Tax Policy: Cutting Burdens, Digital Transformation the Priorities

The government says it will continue to streamline the Hungarian tax system, the transformation of which has already brought about tangible results, for example, more transparency. One of the major aims is to facilitate the switch to digital while, at the same tie, simplifying tax-related red tape and easing the general burden.

The change has already started: the tax policy measures of recent years; reductions in the tax burden on the employee, the employer and entrepreneurs has surely contributed to the growth of employment and the reduction of unemployment.

As a result, Hungary has been at the forefront of reducing tax burdens in the European Union. With a tax burden proportional to 1.6% of GDP, after the United States, the tax burden decreased most in Hungary from 2018 to 2019, said Minister of Finance Mihály Varga at a conference late last year, citing data by the Organization for Economic Cooperation and Development (OECD).

The tax policy has also supported the reduction of the state deficit and debt, at least prior to the state interventions demanded by the COVID pandemic, he said. Overall, the Hungarian system has become more attractive in the EU.

“We should not stop here if we want to be among the leaders of digital taxation as well,” Varga added.

Three-step Process

The digitization of the existing system is a three-step process, the first of which, the administration of private individuals, is already being handled by the tax authority.

The second step, scheduled to debut in the second half of this year, is aimed at supporting roughly half a million entrepreneurs (for example by helping them fill in VAT returns).

The third step will see the end of the era of paper tax returns and with that will start the age of digital tax bases. The system will debut with employment-related administration. The Ministry of Finance says it is already working on a digital database that will contain all the information that needs to be sent central authorities.

There are several benefits to online taxation and administration. It does not only make the process smoother and more convenient, but also saves time and paper. Online invoicing now allows for parties to send invoices to one another without having to print them. Other online tools, such as EKÁER, the Electronic Trade and Transport Control System, or online cash registers, improve traceability.

They also give a better insight into performance. As a result, the government was able to follow more accurately the economic performance of the hospitality sector during the first wave of the coronavirus. Based on the data coming from online cash registers, the finance ministry could see there was a problem and could take action right away without waiting for statistics and surveys, Varga pointed out.

Doing tax returns online will help pinpoint when there is a discrepancy between the declaration and the tax authorities’ records. Digital tools allow for more frequent checks and the time to make good any formal irregularities is also shortened.

Beyond that, with the data collected, taxpayers have a source to reach out to when they need specific information. The popularity of electronic payment is also on the rise, and now people are able to buy bonds online as well.

Digital Progress

“About 60% of enterprises in Hungary have already significantly digitized tax administration processes, the proportion of those working mostly on paper is small, while 40% of enterprises outsource part of the tax administration, most of them completely,” said Norbert Izer, State Secretary for Tax Affairs at the Ministry of Finance last fall in a presentation about the digitization of taxation.

“Based on this, although strengthening the digitalization of processes further seems a promising direction, in order to make the benefits tangible to businesses, the range of services provided directly by the tax authorities needs to be increased,” he added. 

However, the proliferation of electronic declaration channels has not directly led to a reduction in administrative burdens. For that to decrease, the logic of data collection should be changed.

This means the consolidation of data requirements by the state authorities (which would eventually require companies to submit less data) and also to request transaction information generated by businesses in the course of their natural business processes.

Transitioning to such a model requires a great deal of preparation as what circle of information will be required that meets the needs of all the authorities needs to be decided, and it must be done in a way that simultaneously complies with the data protection and data management rules and provides a solution that is reliable, flexible, and capable of connecting to the existing systems of the state administration.

The National Tax and Customs Administration (NAV) says it has already launched developments that can be implemented in the shorter-term to reduce administration and minimize erroneous data provision, both on the side of the client and the authority.

Beyond that, the development of NAV’s digital capabilities in the coming years is a priority, Izer noted. In doing so, the renewal of customer relations interfaces and the expansion of services will be the two main directions of travel, he added.

This article was first published in the Budapest Business Journal print issue of February 26, 2021.