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  There is much perplexity on the market about expected wage hikes and their compensation, suggesting it was rather unexpected for most of the companies concerned. But making it a condition for entering public procurement tenders seems to be a good motivator.   

 

The elimination of the tax credit for personal income taxes affects people on the lowest income. In order to keep the real value of their wages, the Hungarian government decided at the end of last year to advise companies to pay an “expected wage increase” to these employees.

 

The 2012 tax laws, including that on social security contributions, stipulate that all workers who were employed any time between October 1, 2011 and December 31, 2011 and whose gross wage was lower than HUF 216,805 should be compensated. If the wage is higher than HUF 59,600 gross, the measure of the increase should be between HUF 15,500 and HUF 500. If the wage is lower (e.g. for part-time employment), the extent of the compensation is 26% of the monthly salary.

 

Employers also get compensation for their cooperation, namely a tax allowance – its exact conditions are regulated by a government decree. If a company raises all wages concerned (and not simply by giving more fringe benefits), it is eligible for this compensation. Together with the act, this keeps the costs of the rise for the employer at no more than 5% in case of unchanged net wages for employees.

 

For the minimum wage, the expected wage hike does not mean new expenditure for most, besides the obligatory raise in the wage type itself. In 2012, the monthly minimum wage has risen from HUF 78,000 to HUF 93,000 – with the expected wage rise, it would be HUF 92,700. As for the guaranteed wage minimum (for employees with high-school diplomas or professional skills), the previous HUF 94,000 must go up to HUF 108,000, which means again a meeting of conditions, with the expected rise being HUF 107,800.

 

If the employer doesn’t fulfill these requirements, there are several negative consequences. Firstly, the company risks its eligibility to participate in public procurement tenders for two years and to receive state subsidies. If it does apply for a tender, and the tax authorities find any deficiencies during a regular check-up, the employer has to repay all tax allowances with a fine of up to 200%. Experts say it is best to give particular attention to documentation, because the authorities will make these check-ups a priority.

 

Moderate risk for competitiveness

 

Whether this is a gallant offer from the government is still being disputed; however, there are definitely some cases when complying is an advantage. First and foremost, companies interested in public procurement tenders have raised or will raise the salaries of at least two-thirds of their employees, which is the bottom line for the rise.

 

Moreover, it costs even less to raise it for all employees because the company can apply for the social contribution tax credit, and about 10% of costs are covered by the state budget. Otherwise, keeping the real value of net wages for employees who earn less than the average “would mean a 15% gross wage rise, all paid by the employer”, noted József Angyal, a chartered tax expert for Adózóna.hu.

 

However, there are several problems with the compensation system. Most advisors the Budapest Business Journal spoke to mentioned the increased administrative burden stemming from the complicated regulations. Different shifts or overtime work that vary from month to month add to basic wages and make eligibility for compensation hard to define.

 

Where thousands work for lower wages, as in manufacturing or assembly, even that 3%-4% of additional costs count a lot, not to mention that in 2013 this will further increase because of decreasing compensation rates. Nonetheless, “this very important GDP-generating segment in Hungary is already suffering the effects of the compulsory minimum wage rise, so with the compensation they at least have the chance to reduce their losses,” Ferbal Auditing & Consulting managing director Lajos D. Nagy said.

 

“Some of our clients, mainly international enterprises, have not taken any action yet, they might still be in the process of negotiating with their parent companies,” added András Szalai, managing director of Process Solutions. Compensation can be claimed retroactively, and time is needed for the exact calculations and necessary restructuring of business plans.

 

Part-time success

 

In those plans, restructuring of the workforce will probably be a major issue. While experts do not predict mass layoffs, there will definitely be some headcount reductions, and even more previously full-time workers will be offered part-time jobs instead. “The compensation is more advantageous for part-time employment, so companies will be restructuring their workforce toward that,” said D. Nagy.

 

The compensation for the expected wage rise is 21.5%, with a maximum of HUF 16,125 for wages under HUF 75,000. For wages higher than that, the zones go up by 14%, up to HUF 190,000 gross. Salary cost-driven sectors, such as manufacturing, hospitality or construction, in order not to jeopardize their competitiveness, are already trying to cut labor costs by dismissing people and enhancing production efficiency. In practice, this might mean an eight-hour employment turning into a six-hour one, but only on paper.

 

Angyal also called attention to the fact that even if the employer does comply with the expected wage hike measures, the jobs of its workers still will not be ensured. After a layoff, the employer can hire new workers for the same low wage as before the hike, while the company again gets the tax allowance – even more than for the laid off worker, because a lower wage means a higher allowance.

 

From another perspective, the circle of employees that make an employer eligible for compensation has been widened, compared to those who were eligible for tax credit in 2011, giving again room for creativity in the books. A typical example is the case of a managing director at a Hungarian SME, who is employed by his own company with a gross wage of HUF 100,000, but has other revenues like dividends, or sale or rent of a real estate.

 

In 2011, this person was not eligible for a tax credit, but this year, according to the gross revenues coming from the employment, his company can apply for a wage compensation tax credit. Additionally, in every position, the monthly salary can be “complemented” by commission work or another part-time job. Those paying taxes through EKHO  (a regime of simplified contributions to common charges) are also automatically eligible for compensation after their minimum wage.

 

Although the goal of the new regulation would be to keep wage-type revenues in the legal track, there are some sectors in which reaching this goal is at risk, noted Szalai of Process Solutions. AJM

 

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