Whistleblower Claims Corruption in Government Enables Large-Scale VAT fraud in Hungary

According to András Horváth, a tax inspector who just left Hungary’s National Tax and Customs Administration (NAV), corruption at governmental level makes large scale VAT (value added tax) fraud possible. Horváth has submitted a report to Hungary’s Chief Prosecutor, backing his statement with documentary proof. He disclosed the details at a press conference in Budapest today organised by the Clean Air Action Group, the Association for the Protection of Interest of Enterprises and Atlatszo.hu Nonprofit Ltd.

According to official estimates, the sum of the illegally evaded VAT and illegally reimbursed VAT in Hungary equals 5 to 6 % of the GDP. Horváth’s investigations show that main actors of VAT fraud in Hungary are not private persons or small enterprises, but highly organised criminal groups which established close relations with the state administration. They have been carrying out illegal activities already for many years and they are assisted by officials within the tax authority.

“There have always been personal and structural problems within the tax authority, but serious deterioration started in 2007 with profound changes in its personnel and organisation” – says Horváth. The administrative burden of the employees substantially increased. The authority’s top management and heads of units were replaced by people who lacked good managerial and professional skills. Due to these reasons many experienced and highly qualified employees left the authority. Others, who expressed dissatisfaction with the corrupt practices of the leadership of the tax authority, were laid off or transferred to insignificant positions within the authority. In spite of positive expectations, this practice gained total acceptance after the Fidesz party gained power in 2010.

In accordance with the EU practice, NAV has special units to inspect and monitor large companies. The problem lies with NAV’s approach according to which large companies have too much to lose committing tax fraud and  therefore they are low risk and do not need significant oversight. This means that the units responsible for inspecting these companies in almost all cases do not carry out detailed in-depth survey (which is generally being done at other companies). Another problem is that the supervision of the large companies and their subcontractors are separated (they are even done in separate offices) and they are almost never connected to each other. Furthermore, NAV does not start investigation of tax practices of large companies even when they receive credible tips about possible tax fraud. On the contrary, in several cases when NAV employees tried to stand up against these practices they suffered serious reprisals: they were dismissed from NAV or transferred to another position where they had no more possibility to deal with large companies involved in tax fraud.

The VAT fraud committed by these large companies forces all other companies operating in the same sector to make their choice: either join the club or leave the market. The process of more and more companies getting involved in VAT fraud can be clearly observed in several economic sectors in Hungary (e.g. the meat and grain sector).

“People within the state administration warned the highest levels of the government about the grave situation within the tax authority and the corruption practices making it possible to deprive the public budget of huge revenue. In the past three years there have been a number of articles on the issue in the press. Nonetheless, the situation did not improve. Therefore I decided to take the risk to my personal safety and publicly take a stand” – declared Horváth.

The Clean Air Action Group, founded in 1988, is a federation of Hungarian NGO’s working for environment protection, better public participation and transparency. The Association for the Protection of the  Interests of Enterprises is nonprofit organisation which aims to defend those enterprises and social groups which suffer unjust disadvantages. Atlatszo.hu Nonprofit Ltd. is an independent watchdog NGO to promote freedom of information and transparency in Hungary.

Read more about Horváth’s claims here (PDF).