Hungary May Scrap 'Solidarity Tax'

by Ulrika Lomas, Tax-News.com, Brussels

25 July 2008

The Hungarian government may be in a position to scrap its controversial 'solidarity tax' on companies and wealthy individuals in view of its improving budgetary situation.

The Finance Ministry announced last week that it expects this year's deficit to drop to 3.8% of GDP, which, if achieved, will exceed the government's target of a 4% deficit this year. By next year, it is expected that the budget deficit will reach 3.2% of GDP, leaving the country well on course to join the euozone some time after that.

With this in mind, Prime Minister Ferenc Gyurcsany has reportedly told Hungarian business leaders that the government would have room to repeal the unpopular 4% solidarity tax, but only if the revenue is offset by increases in taxation elsewhere.

The solidarity tax came into being in 2006 as part of a tough fiscal austerity programme designed to deflate the government's 10% budget deficit - then by far the highest in the EU - and put the country on the path towards adoption of the euro currency. The tax was expected to collect HUF150bn (USD730mn) in revenues in 2007.

It is effectively a surtax and is paid by corporations and the self-employed, as well as individual wage earners on incomes above a pre-determined threshold, which in April 2008 was HUF7.13mn per annum (EUR30,860). However, for some, particularly in the business community, the solidarity tax was a tax too far, and foreign investors threatened to pull out of the country unless the government changed its mind.

One particularly vociferous opponent of the new tax was German carmaker Audi, which, as one of Hungary's largest foreign investors, held enough sway over the government so that it eventually watered down the new law for companies with research and development expenditure.

With the government's budgetary pressures seemingly reduced, the Prime Minister has also been hinting that he wants more tax cuts as part of plans to streamline the tax system and boost investment.

Earlier in the year, four tax packages were under discussion by the governing Socialist Party and its junior coalition partner Free Democrats: one would cut the 'tax wedge' on labour from 29% to about 20%, but increase the top rate of VAT by 2% to 24% and abolish tax allowances; the second would reform the personal income tax system, applying the principle of 'super grossing'; the third would reduce the tax burden on corporations; and the fourth would introduce a flat tax on personal incomes and/or corporate incomes and VAT.

It is intended for the new tax cuts to pass into law in 2009, but reports suggest that the coalition is split on the scale of proposed cuts.

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