Bills changing taxation regulations were approved on 14 November 2017 by Parliament, the majority of whom are going to enter into force on 1 January 2018. The following newsletter is to present these changes – with some important interim alterations.
I. Major changes regarding tax laws
Changes in social contribution tax
The amendment about the Social Contribution Tax getting reduced to 20 percent - from the current 22 percent as of the 1 January 2018, has already been acknowledged in 2016 (Act CLXXXII of 2016 on the amendment of certain financial and economic laws). However, according to the recently accepted amendment (bill T / 17776), a further reduction in the tax burden is expected - up to a total of 19.5 percent. Accordingly, also the 22 percent healthcare contribution (EHO) decreases in the same way.
Changes in corporate tax
According to the proposed amendment to law, accepted as T / 18006, investment forms eligible for development tax allowance will be expanded with two new items (in line with the spring modification of the ECD subsidy regulation). According to the draft, these investments are subject to being considered initial investments resulting in product diversification or new process innovation. In the case of investment for job creation, the tax advantage is available when the investment value is at least 3 billion forints, otherwise the minimum limit is 6 billion forints. The advantage is specifically targeted at the large enterprises operating in the eligible municipalities of Közép-Magyarország régió (Central Hungary Region – Budapest and Pest county). Another condition is the resolution of the Government (based on the authorization of the European Commission), so the announcment is not enough.
The applicability of the cost of the electric filling stations as a reduction item in the corporate tax base is in force from the 1 July 2017. The upper limit of the reduction lot is EUR 20 m (per charging station) and the cost has to be reduced in the 3 years following the investment, with positive results achieved by the charging station, which amount is to be estimated in advance when applying the reduction (or to be later modified with self-revision in the event of a negative difference). A further specialty of this tax base reduction is that it can also be enforced in the so-called „Robin Hood” tax (income tax of energy suppliers, Act LXVII of 2008 on making district heating more competitive); of course, by choice, strictly only in one of the tax forms. In addition, the income tax reduction of energy suppliers can be "transferred" to the benefit of the affiliated enterprise - if the enterprise originally entilted to does not take use of it.
The Decree of Implementation of the tax incentive for energy-efficient investment, applicable from January 1, 2017 (about which we wrote in our earlier newsletter, see here-link), entered into force on July 5, 2017 (Decree (VII. 4) 176/2017 on the implementation of the tax incentive for investment for energy efficiency purposes). Thereby, the detailed rules applicable when using the tax allowance were established: for example, the proof of investment quality. It is worth knowing that, although the first measurements of the energy auditor (or audit organization) are in principle to be carried out before the start of the investment, it is possible to apply transitional rules for investments initiated prior to the entry into force of the implementing regulation.
As for the corporate tax, a further change is the amendment to the law on ’allocation of tax’, adopted on 14 November 2017 (T / 18007 bill). Accordingly, the conditions of supporting film-making, performing arts organizations, and popular team sports through tax allocations have softened: insofar as the only obstacle to the transfer of the tax allocation is the late payment of the tax (advance), the payment can still be made on the separate request of the taxpayer. This is subject to a small delay (within 15 days) and full payment of the tax (advance).
Changes in the value added tax
As of 1 January 2018 the VAT rate of the following products / services will decrease to 5%:
• fish and certain fish products for human consumption;
• Braille typewriter, printer and display;
• Internet access service;
• Food and locally made, non-alcoholic beverages served in restaurants.
Changes in personal income tax
Based on the amendment of the ’Act CXXVI of 1996 on the use of a specific part of the personal income tax pursuant to the taxable person's provision (T / 17957)’ adopted on November 14, 2017, the one-percent offering from private individuals in favor of churches will not only apply to the given tax year but will be continus, until getting amended or revoked. Furthermore, in the future, information/ data on the private individual will be available not only for foundations, other organizations, but also to churches (based on a private person's statement).
Sport related companies in local business tax
On November 14, 2017, T / 18006 law proposal was adopted, which draws up significant reductions in local business tax for sport related companies. The essence of this is that the income related to sport activities (such as revenue from admission tickets, lease sales, advertising publishing, sponsoring contracts) of the sport related companies does not create local business tax base. However, this amount constitutes as state aid, which the taxpayer may choose to use in accordance with the rules on de minimis grants or the ones on block exemption regulation.
Excise tax and energy tax
From 1 July 2017 a new law on excise tax came into effect: LXVIII of 2016 law. At the same time, the old version of the law on excise expired (Act CXXVII of 2003), so did Act LXXXVIII of 2003 on Energy Taxation. Thus, the ’energy tax’ has also been abolished as an independent tax. However, the obligation to pay taxes on energy does not cease, but excise regulation has been supplemented with the concept of energy product. That is to say, that from July 1, 2017, energy has become an excise product. There is a significant difference in regulation of new energy products (electricity, natural gas, coal) compared to 'traditional' excise products, which substantially resembles the characteristics of the former energy tax.
