Text (edited) of the video of the Press Conference by András Horváth, former employee of the Hungarian tax authority, on VAT fraud and corruption in the government
Text (edited) of the video of the Press Conference
by András Horváth, former employee of the Hungarian tax authority, on VAT fraud and corruption in the government
Budapest, 8 November 2013
Now I’m giving the floor to Mr. András Horváth who will share the facts available for the public at the moment. A complaint with details and pieces of evidence has been filed at the relevant authority. However, only certain facts can be shared at the moment.
HA: Thank you for the introduction. I’m sure there will be plenty of questions regarding names or company names. But these are of course business secrets or tax secrets, so if I would tell any, I would be the first one to be lead away in handcuffs. But I’m pretty sure some of this information will be leaked in time. First of all, let me tell you that I am specialized in tax fraud networks and I experienced it at work that the authority does not do everything it could to fight them. That’s why I was pleased when, in the autumn of 2011, Prime Minister Viktor Orbán clearly stated that the tax authority should perform better in the field of tax frauds. However, nothing changed. They just could not change this tax evasive attitude which has been present for long in the most corrupted areas of economy. Moreover, I’ve got evidence for the fact that in certain sectors the situation got even worse. There are two sectors I could definitely mention here, but there must be others as well. One of them is the food industry. It’s being featured in the press quite frequently these days, as an announcement was made yesterday. I will talk about it later. And the other area is grain trade. I was involved in it quite deeply. For now, the VAT frauds have stopped there since the introduction of reverse taxation. I can confirm that in 2011, the state budget suffered a loss of about HUF 1700 billion from VAT fraud. This of course includes small businesses and the business sector in general. The most significant ones are being backed by organized crime. This can measure up to HUF 1000 billion of the above amount. This is still a remarkable proportion of the Hungarian GDP [3-4%]. If the tax authority could only levy 20-30% of that, even that would be of a great help for the budget and many areas these amounts are missing from. There are three main reasons why it cannot do that. First, as I see it, the function of NAV [National Tax and Customs Administration of Hungary] has been reduced to money collection and allocation. As a controlling authority, it has become practically dysfunctional. It has become incapable of enforcing law-abiding attitude on the most corrupted areas. This clearly shows in the wasteful way it treats its human resources that could be used for revealing and fighting tax frauds. Moreover, experts with critical attitudes towards the soft spots of the system have been set aside no matter how impressive professional experience they had. I have evidence for that and there are several other people who could verify it. I have consulted with many of them, however, they did not undertake to sit here next to me at this press conference for good reasons. Abuse of office is very typical in the operation of NAV. The present situation is a consequence of a systematic destruction process going on since 2007. This means that the most important decision-making positions at the tax authority were assigned to mediocre, impressionable leaders. Nothing was changed at the change of government [in 2010] either. This trend was not reversed. No investigations have been conducted to find the responsible people. Everything was going on with mostly the same people as under the previous government. What I see as the biggest problem is that this preserves this situation which keeps a certain circle of taxpayers in a privileged position, and this circle pays only a small proportion of the taxes compared to what could be expected based on their economic performance. Therefore they profit the most from the social contribution and VAT fraud of organized crime networks. These are the the biggest multinational and Hungarian wholesale and retail chains. These companies never undergo any serious audits regarding VAT or social contribution and even the audits completed are closed without any remarkable results. And the decision-makers within the tax authority are interested in preserving this situation. Instead of serving public interest, they serve the interests of these companies and the political and economic groups of interest behind them. So they are interested in concealing their unlawful behavior. From the numeric data made public by NAV we can draw the conclusion that the tax authority is mostly tough with the so-called phantom companies or missing traders. A great proportion of the unpaid tax found by NAV comes from this circle, which means hundreds of billions of Forints each year and this is also communicated to the press. Another quarterly list was published by NAV last week, containing taxpayers with the highest tax debts. This is entirely public. The company first on the list used to deal in the food industry, anyone can check it in the company register. This company was formed in February 2012. On this company NAV imposed a demand of HUF 8 billion altogether, including