Learn from the Hungarians!

In our article ‘Allying with tax evaders’, Business Recorder, January 25, 2103, we mentioned that “while our government and parliamentarians during the last many years have been busy in extending amnesty schemes, immunities and concessions to tax evaders to decriminalize their illegally-gotten wealth and avoid all kinds of probes and punishments under various laws, the world governments showed commitment to take tax cheats to task.

The latest move came from Hungary’s government on 16th January, 2013 when Prime Minister’s chief of staff Janos Lazar expressed determination to identify and tax all wealth held by Hungarians in foreign – mostly Swiss – banks. Lazar announced that Hungary wants to tax all holdings in foreign deposits at an average 35 percent rate.”

Determination of the Hungarian government to crack down on tax evaders and impose tax on the rich has paid off, to the utter surprise of many financial wizards and political pundits, by paying back the final instalment of $2.125 billion of a total credit line of $25.5 billion before even it was due, to the International Monetary Fund (IMF). Hungary had obtained loan in 2008 under a previous Socialist-led government to stave off financial collapse during the worldwide economic crisis. The current conservative government of Prime Minister Viktor Orbán after coming to power in 2010 showed determination to quit the IMF programme declaring that “the terms of the IMF loan are not in Hungary’s interest”. Within three years, Orbán achieved what he promised. While our rulers on assuming powers are shamelessly saying that elections promises were a hoax.

Primer Orbán in a lecture at the 24th Balvanyos Hungarian Summer University in Baile Tusnad (Tusnádfürd?), Romania, in July 2013 said that “a crucial component of the government’s economic strategy is a policy seeking to help ethnic kin retain their Hungarian identity, prosper in their homelands, and have access to Hungarian education”. He added that “in line with Hungary’s economic policy the government is committed to retaining all the assets produced by the Hungarian people and prevent them from being repatriated from the country. During the past two decades, Hungary stayed a “vulnerable and exploited” country despite its political freedom, he said, and argued that funds were “pumped” out of the country through several channels. As examples, he mentioned the profit of foreign banks, the central bank’s base rate “kept artificially high” or foreign currency-denominated loans.

Orbán said he had instructed the Minister of National Economy to pay off the loan Hungary had taken from the International Monetary Fund in 2008, before the end of the summer. He said that the necessary funds were available because “the Hungarians have generated that money during the past three years.”

Answering questions after his lecture, he said that reducing Hungary’s debt was in the interest of the whole nation. He said that a country could hardly recover on its own if its debt ratio exceeded 90 percent of GDP, but added that with a ratio of 77 percent Hungary was “in the critical zone”. He suggested that in an ideal scenario the debt rate should be reduced below 50 percent.

Orbán’s plan to pay back the IMF loan and a call on the Fund to shut its Budapest office is termed as “a symbolic move to display its economic sovereignty.’ Reuters reported that “Hungary’s ability to avoid the austerity programmes faced by many of its European neighbours would be the government’s main selling point when it bids for re-election next year.”

In a letter to the IMF’s Director, Christine Lagarde, on July 15, 2013, Chief of Hungarian Central Bank Gyorgy Matolcsy, while appreciating the role of the Fund, highlighted the pro-growth stance of the bank that slashed interest rates to a record low of 4.25 percent over the past 11 months. As such, Mr Matolcsy said, it was no longer necessary for the IMF to keep an office in Hungary.

It must be mentioned that Central Europe’s most-indebted nation, Hungary, was pulled back from the brink of bankruptcy with a 20 billion euro rescue package from the IMF and the European Union amid the global crisis. Shortly after taking office in 2010, Prime Minister Orbán abruptly ended that programme as the government sought to control the country’s financial affairs on its own. It initiated an unorthodox campaign that included Europe’s highest bank tax and special levies on business.

On the contrary, Pakistan’s new government during election campaign claimed that it would not go to the IMF and would raise its own funds, but immediately on assuming power not only has it sought the IMF’s huge loan but also gave relief to the rich corporate sector. It cruelly imposed extra tax burden on the poor and vulnerable economic classes-especially the fixed income groups. Premier Nawaz Sharif and his close relative Finance Minister Ishaq Dar bowed before the IMF rather than showing fortitude demonstrated by the Hungarian Prime Minister Victor Orbán.

The previous government of PPP also displayed the same shameless conduct – instead of taxing the rich and stop giving plots and perquisites to the privileged classes, it tabled a bill offering unprecedented tax amnesty at the meagre rate of 1%! Luckily the bill was not passed because of media’s immense pressure campaign that elected members did not pay taxes and just wanted to secure such benefits for themselves. PPP government also did not bother to seek information from Swiss banks where Pakistanis have parked untaxed funds of over Rs 1.52 trillion – No will to tax the rich, Business Recorder, June 14, 2013. Even the government of Nawaz Sharif in its first 100 days has not taken any step in this direction. In contrast, the Hungarian government forced Switzerland to disclose all data pertaining to bank accounts of Hungarian citizens in Swiss banks.

Hungary has been struggling to reduce its budget deficit under the European Union limit of 3 percent of gross domestic product (GDP). To meet the challenge, Premier Orbán has been hostile to offshore holdings since he took power in 2010. On the contrary, our rulers have been encouraging flight of capital and extending unprecedented tax concessions to the militro-judicial-civil complex in the form of free plots and perquisites, and squandering taxpayers’ money for their personal comforts and luxuries – ‘An elitist Pakistan’, Business Recorder, July 26, 2013.

All governments including the present one have shown total apathy towards improving tax collection and eliminating wasteful expenses resulting in fiscal deficit jumping to 8.8% of GDP. Instead of meeting revenue target of Rs 2381 billion fixed at the time of budget for the fiscal year 2012-13, Federal Board of Revenue (FBR) suffered shortfall of over Rs 142 billion. This is the difference between Hungary and Pakistan. In trouble, Hungarian leadership showed vision and courage to overcome the crisis whereas our leaders remain busy in evading taxes and plundering the wealth of the nation. Our leadership can learn from Hungary, but obviously there is no will to do so.

The Hungarian government citing international comparisons and intelligence sources estimated the total holding of Hungarians in foreign, mostly Swiss banks at least one trillion forints (USD 4.53 billion) and passed asset seizure legislation for tax recoupment. They adopted pro-growth policy and reduced interest rates and inflation. Our governments have never shown any interest in accelerating growth and to tax assets lying abroad-no information from the countries having tax treaties with Pakistan has been sought till today. This is not a case of apathy or bad governance, but a wilful criminal act-instead of taking action against rent-seekers and unlawful outflows, the government has decided to continue with obnoxious provisions like section 111(4) of the Income Tax Ordinance, 2001 providing a legal cover to tax evaders and persons engaged in organised crimes to get their dirty money laundered. The million dollar question is that how can such regimes ever pull the country out of this present mess?

(The writers, tax lawyers and partners in HUZAIMA & IKRAM (Taxand Pakistan), are Adjunct Faculty at Lahore University of Management Sciences)