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More rules, if not higher taxes

The corporate tax bite for last year’s earnings should not be dramatically different from the year before for most companies, but the administrative burden will continue to grow, according to local experts.

EKAER regulations help authorities keep tabs on trucks.

As companies file their taxes on earnings made last year, most should find that there are not huge differences in the amount owed under the new regulations, according to tax experts interviewed by the Budapest Business Journal.

Still, stricter enforcement measures may mean that some firms pay more than they did before. And most companies have probably already experienced an increase in the amount of administration involved in reporting income and paying the right amount on time. Complying with the more difficult administrative burden is a good idea, the experts say, as those who pay accurately and punctually for several years in a row can enjoy some benefits.

The experts interviewed are hard-pressed to make generalizations about whether companies should expect to pay more or less.

“It depends on the business. For example if someone used to benefit from tax loss carry forward, companies that had a great deal of tax losses in previous tax periods would be able to benefit from this measure, but the legislation was changed last year,” explains Erzsébet Antretter of tax consultants Accace Hungary.

Like many other tax systems, Hungary allows businesses to carry forward losses by postponing declarations of those losses, on the expectation that they would be more profitable in coming years. The firm could deduct a loss from  several years ago on its current filing for a very profitable year, to reduce their taxable income.

“Now there are limitations – down to five tax years from 2015 – so companies will have higher burdens in the years to come because they will lose their tax losses from previous years,” explains Antretter.

Conversely, companies that are able to take advantage of the new gross tax credits will have lower income tax burdens this year, Antretter adds. The downside is that the gross tax credit only applies to businesses with before-tax profit far exceeding that of previous years. “Such companies will not have to pay corporate income tax on the portion of the profit that is five times higher than in previous years,” Antretter explains, adding that companies in fast growing sectors, such as IT, are the most likely to see such exponential growth.

“Changes may be advantageous for specific sectors, for example freight forwarders or companies operating in sectors affected by a decrease in VAT rates,” notes Katalin Lunczer of VGD Ferencz & Partner Kft. “Companies might benefit from the new tax base and tax-reducing corporate income tax items, including easier donations and tax credits for sport and cultural purposes and tax credits for growth as well as a local business tax that includes tax allowances on R&D costs.”

Given the introduction of electronic-tills, new software requirements, more frequent VAT returns, and additional paperwork, Antretter believes that, even if a taxpayer’s nominal tax burden is no higher or even slightly less than in previous years, they will end up including more income or profit on their returns and therefore their payable taxes are likely to increase.

Electronic tills

The reach of the mandatory electronic till system, in which cash registers for all kinds of businesses are directly connected to the tax authority, has been expanding steadily since it began in 2014. The system means every sale is instantly reported to the tax authority, and it makes it harder to cheat on VAT.

When it was originally introduced, the law required that most cash-heavy businesses operating in Hungary install tills by the deadline in the fall of 2014. Fines for failure to do so could run up to HUF 500,000. After a long and rocky start to the program, upwards of 190,000 e-tills had been installed by the end of 2014, and were in operation throughout last year.

In November, the Hungarian government announced plans to expand the mandatory use of electronic tills to include auto mechanics, taxis, laundries and currency exchange offices.

Already by the end of 2014, NAV had encountered thousands of cases with shortfalls and fined several companies for failing to comply following a series of targeted audits. NAV also noted a subsequent increase in VAT revenue of nearly HUF 200 billion by the end of the first year of the tills’ operation, according to reports. It appears that the measure to reduce what Economy Minister Mihály Varga calls Hungary’s “shadow economy” is a resounding success.

Increased electronic monitoring elsewhere

While experts say that missed VAT payments still represent the majority of unpaid taxes, this could be further reduced through the proposed introduction of online corporate invoicing linked directly to NAV. This measure would allow the authority to follow invoicing in real time, just as it does with electronic tills.

Details on the measure have not yet been confirmed, but other forms of closer electronic monitoring by the tax authorities are already in place.

As of January 1, the tax authority introduced a new invoicing software requirement that will help the government scrutinize a business’ activity more closely. The new software add-on includes a built-in function referred to as the “supplying of data for tax inspection” feature that must be installed by all Hungarian business with a VAT number.

“Based on the new requirement, all invoicing software should have a data export function that allows the Hungarian tax authority to request taxpayers to perform a data query concerning invoicing-related information in a pre-defined data structure,” says VAT expert and EY Partner Tamás Vékási. “If the invoicing software fails to perform the data export function in compliance with the requirements, the tax authority may levy a default penalty (up to HUF 500,000) per occasion and order that the taxpayer implement the data export function to its invoicing software by a fixed deadline.”

“For most taxpayers, this will result in costly software developments, otherwise they will be unable to meet this mandatory requirement,” Antretter adds.

