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Calculation of the base of the 2013 business tax liability

21 February 2014

Having entered into force on 1 January 2013, the amendment to Act C of 1990 on Local Taxes has resulted in a significant change to the rules applicable before that date to the determination of the local business tax base.

 

Owing to the change, the companies concerned had to modify their respective tax advances already filed for the 2013 tax (fiscal) year and the tax-payers subject to a tax top-up obligation also had to re-assess their anticipated tax liability in accordance with the new rules. As business tax liability will also have to be stated in the tax returns for 2014 in accordance with the new rules, a brief overview of the assessment of the tax base is likely to prove useful.

 

If a business (commercial) activity is pursued on a permanent basis, the basis for the assessment of the tax base is net sales revenues determined in accordance with the Accounting Act. Sums paid to subcontractors, material costs and the direct cost of basic research, applied research and experimental development recognised in the tax (fiscal) year at issue will remain fully deductible. However, in contrast to the decreasing items mentioned above, the entire combined sum of the cost of goods sold (COGS) determined in accordance with the Act on Accounting and the value of mediated services will no longer be deductible from net sales revenues; rather, tax-payers will be allowed to deduct from the local tax base part of the cost of goods sold and part of the value of mediated service as calculated based on brackets (ranges) determined in relation to their annual sales revenues.

 

The eligible (recognisable) part of the COGS and the value of mediated services will have to be determined as follows, in accordance with the appropriate brackets (ranges) of sales revenues:

 

- in the case of sales revenues not exceeding HUF 500 million, the total amount of a decreasing item related to net sales revenues in this range may be deducted;

 

 - a decreasing item related to net sales revenues exceeding HUF 500 million, but not reaching HUF 20 billion is deductible; however, it is capped at 85 % of the net sales revenues in this range;

 

- a deductible decreasing item related to net sales revenues exceeding HUF 20 billion, but not reaching HUF 80 billion is capped at 75 % of the net sales revenues in this range;

 

 - a deductible decreasing item related to net sales revenues exceeding HUF 80 billion is capped at 70 % of the net sales revenues in this range.

 

In contrast to the above, the total amount of the COGS and the value of mediated services are fully deductible if they relate to revenues earned on sales and services that can be recognised as net revenues from export sales under the Accounting Act or as net domestic revenues earned on the sale of state financed pharmaceuticals considered as goods.

 

Likewise, entities engaged in clearing house activities may also deduct the total value of the goods purchased and resold by them - in the interest of the clearing (financial settlement) of natural gas and electricity market transactions – and recognised as COGS under the Accounting Act.

 

The example below illustrates the application of the above:

 

Data for the 2013 tax (fiscal) year

X. Kft. (in HUF)

Net sales revenue

6 000 000 000

Of which domestic sales revenue

5 400 000 000

Of which revenues from export sales

600 000 000

Cost of goods sold (COGS)

3 400 000 000

Of which COGS related to domestic sales

3 100 000 000

Of which COGS related to export sales

300 000 000

Mediated services

200 000 000

Of which mediated services related to domestic sales

185 000 000

Of which mediated services related to sales abroad

15 000 000

COGS and mediated services related to domestic sales

3 285 000 000

COGS and mediated services related to export sales

315 000 000

Material costs

250 000 000

 

The first step is to determine the part of the combined value of the GOGS related to domestic sales and the value of mediated services that can be recognised as a net sales revenue decreasing item.

 

Net sales revenue

Net sales revenue in the range

Net sales revenue decreasing item in the range

Upper limit on the decreasing item (100 % and 85 % of the sales revenue)

Decreasing item in the range*****

HUF 0 to HUF 500 million

500 000 000

273 750 000*

500 000 000***

273 750 000

HUF 500 million to HUF 20 billion

5 500 000 000

3 011 250 000**

4 675 000 000****

3 011 250 000

Total

6 000 000 000

3 285 000 000

 

3 285 000 000

 

* calculation: (3 285 000 000 / 6 000 000 000) * 500 000 000

**calculation: (3 285 000 000 / 6 000 000 000) * 5 500 000 000

***calculation:  500 000 000 * 100 %

****calculation: 5 500 000 000 * 85 %

*****calculation: Net sales revenue decreasing item, but not higher than the upper limit on the decreasing item.

 

As can be seen, the net sales revenue decreasing item is below the applicable limit, so the total amount of the COGS related to domestic sales and the mediated services can be recognised as a decreasing item. We wish to note that no cap on the COGS and mediated services related to export sales need to be determined because their total amount can be deducted from net sales revenues. Nevertheless, not only net domestic sales revenues, but net revenues from total (i.e. domestic and export) sales also need to be considered when a cap (ratio) is determined.

 

The second step is the determination of the tax base at a company level. As has been mentioned, in so doing, tax-payers will be allowed to deduct from their net sales revenues the total amount of material costs, the sums paid to subcontractors and the recognised direct cost of basic research, applied research and experimental development, the combined amount of the COGS and mediated services related to export sales and such part of the COGS and mediated services related to export sales that has been determined as a proportion of net sales revenues (the total amount in the example).

 

 

Accordingly, the business tax base in the examples will be as follows:

 

Net sales revenue

6 000 000 000

COGS and mediated services related to export sales

315 000 000

COGS and mediated services related to domestic sales

3 285 000 000

Material costs

250 000 000

Local business tax base

2 150 000 000

 

 

The most important change affecting company groups is that related party undertakings will, if certain conditions are met, have to state their tax base on a consolidated basis. In establishing whether or not a related-party relationship exists, the definition of related-party undertakings used for the purposes of corporate tax liability must be used. The Act on Local Taxes does not have any provision as to which day of the reporting year should be the date when the existence or otherwise of a related-party relationship must be established, therefore, if such a relationship existed during the tax (fiscal) year - even if for one day - the consolidation rule shall apply. The data of non-resident related-party undertakings need not be consolidated, because they are not subject to local tax liability. Resident related-party undertakings need to determine their business tax base on the basis of consolidated data only if the combined amount of the cost of goods sold and the value of mediated services exceeds 50 % of the net sales revenue of the related-party undertaking concerned. Any member company that fails to meet the above requirement is excluded from the consolidation.

