2014-03-18 – Tax fraud – sanctions in Hungary and abroad

Untaxed income in foreign bank accounts and tax havens represents a huge loss for the Hungarian budget. Taxpayers also commit fiscal fraud by concealing income, a not insignificant fact, which may incur sanctions set forth in the Act on the Rules of Taxation and, in some cases, in the Criminal Code.

If the National Tax and Customs Administration (NAV) establishes a tax shortfall as part of a tax inspection, the tax authority, based on Act XCII of 2003 on the Rules of Taxation (hereinafter referred to as: the Act on the Rules of Taxation), may impose a tax penalty totalling up to 50% of the amount that the taxpayer failed to pay. If the tax shortfall is related to concealing income, falsifying or destroying documents, books, and records, the tax penalty may even total 200% of the tax shortfall. In addition, the tax authority may also decide to levy a default penalty and a default charge. The amount of the default charge depends on the tax shortfall and the prevailing base interest rate of the central bank.

In some cases, however, provisions of the Criminal Code (hereinafter referred to as: “Btk.”) may also apply. Based on the Btk. anyone who deceives or keeps others deceived in relation to fiscal payment obligations or funds originating from the budget, makes a false statement, conceals facts, or makes unlawful use of discounts related to payment obligations commits fiscal fraud. The Btk. punishes fiscal fraud depending on the amount of the pecuniary damage and the way the crime was committed by imprisonment of 2 to 10 years, whereby the aspects of criminal conspiracy or business-like manner constitute aggravating circumstances. However, the punishment may be alleviated without limitation if the person reimburses the pecuniary damage caused by fiscal fraud up until the submission of the indictment, except in the case of fiscal fraud committed in a criminal conspiracy or in a business-like manner.

If the taxpayer is late in declaring and paying the tax that they failed to pay, depending on the given situation a default penalty and a default charge (200% of the base interest rate of the central bank), or a self-revision penalty equalling the base interest rate of the central bank must be paid. The taxpayer is only entitled to pay the tax shortfall with the self-revision penalty if any tax return for the given period was submitted earlier.

The Act on the Rules of Taxation specifies a statute of limitation on the right for tax assessment, based on which such right lapses five years after the last day of the calendar year in which the tax return or declaration should have been filed. However, in the event of fiscal fraud, the tax assessment right shall not lapse until the statute of limitation for the crime lapses (maximum 10 years).

European countries and governments are determined to repatriate concealed income to home countries and tax it, while in return the authorities promise to alleviate several taxation and criminal law consequences. There was a tax amnesty from January 2009 to December 2012 in Hungary, which enabled taxpayers to bring their income hidden in tax havens back to Hungary, and legalise it by paying a preferential tax. Nowadays, legislation does not provide for genuine tax amnesties concerning offshore assets. The prevailing Stability Savings Account, which differs from previous tax amnesty opportunities, will probably remain controversial for a long time.

Several European countries make use of the legal institution of “voluntary disclosure”, which means that taxpayers voluntarily declare their hidden income. Below is a short summary of this practice in some of the European countries.

In Germany, the authorities punish by charging an annual default interest of 6% based on the amount of tax shortfall in the case of unreported income, and by imprisonment of up to 10 years in serious cases. In the case of “voluntary disclosure” (“Selbstanzeige”), however, payment of the concealed tax and an additional tax rate of 5% exempt the taxpayer from criminal law consequences. In Austria the taxpayer is fully exempt from all criminal law consequences in the case of voluntary disclosure, while in Italy the system of voluntary disclosure is currently being implemented.

Dutch authorities may impose a tax penalty amounting up to 300% of the concealed tax, and punish those who committed fiscal fraud by imprisonment of maximum 6 years. In the case of “voluntary disclosure” the taxpayer is exempt from criminal law consequences until 1 July 2014, after which only the penalties imposed may be reduced, while complete criminal law exemption will no longer be an option.

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