A bit of real world economics here. You might heard that the Hungarian government, lead by Prime Minister Orbán is creating "unorthodox" taxes out of the sudden, without any kind of structure, order or even the appearance of fairness. These taxes are codified in a way that each targets one or two corporations. For example 50% of the "advertisement tax" is paid by the broadcasting firm RTL, despite they have just 12% market share. The local branches of various international banks are in loss due to the bank taxes. The latest target is the TESCO, the name of the tax is "food safety administration fee", but it's not a fixed cost or even scaling with the size of the shop, it's a tiny value if you are small, but if your revenues are above $1.4B, it's 6% of the revenues. You guessed it, only TESCO is above this revenue in Hungary.
Critics consider it either lunacy or an act of dictatorship, trying to push TESCO, the banks, RTL and the rest out of Hungary so the business will go to his clients. They are wrong. No lunatic wins three democratic elections, two of them with 2/3 majority. Pushing out the companies not only makes little sense (they pay more tax than clients would), but clearly doesn't happening. He "failed" to push out a single company. Despite they suffer hundred millions or even several billions of dollars of losses (negative yearly profit), the companies aren't leaving. Now the pro-Orbán media says that that's a lie, these companies are still profitable, they just channel out the profit to low-tax countries like Ireland or Luxembourg. That's wrong too, because in this case the taxes could be fair to support fair competition, let the most profitable win, so more taxes can be taken.
I think Orbán and his staff understood economy deeper than the critics and realized that these companies aren't really profit-oriented private companies. In a private owned company, Mr Tesco makes the calls and he wants profit. If he has losses, or even if he could have more profit in another country, he'd just pull out of Hungary. Hell, if the government messes with him with unfair taxes, he might pull out just to make a point: "no one can mess with John Tesco". The problem is that Mr Tesco doesn't exist. TESCO is a stock exchange company, it's owned by millions of shareholders, most of them doesn't even know about it. They bought some investment fund papers and it contained some TESCO shares. The calls are made by various levels of managers, who are not owners, but employees. And this is the catch.
The best for the company would be pulling out of Hungary, since they have negative profit and no perspective for things getting better as the government clearly doesn't respect them, openly robs them and there is little hope for change since it's stabilized by the robbed money. If Mr Tesco would be calling the shots, they would leave now. But the shots are called by managers, who aren't interested in making profit, but in keeping their jobs. If they'd pull out, all the Hungary branch managers would be unemployed, and the higher-ups would also be in trouble explaining why a multi-billion branch was written to zero. It's much more easier to explain a couple hundred-million yearly losses as being "temporary", even if they are 100% sure that things will only get worse. They don't care. Every year they have their job is a year when they got their extreme salaries. Even if they know that the show will end one day, they keep running it while they can.
This is why the taxes are pin-pointed. If they were broad and fair, they would hit companies owned by one person or a family or a manageable group. Such companies would pull out, denying tax income to the government. So the government carefully avoid taxing them, robbing only the companies where the managers don't care about losses.
Critics consider it either lunacy or an act of dictatorship, trying to push TESCO, the banks, RTL and the rest out of Hungary so the business will go to his clients. They are wrong. No lunatic wins three democratic elections, two of them with 2/3 majority. Pushing out the companies not only makes little sense (they pay more tax than clients would), but clearly doesn't happening. He "failed" to push out a single company. Despite they suffer hundred millions or even several billions of dollars of losses (negative yearly profit), the companies aren't leaving. Now the pro-Orbán media says that that's a lie, these companies are still profitable, they just channel out the profit to low-tax countries like Ireland or Luxembourg. That's wrong too, because in this case the taxes could be fair to support fair competition, let the most profitable win, so more taxes can be taken.
I think Orbán and his staff understood economy deeper than the critics and realized that these companies aren't really profit-oriented private companies. In a private owned company, Mr Tesco makes the calls and he wants profit. If he has losses, or even if he could have more profit in another country, he'd just pull out of Hungary. Hell, if the government messes with him with unfair taxes, he might pull out just to make a point: "no one can mess with John Tesco". The problem is that Mr Tesco doesn't exist. TESCO is a stock exchange company, it's owned by millions of shareholders, most of them doesn't even know about it. They bought some investment fund papers and it contained some TESCO shares. The calls are made by various levels of managers, who are not owners, but employees. And this is the catch.
