In spite of ever more intensive efforts by Hungary’s tax police to clamp down on dodgy business dealings, fictitious transactions in which companies “reclaim” tax after submitting a fraudulent invoice to the authorities are on the rise, said Monday’s business daily Napi Gazdasag.
Between January and November last year, APEH, the tax authority, stepped up the investigation of company transactions with a focus on retail chains by 30 percent, said the paper. The net tax discrepancy had risen by two and a half fold during the period compared to the previous year.
The Socialist government under Prime Minister Ferenc Gyurcsany has made “whitening” the economy a central plank of its tax policy. Efforts to bring employees into the tax fold have yielded more revenues for the budget, whose deficit has fallen from around 9 percent in 2006 to an expected 2.6 percent in 2009.
But holes remain in the system, and businesses are using a number of methods with which to exploit the weaknesses, such as the simple ruse of issuing a fictitious invoice or more elaborate schemes which involve the cooperation of several players, said the paper.
Alternate interpretation for balance: detection of “tax evasion rose last year” following clampdown.
Correction:
“But holes remain in the system”
should read:
“Buttholes remain in the system”.
@Stan, So true!
It’s almost as if the system has a natural balance point. There’s a modelling technique called “System Dynamics.” It shows that where one “circuit” has a lower cost than another, the lower cost circuit will prevail. In the case of a choice between paying and evading taxes, the high cost of the taxes (and ensuing bureacracy) and companies failing (due to the onerous nature of the level of tax) competes with the cheaper path of corruption, evasion and the externality of being caught.
I’m thinking that here, the tighter the controls get, the more the evasion would occur…
@rolrox: I’d be more inclined to refer to this as finding the equilibrium point of the opportunity costs of evasion vs compliance. I believe the paper you are looking for is: “Tax Evasion, Income Inequality and Opportunity Costs of Compliance” (http://www.irs.gov/pub/irs-soi/bloomq.pdf )
@Vandorlo… Thanks, I’ve not read it all (yet!). Bloomquist suggests that evasion is partially driven by the gap between rich and poor, and the impact on those in the middle who are forced to pay more to compensate. She posits that this in turn drives more evasion, which overloads tax collectors, reducing the odds of being caught and therefore further encouraging evasion.
Interesting if applied here to HU. By focusing on some tax evaders, is APEH overloaded and unable to chase after others?
@Rolrox: I think this comes down to the quality and quantity of paperwork (receipts, employment records etc…) that exist. My belief is that this follows a positively skewed bell curve. Meaning that the lower to central middle class pay proportionately more due to these being easier to track (and a large proportion of these are government employees anyway). My reasons for believing this is the deliberate choices that APEH have made about what types of records are required to be kept. For the lower classes it is hardly worth the money to keep tabs on their transactions, but for the upwardly mobile and high earners they continue to have plenty of ways to dispose of their money pretty much unchecked. So expensive holidays, car purchases, luxury goods, hotel bookings, etc… are all pretty much allowed without requiring too much information that will allow APEH to clearly demonstrate that a person’s reported income/wealth does not match their spending (ignoring the story a while ago of APEH using photo-spreads of some media stars to prove they were going on far too many holidays). Until APEH is “able to match most of their income using information documents” a the lower middle classes will be carrying this country. Obviously, I’d love to find any available data on any of these matters.
@Vandorlo. 2 stories to your point:-
An IRS Agent living in my friend’s hometown tells of how he would write down license plate numbers of cars parked outside fancy restaurants; and then run their records to see what they filed. As the IRS are incentive-ised – he claimed that his technique worked most of the time; and enjoyed the fruits thereof.
As a kid growing up, I knew several people who deliberately drove cars way below their income levels specifically so as to not attract IRS attention.
@Vandorlo. I see your point about those that cannot avoid get hit worse. More well off can afford to create vehicles that would avoid further taxation.
However, in truth its the country itself that suffers as a great deal of capable people waste their time finding loopholes. My own experience is that we spend 10% of our resources finding ways to compensate in a way that is above board, but at the same time – through various legal mechanisms, avoids paying 65% (eg. via EVA). Lets face it, a litre of petrol here is the same (or more) than in London; peoples costs aren’t too different. So to walk away with the same money just to live – if done the normal way means staff cost 3 times what they would in the West.
Just today this came up again, my western partners and potential investors are scared that we don’t have ‘normal payroll,’ but instead all 3rd party contractors (including partners) who apparently could leave at a moment’s notice. When I explain to investors that this is how it works in HU, they are scared off as the place sounds like a banana republic. I try to explain how it isn’t; it’s one step to the side: ‘A Paprika Republic’ (just look at the colours of the flag, not a hint of yellow!) but the net result is the same. No investment unless I’d consider moving.