Price Control in the Eastern European Region

2 hónap ago

Hungary is the first country in the region and the EU to have recently introduced official price regulation. But Hungary is not the only European country where the government intervenes in market prices. It has been applied in Croatia, Slovenia and Serbia, and Poland has taken a different approach to the problem of price volatility. Despite the fact that, according to economists, price regulation may be justified for a short period of time, it has been used in our country for a long time. Furthermore, in the October 2022 decision, the Hungarian government extended it to additional basic foodstuffs. However, with this decision, the government does not help to reduce inflation, it only covers it up.

Introduction

Hungary is the first country in the region and the EU to have recently introduced official price regulation. In 2013, an official price was already set for bottled gas, and then the Hungarian government saw the need to regulate the price of several products due to the epidemic situation. Currently, for the first time in a year, an official price is applied to fuel and to several products: granulated sugar, flour, cooking oil, pork legs, milk, and the latest product to be subject to an official price is firewood, following the energy crisis. It was imposed for a period of three months, but will be extended again and again as the period expires.

Price control in the Eastern European Region

But Hungary is not the only European country where the government intervenes in market prices. It has been applied in Croatia, Slovenia and Serbia, and Poland has taken a different approach to the problem of price volatility.

In Serbia, official prices similar to the Hungarian regulation were introduced in 2021, and the rationale is the same, i.e. to curb inflation. The products are also the same, except for chicken breast. However, the important difference is that, on the one hand, the Serbian government introduced it for a shorter period of 2 months, but after that period it was maintained, and on the other hand, if the market was already overburdened by the maintenance of the legislation, the government removed the official price for the product.

In Croatia, only fuel is subject to an official price, for a period of one month. After one month, the official price was abolished, but if the legislator saw fit, it was reintroduced, again for a period of one month.

Slovenia used a similar method to Hungary, fixing fuel prices for a period of 3 months. However, it was phased out before the end of the period, on the grounds that it placed a disproportionate burden on the country's economy.

In Poland, however, the inflation problem has been approached from a different angle. Instead of using official prices, the Polish government saw the solution in tax cuts, with larger reductions in taxes on food, fuel, natural gas and electricity.

It can therefore be seen that it is mainly in the Central and Eastern European region that there is a preference for the institution of price regulation by public authorities. In my opinion, when applying it, particular attention should be paid to the effects of official prices on the market, so that they can be adjusted and corrected if necessary. This is the case with the Serbian and the Slovenian solutions, where the negative impact was stronger than the positive one, and the official price for the product was abolished and removed. For similar reasons, in Croatia it is only applied for short periods of one month. From this point of view, in the long term, the Hungarian economy is the most exposed to the negative effects of price regulation, as it is the least monitored, examined and corrected for its impact on the economy. Compared to the Hungarian solution, other countries are more attentive to the effects of price regulation on the economy and are willing to change it if it is perceived to be inappropriate.

In Hungary, official price controls are currently in place for 11 products, and according to radio statements by the Hungarian Prime Minister, the range of products is expected to be extended, with plans to set official prices for more products, including eggs, cheese and bread, according to press reports.

The exceptional situation, the energy crisis, has led to the introduction of a "price cap" on gas not only for Member States (although they have exclusive competence to introduce official prices) but also as a common measure for the whole EU, but negotiations are still ongoing. The EU attaches the importance to ensuring the availability of the gas it needs at an affordable price, which is why a common "official" price has been considered.

Inflation in the Eastern European Region

After looking at the different methods of official price controls in the CEE countries, let's look at the inflation rates in these countries.

First, let us take a look at Hungary, where the inflation rate is more than 20% based on September 2022 data, with an exact value of 20.1%, but the inflation curve has not yet started to decline, so inflation is expected to rise further. Meanwhile, the country's central bank has raised its base rate to 13%. Meanwhile, Hungary's southern neighbour, Serbia, has an inflation rate of 14%, also based on September data, with the country's central bank base rate raised from 3.5% to 4%. In Slovenia, inflation is 9.9%, but it is worth noting that, unlike the other countries, inflation has fallen from 10% to 9.9%, albeit minimally, compared to the previous reading, while the base rate has been raised to 2% from 1.25%. In Croatia, the inflation rate is 12.8%, also with a rising inflation curve, but the base rate is also significantly lower than in Hungary, at 2.5%, which has not been raised since the previous survey. Poland is in second place after Hungary, with an inflation rate of 17.2% and a base rate of 6.75%, which is also the second highest base rate of all the countries surveyed, and interestingly only half of the rate in Hungary. Although no price controls have been applied in Poland, the inflation data shows that excessive tax cuts are not the right solution either.

Source: Own editing (tradingeconomics.com)

For comparison, look at the Eurozone, where inflation was 9.9% in September, up from 9.1%, and the base rate was 2% in October, up from 1.25%. Looking at the main components of euro area inflation, energy had the highest annual rate in September (40.7%, compared with 38.6% in August), followed by food, alcohol & tobacco (11.8%, compared with 10.6% in August), non-energy industrial goods (5.5%, compared with 5.1% in August), and services (4.3%, compared with 3.8% in August).

