Act CLXXVIII of 2015 on implementing the application of the International Financial Reporting Standards in Hungary for individual reporting purposes and the modification of certain financial laws made it possible, from 1 January 2016, to incorporate the detailed rules on IFRS into the Acts on Corporate Tax and Local Taxes, in addition to the Accounting Act.
Corporate tax is a crucial issue among the tax implications of IFRS.
For the purposes of corporate tax, the regulation was developed during the IFRS implementation in such a way that it is in fact possible to “have your cake and eat it” during the transition. It had to be ensured that budgetary tax revenues would not decrease with the transition, and that taxpayers could plan with predictable administration and tax calculations in the years following the transition, with due consideration of the special transition differences.
In the fiscal year of the transition and in the following fiscal year, if the tax payable by the taxpayer choosing IFRS does not reach the tax payable for the fiscal year preceding the fiscal year of the transition, then the tax payable in these two years will be the same as the tax payable for the fiscal year preceding the transition. For those making the transition in 2017, the tax payable for the year preceding the fiscal year of the transition has to be recalculated with the flat 9% corporate income tax rate effective from 2017. Of course, the tax base may well be lower in the first two years following the transition for other business reasons or market movements. In such cases, the taxpayer may submit an application to the NAV (Hungarian tax authority) parallel to filing its tax return (obviously providing evidence as to why the tax payment potential has fallen). Although 2016 and 2017 were not about mass transitions, the incorporation of IFRS rules into tax laws may offer relief for multinational companies at group level, in light of similar practices in neighbouring countries.
Local business tax
The 2016 changes in local business tax were primarily justified by the fact that its definitions were closely related to accounting rules. Moreover, similar to corporate tax, one of the guiding principles was that the tax position of businesses should not change just because the taxpayer prepares its separate financial statements according to Hungarian accounting rules or IFRS, i.e. switching to IFRS should have a neutral effect on local business tax.
To-do list, and most important changes in 2017
Prior to the IFRS transition (the emphasis here is on being prepared, just like with all tax issues), one of the most important tasks is paying proper attention to the transition, the tax implications of IFRS and the corporate tax impacts.
One of the main elements of the 2017 tax amendments is that when transitioning to IFRS the law allows a taxpayer to choose between all its existing total assets and liabilities recorded in the books as of the day preceding the first day of the fiscal year of the transition, or only all of its tangible and intangible assets.
The choice refers to total assets and liabilities (tangible and intangible assets), not to individual items. The essence here is that the tax base for these assets and liabilities (tangible and intangible assets) may be assessed as if the taxpayer had not adopted IFRS; for example, the previous tax depreciation applies in the case of a tangible asset, and there is no tax base difference as a result of the transition.
When choosing this method, relevant tax and accounting values must be recorded separately. This is obviously important because assets before and after the transition have to be treated differently. The taxpayer has to choose the method no later than when filing the corporate tax return for the fiscal year of the transition, and it may not be subsequently modified or withdrawn.
Tax implications of IFRS – worth quantifying in respect of local business tax too
Given that the absolute amount of local business tax approximates or exceeds the amount of corporate tax at many companies, it is also worth quantifying the impact of an IFRS transition on local business tax, since it is not only the Act on Corporate Tax that contains quite a few special rules, the Act on Local Taxes does too.
You can read about the strategic aspects of IFRS transition here, about its initial accounting steps here, and about its legal aspects here.