Gabor Vago: Value added tax fraud is pervasive in Hungary

November 16, 2014

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Two months ago former Politics Can Be Different MP Gábor Vágó talked to the Budapest Beacon about his crusade to force the government of Hungary to address wide-scale value added tax fraud.

How do you feel about the amount of attention the Tax Authority scandal has received?

Look, it’s no coincidence that this scandal is not receiving much attention on the political level. I interviewed many people about this issue, and it became very clear to me that this problem is worth HUF trillions in size and made up of numerous HUF 60-70 billion schemes.

Even I’ve noticed that my friend’s neighbor – who works as a truckdriver –  no longer drives a Suzuki, he’s now driving a black BMW. I asked that guy whether he changed jobs. “These days,” he said, “I’m only transporting inventory on paper.”

So the Tax Authority has a very clear picture of what is happening and who is involved, but they choose to allow them to continue with the schemes. That’s why, for me personally, this issue was the straw that broke the camel’s back.

It’s been about a year since Andras Horvath’s whistleblowing story broke.

The story came to the attention of the public in October 2013 but it really started getting traction in November.

Andras Horvath is definitely a real trouper for turning whistleblower in such a serious case.

He is but look at what it’s got him. He’s got nothing. Andras’ case perfectly shows the very serious and real problems that whistleblowers face in this country. It’s clear that when someone decides to come out and blow the whistle, there needs to be a safety net to protect them from the fallout of their decision. If they don’t have financial, legal or any kind of institutional support, they’ll fall flat on their faces.

Andras didn’t have a “safety net”?

No, he doesn’t have a job and that’s the biggest problem. Those who stand up for justice are left to stand alone because there is no societal support behind them. Sure, it’s good that an article about the tax authority’s scandal is posted to Facebook and gets 8-9,000 “likes”. However, that still doesn’t help the whistleblower who got the information out. However, if those same 8-9,000 each donated HUF 500 (USD 2) to help Andras, he might not be in the terrible situation he’s in right now. That’s what I’m talking about when I say that there isn’t any societal support for whistleblowers.

The reason why I took the tax authority scandal so seriously is because I didn’t want this scandal to blow over. I didn’t want people to forget about it. My goal was never to support Andras Horvath. I wanted to put pressure on the government to deal with the enormous scandal that Andras brought to the public’s attention. I put a good 6 months of work into publicizing the scandal. I tried everything in my power to bring this scandal before the government.

Fidesz strongly opposed the creation of a parliamentary investigative committee to investigate Horvath’s claims. Fidesz obfuscated any insight to the issue by confining it to a labyrinth of legal hurdles.  And nothing has happened. Sure, if there’s any truth to the rumors that there is a war going on between this country’s oligarchs, it’s possible that an oligarch’s personal appointee to a government agency might be kicked out, but that still doesn’t change the situation because another person will take that person’s place. Removing the affected individuals from the agency won’t change the situation or bring back the stolen public funds, because the institutional integrity of that particular system will still have its weaknesses.

What was it like to work so much to try and bring this scandal to the public’s attention?

I’m not entirely convinced that the way we initially chose to bring this issue to the public’s attention was most effective. We chose to bring newer and newer details of the scandal out every month. In hindsight, it may have been smarter to just release all the information immediately to let the public see the magnitude of what was happening.

Our method was effective in keeping the story alive for a while. But I think that it wasn’t effective in really breaking the threshold for public outrage which is needed in order for change to be demanded.

Being a part of this is demanding and comes with great risk. If the powers that be ever decided to go out of their way to cause problems for me, I would have to go wash dishes in Berlin. I’m not too concerned about my existence because I’m sure I’ll always get by.  But it’s definitely something that scares me when I think about the kind of mafiosos that this scandal involves. These guys are capable of manufacturing lies that can destroy someone.

So what’s this whole scandal about?

It’s pretty complex but here’s how it looks. Countries throughout Europe have different VAT rates. Using a series of fictive companies incorporated in three different countries, the seller can claim VAT refunds by simply manufacturing invoices that show the merchandise has traveled around in different countries until reaching its final point of sale. The VAT can be claimed back by the companies engaged in the trading of whatever merchandise is being “moved” because the final sale has not yet taken place. In reality, the merchandise never left the country, or, if it did leave the country, then it’s clear that the transportation was not connected to any legitimate sale. In such cases, there’s a lorry driving in circles.

This problem is not limited to Hungary.  It’s present throughout the European Union. What makes Hungary unique is that it has the highest VAT rate in the developed world. This incredibly high VAT rate attracts many tax cheats from neighboring countries because it allows for such elaborate tax fraud to take place.

What’s so terrible about this endemic problem in Hungary is that it has an incredibly adverse effect on people and businesses who are responsible and who do not commit tax fraud. What happens is that they are simply unable to compete with those who are committing tax fraud. Those who play by the rules and respect the laws simply cannot compete with the cheaters.

Suppose it costs 1 dollar to produce sugar. How is it possible that the sugar is being sold at supermarkets for 95 cents? Here’s how: you produce fraudulent transportation costs across countries with different VAT rates and get enough back in VAT refunds that you can sell this product for a price which is under what it actually costs to produce and put it on the shelves.