II. Major changes in tax administration
On 14 November 2017, the Parliament adopted the draft of the new law on taxation (T / 17994), which has been planned now for years. The new law will bring significant changes to the tax administration (mainly tax audit) procedures. In addition to the new "Art.", a new background law was adopted at the same time (Act T / 17995 on Tax Administration order, "Air").
The main declared objectives of the re-regulation are primarily the creation of understandable regulation, the strengthening of the tax authority's service provider status, shortening of the tax procedures, the reduction of the administration and the support of voluntary law-abiders - besides to safeguarding the revenue interests of the budget. The new laws will have to be applied for the first time in procedures started after (and in repeated procedures) from 1 January 2018.
Prohibition of providing „new facts/circumstances”
One of the most significant consequences of the change in tax administration procedural rules will be the concentration of the substantive part of the tax procedures on the first instance procedure. Prohibition of providing „new facts/circumstances” will be introduced in both the appeal and the new proceedings, and in addition, during court proceedings based on ’Act I of 2017 on Administrative Procedure order’. For the time being, the tightening raises a number of questions and uncertainties; it is expected that the detailed rules will only be clarified during application of law.
There is no meaningful difference, but it is good to know that based on the new regulations, instead of the total of seven types of investigations, now there will be two new types of audits: tax audit, which creates a „closed period”, a period which cannot be investigated again (with, according to general rules, a 90-day deadline) and a compliance audit, which, regardless of its purpose, is expected to cover all the other types of former investigations (30 days deadline according to general rules).
It is to be welcomed that during the audits (and also beyond), electronic communications are expected to play an increasingly important role, - in particular the compulsory online registration of companies („Cégkapu”) - which hopefully facilitates the lives of taxpayers.
It is a long-standing goal to end the practice of long-lasting revisions. The most important change to this matter is that in the future, tax audits shall be completed within 365 days. In the case of trusted taxpayers, in principle, just as until so far, it shall be done within 180 days.
To some extent, the above mentioned aspirations are less supported by the new provision, according to which a superior body may instruct a first instance tax authority to carry out new procedural actions in order to further clarify the facts, for which procedure the legislator provides an additional 90-day deadline. This legal institution will be the alternative to the new procedure in the future, but in practice it may even create a "soft limit" for the deadline of the first instance procedures. In any case, it is likely that, in this form, contrary to the bigger time demand of the order of a new procedure, the number of lapsed cases will be reduced.
Finally, regarding the deadline, we note that a new guarantee rule is expected to be included in the law - although not for audit procedures, but for duty and fee obliged procedures (eg appeal): in case of exceeding the deadline the tax authority is obliged to reimburse the fee/ duty amount payed by the tax payer, and in case of exceeding the double of the deadline to reimburse the double of the fee/ duty.
It is an important change that the deadline for commenting on the Minutes in the new regulation will become irreversible in the future - along with the fact that the deadline for this in the case of tax audits increases from 15 days to 30 days. Keeping in mind, that as opposed to an appeal, this is a free legal remedy, it is worth taking advantage of.
The length of the decision- making process will change in the future in so far as, when submitting an observation, the 60 day deadline will have to be counted from the receipt of the observation, so the total duration of the first instance decision may increase to more than 90 days.
Regarding the appeal, in addition to the " New ’fact / circumstance’ prohibition", another change worth mentioning - and the interpretation of which is expected to get claryfied also only during practice– is the rejectibility of the appeal. If the appeal is unclear or controversial, the tax authority will provide the taxpayer with an 8-day deadline for clarification and will refuse the appeal in the case of non-clarification.
However, it is a positive change that, in the case of an appeal submitted late, the tax authority asks the taxpayer to claim a verification request and the appeal will be rejected only if this is missing (the deadline for appeal is still binding).
The general change affecting the verification request is that the deadline for submitting it is reduced from six months to 45 days.
The conditional tax penalty discount is a new legal institution, according to which if the taxpayer waives his right to appeal and pays the tax difference until its due date, she/he is exempted from 50 per cent of the tax penalty imposed. It is important to add that, in the event of such a discount, the taxpayer also falls from the possibility of a supervisory measure.
The significant increase in the late paymentinterest, published in the law proposal this summer, no longer appears in the legislation finally adopted, thus its generalrate remains twice the central bank base rate. Similarly, the proposal to reduce the 200% penalty to 100% has been withdrawn: the penalty amount ordained for concealing incomes and for the falsification of reciepts remain the current 200 percent.
Regarding the default penalty, it can be said that the regulation is expected to be shorter and more transparent, but this does not mean that taxpayers shall expect a milder fining practice in the future. A general penalty rule will be more in focus, according to which a natural person may be liable to a fine of up to 200 000 HUF and other taxpayers to a default penalty of up to 500 000 HUF for the violation of the obligations contained in the tax laws, while the number of omissions listed in the tax code decreases.
Services provided by the tax authority
Separate chapters have been provided in the new ’Art’ for the services provided by the tax authority - however, a significant part of them are not new items (for example, operating tax calculators on the TA’s website). The most significant innovation is the support for start-ups: in the first month, new taxpayers receive free information on their tax liabilities and their fulfillment and can participate in six month mentoring process, which aims to provide assitance with the fulfillment of tax obligations.