The best for the company would be pulling out of Hungary, since they have negative profit and no perspective for things getting better as the government clearly doesn't respect them, openly robs them and there is little hope for change since it's stabilized by the robbed money. If Mr Tesco would be calling the shots, they would leave now. But the shots are called by managers, who aren't interested in making profit, but in keeping their jobs. If they'd pull out, all the Hungary branch managers would be unemployed, and the higher-ups would also be in trouble explaining why a multi-billion branch was written to zero. It's much more easier to explain a couple hundred-million yearly losses as being "temporary", even if they are 100% sure that things will only get worse. They don't care. Every year they have their job is a year when they got their extreme salaries. Even if they know that the show will end one day, they keep running it while they can.
This is why the taxes are pin-pointed. If they were broad and fair, they would hit companies owned by one person or a family or a manageable group. Such companies would pull out, denying tax income to the government. So the government carefully avoid taxing them, robbing only the companies where the managers don't care about losses.
15 comments:
Interesting.
Tesco looks like the US firm, Walmart in a lot of ways.(We have no Tesco stores here in the US, but lots of Walmarts.)
You cannot truly destroy Walmart (Or Tesco, I expect.) by levying a tax of that type. They'll just double down, reorganizing if they have to. 6% is a lot, but the advantage vertically integrated, systems oriented companies like Tesco have over much smaller companies means they can just choke it down. After all, "Market Share" is god to them... they won't give it up easily.
Good! I applaud Mr Orban! Companies are awesome, and the free market is great, but there is a limit to how far it should be allowed to go. A non linear, ever increasing into the stratosphere so as to cap the theoretical size of a Multinational tax is the way to go.
What Tesco will do, if this just keeps going, is split into smaller entities to avoid the tax burden. DING! Solution! All the jobs are saved, all the commerce still runs, all the people still get their stuff. The money is just kept more local.
CCP can apply the SAME CONCEPT to crush too big for their own britches alliances like CFC. The more systems an alliance owns, the higher the monopoly tax is... not a tax directly, but rather the profits are just preemptively reduced at the points of generation. A CFC Alliance system's Money Moon would simply be less profitable than a tiny alliance Money Moon. And if they lose sov? Poof! It suddenly "works" again.
I love the concept of Sov in Eve, but the eventual end game of unchecked alliance brokering is the blue doughnut. You need a mechanic like the Ft61bn levy to contain these beasts and let small groups have a shot at sov in null again. This is a practical and workable way to get people out of high sec and into null. As a massive alliance gets bigger, it's profit base deteriorates and it cannot effectively fight other alliances AND curb encroaching smaller groups. Alliances would form, grow too fast, then mushroom and collapse as their income dries up. Null would be the chaotic place it's intended to be.
Any intelligent private business owner realizes that sooner or later Orban runs out of easy targets ... these types of extra-legal seizures end up getting progressively worse.
There are two possible courses of action: stay or go. They can do some projections and math for both and see which one costs them less money. If there would be a significant savings for one, I'd bet that these managers would take it. Which means it's probably pretty close to being even. The tax might have been carefully crafted to be just under the threshold where it's obviously better to close up shop, and give company management hope that if they agitate and lobby, they might be able to claw back some of these profits later. The opportunity of running a brand in a country is enormous, and if there's any chance that someday they can get this tax revoked, they'll be better off 10 years after that than if they'd left now and had to rebuild some day.
"channel out the profit to low-tax countries like Ireland or Luxembourg. That's wrong too"
tax minimisation is a thing. part of the discussion at the recent G20 was how to deal with global corps not paying proper taxes.
revenue tax is probably the way to go. if the company cant make greater than 6% profit on revenue they need to change.
however the organisations having to pay a revenue tax would be foolish to declare a profit and pay profit tax as well. so I'm sure they are structuring themselves in such a way to minimise the taxes that they can.
hmm a double edged sword of course. Managers invested in the company will often do short term activities to increase their value. managers not invested have no reason to push things to get better. Now the question is does the managers of the stocks understand this and take the correct action? A: get managers invested B: protect the long term interest of their clients via controlling the managers or not. Not real up on euro eco as some of it seems counter intuitive to me.
