Hungarian Local Taxes Are Deterring Foreign Firms, Say Experts

by Ulrika Lomas Tax-News.com, Brussels

30 April 2003

Hungary's local business taxes have been the subject of some criticism this week from tax experts in the country, who argue that they discourage foreign investment and are incompatible with European Union tax regimes.

The major bone of contention appears to be with levies imposed on business by local municipalities, which enjoy the right to charge a tax level of between 0% and 2% on a company's revenues, which all firms and entrepreneurs are obliged to pay. It allows for certain deductions, such as the cost of raw materials used in manufacturing, though many complain this means that the tax hits businesses in the services sector particularly hard.

“The main question is: What is local tax? If it is a kind of revenue tax, it is not EU compatible, because there already is such a tax: VAT. If it is a kind of local profit tax, it should be sector-neutral, in terms of deductions, to be EU compatible,” Gabriella Erdos, head of tax and legal issues at PricewaterhouseCoppers Kft, asked in the Budapest Business journal. Fearing that the current tax regime is a disincentive for investment in Hungary, she added: “I hope the current scheme will not be long-standing.”

However, not all experts in the region are of the opinion that the local business tax has an adverse effect on foreign investment. According to Laszlo Zara, secretary general of the Hungarian Association of Tax Advisors and Tax Experts, it is not the tax itself that is the problem, rather the fact that fixed term tax holidays for new investors were phased out last month. All similar schemes will end by December 31 2007.

Another local tax expert, Zoltan Gerendy of BDO-Kontroll Kft agreed with Zara's viewpoint, and pointed to what are in his opinion much more fundamental factors affecting Hungary's competitiveness, such as a high welfare burden on employers and the exchange rate.

Meanwhile, the KPMG corporate tax survey revealed that the country's business tax rate compares very favourably with both regional and global competitors. Hungary's corporate tax of 18% was found to be the second lowest of the OECD members, second only to Ireland which reduced its corporate tax from 16% to 12.5% in the last year.

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