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Tax issues: EU harmonization slow to catch on

The Hungarian law under which businesses receiving government subsidies are not allowed to fully deduct VAT is in violation of EU directives on sales tax. If the European Court annuls the article, it will most likely do so with retroactive effect, according to the business daily Világgazdaság. Tax experts say the Hungarian fiscal government can expect tough battles in the issue. The VAT scaling decree introduced as of January 1, 2004 is in clash with the EU directive on sales tax, Iván Vadász, vice president of the Association of Hungarian Tax Consultants, said. Under Hungarian law, a portion of the VAT proportionate to the amount of the subsidy within all revenues cannot be deducted. Thus, the subsidy is regarded as tangible tax-free revenue. The European Court is likely to annul the Hungarian law with retroactive effect, Vadász said. This would mean that affected businesses, mostly agricultural and industrial enterprises and theaters, would be able to reclaim the entire amount of VAT they were not able to deduct since January 1, 2004. This would amount to more than Ft 10 billion annually, Ferenc Pichler, head of the Finance Ministry?s press department, said.