Two days ago it was announced that Dirk Gerkens would step down as CEO of RTL Klub in Hungary. His departure had long been rumored since Gerkens’ fierce defense of the television station’s independence from government interference greatly irritated the officials of the Orbán government. Irritation was translated into action. On June 11, 2014, the Hungarian parliament passed the Advertisement Tax Act. It hit RTL Klub the hardest because the tax rate was progressive: small companies would pay nothing while the largest would pay a 50% tax, not on profits but on revenues. RTL Klub was the only company that had to pay half of its advertisement revenues to the government.
It was obvious from the very beginning that the European Union would not let this Hungarian action go unanswered. It was also clear that if the case was ever litigated the Hungarian government could only lose. So, after lengthy negotiations, the Hungarian government expressed its willingness to change the most objectionable part of the law, its progressivity. Viktor Orbán was adamant, however, that the budget couldn’t forgo the money the tax law would generate. He was ready to give up the progressive feature of the law in favor of levying the tax on all media organs, regardless of size. János Lázár, who has been handling the RTL Klub case, mentioned several possible figures but most often talked about a tax of between 5 and 10% across the board. I assume that this lower tax rate would also be levied on advertising revenues, not on profits. It seems that the price of the deal was the departure of Gerkens.
Meanwhile Brussels began to investigate the June 11, 2014 tax law and indicated that the progressive taxation system contained therein is in breach of European Union laws. Hungary was given until February 16 to offer an acceptable alternative version of the law on advertising. February 16 came and went. Eventually Margrethe Vestager, EU commissioner in charge of competition policy, seems to have had enough and today released a statement announcing the opening of an in-depth investigation into the Hungarian advertisement tax. The question is whether “Hungary’s advertisement tax introduced in June 2014 complies with EU state aid rules.” Investigations in the European Union usually last so long that countries not in compliance can sometimes achieve their objective before the final ruling is handed down. But in this case the statement Vestager released added the following “suspension injunction”: “The Commission has … taken a separate decision prohibiting Hungary from applying progressive rates until the Commission has finished its assessment.”
Let me say a few words about Margrethe Vestager who, according to a Financial Times article, “has a steely reputation.” She has been in politics ever since the age of 21 when she was appointed to the central board and executive committee of the Danish Social Liberal Party (Radikale Venstre). Since then she served as minister of education and later as deputy prime minister and minister for economic and interior affairs.
As Vestager sees the Hungarian situation, the problem lies not only with the progressive nature of the tax. She promised that “the investigation will look in detail both at how the advertisement tax applies currently as well as how it is amended, to make sure there is no unfair discrimination against certain media companies.”
In practical terms this means that from this moment on the Hungarian government will be unable to collect any advertisement tax from any media outlet. The 7 billion HUF Orbán needs so desperately for his 2015 budget and that was supposed to come from taxing the Hungarian media outlets is in jeopardy.
The Orbán government had tried to postpone making any legislative changes to the current law as long as possible. With this “suspension injunction,” however, dragging out the procedure actually works against the interests of the government. The longer they do nothing the longer the suspension will remain in force. Moreover, even the speedy enactment of a new law will make no difference as far as this “suspension injunction” is concerned. It will remain in force while Brussels conducts an “in-depth” investigation into any unfair discrimination in the new version of the law. It seems that Brussels no longer trusts the Hungarian government because, as Ricardo Cardoso, spokesman of the European Commission, indicated, they will not only have to study the new or amended tax law but will also investigate whether “possible illegal state aid has distorted the market already.”
What is the Orbán government’s reaction? The Kormányzati Információs Központ (KIK/Governmental Information Center) announced that the cabinet will discuss the matter next week. The spokesman stressed, however, that “the government seeks dialogue but will defend the interests of Hungary.” The question is whether the normally belligerent Hungarian government will eventually cave or will simply ignore the verdict of Brussels. If the prime minister is foolish enough to launch another “war of independence,” Brussels would most likely take the case to the Court of Justice of the European Union, the body that interprets EU law to make sure it is applied uniformly in all EU countries. The Court has 28 members from the 28 EU countries. I have no doubt that if the case ended up before this court the verdict would go against Hungary. The only remedy, however, would be a hefty fine. The question is whether it would be hefty enough to make it economically unwise for the Hungarian government to ignore the EU and collect the tax money it needs to plug the hole in the 2015 budget.
P.S. Breaking news: “The EU has blocked Hungary’s €12bn nuclear deal with Russia.” See http://www.ft.com/intl/cms/s/0/9a6467e2-c8c1-11e4-8617-00144feab7de.html?siteedition=intl#axzz3UCd1Ux7S