Hungary Scraps Company 'Reasonable Tax'

by Ulrika Lomas, Tax-News.com, Brussels

30 March 2007

The Hungarian government has ditched its plans to introduce a so-called 'reasonable tax' on companies that declare losses, but has insisted that businesses will not be able to get away with paying nothing in income tax.

The reasonable tax would have been introduced from July 2007, and it was expected to bring in about HUF60 billion (US$323 million) in additional revenues for a government that is desperately trying to narrow a budget deficit that is by far the highest in the European Union as it prepares to adopt the euro single currency.

The law was stuck down by the country's Constitutional Court earlier this year after judges concluded that the tax took no account of the taxpayer's financial status, nor gave them sufficient grounds to protest; but speaking at a press conference this week, Finance Minister Janos Veres insisted that the government had not abandoned plans to make companies declaring losses, while apparently flourishing, pay some form of tax.

According to Veres, 118,000 out of the 315,000 firms currently registered in Hungary declared losses, while a further 16,000 reported neither loss nor a profit. He also claimed that out of the country's 321,000 private entrepreneurs, 210,000 do not pay taxes.

While Veres revealed that the government would not attempt to replace the reasonable tax with another tax, he said more powers would be given to the tax department to crack down on companies suspected of under-reporting income to help make up the revenue shortfall. Under new plans being considered by the government, companies declaring a pre-tax profit of less than 2.5% of sales would be required to complete an additional form with their tax returns. On the basis of this information, the tax authority, the APEH, would then select which firms should undergo audit. Veres admitted however, that the tax department would struggle to absorb the increased workload in its present form.

The Hungarian government's attempts to extract more in revenue from the corporate sector as part of its fiscal austerity package, announced last year, have been thwarted on previous occasions. In November 2006, the constitutional court struck down a proposed law which would have taxed companies' cash holdings, arguing that that the 20% tax on cash stocks above a certain value was unconstitutional because cash could be considered neither as income nor as assets. The government wanted to levy the tax to increase business transparency by encouraging companies to keep only a minimal stock of cash, but it would have also raised an additional HUF5 billion (US$25 million) annually for its coffers.

The fiscal austerity package also contained the controversial 4% 'solidarity tax' on businesses, but the government was forced to water down this measure last year by shrinking the solidarity tax base for certain companies after Audi, a major investor in Hungary, threatened to pull out of the country.

The tax hikes and spending cuts in the package are designed to reduce the government's budget deficit from more than 10% to 3% of GDP so that it can adopt the euro, possibly in 2009.

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