Hungary's new ad tax seen hurting economy as well as free speech

By bne IntelliNews June 16, 2014

Kester Eddy in Budapest -



Hungary's controversial new advertising tax, fast-tracked through parliament via a private member's bill on June 11, is not only harmful to media independence, it will also have a negative impact on the economy, say industry specialists, some of whom have pledged to fight the law “by all legal means.”

The new tax, which at the top rate amounts to 40% on ad revenues of media companies, prompted publishers to print blank pages and broadcasters to suspend programming in protest at what they say is an attempt to curb media freedom. However, the government of Prime Minister Viktor Orban justifies the move by what it terms the need for “burden sharing” from a “highly profitable” industry, while it specifically denies any intention to discriminate against any companies within the sector. The tax is expected to raise some HUF8bn (€26m) in additional budget revenues annually.

But while the initial outcry surrounding the tax centred on suspicions that it is intended to target broadcaster RTL Magyarorszag – it is the only company affected by the 40% tax bracket – everyone in the Hungarian media and advertising world is apprehensive about the tax's wider impact.

Virag Balogh, international spokesperson for the Hungarian Advertising Association (MRSz), argues that the tax will backfire on the government over the medium term, slashing up to HUF40bn (€132m) – or roughly 0.1% – off Hungary's GDP. “It's well known that the advertising industry has a multiplier effect: it promotes innovation, competition and consumption. So, as a study done by PwC last year showed, every HUF10 spent on advertising results in HUF47 added to Hungary's GDP,” Balogh tells bne.

Taking cash out of the system via an additional tax has the opposite, magnified effect on the economy – most particularly through job losses as the industry trims budgets to balance the books. “If there is a loss of HUF8bn, we estimate that, mid-term, there will be an annual loss to the economy of between HUF30bn-40bn,” she argues.

Confused policy

But it is the publishers and broadcasters who are grappling with the immediate effects of the tax – and, not for the first time – legislation rammed through by the Fidesz government is causing confusion and uncertainty. “There are some fundamental problems with this law,” says Tibor Kovacs, president of the Hungarian Publishers' Association. “Nobody really knows how the players will react.”

First and foremost, the government once again used a private member's motion to bring the bill before parliament – thereby avoiding the discussions with affected industries that are mandatory for government-sponsored bills. As a result of this short cut, media companies have to make the first new tax payment at the end of August, totally upsetting business planning, says Kovacs. “No company had prepared to pay millions [of forint] with two months' [notice],” he says.

The reaction of RTL – how it will cover the enormous increase in costs it now faces – is likely to impact negatively on the media sector. “Over the last 10 years, the two main commercial TV channels [RTL and TV2] have been the price dictators, and all the other players followed,” Kovacs says.

The fear is, he says, that RTL will increase its advertising rates, creating a “a kind of vacuum cleaner effect,” with much of the national advertising spend being sucked into the major TV stations, to the detriment of smaller media companies, particularly print.

The law also seeks to tax online advertising, which was worth HUF39bn last year, the second largest slice of the market. But exactly how the government is going to force providers with no legal presence in Hungary to pay up is “the $64m question,” says Kovacs. “It's a problem the European Union itself has been struggling with.”

Peter Nadori, deputy chief executive of Lapcom, an independent Hungarian publisher, argues the law must be examined at the highest level. “We've had demos and blank pages, that's all very nice, but I think this is something we have to challenge legally,” he says.

Since the Hungarian Constitutional Court will be “pretty much a non-starter” – as it can no longer rule on tax matters – he reasons the industry may be forced to turn to the EU or European Court of Human Rights, “because this has very heavy free speech, free press implications,” Nadori says. “I, personally, am in favour of doing everything and anything of any legal form to challenge this.”

But any such legal challenge could take years before a verdict is reached.

Meanwhile, Hungary's advertising market will have to deal with the consequences of the tax. With a total spend of HUF175bn (€560m) last year, it has already shrunk some 30% since the recession of 2008. Industry analysts say media close to the Fidesz government have seen healthy advertising revenues since 2010, but many without such connections have struggled to survive this far.

Even if, for smaller companies, the new tax payable is small or even zero, Kovacs says, it all leaves “a huge question mark over Hungary's media market.”


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