the unpaid tax, the fine and the late payment fee. The companies displayed high on these lists are those phantom companies which do not pursue actual economic activity, they just issue invoices. And as I told, that’s what the tax authority is good at, catching these companies and communicating it as a great success. However, they should go higher in these chains, to those huge conglomerates which really profit from it. From 2011 on there were apparent hints coming from inside the tax authority including myself and other coworkers, as well as from outside, from other Hungarian and foreign economic and civil organizations and from members of Parliament, to the decision-makers in the government, on how unacceptable this situation is, including serious market dysfunction, the weak controlling performance of the tax authority and the high number of tax frauds. There was one result (if we can call it a result, as it means nothing for the operation of the authority): the introduction of reverse taxation for grain trade, so VAT-fraud stopped in this field. But incredible amounts have been drawn from the public budget so far, and these will be made public on the homepages of the organizations that made this press conference possible. Apart from this, no significant measures were taken to reduce tax fraud. Moreover, in the meat industry, the plan to reduce VAT did not seem to be realized either, until yesterday morning. And in the afternoon we could already read it in the papers that the VAT of live pigs and half-carcasses will be reduced to 5% [from 27%] from January. This is a very one-sided decision. I have an insight to this area, so I can also confirm it is extremely corrupted, but not only regarding live pigs and half-carcasses. VAT fraud is present in all areas of the meat industry from live pigs to frozen chicken legs or whatever.
Professional organizations are absolutely right to demand that VAT should not only be reduced in such a small segment of the meat industry but for other basic food products as well, especially sugar, cooking oil or whole milk products. VAT fraud is present to a similar extent in these fields, and for coffee as well, which is not a basic food product, though. These are the products that create incredible amounts of money for organized crime networks and immense extra profit for retail chains because those stores sell huge quantities of these products where VAT has been evaded all along. There is an apparent outside pressure on the tax authority. But instead of really standing up against these tax evader networks, NAV mostly responds by means of communication. It highlights a few individual cases and communicates them as great accomplishments. Plus, it conceals the distressing situation in the field of controlling with some statistics. This philosophy of NAV is being pushed from higher levels. It is more about selling ourselves instead of overcoming the taxation anomalies of critical sectors, including the necessary organizational changes and total renewal to aid this process.
In my opinion, a responsible government should do the following to serve the interests of the country: First of all, the controlling procedure of the tax authority should be made more effective, with special regard to chain transactions reaching beyond borders. Reverse taxation should be introduced in many other fields and VAT should be reduced to a remarkable extent in the most corrupted sectors. So the announcement they made the other day [on VAT reduction for 2 products] is far from enough. While the government has been thinking about it (already for years ), organized crime networks are constantly creating profit for themselves and damage the economy on a national level by evading taxes.
Let me go back a little bit. For a short period, the government introduced retail tax [in 2010]. This does not exist anymore. But it was obviously introduced because the government was also aware of the incredible tax fraud in this area, not only VAT but social contributions as well. Fraud of the latter kind might measure up to 1000 billions of Forints each year. So instead of introducing retail tax, their main priority should have been improving the operation of the tax authority so it could stand up against these kinds of fraud more effectively. But in my view, it is hopeless to expect that any measures taken either by the government or the tax authority would bring any remarkable changes in the fight against black economy if we do not put an end to those foul connections in public administration, economy or politics for the purpose of illegal manipulation of taxation. All those corruption issues aided by abuse of office can be blamed mostly on the actors behind these connections, no matter which political side they belong to.
As I have mentioned, I have filed a complaint to the prosecutor’s office about the abuse of office and the illegal controlling practices at the tax authority. And last but not least, I would like to thank all the Members of Parliament (both from the governing party and the opposition), the civil organizations and my fellow clerks who have tried to stand up against these anomalous phenomena going on in several areas of public life and public administration over the past years. And finally, everybody please feel free to help our activity to clean public life and public administration. Thank you, that’s all I wanted to say.