A positive change is that in the future there will be an opportunity to submit notification and change reporting obligations online - opposed to the so-called 'T201' form.
Among the new services offered by the TA according to the new rules, the publication of reliable taxpayers is included: accordingly, reliable tax status will become public information in the future. In relation to reliable taxpayers, we also mention the similarly positive change, that in their case, further reduction in the deadline for the transfer of VAT will happen: to 30 (20 days in the case of public share companies) from the so far 45 days (30 days in the case of public share companies).
Further changes in tax administration
In some respects, the rule of the self-revision delaying the launch of examination is restored: taxpayers will have the opportunity to declare a self-revision per tax and per period, after this, examination can not be initiated at the taxpayer (for the given tax and period) within 15 days.
In the future, it will be worthwhile to closely monitor the information published on the TA's website, in view of the newly declared rule, according to which the procedure under these disclosures exempts from legal consequences in the case of a possible tax assessment (but not from the lack of tax).
It is a positive change that the individual's automatic installment payment option will be expanded: from the so far value of 200 00 HUF to 500 000 HUF and from 6 to 12 months.
The above brief summary mentions only a few significant changes, in order to draw attention to the amendments, besides these, a number of other legislative changes also will take effect. The fragmentation of future regulations is also worth mentioning: in many cases, the new provisions empower the government and the minister responsible for taxation to create decrees, which may indicate that in the future a number of laws will need to be interpreted together in order to answer certain taxation issues.
III. Changes regarding Transfer Pricing
Over the past few years, the observed tax base erosion and aggressive profit-sharing of some multinational corporations and the lack of tax harmonisation of direct taxation resulted in a collective, ever-more effective action taken by the G20. In this combined effort, the G20 asked the Organisation for Economic Co-operation and Development (OECD) to draft the BEPS (Base Erosion and Profit Shifting) action plan in July 2013. The main goal of the 15-point BEPS package is to accomplish that the profits made by companies should be taxed in the same country where value creation has actually been achieved.
One of the elements of achieving the aforementioned objective is to control and clarify the pricing of intra-group transactions, i.e. the transfer pricing.
As a result of the BEPS action program, the international transfer pricing control regulations (the OECD Transfer pricing Guidelines) have been modified.
As a consequence of this, there has been a significant change in the law on drafting of transfer pricing for each country, including Hungary.
Major Changes in Hungary
In 2017, the two main changes in domestic transfer pricing regulation were as follows:
- The new Decree No. 32/2017. (X. 18.) of Ministry for National Economy on the Documentation Requirements Related to Transfer Pricing is released and it replaces the former Decree No. 22/2009. (X. 16.) of the Minister of Finance, and
- Act XXXVII of 2013 on Certain Regulations on International Administrative Cooperation in the Field of Taxes and Other Charges, has been expanded with data provision and automatic information exchange by Country-by-Country Reporting and with automatic information exchange.
The following are the most important parts of the legislations above.
New 3 pillar transfer pricing obligation:
- Master file;
- Local file; and
- Country-by-Country Reporting (CbCR).
The 32/2017. (X. 18.) NGM Decree
The new regulation eliminates the former single documentation form, instead of that, it is mandatory to make a transfer pricing report every tax year, including a Master file and a Local file suggested by the OECD Guidelines. The deadline for preparing the reports is still the date of corporate tax return, but if the taxpayer has prepared the Local file till the deadline, the term for the preparation of the Master File may be prolonged up to the deadline for documenting the parent company but no later than 12 months after the last day of the financial year.
The new form of the report requires compulsory disclosure of new content elements (such as presentation of intangible assets within the group of companies, value chain analysis, structure of the management of Hungarian group members, etc.) in the documentations in order to obtain a more comprehensive view of the companies for the Tax Authority.
There is also a significant change in the comparative analysis as the law clearly states regarding the search for comparable data, that in the future, it will be mandatory to conduct and execute the search in a way that it could surely be reproduced. Likewise, the comparative analysis is affected by the modification that any method can justify the use of the interquartile range.
If the taxpayer has not properly or incorrectly made the transfer pricing documentation, it is necessary to modify it which can only be done until the beginning of the tax audit. In this case, the transfer pricing documentation will consist of the original and the modified reports.
The arm’s length range of the low value added intra-group services has also changed. According to the new regulation in case of low value adding intra-group services, 3-7% margin on gross costs are considered as market value.
As a result of the BEPS action plan, in addition to the transfer documentation, the group of companies should also produce a Country-by-Country Report, which aims to help the international exchange of information.
All Hungarian companies that are members of a Group with a total annual consolidated revenue of more than EUR 750 million are subject to a new reporting and/or notification obligation from the fiscal year commencing on or after 1 January 2016. These obligations for financial year 2016 and 2017 must be fulfilled electronically, by filling the forms issued recently by the Hungarian Tax Authority before 31th December 2017.
Failing to submit the report, late submission, or providing incorrect, false or incomplete information may be subject to a default penalty of up to HUF 20 million.
Transfer pricing - Changes in regulation