Hungary’s Tax System Stable but Administration-heavy
Although the administrative side of the Hungarian taxation system might be daunting, the local tax environment is stable, Róbert Heinczinger, tax services partner at EY Hungary, tells the Budapest Business Journal.
Róbert Heinczinger of EY Hungary.
The local market has seen value-added tax reductions in certain sectors for some goods, as the levy is an important income source for a state budget, no radical changes are expected in the near future, the tax expert says.
Despite the often eye-catching changes (most recently, Prime Minister Viktor Orbán announced women who have four or more children will be exempted from income tax for life, as the country battles to overcome the demographic mathematics of its shrinking population), the volume and the magnitude of such changes have significantly dropped in number over the past few years.
Additionally, the Hungarian markets have seen tax measures that certainly contribute to the economy, in general.
“I can single out anti-black economy measures that work very efficiently. These include on-line cash registers at retailers in B2C, the EKEAR system and now the online invoice data reporting in B2B,” Heinczinger says.
“These measures have helped Hungary become a regional champion in how efficiently the country collect taxes; it is estimated that these measures resulted in annual extra tax revenues of more than HUF 200 billion,” the EY partner adds.
He also mentions the OECD BEPS rules (Base Erosion and Profit Shifting) in fighting harmful tax practices, the framework of which is followed by 127 countries, with the number of states signing up still growing.
“This is a big change in our profession; in fact, I have not seen a bigger one, including EU accession back in 2004,” Heinczinger says.
While there is no single measure that exists for grasping the tax competitiveness of a country, tax revenues as a percentage of GDP is a figure that is often considered helpful for getting a rough overall picture of how a country does in terms of taxes.
“Hungary like many other countries in the region, tends to come out better than Western European countries, that means less is collected in a centralized manner. Hungary is at about 39-40%; that is about the EU average, better than most Western countries, but worse than the other V4 countries [Czech Republic, Poland and Slovakia]. The declared aim of the government is to reduce tax centralization to the regional average by 2021, which means further tax cuts are coming,” says Heinczinger.
He adds that, based on his experience “Clients love the 9% corporate income tax rate and wide tax treaty network, that there are no withholding taxes, there is flexibility of opting for an alternative fiscal year, functional currency, or IFRS.”
Like other countries in the region competing for FDI, Hungary traditionally maintains higher consumption taxes and lower income taxes compared to Western Europe.
“The VAT with its 27% general rate is an important source of revenue for the state budget. Therefore, levying a lower rate of VAT on certain goods and services is limited, as it reduces government tax revenues,” Heinczinger explains.
“In addition, the reduction is only possible for certain limited categories of goods and services allowed by the general EU rules. By reducing the VAT rate, the government can drive economic policies. It may be that in markets where prices do not change much as a result of the VAT reduction, a business can keep more as revenues from the money they collect from their customers,” he adds.
The hospitality sector’s tax reduction is a good example, he says. It has enabled hotel and restaurant operators to keep more money as revenues against the increased costs, particularly in wages.
“In some other markets final gross – VAT inclusive – consumer prices may reduce as a result of lower VAT rate and thus can influence consumer preference at one end of the chain, while at the other end they can result in higher revenues for businesses. An example may be pork, where farmers could keep more money, and at the same time, there may have been a higher demand for pork versus other comparable products,” says Heinczinger.
In spite of the stable and welcoming environment, there is room for improvement.
“One area is certainly easing the administrative burden. In today’s environment where human resources are scarce, it is imperative that the time necessary for tax compliance be significantly reduced,” Heinczinger says. In his experience, Hungarian businesses spend more than 250 hours on tax compliance, which is very high on any comparison, the tax expert says.
Heinczinger believes that reducing the number of taxes from more than 60 could help ease the administrative burden. He says that 40 types of taxes account for 99% of total tax revenues, the remaining 20-plus only generate 1%.
“Cutting the number of taxes may not be enough; one also needs to look at the so-called large taxes. For example, the Hungarian VAT return is extremely complex and detailed. If other countries manage from far less information, then that may also be a learning point,” he concludes.
Editor’s note: The other Big Four consultancies were approached to contribute to this article, but has either not responded by the time we went to press, or declined to comment.
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