SZ: Thank you very much. This is a historic moment. A key person at the tax authority who has deep insight into its operation had enough and stood in front of you, the public to reveal what is going on behind the scenes as much as it can be revealed. Because the actual details had to be kept confidential for the prosecution. All in all, huge multinational trade companies acquire extra profit by cooperating with criminals as links in their networks, robbing the budget and all of us with thousands of billions of Forints.
HA: […] The most corrupted relation is between Slovakia and Hungary. The biggest sugar factories and packaging companies of the region (not only Hungary) are involved in this huge tax fraud network. It happens like this: first, a small phantom retail company (one of those being displayed high on the NAV lists of the highest tax debts) purchases the goods, say, a truckload of sugar. After a purchase within the EU it only has to pay VAT if it sells it domestically. But it won’t pay the 27% VAT because these are mostly companies with strawmen as managing directors, with no intention of pursuing real economic activity whatsoever. So it just displays fictional invoices on expenses in its tax statement in the amount which is enough to knock out the VAT it should pay after domestic sales. Then, another link or two (not too many) are built into the chain and the second or third actor where the goods land at may already be any of the biggest retail chains I’d prefer not to name. What makes it even more peculiar is that I can see it in our documents and the data supplied by foreign companies that these trucks usually head straight to the sites of the retail chains. No matter that there are two or three more companies in the chain, the goods are still being transported straight to the sites of the retail chains. And this would be enough to prove that the retail chain was well aware of this activity as it is in no actual contact with those intermediary companies. It actually purchases sugar directly from Slovakia and acquires extra profit from evading VAT when selling it to us, customers.
?: To make these frauds in volumes of hundreds or thousands of billions of Forints one needs hundreds or thousands of trucks, but there are not so many companies. So there are surely hundreds of phantom companies but not thousands...
HA: There are hundreds of companies for each sector. But these are actually many hundred separate companies. There may be hundreds for each sector, all of them running simultaneously in this system. I wrote an paper on this matter; NAV had an action early this year. When the Slovakians heard that NAV was watching each border crossing, they stopped truck traffic immediately and the daily traffic dropped by 1600 trucks. But it’s no use checking these trucks as the criminals will return to the good old way of “virtual” transport. And the retail chain (or even retail stores) will receive the products without VAT.
?: These multinational companies must have some serious research behind so they know where to purchase from...
HA: Yes, you see it right. I think both the Hungarian and the foreign authorities bury their heads in the sand. It is known exactly which huge storages the goods are transferred to. And the packaging plants are also well known, in which the products are being repacked or relabeled. That’s why the shelves of Hungarian chain stores are loaded with sugar from Slovakia or the Czech Republic and I would not be surprised if I saw Hungarian sugar over there in Slovakia. And the same goes for coffee, cooking oil, etc. It is a weird thing about Tchibo coffee, which is sold both in Slovakia and Hungary, that the coffee of the Hungarian Tchibo factory is being sold in Slovakia while the Slovakian product is being sold in Hungary. So it is all about these black imports and the contribution of the “missing” traders.
?: Does that mean the goods are only being transported virtually?
HA: No, only part of them. There are several ways to be fraudulent. Now we mentioned one particular case when physical goods are being sold at supermarkets. But there are fictional VAT refund claims as well. One really does not need any products for that, so in this case the goods may be transported only virtually. It is difficult to trace it back retrospectively whether there were any physical goods in this cycle or not because these phantom companies soon vanish. But by that time the end user has already “sold the product”. But it doesn’t really matter after all. It is the same case of fraud whether there were any physical products or not. When these criminal networks stopped their truck traffic because some of the freights had been seized, then obviously no actual transport was performed, only virtual. So the number of VAT frauds did not decrease. Only they did not actually launch the trucks but only made the paperwork. This might be relevant because it is more likely to be revealed later.
?: Can it be checked whether a certain truck was really moving?
