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Tax related tasks in connection with year-end closing

22 January 2014

With this newsletter we would like to provide you help regarding the most important tax-related tasks connected to the year-end closing procedure; as well as to draw your attention to some key areas we find advisable to analyse by the preparation of annual tax calculations and  tax returns.

Most important deadlines and administrative tasks concerning the year-end closing procedure

Tax payers are required to prepare tax returns on corporate income tax, innovation contribution and local business tax until 31st May in the year following the tax year; and to pay the tax (the difference between the amount of tax determined for the tax year and the sum total of any tax advances and supplementary advances paid) until 31st May in the year following the tax year; and they may claim any positive differences to be refunded from that date.

Tax payers having a business year that is different from the calendar year are required to meet their obligation to prepare tax returns on corporate income tax, innovation contribution and local business tax until the last day of the fifth month following the last day of the tax year with the proviso that their obligations to determine their taxes, to prepare tax returns, to pay for their taxes, and to pay for tax advances will be governed by rules effective on the first day of their business year.

Tax returns on  corporate income tax and innovation contribution are need to be prepared by using Form 1329 issued by the Tax Authority and tax returns on local business tax by using forms issued by local governments. We kindly draw your attention, however, to a change making administration easier for you: as of 1st January 2014 tax payers may perform their obligation to submit their tax return on local business tax also by using a centrally prepared standard form as published in Ministry of Finance Decree 35/2008. Please note that this form may be submitted electronically only where it is allowed under a Local Government Decree.

We kindly draw your attention to some main changes regarding the preparation of annual tax calculations for year 2013:

Corporate income tax

  • When determining the base for the minimum tax, please take into account an amendment taking effect on 1st January 2013: for the purposes of determining the minimum income-profit, the amount of total income is to be increased by 50% of the positive difference, if any, between the daily average amount of liabilities to a member and the amount of liabilities to the member on the last day of the tax year preceding the tax year in question.
  • When calculating thin-capitalisation, as of 1st January 2013 you do not need to take into account any transactions deriving from the transport of goods or the provision of services  by the determination of liabilities and receivables to be deducted from liabilities. As before, losses carried forward may be taken into account only up to 50% of the tax base. This limitation, however, is not applicable to any losses incurred before 2004 connected to the establishment of companies, which losses may be used without any limitation in case certain specified conditions are fulfilled. Furthermore, when using losses carried forward, please take into account that accrued losses may be used only in the order of the dates on which they arose.
  • Please note also that, in parallel to preparing a corporate income tax return, you are required to prepare transfer pricing reports  in connection with  transactions carried out between related enterprises as well as to check whether the prices applied meet the  arm’s length principle. As a result of a mid-year change in the Act on Accounting, as of 30th June 2013 tax payers are allowed to carry out a subsequent adjustment in their accounting records, if the price applied is different from the  arm’s length price, by adjusting the amount paid for the original transaction to the market price to avoid the need to modify the corporate income tax base.
  • If a tax payer has provided some financial support, then, in order to recognize it as a tax deductible expense, the tax payer must obtain a declaration from the recipient stating that the recipient's profit in the tax year of the support is not negative even when calculated without the income recognized as a result of the support. In this newsletter we kindly remind tax payers that the recipient of such financial support must certify that fact in a declaration also after the preparation of its financial statement (please note that this will mean that 2 declarations are in fact needed); therefore, we find it important for tax payers to ensure that all required declarations are obtained before the finalisation of the tax calculations.

In addition to the changes of year 2013 described above, please find below few typical mistakes tax payers tend to make when calculating the corporate income tax or submitting the tax return:

  • When calculating thin-capitalization, if the average daily amount of the shareholders' equity is negative then the total amount of the interest paid on liabilities (as specified in the Act on Corporate Income Tax) will increase the tax base.
  • The item that may be carried forward to subsequent tax years as loss carried forward may not be the negative pre-tax profit but the negative corporate income tax base.
  • If a tax payer makes some development reserve in a tax year, then the depreciation (as per the Act on Corporate Income Tax) on any investment carried out from the reserve must be considered as an amount already recognized as part of the amount of the development reserve used; therefore, this depreciation cannot reduce the corporate income tax base.
  • If a tax payer does not use the option to reduce its tax base by its losses carried forward in its corporate income tax return, then this tax payer cannot alter this decision with a self-revision.

Local business tax

  • In connection with the calculation of local business tax, please note that, as of 1st January 2013, the sum total of the cost of goods sold and the value of mediated services may be deducted from the sales revenue only with some limitations, progressively and with brackets applied.
  • Furthermore, if a tax payer has some related enterprises, than the amount of the local business tax base must be determined as a consolidated amount with the requirement that related enterprises must determine the positive difference between the amount of their aggregated net sales revenues and the amount of the items to reduce their net sales revenues, and must apply the above-mentioned calculation to this difference. The amount of the local business tax base for each tax payer must be determined by multiplying the sum total of the said difference and  the proportion represented by the tax payer's net sales revenue in the consolidated net sales revenue. However, only such tax payers must use the above consolidated calculation for which the sum total of the cost of goods sold and the value of services mediated is higher than 50 percent of the net sale revenue.

Furthermore, please note that, when making your local business tax calculations, never forget to ensure whether all items recognized as items to reduce the sales revenue can comply with legal requirements, with special regards to the following:

  • In case of mediated services: is the fact of, and the option for, mediation included in the relevant contracts and invoices?
  • And please check whether mediated services and sub-contractor performances are properly segregated, and whether contracts to reflect it are available.

Innovation contribution

  • Considering that the innovation contribution base is identical to the local business tax base, please note that the rules to the calculation of the local business tax base (taking effect from 1st January 2013 as described above) are also applicable to the calculation of the innovation contribution.

As described above, several aspects need to be taken into account when preparing your tax calculations for year 2013. According to our experiences, changes in legal regulations may in certain cases lead to questions as to their interpretation. To avoid sanctions in future, we recommend involving a tax expert to review your annual tax calculations; in connection with we would be pleased to assist you.