A threat to network investment as the Government signals intention to take action if any firms are found to be passing the tax on to consumers
Impacting a range of sectors and investors: On 4 June 2022, the Hungarian Government issued a decree imposing new taxes on a number of industries considered to have made ‘extra profits’ in recent years. Using emergency powers, Prime Minister Viktor Orban’s administration has announced windfall taxes worth HUF800 billion (£1.73bn), which will apply to various sectors, including aviation, banking, energy and telecoms. While banks and energy companies will bear the brunt of the tax scheme, an extra HUF40bn (£86m) is expected to be extracted from telcos over the next two years. The measures, which quickly lowered stock prices and investor confidence, have been designed to rein in the budget deficit partly due to costly tax rebates and other reelection promises, e.g. subsidised utility bills. Shares in Magyar Telekom (a unit of Deutsche Telekom), have lost 8% of their value since the windfall taxes were announced, trading at their lowest since the beginning of last year.
A material impact on operator's financial outlook: The “supplementary telecommunication tax”, which is expected to be implemented for two years, is progressive up to 7% and levied on annual net sales of electronic communications services, as defined by local law. It is also not a unique case, with the Democratic Republic of Congo and Nigeria announcing new taxes on telecoms services in March and May 2022, respectively. In Hungary, Magyar Telekom estimates that it will be liable for approximately HUF25bn (£54m) in additional tax in 2022. The telco expects that the tax will be accounted as an operating expense and therefore will proportionately lower its EBITDA AL and free cashflow for the year. Taking into account “underlying business tendencies”, Magyar Telekom foresees these metrics will exhibit a moderate decline for 2022 compared to the previous year – and also below the 3-5% growth it had predicted.
Additional taxation could have negative spillover effects:. As well as triggering a fall in Magyar Telekom’s core profit in 2022, the new tax could undermine Hungarian operators’ ability to invest, particularly as the Government has stated that it will take swift action if any firms are found to be passing the tax on to consumers. Telecoms services have proved fundamental to society since the outbreak of COVID-19, with operators introducing specific measures to support vulnerable end users. However, the windfall tax could hamper Hungary’s network rollouts and slow the adoption of next-generation services, which many countries are looking to harness for economic recovery post-pandemic.
Source: https://www.telekom.hu/about_us/investor_relations/investor-news/2022/june_5