HA: It is such a huge quantity of documentation that there is not enough capacity in the tax authority to process them all, so the data can be manipulated easily. Moreover, these transport companies are incorporated into these criminal networks. So when the tax authority requests them to make a statement they will show all the documentation. Still they are parts of the organized network. There are many of these. Each of these transport companies might even move hundreds of tons of these goods each year. Actually or virtually, we do not even need to know. They will acknowledge everything and even show the relevant documents. If the tax authority organized a team to analyze these documents, many of them would be busted for sure. However, they are only links in the chain. They will acknowledge and document everything, still nobody will pay the VAT. The problem is, if the tax authority looks inside of the tachographs and the documentation too deeply, these companies will feel the rope tighten around their necks and disappear with all of the documentation. True, if everyone carried a GPS, these virtual transports could be revealed much more easily, at least in the case of truck transport. But some goods can also be transported on water or railway and there must be the same dirty trickery going on in the background.
?: Hungary is surrounded by land. How do they approach it?
HA: Actually, much of the grain is transported on water to Western Europe, on barges. We have many ports. Or I could mention chemical fertilizers or timber. The same is going on as in grain trade. Or metal. It is mostly transported on railway or often by barges. Those are not so easy to control as trucks.
?:How does this happen? Anyone has to pay 27% VAT after selling say, sugar domestically. The tax authority will see this 27% has not been paid even though it should be. What happens? How come they can accumulate unpaid VAT up to HUF 8 billion?
HA:They make it within a few months. I can tell you, these companies only exist for a few months. Then the tax authority imposes the charges after a short investigation. There is a risk assessment department within the tax authority. Its purpose should be to find companies of this kind as fast as possible. But even if they do, it is not a big loss. These companies are replaceable. New ones are being formed constantly and they are only running until the tax authority starts an investigation or suspends their tax number. These companies are designed to run for only a few months. In the past they used to run for a year or two, but not anymore. The tax authority will step up to them, charge them billions, but there is no result. Does this make any sense? I have asked this question several times and I still do.
?:What kind of sanctions can be imposed on the managing directors of these companies?
HA:They are strawmen. They have no property most of the time, this is important. Often the managing director is a Ukrainian, Serbian or Slovakian citizen. They cannot be reached from Hungary, so no sanctions can be imposed on them. They can impose it on the company, those huge unredeemable demands the tax authority cannot do anything about.
?:So then these companies will be shut down and new ones are formed?
HA:Sure. These companies do not pursue real economic activity. That’s why it is strange why the tax authority imposes the liabilities on them. The real problem does not lie on this level. The authority should go higher in the chain as far as possible, preferably to the end user. That’s where the real profit is created. The two or three intermediary companies take about 2-3 % from the 27 % VAT. Even that is a huge amount and makes a good living for many criminals. What we see on TV sometimes, when NAV seizes some tough guys, bringing them down on the floor, they are the ones on the very bottom of the chain, in charge of making these phantom companies. Their fee is probably just a few percent of this 27 %. The real profit is created at those multinational companies which sell the goods abroad and claim VAT refund, or at retail chains which purchase these goods without VAT (it is only displayed in the documentation). They are supposed to pay corporate tax only. But they will find a way not to pay that either. They will take it out of the country through offshore companies.
?:What about the communication with foreign tax authorities?Are there any opportunities or intentions to ask them for help?
HA:By my experience and what I heard from NAV colleagues working near the borders, communication does not work. Alright, NAV would quickly bring some nice examples for good cooperation. There have really been some joint actions in criminal matters like metal trade about one year or half a year ago. But generally, the truth is that there is no effective cooperation between these three countries (Slovakia, Romania and Hungary). We send information to one another and our inquiries must be answered within three months. We can gather valuable information this way. But this is not enough. Joint audits should be made. At the end of last year, the European Commission made recommendations for each country. Performing joint audits and effective cooperation were integral parts of these recommendations. Information exchange is a must and it works as well, but it’s not enough. Cooperation in the auditing process would be essential. The present situation is just ridiculous. The auditors write to Slovakia that they would like to talk to the managing director (who is supposed to be responsible for the sugar trickery). Then they receive a response like the managing director of this Slovakian company is a Romanian citizen and they recommend the Hungarian tax authority should ask the Romanian tax authority. And that’s what the criminals take advantage of. And Slovakian companies doing these tricks in the food industry often have Hungarian managing directors. They are very well known. Criminal networks “employ” them frequently in various sectors as strawmen. This also shows how large-scale this phenomenon has become between these countries in our region that is Slovakia, Romania and Hungary. The cooperation [among tax authorities] is definitely insufficient here.