That's very much a Robin Hood move right there :)
Robin Hoods generally have 2 issues
1) Unchecked, they quickly become Sheriffs, and everybody loses. This case is particularly susceptible, because the one doing robin-hoodin' is already the governent
2) Sooner or later, the target companies pull out. Though i agree that this may take months or years in Tesco's case
Ultimately, for now it does seem like a win-win for Hungary.
"Good! I applaud Mr Orban! Companies are awesome, and the free market is great, but there is a limit to how far it should be allowed to go."
You can't possibly be serious. This neo-communist attitude some westerners have troubles me. Splitting to smaller entities is probably not the right move. The law can be easily modified to apply to these entites as well. It would also introduce a management overhead that results in a similar loss like that dreaded 6% tax.
Gevlon forgot to mention that there is another law being introduced that explicitly bans these large companies from the country should they produce losses. Forced into eviction by taxes - free market my ass.
You know what's likely gonna happen? As for most local suppliers TESCO is the biggest partner, TESCO will just seize his marked power to force even lower prices on its suppliers to be able to pay that extra tax. This will result in loss of profit and loss of taxes for the local, smaller companies supplying TESCO.
In reality the people and the country eats the loss but you can keep clapping your hands for Orbán for putting stop on the evil multinational capitalists, yeah.
There's no chance Tesco are making a loss and sticking around. They are a big enough company with large enough margins that swallowing the extra 6% is nothing.
Tesco aren't making a loss, they will be pushing the extra cost onto suppliers and shedding staff as necessary. I speak from experience, thats how UK retail operates.
"There's no chance Tesco are making a loss and sticking around. They are a big enough company with large enough margins that swallowing the extra 6% is nothing."
That would be this tesco, right?
http://www.independent.co.uk/news/business/news/tesco-to-face-criminal-probe-after-265million-hole-found-in-profits-9826723.html
"That would be this tesco, right?"
Yes, that Tesco. don;t get all excited too quickly, that's not a loss. What that actually is talking about is them overstating their profit due to bad accounting. They still made a profit of around £750m even when their accounting errors were seen.
No large company is going to continue investing in store that are unprofitable. They do it for profit, not kindness, so if they don't make profit they have no reason to stay. Like others have said though, Tesco is big enough to simply force it's cuts onto it's suppliers.
It's not abnormal for a large company to be charged more than a smaller one. It's a way to keep the large company from being able to crush the margins of smaller companies. A company like Tesco buys in such bulk that they can afford to reduce their prices down way below what an independent shop could. Higher tax limits how much they can reduce those prices.
The problems of those policies of Mr. Orban does not come from the effect of existing businesses in Hungary (foreign or otherwise), but from the effect on potential future foreign investments in the country. These kind of restrictive policies will prevent foreign investment, and that will hurt Hungary, alot.
A forced divestiture from an overseas market typically costs more than it would to restructure into a more profitable organisation. It is only something that multinationals consider when they lack the cashflow or the management will to fix the issue.
As Ariantes said, these policies have a greater impact on new foreign investment. New investors will require a higher rate of return to offset the potential risk of getting hit by punitive taxes and neighbouring markets might look more attractive and capture the investment instead.
"Yes, that Tesco. don;t get all excited too quickly, that's not a loss. What that actually is talking about is them overstating their profit due to bad accounting."
It is a loss enough for them to have their 2nd biggest investor pull out, and for them to be put on rating watch negative by Fitch, and for investment groups to change their stance to advise against buying.
@Anonymous
Investors don't want their companies to make a loss, but there are other reasons driving the concerns.
(a) If a company doesn't understand and cannot account for their own business there is no way for investors to value their investment with confidence.
(b) Corporate controls have been demonstrated to be insufficient. There could be more errors yet to surface and nothing to keep it from happening again.
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