Hungary is a very popular destination in Europe for investments. Its geographical location in the middle of Central Europe is a valuable asset for the country. This benefit combined with advanced infrastructure creates optimal conditions for new investments. Proximity to customers, and low transportation costs and short deadlines as a result, provide an advantage for Hungary in becoming a popular destination for investments in the region. While transport is certainly becoming faster and faster in the region nowadays, we are also seeing fiercer competition. Our neighbouring countries of Slovakia, Romania and also the Czech Republic and Poland are Hungary’s rivals in the race for new investments. Taxes play a key role in this competition. The good taxation policy is the main reason for Hungary attracting a substantial part of investments in the region.
If Hungary can play a key role in Central and Eastern Europe, investments implemented in the country can take a new direction. The government has also recognised that the activities of plants previously focused on serving central requirements can be complemented with key functions (e.g. research and development), which enable these units to pursue independent and comprehensive economic activities and have more freedom as market players in terms of business opportunities, and obviously risks of course. This entails an increasing need for highly qualified professionals (engineers, financial experts). The expansion of work with higher added value has become a key aspect of the current labour market conditions.
Role of taxation policy
To achieve a central role, however, we always need to monitor the development of our neighbouring countries. “Monitoring” the markets in the region can ensure that Hungary is able to secure the best position it can. Poland, for example, is a really successful competitor. With its special economic zones and highly qualified but not expensive labour force, Poland is a very attractive investment destination. Hungary must withstand the competition in all respects.
What we see is that investors consider a number of factors when making new investment decisions. Tax benefits are not enough for the Hungarian government to achieve its goal of attracting large investors. However, if an investment is implemented in this economic zone, taxation policy and taxes themselves play a key role in the selection of the target country.
The most important factor when making investment decisions is long-term predictability
During my 25 years as a consultant I have not had any meeting with any decision-makers of large companies where long-term predictability was not mentioned as a prime factor. Even financial managers and tax directors, whose main task nowadays is to reduce the so called “effective tax rate” of the corporation, unanimously confirmed that a reliable tax system and predictable taxation policy are more important than the tax rate itself.
Unfortunately, this opinion puts the advantages of Hungary’s 9% corporate tax rate into context. Of course, Hungary cannot apply tax rates, that are higher than the regional average, but even the lowest tax rates are not enough for investors if past experience shows that tax laws are continuously amended. This can negatively affect the launch of large investments that only have long-term returns. In terms of the reliability of taxation policy in Hungary, the continuous changes in tax laws over recent years mean the disadvantage Hungary faces here is not negligible.
Past experience
Without aiming to give an exhaustive summary, the following list reveals examples of inconsistent changes:
- decreasing the value added tax rate, then increasing it twice;
- introducing special taxes, then abolishing them for energy service providers and telecommunication companies, introducing additional taxes in the same sectors (partly in parallel);
- introducing a fringe benefits system with the aim of optimising taxes, then increasing the taxes on these benefits;
- introducing a generous sponsorship system for sports clubs, then considerably reducing the available benefits;
- multiplying the food-chain supervisory fee and the advertising tax, then lowering it considerably following EU pressure.
These were only examples of inconsistent tax law changes. If a company made a decision based on these rules, it later had to reverse it, or was at a disadvantage because of the changes in the regulations.
Price of changes
Besides these changes, a number of new taxes have been introduced over the past few years of taxation policy unfortunately: special tax on financial enterprises, transaction fee, telecom tax, tax imposed on utility infrastructure and energy service providers, insurance tax, accident tax, fat tax – it is hard even just to remember the names of the new taxes. Although these taxes barely affect parts of the companies, primarily their production units, the introduction of a new tax is always bad news in the head offices of these corporations. These measures create a negative atmosphere among investors. In addition, the taxes represent a significant cost factor: large organisations are very slow and it is costly for them to respond to changes. Due to the high number of small changes, the system is no longer transparent, which ultimately means that potential investors become unsettled, and decide to choose another location for their investment.
Key to the solution
Despite this, the solution is not necessarily abolishing the new taxes. Certain regulations incorporated into law a few years ago and clearly having a negative effect (for example deferring usage of loss carry-forwards) should definitely be removed. It is much more important, however, to ensure that the current rules of taxation policy remain unchanged in the long run. 16 years ago, the government currently leading the country accepted tax laws for two years. Investors would appreciate similar measures today.
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