The tax
benefit scheme in the Hungarian sport sector decision of 9 November 2011 marked a turning point as
regards the Commission’s decisional practice in the field of State aid and
sport. Between this date and early 2014, the Commission reached a total of ten decisions
on State aid to sport infrastructure and opened four formal investigations into
alleged State aid to professional football clubs like Real Madrid
and Valencia CF.[1]
As a result of the experience gained from the decision making, it was decided
to include a Section on State aid to sport infrastructure in the 2014 General Block Exemption Regulation. Moreover, many people, including myself, held that
Commission scrutiny in this sector would serve to achieve better accountability
and transparency in sport governance.[2]
Yet, a recent report by
Transparency International (TI), published in October 2015, raises questions about the efficiency of State aid enforcement in
the sport sector. The report analyzes the results and effects of the Hungarian tax benefit scheme and
concludes that:
“(T)he sports
financing system suffers from transparency issues and corruption risks. (…) The
lack of transparency poses a serious risk of collusion between politics and
business which leads to opaque lobbying. This might be a reason for the
disproportionateness found in the distribution of the subsidies, which is most
apparent in the case of (football) and (the football club) Felcsút.”[3]
In other words, according to TI, selective economic
advantages from public resources are being granted to professional football
clubs, irrespective of the tax benefit scheme greenlighted by the Commission
or, in fact, because of the tax
benefit scheme.
One would expect TI’s report to be a wake-up call for
the Commission, triggering it, as “Guardian of the Treaties”, to re-investigate
Hungary’s tax benefit scheme without delay. Further incentives to scrutinize
the matter is provided by the Hungarian MEP Péter Niedermüller, who in November
2015 officially asked the Commission whether it intended to review its
earlier decision to authorize the tax benefit scheme. The Commission’s answer,
seen here below, indicates that immediate action is not to be expected.
Not satisfied with this answer, Niedermüller replied that
even though the Commission had authorized the tax scheme in 2011, it does not
absolve it “from the obligation to proceed with the appropriate care thereafter
and to monitor whether the system is operating in accordance with the
objectives originally set”.
The overall aim of this two-part blog is to analyze
the rules and procedures surrounding the monitoring of previously authorized
aid schemes in the sports sector by the Commission. It will use the tax benefit scheme in the Hungarian sport
sector decision as a starting point, describing the objective and the
functioning of the aid scheme, as well as the conditions and obligations for
Hungary and the Commission attached to it. In continuation, basing myself on
the findings and conclusions drawn in the report, I will try to determine
whether the current practice in Hungary deviates from the original objectives
and conditions of the aid scheme, and what the consequences of such a deviation
could be. Do the State aid rules impose an obligation upon the Commission to
act and, if so, in what way? Furthermore, could the Hungarian case make one reconsider the usefulness of State aid
rules to achieve better accountability and transparency in sport in general?
The tax benefit
scheme in the Hungarian sport sector decision
A description of the
scheme
In April 2011, the Hungarian authorities notified the
Commission of their plans to introduce a tax benefit scheme with the aim of
developing the country’s sport sector.[4]
More specifically, via the scheme, they hoped to “increase the participation of
the general public in sport activities, by inter
alia, promoting mass sport events, training of the young generations as
well ensuring adequate sport infrastructure and equipment for the general
public”. Due to the existence of a market failure (i.e. a situation where
individual market investors do not invest even though this would be efficient
from a wider economic perspective), Hungary saw itself obligated to provide
public money to the sport sector in order to achieve the aforementioned objectives.[5]
Under the scheme, which will run until 30 June 2017,
corporations (operating in any sector that is subject to corporate tax) can
choose to donate money to sport organizations, both amateur and professional. Sport
organizations may use these resources to train the young generation, cover
personnel expenses and to construct/renovate sport infrastructure. The
donations would be deducted from the corporation’s taxable income and from
their tax liability.[6]
Hungary decided to focus the aid scheme on the five most popular team sports in
the country, i.e. football, basketball, ice hockey, water polo and handball. The
reasoning behind this choice is that the scheme would not only benefit the
sport organizations themselves, but also the sportsmen and sportswomen using
the facilities, as well as the general public interested in attending the
sporting events.[7] Sport
organizations wishing to receive donations have to elaborate a development
programme (DP), in which they outline the planned use of the donations. The DPs
are evaluated by the respective national sport governing bodies (SGBs), who
decide whether the sport organization is eligible for the donations. Once the
SGBs approve a DP, the sport organizations may approach corporations willing to
donate money to them.[8]
In the specific case of donations used for the
construction, renovation or maintenance of sport infrastructures, Hungary
notified the Commission that it had introduced a monitoring system that serves
to avoid any misuse of the donations or cross-subsidizations of other
activities of sport organizations. The so-called Controlling Authority (a
public entity falling directly under the Ministry of National Resources)
monitors compliance of donators and beneficiaries with the central price
benchmarking mechanism regarding rental and operation fees of the infrastructure,
introduced to limit the distortion of competition arising from the tax benefit
scheme.[9]
The Commission’s
decision
As stated above, the donations should be used to fund
the development of sport infrastructure, train the youth teams and cover personnel
expenses. The Commission agreed with Hungary that the training of youth teams
falls outside the scope of EU State aid rules, in line with the 2001 Commission
Decision Subventions
publiques aux clubs sportifs professionels. Donations used to cover personnel costs could be falling
under the General Block Exemption Regulation[10] or the de
minimis aid Regulation.[11]
Compliance with the two Regulations is a task for the Hungarian authorities.[12]
Consequently, and taking into account that amateur sport clubs are generally
not considered to be undertakings within the meaning of Article 107(1) TFEU, the
tax benefit scheme in the Hungarian sport
sector decision only covers aid for the infrastructures used by the
professional sport organizations.