Source: Own editing (tradingeconomics.com)

These are also the areas where inflation is the highest in the states surveyed, but at different rates of course. In the European Union ranking, Hungary is ahead of only three countries: Estonia with 24.1%, Lithuania with 22.5% and Latvia with 22%. "The sharply higher-than-average inflation trend in Estonia can be ascribed to a slew of factors including a scarcity driven surge in electricity prices and an exceptionally strong rebound of the Estonian economy after the pandemic leading to labour shortages and higher wages. According to Estonia's central bank, the country's economic output stood about 7 percent above pre-pandemic levels at the end of last year. Germany, the region's economic powerhouse, by contrast had failed to return to pre-pandemic size at the time. [...]” Estonia's membership of the eurozone means it can't change interest rates independently to suit its own economic needs, such as raising borrowing costs now to choke off economic activity and so prices.

Instead, the Germany-based European Central Bank (ECB) makes decisions for all euro countries after discussions among the governors of the 19 member countries. That means interest rates may not rise as much as Estonia might want, as more indebted eurozone members with lower inflation - such as Italy - are likely to resist.  This is also true for the other two Baltic countries. Statistics show that France has the lowest inflation at 6.2%, followed by Malta (7.4%) and Finland (8.4%).

Summary of the price regulation decision

In summary, countries that are more careful about the changes that may be needed to their official prices do not experience the same level of inflation as countries that maintain the measures without changes and for significantly longer than Hungary. It is worth noting that it is unfortunate that a significant increase in the central bank base rate is accompanied by a significant increase in official prices, as it can have the opposite effect, with the benefits being lost and the negatives being felt by the economy of the country concerned, which other countries with official price controls are trying to address.

 

For a list of references, click HERE.

Author:  Márk Sebestyén Pella, law student, University of Debrecen, Faculty of Law

 

Kategória: Monetary CrisisBrexit Eng: Fogyasztóvédelem: Consumer Protection: 16th Anniversary: 
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The Role of Offshore Companies in the Macroeconomy - From Tax Optimisation to Tax Avoidance

2 hónap 3 hét ago

Offshore companies play an exceptionally important role in the macroeconomy. As a result of the recently emerging scandals (Panama papers, Pandora papers) now they could face more attention than ever before. Despite the commonly regarded negative sense of macroeconomy, it is undeniable that it has many positive effects, especially in terms of tax optimisation, or encouraging investment. It is important to note, that offshore companies raise several questions and concepts, which require further elaboration: such as their legal regulation, the term of tax avoidance, and the blacklist (the list of non-cooperative EU countries from a tax point of view).

Introduction

In recent years offshore companies have received an increased amount of attention due to various scandals. Their existence in the economy raises numerous questions: many wonders why they are not regulated more strictly, why they are legal, what are their benefits, and where the line is drawn between offshore companies and tax avoidance (i.e. when do we talk about tax optimisation and when do we talk about tax avoidance), and why their presence in macroeconomy is justified. The role of offshore companies in the macroeconomy can be very important, as they bring a wide variety of benefits if they comply with the established legal rules: whether we look at the foreign capital flows of a particular country, or even if we consider the benefits for a multinational company or enterprise.

The role of offshore companies

Offshore companies can be established in countries where local laws do not tax foreign activities since they are considered tax-free. In contrast to this, they must pay a fixed flat-rate tax yearly. In this case, we are talking about a company registered in a country, but does not carry out any activities there, therefore not making any income in that country. The reason for this is that entrepreneurs or companies want to optimise their tax burden by avoiding what they consider to be too high in their own country. To achieve this, they mostly operate in tax havens with low tax rates: e.g., Bermuda, Andorra, Bahamas, Cayman Islands etc. Favourable tax conditions are not the only reason for the tax haven title. In addition, the following conditions also contribute to the ability of such areas to operate as tax havens: minimal bureaucracy, confidentiality, discretion, special legal guarantees, and modern infrastructure (whether in telecommunications or banking etc.) (Offshore.net 2022). Low tax rates can be eliminated by the introduction of a global minimum tax, which Hungary was the only country to veto, but which will probably still be applied.

However, to see the importance of offshore companies for the economy, we need to look at foreign capital flows. If we take Hungary as an example, then from the data we can conclude, that the foreign capital flow in the country is at a very high level:

Source: Hungarian Central Statistical Office

In my opinion offshore companies (in addition to other major factors) play an important role in increasing foreign capital flow, which is imperative for the functioning of the world economy.

