The Hungarian Government submitted the 2019 state budget to the National Assembly in the middle of June. Obviously, a tax consultant is primarily interested in the changes to the tax regime. Since investors mainly want predictability when it comes to the elements of a tax regime, we were happy to see that based on the budget forecast we do not expect any major, unforeseen changes in 2019.
The 15% personal income tax and the 27% VAT reduced by preferential rates shall remain in force, and the only change in the area of family tax relief or social contribution tax is that the amendments previously adopted and providing further advantages will enter into force. Although the narrowing of fringe benefits and the introduction of the special immigration tax in 2019 could still ruffle some feathers, on the whole we have to ask whether the tax regime really is complete, and is there no need for further material changes in the coming four years?
What should be changed on the tax regime in Hungary?
The radical transformation of the tax regime in Hungary in 2011, i.e. the shift in emphasis from the taxation of income to the taxation of consumption, was a new and fundamental tax policy direction and it would be difficult to challenge this in light of the current economic indicators. However, there are three smaller proposals which will not change the tax regime materially but applying them is worth considering. I will attempt to outline these now.
Special sectoral taxes of the Hungarian tax regime
In Hungary, the 6 largest special sectoral taxes (special tax on financial organisations, income tax on energy providers, telecom tax, public utilities’ tax, insurance tax, gaming tax) barely generated 3% of tax receipts for the 2018 budget. However, these special taxes distort competition. If we add the special tax to the corporate tax paid by companies operating in sectors that are subject to a special tax, then in most cases they face an effective tax burden in excess of 50%, but in some cases it can be more than 80%. With a tax burden of this size there is almost no point in conducting any business activity at all, while the only thing really keeping these investors in Hungary is that under such taxation conditions they would only recover a fraction of their invested capital were they to sell up and leave. And waiting for the appearance of new market players in industries subject to a special tax is most certainly a fruitless endeavour. The VAT revenue growth of HUF 200-300 billion (roughly EUR 600-900 million) expected from the introduction of online invoicing from 1 July 2018 would make up for almost the total discontinuation of the special sectoral taxes. This step would revive investment appetite in the industries concerned, so some of the missed budget revenues would be collected in the form of different tax types.
Local business tax
Local business tax is the third largest income-generating tax at the level of the national economy after sales taxes and personal income tax. How is it possible that the 9% corporate tax generates less revenue for the budget than the 2% local business tax, which seems negligible?
Apart from the available allowances, this contradiction in the area of corporate tax is explained by the fact that the basis for local business tax is a multiple of that for corporate tax. The more than HUF 600 billion (roughly EUR 1,8 billion) received by local governments from this tax type is not expected to decrease drastically. With a gradual increase in the tax rate and a simultaneous, gradual approval of the deduction of wage-type expenses, depreciation and other expenses from the tax base, local business tax revenue would still remain unchanged and, parallel to this, the profitability of companies would be expressed in the amount of tax payable to a greater extent.
Prior to making an investment decision, major investors always calculate the so-called effective tax burden based on the taxes charged in the given country. If we stop communicating economic policy merely at the level of tax rates and demonstrate Hungary’s regional tax benefit to potential investors in terms of the effective tax burden in the area of income taxes, including the advantage of transparency, which should not be underestimated, we can achieve serious economic development.
The most unjustified element of the Hungarian tax regime: the corporate tax top-up system
Taxpayers which had net sales revenues in excess of HUF 100 million (roughly EUR 300,000) in the year prior to the reporting year must estimate their entire annual tax liability by the 20th of the last month of the given financial year and pay the difference between this amount and the tax advances already paid.
Alongside the otherwise efficient and logical Hungarian tax advance system, it makes no sense to have to estimate corporate tax by 20 December (or by the 20th of the last month of the financial year if the company follows a different financial year), and pay the difference taking the paid tax advances into account. This date often precedes the balance sheet preparation date by 2-3 months. But the pre-tax profit and thus the corporate tax base are heavily influenced by year-end accruals, turnover-related bonuses and group accounting. There are also many items that can increase or decrease a company’s corporate tax base. It is not easy taking these into account months before the financial statements are prepared either.
If the tax advances paid during the year and the top-up payment at the end of the year are collectively less than 90% of the actual corporate tax payment liability, which is assessed only 5 months later, then a default penalty becomes payable amounting to 20% of the difference. And all because, several months before preparing its annual financial statements, the company did not know precisely how external factors would impact on its profit. What is more, the Hungarian tax authority is unrelenting in its levying of default penalties. If the top-up payment is transferred one day late because the authorised signatory was perhaps not in Hungary the day before, the penalty is imposed in full and without exception.
I have my suspicions that this system serves one purpose and one purpose alone: in order to avoid the significant default penalty companies pay tax advances and make their top-up payments at amounts which exceed their actual corporate tax payable, thereby financing the state budget interest-free for 5 months from the end of the year. With economic growth of 4% and a budget deficit of less than 2%, now is perhaps the time to abolish this economically unjustified system.
We have already formulated several modifications regarding the tax regime for the Hungarian Ministry for National Economy (the old/new Ministry of Finance) in our proposal packages submitted annually, yet I think if we could see the 3 most important revisions listed in this article in our tax laws in the following four years, we can be satisfied with the Hungarian tax regime.
If you are planning a complex tax strategy for your company and you need a tax consultant to define the actual steps and for a detailed analysis of the Hungarian tax regime, do not hesitate to contact us and make sure you avoid the possible pitfalls.
