A unique financial transaction act
Author: Dr István Gárdosdownload
A unique financial transaction act
On July 9 2012 Parliament adopted the Act on Financial Transaction Fees (116/2012), which becomes effective from January 1 2013. The act designates the levied contribution as a fee, but this characterisation is highly questionable, as the contribution does not represent a reimbursement of costs or consideration for a service rendered by the state. As such, it is really no different from a general tax and is commonly called the 'financial transaction tax'.
The financial transaction tax is payable by banks and other providers of payment services with a head office or branch in Hungary. It is payable in connection with two types of financial transaction:
- payment services, such as fund transfers, collections or cash payments to or from payment accounts or through the post office; and
- issuing bills and accepting deposits by the Magyar Nemzeti Bank (MNB) - the Hungarian central bank - for a term no longer than two weeks.
The rate of the financial transaction tax is 0.1% of the payment amount, with a cap of Ft6,000, except when the financial transaction tax is payable by the MNB or the post office, when there is no cap. In the case of overnight deposits with the MNB, the rate is 0.01%. The financial transaction tax is chargeable on the day that the transaction occurs and is payable monthly on the 20th day of the month following the month in which the transaction was executed. The payment service provider must inform its customers about the amount of financial transaction tax paid in connection with the execution of their payment orders.
In order to evaluate this legislation, it is important to remember that a legislative process for harmonisation of the financial transaction tax at EU level, on the basis of a proposal by the European Commission, is in an advanced phase.(1) In addition to generating budgetary revenue, the proposal aims to complement the EU regulatory reform programme in the financial services sector, ensuring that financial institutions make a fair contribution to the costs of the financial crisis and creating disincentives for particularly risky transactions.
In contrast to the EU proposal, the purpose of Hungary's financial transaction tax is simply to cover public expenditure - or, as the prime minister stated in a radio interview, the financial transaction tax is to fund the government's "job protection plan". The Hungarian tax plan also has a different recent history: a special tax was imposed on financial institutions two years ago (for further details please see "Will new bank tax kill the recovery?"). The national economy has been stagnating for several years and bank lending and profits are at historic low. Many fear that this new measure will further harm the profitability of financial institutions and discourage the use of financial services by increasing the cost of basic transactions.
The EU proposal sees payment services as a fundamental basis of a modern society, playing an important role in the day-to-day financial activities of private households and businesses. In order to avoid a negative impact at this level, it excludes payment services from the otherwise broad scope of the proposed financial transaction tax. However, the Hungarian financial transaction tax is levied specifically on payment services, not on any other financial service.
Another difference between the EU proposal and the financial transaction tax is that while the European system would exclude all transactions with the European Central Bank (ECB) and the central banks of the member states, the Hungarian financial transaction tax is also levied on certain monetary policy operations of the MNB. In its opinion about the new act, the ECB stated that the imposition of the financial transaction tax impairs the MNB's functional, institutional and financial independence, and disrupts the monetary policy transmission mechanism.(2)
Once the EU proposal is adopted, Hungary will be unable to maintain the financial transaction tax in its current form. However, many believe that certain amendments will become necessary sooner. Hungary has started negotiations with the European Commission and the International Monetary Fund in order to obtain a new credit line for the country. The financial transaction tax - and in particular its extension to the MNB - may become an obstacle to achieving this goal.
(1) COM(2011) 594 final of September 28 2011: Proposal for a council directive on a common system of financial transaction tax, amending EU Directive 2008/7/EC.
(2) Opinion of the ECB of July 24 2012 on the financial transaction tax(CON/2012/59).