Accordingly, the HUF data of 3 related-party undertakings are as follows:

 

Undertaking A               Undertaking B               Undertaking C

Net sales revenue                                 12 000 000 000             5 000 000 000               4 000 000 000

COGS                                                   6 500 000 000             1 000 000 000               1 800 000 000

Mediated services                                     500 000 000                 600 000 000              1 000 000 000

50 % of net sales revenue                       6 000 000 000             2 500 000 000               2 000 000 000

COGS + mediated services                    7 000 000 000             1 600 000 000               2 800 000 000

 

As is clear from the example, of the 3 related-party undertakings, the tax base of only Undertakings A and C needs to be determined on a consolidated basis. Undertaking B need not be consolidated as the total amount of the COGS and the value of mediated services is below 50 % of its net sales revenue.

 

Consolidation means that the respective net sales revenues of the related-party undertakings to be consolidated must be aggregated. So must the items decreasing net sales revenues. This is how the consolidated tax base of the company group as a whole needs to be determined. The tax base of the individual tax-payers can be determined as the ratio of the net sales revenue of the tax payer under review to the entire amount of the sales revenue of the group on the basis of the consolidated tax base of the group.

 

The following example illustrates the application of the above:

 

 

 

 

2013

X. Kft.

Y. Kft.

Total (in HUF)

Net sales revenues

7 000 000 000

6 000 000 000

13 000 000 000

Of which net domestic sales revenues

6 200 000 000

4 800 000 000

11 000 000 000

Of which revenues from export sales

800 000 000

1 200 000 000

2 000 000 000

Cost of goods sold

4 000 000 000

3 200 000 000

7 200 000 000

Of which COGS related to domestic sales

3 500 000 000

2 500 000 000

6 000 000 000

Of which COGS related to export sales

500 000 000

700 000 000

1 200 000 000

Mediated services

430 000 000

150 000 000

580 000 000

Of which mediated services related to domestic sales

410 000 000

90 000 000

500 000 000

Of which mediated services related to export sales

20 000 000

60 000 000

80 000 000

COGS and mediated services related to domestic sales

3 910 000 000

2 590 000 000

6 500 000 000

COGS and mediated services related to export sales

520 000 000

760 000 000

1 280 000 000

Material costs

300 000 000

250 000 000

550 000 000

 

Naturally, the first step is to decide whether the related-party undertakings need to calculate the base of their business tax liability on a consolidated basis. In so doing, they have to compare the amount of the total (i.e. domestic and export) net sales and that of the total (i.e. domestic and export) COGS and mediated services. As the combined amount of the COGS and the mediated services exceeds 50 % of the net sales revenues of both undertakings, the consolidation rule applies to them.

 

The next step is the aggregation of the initial data at a company group level. Subsequently, that part of the combined amount of COGS and mediated services related to domestic sales must be determined at a company group level that qualifies as a sales revenue-proportionate decreasing item.

 

Net sales revenue

Net sales revenue in the range

Net sales revenue decreasing item in the range

Upper limit on the decreasing item (100 % and 85 % of the sales revenue)

Decreasing item in the range*****

HUF 0 to HUF 500 million

500 000 000

250 000 000*

500 000 000***

250 000 000

HUF 500 million to HUF 20 billion

12 500 000 000

6 250 000 000**

10 625 000 000****

6 250 000 000

Total

13 000 000 000

6 500 000 000

 

6 500 000 000

 

* calculation: (6 500 000 000 / 13 000 000 000) * 500 000 000

**calculation: (6 500 000 000 / 13 000 000 000) * 12 500 000 000

***calculation: 500 000 000 * 100 %

****calculation: 12 500 000 000 * 85 %

*****calculation: Net sales revenue decreasing item, but not higher than the upper limit on the decreasing item.

 

As can be seen, the net sales revenue decreasing item is below the applicable limit, so the entire amount of the COGS and mediated services related to domestic sales can be recognised as a decreasing item.

 

Then, a consolidated tax base at a group level needs to be assessed. As has been mentioned, in so doing, tax-payers will be allowed to deduct from their consolidated net sales revenues consolidated material costs, consolidated sums paid to subcontractors and the recognised direct cost of basic research, applied research and experimental development, the combined amount of consolidated COGS and mediated services related to consolidated export sales and such part of consolidated COGS and mediated services related to domestic sales that has been determined as a proportion of net sales revenues (the total amount in the example).

 

Accordingly, the group-level business tax base in the examples will be as follows:

 

Net sales revenue

13 000 000 000

COGS and intermediated services related to export sales

1 280 000 000

COGS and mediated services related to domestic sales

6 500 000 000

Material costs

550 000 000

Consolidated local business tax base

4 670 000 000

 

 

Finally, the consolidated tax base needs to be split among the related-party undertakings based on the net sales revenues earned by them:

 

2013

X. Kft

Y. Kft

Total

Net sales revenue

7 000 000 000

6 000 000 000

13 000 000 000

Local business tax base

2 514 615 385

2 155 384 615

4 670 000 000

 

 

The above calculations must be expressed to six decimal places. The new regulations may change the tax base of the individual related-party undertakings assessed on the basis of their own data. However, the company group as a whole will incur tax liability on the same amount of tax base.