Additionally, unlike in previous years, new taxpayers are now required to file VAT returns not quarterly but monthly,” says Antretter, speaking of companies who were either established this year or have applied for VAT registration this year.

The payment schedule of VAT was affected by another development: Changes in transactions with periodic settlement. “This is a new provision entered into force with regard to all taxpayers, according to which the supply date is the last day of the period concerned by the settlement or payment,” says Vékási.

According to Antretter, officials said this new rule was introduced to facilitate harmonization with EU rules but Hungarian taxpayers were reluctant to accept it at first and it wasn’t implemented until July 1, 2015, and then only for companies dealing with accounting, tax advisory and audit services. The rule was extended to all taxpayers as of January 1.

The introduction of the new regulation among a group of taxpayers who are the most skilled in tax law, i.e. the providers of accounting, audit and tax consulting services, was apparently intended to introduce the profession to the new law, thereby facilitating the introduction of these settlement rules for all taxpayers as of January 1.

Electronic tills catch income at the source.

EKAER transport reporting requirements

Another controversial change that went into effect last year and should have an impact as companies file their taxes is the introduction of the real-time electronic shipping registration system known as EKAER, which was launched on January 1 of last year. The system is designed to eliminate VAT fraud on road shipments and is being criticized as an administrative burden not only for shipping companies but also for firms that buy or sell goods carried by land.

Under EKAER regulations, road haulage companies will need to register shipments for each truck with contents weighing more than 3.5 tonnes and the sender and recipient of the shipment both have to sign for the load and pay a usage-proportional road toll when using highways and other roads defined by the law. Shipments of high-risk items and food will have lower weight thresholds for registration (500 kilos and 200 kilos, respectively).

“Taxpayers or their representative – typically shipment companies – must report all important data of the transport: The name and tax number of sender and recipient, the start date of the transport, the license plate of the vehicle, the weight of the product and the address of the loading and destination,” explains Antretter, adding that “if the EKAER requirements are not met, the penalty is 40% of the value of the goods.” She said that those companies that are able to do so are now organizing their shipments to circumvent the rule. Others that do not have that option are faced with masses of paperwork and heavy EKAER deposits that could cause liquidity issues with their companies.

Reliable vs. risky

One of the most talked about modifications to the tax law is the category of reliable vs. risky taxpayers. Although the classification won’t be finalized until April of this year, it will use information garnered from a taxpayer’s behavior from past years, so it is certainly not too early to be paying attention to this important change.

In the new system taxpayers will be categorized into three groups: Reliable, average and risky and this categorization will automatically be carried out by the tax office on a quarterly basis and taxpayers will only be notified if their status changes, however, taxpayers deemed risky will remain so for the rest of the tax year but can improve their status for the following year by resolving all issues that resulted in the designation.

Businesses which have been in continuous operation for at least three years with a clear track record of paying their returns and liabilities on time and not under investigation by the tax authority will receive preferential treatment including reduced length of tax audits, which could otherwise cause liquidity issues, and a reduction in maximum penalties to 50% of standard rates, payable in installments without additional charges. Reliable taxpayers will also be entitled to reclaim VAT in less than the standard 75 days in upcoming tax years. Additionally, if a reliable taxpayer omits information from their return or provides erroneous information, they will be given a warning rather than a penalty in the first instance.

“The main advantage of being a reliable taxpayer is that the timeframe of tax audits is limited for these taxpayers. Namely, the timeframe of audits should not exceed 180 days. This rule is very favorable, as the timeframe was often much longer than this,” says Szabolcs Vámosi-Nagy, a tax expert at EY.

Unreliable taxpayers such as those on the public list of taxpayers with tax shortages or outstanding tax liabilities as well as companies with unreported personnel, will face longer VAT recovery periods, longer tax audits, markedly higher late payment penalties, late payment interest and stricter penalties for non-compliance.

“The government’s aim is essentially to learn about all the transactions they were unable to previously and prevent companies from hiding their taxable transactions and income. Ultimately this will have an impact on taxpayers’ behavior this year,” says Antretter.

Income received abroad

For sole proprietors or individuals who receive income from abroad, the situation can be complex and a tax expert can more easily determine one’s tax residency. “This is based on a four-stage rule,” explains Tamás Gyányi of WTS Klient Tax Advisory Ltd. “First we have to review your permanent address, then we look at your center of vital interest – where you have your family ties, hold a bank account etc. Sometimes we are unable to determine the tax residency and have to jump to the third stage based on the 183-day rule. So, if you spend more than 183 days in Hungary you may qualify as a Hungarian tax resident,” Gyányi adds. “Then we move on to income tax and review whether you receive an entrepreneur’s fee, a regular salary from a company or royalty fees etc.”