I would like to highlight that me being here and telling this in public was really a final, desperate attempt. Because I’ve been trying for a long time to achieve something within the office. I used to bombard the management with ideas and new methods which could have been used effectively against these networks. But over the past year, I was gradually getting less and less opportunities. I was set aside. Me and a colleague of mine used to work on an area of the most corrupted sectors. But exactly a year ago, both of us were set aside and we are getting only mock jobs ever since. And we are not the only ones. There are many of us...
And this was not all I was doing. I also tried to consult the government when I realized there would be no improvement coming from inside but on the contrary, they were trying to make my work more difficult with sanctions. The first time there were even some results. Audits were started on some fields where there had not really been any before. However, the second time I received no feedback at all. And I see those leaders at the tax authority who are responsible for the development or persistence of the present situation ever since. Not only they are still there but they even receive prizes and honors without doing anything to improve the situation.
?: Do the circles which profit the most from this export return a certain amount to the budgets of political parties?
HA:I have no information on this, but it is very likely. Still that must be just peanuts compared to what the criminal circles and multinational companies receive from the profit. You cannot just claim refunds on billions illegally without anyone warning you. No, it’s not going on like that. There must be some connection between political and economic actors and public administration to carry out this action. No leader would ever have the guts to decide about letting go of billions if they could not take the support of political and economic actors and oligarchs for granted.
And who can be these actors who hold everything in their hands? It does not matter which government is ruling at the moment. The same was going on under the previous government, with the same actors inside and outside. And the same is going on under this government. There are some well-known actors, the biggest oligarchs. And there are others not so widely known. I could mention the names of some company directors, but I don’t think they would ring a bell to anyone here. However, they are important actors of the market and if their names appear somewhere that is enough reason for the tax authority to cancel any actions without even being asked. There are not only politicians but economic groups and economic oligarchs as well. They are high above all. They could achieve their goals to pursue their activities and being left alone under the previous government and so they do now. They are not political actors but big-time business people having very good connections with political actors. It’s obvious that political parties are also being supported from these sources, but I have no proof of that. But I can prove that these big shots profit the most. They have so much power, it does not matter to them who are in the government. The parties don’t really have a choice. Maybe they could do it differently but they do not dare to touch them, so to say.
SZ:Please let me emphasize what András only mentioned briefly, because I can: these exclusive taxpayers are great multinational chains. Plus the financial oligarchs. I could mention 8-10 names right away, owners of exclusive taxpayer chains, all of which would sound familiar to you. As András mentioned, 4-5 names are enough for NAV not to perform any audits or just to keep up appearances. For example, imposing a HUF 30 million fine on a multinational company which had made a profit of say, HUF 23 billion on tax evasion. It will receive great publicity and the public will be content to see X company got fined HUF 30 million. András explained how the mechanism itself works. But when it is not about the mechanism but pure corruption, you are actually putting your life at risk by even talking about it. But we will take the risk as we have already done a few times before. Probably it will be revealed, just like in case of the oil forgery, that the whole political elite was involved in it. They were even taking vast amounts of money in trunks to various people and parties. This case will be similar.
HA:The European Commission is an institution which really has a say in professional matters. However, it should not only make recommendations but take concrete measures as well, when needed. In Romania, there is a certain supervision. The truth is that Romania is ahead of us because it has developed a controlling mechanism due to [the discussion on joining] the Schengen Agreement. They had to set up an Anticorruption Prosecution Office and its activity is supervised by the European Commission. We had it in the news the other day: the Romanian tax authority revealed frauds of a similar kind measuring up to € 50 million. Even public administration experts and politicians were arrested by the Anticorruption Prosecution Office. So maybe for outside pressure, but Romania is still ahead of us. I certainly hope that the European Commission will not only make recommendations but also enforce the rules it brings and as an ultimate goal, even perform controls itself. And if there are no measures taken to realize cooperation between neighboring countries and mutual controls, the EC should make sure these measures are taken.