1. Legal regulation of offshore companies

In Hungarian regulation, offshore companies are referred to as supervised foreign companies. In terms of the regulation, it’s important to highlight Act LXXXI of 1996 on Corporate Tax and Dividend Tax (hereinafter: Tao tv.). The requirements for the creation of a supervised foreign company are the following:

  1. the owner must be foreign,

aa)     in which the taxpayer alone or jointly with associated enterprises

aaa) hold more than 50% of the voting rights, or

aab) hold more than 50% of the shares, or

aac) be entitled to more than 50% of the after-tax profit

ab)     and pay less than 4.5% corporation tax for the tax year;

or

b)         be a foreign establishment of a domestic taxpayer, where the establishment pays less than 4.5% corporate income tax for the tax year (Adó Online 2017).

The law also declares several points when the conditions are not met, i.e., when we are not allowed to define a company as a supervised foreign company.

Concerning the Tao. tv. and the concept of a supervised foreign company, it is important to note that in 2017 the concept underwent a major change compared to the previous one: the shareholding ratio above 50% also changed, which was defined as a shareholding ratio above 10% before 2017.

2. Offshore blacklist

In addition to the legal regulation of the supervised foreign companies, the list published by the European Union (Europa.eu) also contributes to the regulation of offshore companies: the countries on the list do not cooperate on tax issues and do not take adequate actions against e.g., tax avoidance and tax fraud (Crystal Worldwide 2021). Practically speaking the list is a negative visual tool, and it is naturally not in the interest of any country to be on. There also exists a grey list, which contains countries that do not meet the criteria, but are trying to meet the requirements and have taken steps to do so. Therefore, the grey list can be viewed as a transitional list.

The purpose of the blacklist combat tax avoidance and tax fraud not just on a member-state level, but also on an international level, therefore providing the primary conditions of fair taxation. The list is not intended to shame the countries, but to guide them towards positive change, and initiate a consensus among the countries on it. To be labelled as a cooperative country from the taxation point of view, the following conditions must be met: e.g., jurisdictions must ensure the exchange of tax information on request. jurisdictions must provide information exchange with the member states in the way of AEOI (Automatic Exchange of Information) or CRS (Common Reporting Standard), etc. The list was last updated on 24.02.2022. At this time the countries on the list included Samoa, Fiji, Panama, Guam etc. Once the list has been established, updating it proved to be an important task, as countries are constantly added and removed, and the following activities must be carried out: keeping in touch with the countries on the list, updating the criteria, monitoring the changes performed by the country, screening the countries etc.

Overall, the use of the offshore blacklist provides countries with an opportunity to gain insight into countries that are not cooperating on tax issues and provides a uniform set of criteria, which makes it transparent to the countries on the list which criteria they must meet to be off the list.

3. Tax avoidance

Regarding offshore companies, it is important to note that a company reporting their profits to a country with a lower tax rate is not illegal. Tax avoidance is therefore not easy to define since tax optimisation is still considered a legitimate act. However, an essential element of tax avoidance is also the taxpayer’s attempt to find the most favourable tax conditions. This activity becomes illegal when it is carried out in a way that is contrary to the law. We can distinguish between several types of tax avoidance (Krekó & Kiss 2008):

1: avoidance of labour income tax (e.g., illegal work)

2: avoidance of sales taxes (e.g., unlawful refunds)

3: avoidance of capital gains taxes (e.g., concealing capital gains – reporting without bills)

The definition of tax avoidance is therefore widely used: it includes legitimate tax optimisation activities, but also illegal tax avoidance activities, including tax fraud. To see the real threat of tax avoidance, we need to look at the purpose of taxation itself. The main objective: is to provide public services, the main element of a public financial redistribution system. Taxes are a major source of revenue on both local and central levels. Therefore, it follows that taxes affect not just economic, but social relations as well. Tax avoidance can therefore be problematic because it can lead to horizontal inequality and provide unfair competitive advantages to those who avoid tax, in contrast to those who do not, and because it also undermines the efficiency of the tax system, as the unequal access to tax leads to unequal redistribution. Estimating the extent of tax avoidance and the potential loss can be problematic, as in some cases the actual turnover and revenue can be concealed (Krekó & Kiss 2008).

Overall, I believe that the definition of tax avoidance can be widely interpreted, although the practical use of it can lead to social issues in some cases, and it can also weaken the tax system and reduce tax morale.

Summary

Overall, offshore companies play a relevant role in the macroeconomy. Offshore company formation can be beneficial for entrepreneurs and multinational companies as well, because of tax optimisation and several other reasons, as for the whole economy, it can have a positive impact on foreign capital flows. In addition to the advantages, there can also be disadvantages in the case of illegal tax avoidance. The legal framework for offshore companies exists both at the member state level – in this case, Tao. tv – and at the EU level (Offshore blacklist).

For a list of references, click HERE.

Author: Ildikó Krivanics, law student, University of Debrecen, Faculty of Law

The study was made under the scope of the EFOP-3.6.1.-16-2016-00022 "Debrecen Venture Catapult Program".

Kategória: TradeBrexit Eng: Fogyasztóvédelem: Consumer Protection: 16th Anniversary: 
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