Although the tax benefit scheme fulfilled the criteria
of Article 107(1), and thus constituted State aid, the Commission declared the
scheme compatible with EU law under Article 107(3)c) TFEU. Importantly, the
Commission held that the scheme was introduced in a sufficiently transparent
and proportionate manner, i.e. that the measure was well-designed to fulfil the
objective of developing the country’s sport sector.[13]
Moreover, the Commission acknowledged the special characteristics of sport and
held that the objective of the scheme is in line with the overall objectives of
sport as stipulated in Article 165 TFEU, namely that the EU “shall
contribute to the promotion of European sporting issues”, because the sport
sector “has enormous potential for bringing the citizens of Europe together,
reaching out to all, regardless of age or social origin”.[14]
It is worth mentioning that the Commission took a very
similar approach in its decisions on the other State aid measures granted for
sport infrastructure. It considers a sport infrastructure as embodying a
typical State responsibility for which the granting of State aid is a
well-defined objective of common interest.[15]
Finally, to ensure that the monitoring and
transparency obligations are carried out properly, the Commission requires
Hungary to submit an annual report to the Commission, containing inter alia, information on the total aid
amount allocated on the basis of this scheme, the sport infrastructure projects
funded, their aid intensities, their beneficiaries, the parameters applied for
benchmarking prices, the rents effectively paid by the professional sport
organizations, as well as a description on the benefits provided to the general
public and on the multifunctional usage of the infrastructures.[16]
There is no requirement to publish this annual report. Therefore, assessing
whether the information provided by Hungary to the Commission is in line with
the actual practice in the country is currently extremely difficult.
Transparency
International report, “Corruption Risks in Hungarian Sports Financing”
The tax benefit
scheme in the Hungarian sport sector decision looked like a blue print for
the way in which public authorities could grant State aid to the sport sector:
It was aimed at a wide scope of recipients and the general public would benefit
as well, transparency was guaranteed, monitoring and compliance mechanisms were
introduced and, last but not least, it was notified in advance to the European
Commission.
Lack of transparency
However, TI’s report shows that, four years after the
scheme was launched, little remains of all those good intentions. To start
with, TI claims that Hungary’s objective was not to increase the participation
of the general public in sport activities, but simply to make Hungarian
football clubs “excel at the European and international levels”.[17]
TI’s primary finding is that there is a flagrant lack of transparency on every
level regarding the scheme. Most of the data collected in the report was
obtained by TI through freedom of information requests.[18]
The first flaw in the scheme is that under Hungarian
national laws and regulations, there is no obligation to disclose the identity
of the donating corporations. Consequently, even though the SGBs keep count of
which clubs are entitled to receive donations and how much they actually
received, many questions remain on how the money is distributed in practice.
TI also questions the integrity of the clubs’
eligibility process. The Hungarian SGBs, who are in charge of selecting the
clubs worthy of receiving donations, are to a large extent run by people with
close ties to the Hungarian Government.[19]
Moreover, for the selection process, the SBGs do not need to provide a
reasoning behind the decision to choose or not to choose a club worthy of
donations. As TI states, the tax benefit scheme poses a serious threat to
transparency and accountability, and can lead to illicit lobbying and backroom
deals between politicians, businessmen and clubs.
Disproportionate
distribution of beneficiaries
The advantage of using a general tax scheme as a State aid measure is
that it leads to many different beneficiaries and is therefore considered as
one of the least distortive type of state intervention.[20] However,
the functioning of this particular tax benefit scheme creates the exact
opposite result a few clubs are clearly favored. According to the report, the
subsidies from the tax scheme totaled €649 million in four years. An amount of
€240 million was specifically designated for football clubs, 37% of the total
amount. Of all the money donated to football, 28% (or €68 million) went specifically
to 13 football clubs, who, perhaps unsurprisingly, all play in Hungary’s
highest football league.[21] Of
these 13 football clubs, Puskás Akadémia FC received by far the highest amount,
no less than €30 million. Puskás Akadémia FC plays in Hungary’s top division,
but also functions as the youth team of Videoton FC, one of Hungary’s biggest
and most successful clubs. Interestingly enough, Puskás Akadémia FC was founded in 2007 by the current Hungarian Prime
Minister Viktor Orban.