?:About the cooperation with the neighboring countries:How about cooperation between the counties near the borders on both sides?Or can they be contacted only via complicated official procedures?
HA:This could work both ways. The customs authorities on both sides of the border could cooperate. This could be good for one particular reason: most of the employees working near the borders speak both languages perfectly. For example, there are Romanians who used to work at NAV in Hungary. We could cooperate really well with them. But I asked a colleague, a county representative, and she said the tax authority in one of these countries was reluctant to cooperate. But Hungarians are not very keen on seeking contact either. And this is not about language barriers. This is going on systematically. And this system can prevent the introduction of effective measures to stand up against these tax fraud networks.
Nobody talks about these things either in the office or in the government. I’d prefer not to reveal any insider information for now either. But I certainly hope that making this all public will trigger some changes. The institutions in charge, or the European Commission might understand that some pressure needs to be applied to make the system run cleaner.
There are vast quantities of money at stake and there are highly influential people involved, so I have put myself and the people around me at incredible risk. But let me say it again: this was not an ad hoc decision. This was the final straw in a long process. I have tried all official ways both within the office and in the government to achieve something on this matter. I did not want to go this far but this is my last resort. They left me no other choice. I want to see progress in fighting tax fraud. There is no country where there is no tax fraud at all. There is no country where it could be revealed 100 %. But let’s eliminate 20, 30, let alone 50% of it and it would make life much easier in many areas in this country. And that’s what motivated me. The situation must be solved within the tax authority that is one thing. Even more important was when I saw how things were going on with big taxpayers. I was shocked when I saw how strongly they were protected. And if the government is reluctant to take any measures, the public has the right to know.
LA: Please let me add that Mr. Horváth was not the only one who sent warning signals to the government. There were many others. They did not stand up in public. But we had the chance to talk to some of them. We also have some documentation on this.
However, the people concerned gave us no permission to make it public.
?:Roughly how many of the nationally widespread wholesale or retail chains are involved in this matter?
HA:All of them or nearly all. And the biggest ones are the most corrupted. I don’t want to mention any names, everybody knows them anyway. They include not only foreign owned chains but Hungarian owned ones as well. It does not depend on ownership whether they can make it or not, but on the size of the company, its market position and its background connections.
VAT fraud and corruption scandal in Hungary
Materials in English and German
The state of combating tax fraud networks in Hungary and its neighboring countries (21 pages), 08-11-2013, https://www.levego.hu/sites/default/files/vat_corruption_hungary_2013oct_details_0.pdf
Proposal for the European Commission concerning the “Combating tax fraud and evasion – Commission contribution to the European Council of 22 May 2013”, 16-05-2013, https://www.levego.hu/sites/default/files/combating_tax_fraud_proposal_to_ec.pdf
Video (with English subtitles) of the press conference where the whistleblower András Horváth for the first time disclosed his findings to the public about the VAT fraud networks and the related high-level government corruption, 08-11-2013, https://www.youtube.com/watch?v=EPiyXafYvo8
Text of the video, ...
Press materials by the Clean Air Action Group, atlatszo.hu and Hungarian Civil Liberties Union
Corruption in government helps enormous VAT fraud in Hungary (Press release),08-11-2013, https://www.levego.hu/node/4779 , http://atlatszo.hu/2013/11/08/whistleblower-claims-corruption-in-government-enables-large-scale-vat-fraud-in-hungary/
Speech is silver, silence is golden, 27-11-2013, http://tasz.hu/node/3860
Minister sheds some light on VAT fraud and government corruption in Hungary, 23-12-2013, https://www.levego.hu/en/news/2014/01/minister_sheds_some_light_on_vat_fraud_and_government_corruption_in_hungary
Demonstration in Budapest for the investigation of tax fraud scandal, 28-12-2013, …