven’t even received all of the money the government owes them: “in brief, the money that the government wants to collect is nonexistent.” The consequences will be serious, the article warned. There will be liquidity problems that will result in these companies not being able to pay their workers and their subcontractors; they wouldn’t even be able to buy material. In brief, their current projects will come to a screeching halt.

And that’s not all. Even the slightest delay might mean that these firms could not finish the construction jobs before the December 31, 2015 deadline, in which case the country would have to pay back all of the subsidies received from Brussels. That would mean a loss of 1.2 trillion forints. Further, the article warns about possible bankruptcies, which may result in the loss of 90,000 jobs. Problems in the construction sector could seriously affect Hungarian economic growth. In the first quarter of 2014 GDP was 3.5%, and the construction sector contributed 0.5% to that figure. As a result, it can easily happen that Hungary’s deficit may exceed 3%. If that happens, Hungary could be placed under the excessive deficit procedure, which would mean a suspension of all EU subsidies.

The construction lobby is pushing hard, using Magyar Nemzet to describe the worst case scenario if the “asphalt” tax is imposed. It may persuade the government to go light on Hungarian companies, as Lázár already intimated the government would. But I don’t know what Brussels will think if Hungary implements a two-tiered tax: one for domestic companies and the other for foreign companies. Such a solution would definitely restrict free competition, which was Brussels’ objection in the first place.