Unnecessary
construction of new sport infrastructure?
The Hungarian authorities expressed the need in 2011
for adequate sport infrastructure facilities. Due to a market failure, it was
necessary for the State to step in and provide the necessary funds, albeit by
means of a tax benefit scheme. The Commission agreed with Hungary that there is
a lack of investments in sport infrastructure and that using public money to do
so is an objective of common interest.[22]
The TI report indicates that especially the Hungarian football stadiums have
undergone significant upgrades since 2011, but at the same time questions the
necessity to use public funds for these upgrades. Hungarian professional
football has not been attracting more people to stadiums since 2011. The
country’s highest division averaged only 4,897 spectators per game for the
2014/15 season, 624 less than in the previous year.[23]
An example of potential unnecessary construction of sport infrastructure is the
“Nagyerdei” stadium, opened in 2014, in
the city of Debrecen. The stadium, that can hold over 20,000 spectators, cost €40 million
to construct. However, with a match average of 3,400,[24]
one wonders whether the construction of this stadium was an objective of common
interest, or whether there was another, hidden, agenda. Referring to the well-reported,
including by the European Commission, close relationships between Hungary’s businesses and
its political elite, TI points to the realistic possibility that the
construction and renovation of (football) stadiums through public procurement
procedures, was simply a way to for contractors to “finance the economic orbit
of influential politicians in return for all manners of political and financial
favours”.[25]
Interim conclusion
TI’s report clearly shows that there is a huge
discrepancy between Hungary’s intention to devise a tax benefit scheme
benefitting to the entire sport sector, as notified to the Commission in 2011,
and the actual operation of the scheme. The necessity for new and renovated football
infrastructure appears superfluous and the tax benefit scheme itself proved to
be more beneficial for some clubs, particularly Puskás Akadémia FC. Furthermore,
the Commission decision declaring the tax benefit scheme compatible with EU law
highlighted the transparency of the scheme and acclaimed its monitoring
mechanisms. More than four years on, it can be concluded that the scheme is far
from transparent and questions can be raised on the independence and
functioning of the monitoring mechanisms. Assuming that the Commission receives
annual reports by the Hungarian authorities on the tax benefit scheme, why has
it not undertaken any action? Is it simply a matter of unwillingness or could
the answer be found in EU State aid law and its procedural rules itself? The
next part of this blog will analyze the rules and procedures surrounding the
monitoring of previously authorized aid schemes by the Commission, and
determine whether Commission action can be expected.
[1] An explanation on
why the public financing of sports infrastructure and professional sports clubs
only started to attract State aid scrutiny in recent years can be read in: Ben
Van Rompuy and Oskar van Maren, “EU
Control of State Aid to Professional Sport: Why Now?” Forthcoming in: “The Legacy of Bosman. Revisiting the relationship
between EU law and sport”, T.M.C. Asser
Press, 2016.
[2] See for example
Oskar van Maren, “EU State Aid Law and
Professional Football: A threat or a Blessing?”, European State Aid Law Quarterly,
Volume 15 1/2016, pages 31-46.
[3] Transparency
International, “Corruption Risks in Hungarian Sports Financing”, page 41.
[4] Commission Decision
of 9 November 2011, SA.31722 – Hungary - Supporting
the Hungarian sport sector via tax benefit scheme, paras 2-3.
[5] Ibid., paras 88-90.
[6] Ibid., paras 15-16.
[7] Ibid., paras 28-34.
[8] Transparency
International report of 22 October 2015, “Corruption Risks in Hungarian Sports
Financing”, page 31.
[9] Commission Decision
SA.31722, paras 37-39.
[10] The GBER applicable
at the time the decision was taken was Commission Regulation No800/2008 of 6
August 2008.
[11] Commission
Decision SA.31722, para 10.
[12] Ibid., para 64.
[13] Ibid., paras 95-98.
[14] Ibid., paras 86-87.
[15] See for example
Commission Decision of 20 March 2013, SA.35135 Multifunktionsarena der Stadt Erfurt, para 14.
[16] Commission Decision
SA.31722, para 57.
[17] Transparency
International report, page 29.
[18] Ibid., page 31.
[19] Ibid., page 32. TI points out that the chairman
of the Hungarian FA is CEO of the country’s biggest commercial bank and close
to the Government.
[20] Commission Decision
SA.31722, para 20.
[21] The TI report
actually mentions the clubs as well as their youth academia. The 13 clubs are:
Puskás Akadémia FC (aka Felcsút FC, the youth team of Videoton FC);
Ferencváros; Újpest FC; Vasas SC; Szolnoki MÁV FC; Debreceni VSC; Diósgyőri
VTK; Zalaegerszegi TE; OVI-FOCI; Illés Sport Alapítvány; Budapest Honvéd FC;
Balmazújvárosi FC and; Békéscsaba 1912 Előre.
[22] Commission
Decision SA.31722, paras 91-93.
[23]
Transparency International report, page 38.
[24] Ibid.
[25] Ibid., page 42.