“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
– Jean Baptiste Colbert, Minister of Finances of France from 1665 to 1683 under the rule of King Louis XIV
The European Commission has published its annual Taxation Trends in the European Union. The report contains detailed statistical and economic analysis of the tax systems of EU Member States (plus European Economic Area members Iceland and Norway) and country-specific taxation trends. The following information was presented on taxation in Hungary.
Trends in Hungary
As of 2012, Hungary’s tax-to-GDP ratio was 39.2 percent (including social contribution) and the country’s tax burden ranked as the 9th highest in the European Union. The high tax-to-GDP ratio since 2012 came after a sharp decrease between 2009 and 2011, and rose almost two percentage points in 2012 as a consequence of rising indirect taxes and personal income taxes.
From a regional perspective, Hungary’s tax-to-GDP ratio is lower than Austria’s 43.1 percent but remains higher than Slovenia’s 37.6 percent and Romania’s and Slovakia’s 28.3 percent.
According to the report, in 2012, following Hungary’s increase of the standard VAT rate to 27 percent, the already substantial revenues from indirect taxes further increased to 47.1 percent of total tax revenues – the fourth-highest in the European Union after Bulgaria, Croatia and Romania. VAT revenues yielded 9.4 percent of GDP – 2 percentage points higher than the EU average. Local business taxes in Hungary (which are classified as indirect taxes) are the highest in the European Union, mainly due to revenues from local business taxes.
In contrast to the substantial fall in taxes between 2009 and 2011 (and their subsequent rise from 2012), direct taxes (including personal income tax) decreased and were relatively low as of 2012 at 7.5 percent of GDP. The European Union 28 Member State average is 13.2 percent. Social contributions in Hungary are above the European Union average: 13.2 percent in Hungary compared with 12.7 percent for the EU as a whole.
Hungary’s central government remains by far the largest recipient of tax revenues, receiving more than 60 percent of the total amount, while local government taxes represent 6.3 percent of total taxation.
Taxation of consumption, labor and capital, environmental taxation and property taxes
Hungary’s high level of indirect taxation led to a correspondingly elevated implicit tax rate on consumption. In 2012, Hungary’s implicit tax rate (ITR) was 28.1 percent, the fourth highest in the European Union. For that same year, Hungary’s ITR on labor amounted to 39.8 percent – the fifth highest in the European Union, almost 4 percentage points above the EU average.
The 2009 to 2011 jump in employees’ social contributions from 3.2 percent of GDP (in 2009) to 4.7 percent of GDP (in 2011) came as the result of the compulsory contributions to private pension funds being redirected to Hungary’s state pension fund as of November 2010. According to the report, the contrast between the relatively high implicit tax rate on labor and average labor tax revenues in terms of GDP is a consequence of the low employment rate.
Revenues from taxes on capital are among the lowest in the European Union at 5.3 percent of GDP, due to low business income taxation. There was a drop in tax revenues from capital income taxation after 2010 due to the removal of a solidarity surcharge on corporations, an increased threshold for the application of the regular income tax rate and the deductibility of sectoral taxes from the corporate income tax base. However, the abrupt rise in revenue from taxes on stocks of capital is largely due to the introduction of several sectoral surtaxes during that same period, which retroactively covered the years 2010, 2011 and 2012.
Environmental taxes represented 2.5 percent of GDP, close to the European Union average and which had declined since 2003.
The largest part of environmental tax revenues came from taxes on energy, especially transport fuels.
Hungary’s property tax revenues in relation to GDP in 2012 were 1.2 percent, and were well below the EU-28 average of 2.3 percent. Local governments have the authority to levy real taxes on buildings and land, and the share of revenues from such recurrent taxes on immovable property in 2012 amounted to .4 percent of GDP, whereas the corresponding EU-28 average was 1.5 percent.
Between 2010 and 2013, Hungary’s taxation landscape was characterized by a reform of the personal income tax system (with changes taking place in 2011, 2012 and 2013), a lower corporate tax income tax burden, special tax schemes for micro-, small- and medium-sized businesses, and sector-specific surtaxes. Some new taxes were introduced, such as the “Hamburger Tax” in 2011, an accident tax on third-party liability policies and a “cultural tax” on pornographic material introduced in 2012.
By 2013, the taxation landscape had been partly replaced by higher, consumption or transaction type taxes or, in the case of utilities, by taxes on capital stock. Some surtaxes increased significantly.
Main features of the tax system
In 2011, Hungary’s progressive income tax system was replaced by a 16 percent single-rate system. The flat rate applies to all categories of income subject to personal income tax, such as the sale of real estate, dividends and interests. The only major feature which deflects the personal income tax from the flat single rate is the family tax allowance introduced in 2011, which is especially generous towards families with at least three children. In such families, the family tax allowance is exploitable to a full extent by higher earners. The family tax allowance was extended to employee social contributions as of 2014.
The corporate income tax rate was set at 19 percent in 2010, replacing the 16 percent + 4 percent (related to aforementioned solidarity surcharge) rate. Local business taxes (HIPA) can go up 2 percent of a broad base, which corresponds to business value added, but such taxes are deductible from the corporate income tax base.
The report shows that in the typical case of a 19 percent corporate income tax and a 2 percent HIPA, the combined marginal tax burden is around 20.6 percent. The report also shows that in recent years HIPA revenues have been significantly higher than corporate income tax revenues.
In addition to EVA (the simplified enterprise tax) two newer types of simplified corporate tax schemes have been introduced for small- or medium-sized business or micro-enterprises (however, fewer than expected firms have taken the option for these):
KATA – (small taxpayers’ lump sum tax) under which micro businesses will pay a fixed HUF 50,000 (USD 220) per month for the full-time self-employed, and half of this for the part-time self-employed in place of the main taxes on profits and payroll.
KIVA – (small business tax) for businesses with 25 or less employees and an annual revenue of below HUF 500 million (USD 2.2 million). This scheme allows the business to pay a flat 16 percent on its cash-flow profits and payroll taxes (losses can be carried forward).
In 2010, financial institutions saw a surtax introduced on their sector. According to earlier plans regarding this sectoral surtax, it would have been halved in 2013 and entirely phased out as of 2014, but the government decided in 2012 to retain it indefinitely for banks as a permanent bank sector levy. A similar tax on insurance companies between 2010 and 2012 was phased out by 2013 but only after a consumption-type insurance tax was introduced.
In 2009 an additional tax rate of 8 percent was applied on the (adjusted) pre-tax profit of energy suppliers. This tax was extended to other utilities in 2013 and the rate was increased to 31 percent. This significant jump increased the de facto corporate income tax rate of all affected companies to 50 percent. From 2010 to 2012, new turnover-based, progressive sector-specific taxes were applied in the retail, telecommunications and energy sectors. As of 2013, new taxes were introduced on the infrastructure of energy companies.
In 2009, the standard VAT rate was increased from 20 percent to 25 percent, and further increased in 2012 to 27 percent, while milk, dairy products, bread, bakery products and accommodation services became subject to a reduced 18 percent rate.
The VAT on district heating services was first cut to 18 percent in 2009, and in 2010 it was set at 5 percent. A preferential reduced rate of 5 percent also applies to a few other products, including medicines and medical materials, books and newspapers.
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