The frequent changes to Hungary’s tax system have created an uncertain business environment, and clients now more often look to their accountants for explanations regarding the government’s economic policy decisions.
Things used to be nice, and slow, and predictable. Tax laws changed twice a year, with proposed amendments discussed by various committees for several months. This gave enough time for accountants, auditors and tax advisors to prepare for the changes and to communicate them to their clients. Now, in a bid to speed things up, the minimum period between the time tax changes are announced and when they come into force has been reduced from 45 to just 30 days.
The government is playing for time, as it says it is still seeking the best solutions to making tax changes. These include the elimination of tax breaks and ending the so-called half super gross system, the practice of adding half of social contributions to the personal income tax base, but only for income up to HUF 202,000 a month, said Zoltán Lambert, managing partner of accounting firm HLB Klient.
National Economy Minister György Matolcsy had earlier said that the technical details of eliminating these two elements of the tax system are still being worked out, with a likely finalization date of October.
Lower-income earners, who will be worse off because of the elimination of the tax preferences, will be compensated from the revenues generated by the broader tax base for incomes over HUF 202,000.
Lawmakers claim that the shorter minimum period enables them to react faster and more efficiently to economic and fiscal changes. “I can accept that, but speed is not necessarily the best thing in taxes,” KPMG tax partner Gábor Beer said, adding that some pieces of legislation are incomplete, while others are incorrect. “A typical M&A transaction lasts for six to 12 months, so if there is a sudden change in relevant regulations, we can start negotiations all over again.”
Beer cited the example of the recently introduced new rules on transfer tax for the acquisition of companies that own domestic real estate, which can be confusing. According to the new rules, the transfer tax payment liability applies only to the acquisition of capital shares in companies whose principal business activity is related to the real estate business. The problem is that the principal business activity is determined on the basis of the company register, which does not always reflect reality, Beer noted.
Clients are nevertheless tolerant, saying that it is still better to be in a country where tax laws are changing than in one that is often on the front page of the Financial Times, such as Greece and Italy, Beer said. “Fortunately, Hungary is out of the red zone now, and the increasing tax burden is the price we have to pay for that,” he added.
“While frequent changes do not improve the business environment, I do not see new investors worrying too much about the taxes,” HLB Klient’s Lambert said. The introduction of the 16% flat rate personal income tax, for instance, was regarded as a very positive development.
“Many foreigners suddenly realized after the introduction of the flat-rate personal income tax that they spend more than 183 days in Hungary,” Lambert pointed out. Why? Because if you work more than 183 days in most countries, then you become a tax resident and liable for tax on your worldwide income.
The profession is continuously in contact with the relevant ministries regarding Hungary’s tax system, Beer said. The government is open to ideas that do not threaten its revenues, such as the recent introduction of the real estate investment trusts. “However, certain market players sometimes lose their sense of reality, and come up with ideas which would result in a significant fallout in tax revenues,” he added.
He believes that there should be an organization, a chamber maybe, which integrates the communication of auditors, accountants and tax advisors to the government and the tax authority in order to find solutions to actual problems in a more effective way.
All in all, it seems that the government intends to increase consumption taxes more than income taxes, according to Beer. This ensures a simpler and more effective way of getting extra revenues. As Hungarians do not like to pay taxes, an increase in the personal income tax rate, for instance, would further raise the proportion of hidden revenues.
“Although it is also possible to avoid paying consumption taxes – the first question of a plumber is always the well-known ‘with or without an invoice?’ – it is still easier to collect consumption taxes than income taxes,” said Beer.