Tax Evasion no Longer a National Sport, but More Must be Done

Gábor Farkas of PwC Hungary.

How to collect taxes more effectively must be on top of most tax authorities’ priorities. The answer lies in the country’s tax system, which offers different kinds of loopholes. One main feature of the Hungarian tax policy is that taxes on consumption are quite high.  

“By introducing the EU’s highest VAT-rate, which is relatively easy to dodge, we have let the door open for tax evaders,” Gábor Farkas, a director of tax and legal services at PwC Hungary, tells the Budapest Business Journal.

So, the policy’s fate rested on the government’s ability to actually collect the VAT, because had they not, the whole system would have needed to be reorganized, he adds.  

Why VAT? According to the expert, any tax can be dodged. With VAT fraud and evasion, there are three possible ways to do it. Fictitious invoicing, fictitious transportation of goods and so-called carousel fraud. Employing these methods, tax evaders can earn quite a lot in a fairly short amount of time, since evasion is particularly easy with VAT.  

Looking at the statistics of the National Tax and Customs Administration of Hungary (NAV), 90% of the criticism and negative decisions regard VAT. That does not necessarily mean it is all down to tax evasion, which is relatively difficult to calculate in any case; it is, however, easy to make mistakes while preparing the VAT returns.

Mind the Gap

Thanks to measures aimed at whitening the economy, tax fraud has been curbed. NAV and the Ministry of Finance have gradually introduced a number of instruments, most notably the domestic recapitulative statement (as part of the VAT return), the Electronic Trade and Transport Control System (EKÁER), and online cash registers linked directly to the tax authority.

As a result, the rate of undeclared and unpaid VAT has declined significantly in Hungary. While in 2012, 22% of the total VAT tax liability was lost, by 2016 the so-called “VAT Gap” was down to 13%.

With the adoption of these measures, the first two of the abovementioned three fraud types (fictitious invoicing and fictitious transportation of goods abroad) have been largely eliminated, but carousel fraud continues.  

To fight this, and to further improve transparency, the online invoice reporting system was introduced last year. (For more on this, see “Brave New World of Online Invoicing has Been a Success, Experts Say” on page 16.)

The VAT Gap refers to the difference between expected and actual VAT revenues and represents more than just fraud and evasion and their associated policy measures. The gap also covers the VAT lost due to, for example, insolvencies, administrative errors and legal tax optimization.

Last year, the tax revenue of the budget was HUF 3.929 trillion. If the VAT Gap was 10%, an estimated figure based on the previous figures, it means that the central budget would be missing HUF 436.5 billion in tax earnings.

It is not realistic to think that this can be reduced to zero, the expert notes, there will always be a shortfall. Even in the best performing countries, the VAT Gap is 9% in Germany and 7% in Austria, while the EU average is 12.3%.

The introduction of online invoicing has indeed been a useful method, but there are more efficient ones out there, Farkas notes. For example, a special form, called the standard audit file for tax, is used in the Netherlands, Spain and Poland.  

Detailed Data

Unlike online invoicing it is not necessarily real-time, but taxpayers still need to provide very detailed data on, for example, accounting or logistics, or any other data available in the company’s system, at certain intervals, Farkas explains.

“If we move to that direction, Hungary could take action more effectively against tax evaders,” he adds. This may take place sometime in the future as it arises among policy makers every now and then, Farkas says.  

Of the difficulties involved, the expert highlights those related to IT infrastructure. This system requires robust IT backup and the tax authority needs to pay attention to project management as well.   

Tax evasion used to be referred to as a national sport in Hungary, but it no longer is. The main types of tax evasion, such as “black” employment or unreported income are not necessarily as frequent as they used to be in part due to the lower tax rate and wage bill taxes, and the implementation of several instruments by the tax authority and the Ministry of Finance.

However, the ratio of cash payments in the economy is still high, and in the past few years it has increased significantly, almost doubling from 2016 to 2018.

“As a rule of thumb, where it is high, the ratio of fraud is also higher,” Farkas points out.  

This is something that needs some improvement, as the ratio is fairly high at an EU-level comparison and many retail outlets still don’t accept card payments. Online cash registers are mandatory, and result in some sort of control, but those businesses still not accepting cards should be further motivated, Farkas says.