The relationship between man and his environment is special. The more we want to solve a specific problem, the less we “see the wood from the trees”. The same applies for us, as tax experts.
Seriously, except for those who love seafood, who cares that the VAT on fish will fall to 5% next year? Will it really affect our business decisions, or perhaps force us to change strategies, if the social contribution tax falls by a half a percentage point more than expected?
Still, this was what all of the specialist Hungarian press focused on last week; practically all you could read about was the minute detailed rules of the tax changes coming next year.
In the meantime, loss-making companies frequently pay significant amounts of local business tax, when making our daily bank transfers we contribute to central budget revenues with the almost invisible transaction tax, but which adds up to a significant amount overall, and we use Excel spreadsheets to try and calculate the tax and contribution implications of in-kind contributions in any given month, which differ for virtually every item.
We don’t have any time left to push through the material changes because browsing through the detailed rules we rack our brains to figure out whether or not it is worth launching a health maintenance programme in the hope of up to a 10% decrease in the public health product tax.
Please don’t misunderstand me! A good tax consultant is always aware of the minute details of legal regulations currently in force, but if we had time to take a deep breath, we could simplify the tax system and decrease administration with some simplifications and by fixing systemic errors, as well as debating tax strategy proposals.
There is no dispute among professionals about whether the decision to switch the focus of taxation from income taxes to sales taxes was right or not. There is also consensus that reducing taxes on employment was the right decision by the government due to its effect on competitiveness and boosting the economy. However, by simplifying or perhaps abolishing some tax types we could really improve the transparency of the tax system.
Specific tax strategy proposals
- Local business tax
I discussed the possibilities of improving the transparency of local business tax and its systemic transformation in detail in an earlier article. In essence, the significant convergence of the tax base to the company’s profit and a simultaneous increase in the tax rate could maintain the tax burden in a way that calculating tax would be simpler, and it would align with the income-dependent nature of local business tax, which is the declared aim.
- Topping up corporate and local business taxes
Another idea that has been raised before is that at the end of this particularly successful budgetary year the system of topping up corporate and local business tax should be scrapped for good. This rule plagues the work of professionals focusing on taxation and accounting in December. Advent is a special period for many, and it is only chief accountants and tax directors who spend their evenings beside their “crystal ball” instead of going to the Christmas fair. During this time they try to predict their profits and losses for the given year – which often depend on events in the last few days of the year – and consequently their expected corporate tax base.
- Special sectoral taxes
I discussed this issue in detail in a previous article. Few disputed the temporary implementation of these special taxes in the years of the crisis. However, keeping them in the tax system permanently is largely unnecessary during the current boom. They no longer have a significant impact on the budget, but they hinder investment projects significantly, and by often levying a 30-40% tax on pre-tax profits they make it impossible for these sectors to develop dynamically.
- Transaction tax
It cannot be said that the transaction tax – similar to the special sectoral taxes – discriminates some companies. Proportionally, every company feels the “benign” impact of this tax in almost equal measure. This way, however, the tax weighs down on companies regardless of any profitability factor, significantly lowering the advantages of Hungary’s corporate tax rate which is highly competitive in regional terms.
- Fringe benefits
Fringe benefits have become important parts of staff incentives at many companies in Hungary in recent years. By selecting their size and proportions, companies can convey to their employees the values they believe to be important in a unique way. If staff members can select the individual elements of their fringe benefit package themselves to a certain degree, they can develop a system that is advantageous for both parties (the employer and the employee). The various taxes and contributions on fringe benefits make this simple system so complicated and counter-productive that it has resulted in many firms dropping their fringe benefit systems completely in recent years, while those who have kept them complain about the continuous rise in administration. With standard tax charges and maintaining the level of total budgetary revenues, the fringe benefit system could be made simpler and attractive.
- Group corporate tax
A significant number of international companies outsource their different activities into separate business lines, and generally even into separate legal entities. If, fortunately for us, such a company carries out several of its activities in Hungary (production, trade, services), one of its entities could easily generate losses, even if only temporarily. These groups are adversely affected by the fact they cannot consolidate the corporate tax bases of the companies included in their portfolio. The loss generated in one of their business lines cannot decrease the profit of another business line when assessing the corporate tax base. This discrimination should be eliminated by introducing group corporate taxation, partly because in the case of significant such items, companies still take advantage of the opportunity to merge their legal entities, so the central budget can only count on extra revenue in cases affecting corporate tax to a smaller extent. With the option of loss carry forwards this extra revenue is only temporary too, though to a limited degree.
In conclusion
Of all the tax strategy proposals outlined above I have endeavoured to present some simpler points. I’m not saying that their implementation would have a negligible impact on the budget. Still, during the current boom it would be simpler to implement these modifications and they would largely have a positive effect on investment sentiment; they would also enable an additional significant increase in salaries, thus boosting economic growth and consumption. All this would ultimately lead to an increase in tax and contribution revenues. “What is lost on the swings is gained at the roundabouts.”
Do you have also an opinion about taxation? Would you like the government to listen to your proposals on tax policy in Hungary?
Then write us your opinion!
RELATED ARTICLES:
Local business tax, the “little brother” of corporate tax
Paying and topping up corporate tax
The role of special taxes in the Hungarian tax system
The be all and end all of taxation policy: predictability
Fringe benefit changes: still worth it?
Expected changes to foreign investments after the corporate tax rate cut
