Hungarian President Signs Revenue-Raising Tax Package

by Ulrika Lomas, Tax-News.com, Brussels

19 July 2006

Hungary has put the seal on a package of tax hikes designed to ensure that the country meets its fiscal targets allowing it to adopt the euro, after President Laszlo Solyom signed the legislation on Monday.

The legislation will raise the middle tier of VAT from 15% to 20% and introduce a 4% 'solidarity tax' on business profits and personal incomes above HUF6 million (US$27,500).

In addition, a 20% tax will be introduced on interest rate and foreign exchange gains, banks will face a 5% tax on interest revenue from state-financed loans, and a simplified entrepreneurial tax will be raised from 15% to 25%.

Business groups, such as the Hungarian Chamber of Commerce and Industry, had hoped that the President would use his powers to question the legality of the new laws by sending them to the Constitutional Court for review. However, Solyom decided to approve the legislation because of the deteriorating state of the government's finances.

The government intends under its fiscal stabilisation plan - which also includes cuts in expenditure - to reduce its budget deficit to 3% of gross domestic product by 2008 from this year's estimated 8% of GDP; one of the highest in the European Union. Hungary then hopes to be in a position to adopt the euro by 2010 - two years later than initially planned.

The so-called 'austerity programme' reverses a five-year tax reduction programme, begun last year, which was designed to decrease state tax revenues to just below 35% of gross domestic product by 2010, down from 38% of GDP, and provide "security in the tax system" by ensuring that tax laws are predictable for the next five years.

The government expects to generate around HUF160 billion (US$719 million) in extra revenues this year from tax hikes.

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