Like lightning out of the blue; this is how everyone felt about the big announcement last November that the corporate income tax rate would be reduced to 9% from January. The government cut a tax rate that did not really hurt many: small businesses just applied the lower, 10% rate; big ones, including multinationals, were often subject to the higher, 19% rate, but could either mitigate the effective tax with significant credits (by 70-80%), or simply paid it no heed as a below-the-line item. Being an external factor, the corporate tax is beyond the control of the management and plays a marginal or even a non-existent role in influencing share prices or management incentives.
Károly Radnai, Tax partner, managing director, at OrienTax
So what was the goal then? More revenues? Not really. Tax revenues are expected to drop by HUF 145 billion as a result. More jobs? Maybe, but the reduction of employer’s wage taxes would have been a more efficient way. Higher value added? Probably, but value added is much more driven by the availability (or non-availability) of other factors, such as infrastructure, skilled human resources, the degree of bureaucracy, etc.
But before burying the measure completely, let us take a look at the other side. The announcement was extraordinary, indeed. The news about an EU and OECD member state (and not a sunny little island!) where all taxpayers shall pay such a small amount of tax spread like wildfire in the international financial world. Hungary is not like Malta or Luxemburg, where, due to the low population, real local production or service activity does not exist, thus these countries are rather used to facilitate internationally mobile services (and foreign tax authorities treat them accordingly as a result). Hungary is a moderately populated EU member state like Austria, Sweden or Czech Republic. There are only eight member states with significantly more inhabitants; so Hungary itself is an important economic player. Further, this is not a hidden privilege to a small circle of companies, there is no need to apologize to Brussels (who has by the way a number of disputes with Hungary on state aid).
And truly, HUF 145 bln is not the end of the world. This is only 20% of the 2016 corporate tax revenues and 1.35 % of the state revenues in total. So it could be a really good investment if, as a consequence, Hungary is seen internationally as a low-tax environment – let us not forget about the flat 15% personal income tax rate, either.
Some countries may not welcome Hungary’s 9% tax rate however. A number of OECD countries do not treat dividends as exempt from taxes if the tax rate is too low in the source country. As a result, the group’s overall tax burden can be even higher than if everything had remained unchanged. Some multinational companies will be forced, at best, to transform their shareholding structure or, at worse, to move their activities somewhere else. Due to the sudden and surprise-like nature of the announcement, it seems unlikely that anyone has assessed the impact of this before the announcement. Another, rather odd, negative impact could be that deferred tax assets made for tax losses or tax allowances to be utilized in the coming years will need to be written off. Although this is more a matter of financial reporting rather than a cash flow issue, it might have an adverse effect in the short-term.
In the absence of impact studies, we can only guess what the actual effects will be. My opinion is that the end result will be a somewhat positive, but… Reducing the corporate tax rate would have provided a once in a lifetime opportunity to develop a state and regional tax rate instead of the local business tax system. Because local business tax, in fact, is a problem. It is an above-the line item, it distorts and hinders competition and it helps the underdeveloped regions less than the developed ones, so it is also unfair. Hungary, for almost 30 years, has been unable to break out of the trap of the local business tax. It may be time to do something about that as well.
OrienTax, established in 2009, is a fast growing and independent tax firm. We have a team of 17 tax professionals and serve more than 100 clients. Our experts have gained their experience at Big4 firms or the Hungarian national tax authority. Our clients are major players in their industries.
SUPPORT THE BUDAPEST BUSINESS JOURNAL
Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.