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Corporate tax return - what may have been left out at the preparation of the year-end corporate tax advance top-up…

What adjustment factors may and need to be taken into account for the corporate tax calculation to be closed until the end of May? What room do taxpayers have for movement if the amount of corporate tax advance could not be estimated precisely? These questions should be considered as the 31st of May approaches.

As the 31 May deadline for the submission of corporate tax returns for companies having business years identical with the calendar year approaches, once again the question comes up whether the amount of corporate tax liability for 2018 could be estimated precisely at the time of the year-end tax advance top-up? Even with the utmost care, it is possible (especially in the case of international company groups and large companies with complex organizational structures) that important information affecting the amount of corporate tax is not received until 20 December by the persons preparing calculations until the deadline for the filing of the return on and payment of the company's corporate tax advance top-up obligation and the tax advance actually paid is less than the company's corporate tax for the tax year. 

This may be a problem as, if based on the annual tax return prepared on the basis of actual data, tax advance was not supplemented (paid and the relevant return filed) to an extent of at least 90 percent, the tax authority will impose default penalty on the difference between the tax advance actually paid and 90 percent of the actual annual tax liability. A favourable rule is that for the purpose of the calculation of the base of this penalty, any positive exchange difference calculated on the basis of the difference between the exchange rate effective on the due date of the tax advance top-up and that on the balance sheet date as well as subsidies included in the tax base to be accounted for the given tax year but which became known during the period between the date of the tax advance top-up and the date of balance sheet preparation, have to be disregarded. 

As HU TA is able automatically screen defaulters with the help of its IT system, even though the rate of the penalty was cut from 20 to 10 percent, in order to avoid default penalty, companies should check whether any tax or tax base reducing opportunities are available, which were not taken into account during the tax advance top-u but may be applied legitimately for the tax year calculation. 

Tax and tax base reduction opportunities which may be applied during year-end closing

1.Development reserve

If the company realized profit before tax and intends to carry out an investment in the coming four tax years, a development reserve may be set aside, which may be applied as a tax base reducing item. In the 2018 tax year, development reserve may be created in an amount of up to 50 percent of the profit before tax but maximum 500 million forints in the form of reclassification from the profit reserve to the tied-up reserve. 

It is important that the tied-up reserve must be available on the last day of the tax year and may only be released when the investments in question are realized! Otherwise the tax reduction realized through the development reserve must be repaid together with late payment fee. Companies must also be aware of the fact that development reserve comes with a deferred tax payment obligation as, pursuant to the Act on Corporate Tax, no depreciation may be accounted for on the assets realized under the investment. 

2.SME tax credit

If the taxpayer has an effective credit contract concluded with a financial institution in relation to the acquisition or production of tangible assets and on the last day of the tax year of conclusion of this contract the taxpayer qualified as a small and medium sized enterprise, the amount of interest accounted for may be applied as a tax credit until the year of the deadline prescribed for the repayment of the loan under the original credit contract but as long as the tangible asset concerned is recognized in the taxpayer's books at the latest. 

Please note that this tax credit may be applied for up to 70 percent of the tax reduced by the development tax return and also, as it qualifies as a(n agricultural, SME or small-amount (de minimis)) subsidy , further value limits may also have to be considered when applying this tax credit depending on the nature of the investment in question. In addition, the taxpayer must also consider that the tax credit applied must be repaid with late payment fee if the investment is not put into operation within four years from the year of conclusion of the credit contract (unless this is due to damage arising from inevitable external causes) or if the tangible asset is alienated in the tax year in which it is put into operation or in the three subsequent years. 

3.Investment tax base allowance of SME-s

This opportunity is available to taxpayers having only private person members and qualifying as small- and medium enterprises on the last day of the tax year. They may reduce their tax base to up to the amount of their profit before tax by the value of investments recognized in the tax year for previously unused real estate and previously unused tangible assets to be classified under machinery, equipment and vehicles. In addition, tax base may also be reduced by the value of renovations, extensions, changes in purpose of use and transformations carried out during the tax year increasing the purchase value of real estate and the purchase value of previously not used software licenses and intellectual products recognized during the tax year under intangible assets. 

As this tax base reduction opportunity qualifies as a(n agricultural, SME or small-amount (de minimis)) subsidy, further value limits may apply depending on the nature of the investment. 

4.Planning of depreciation for the purpose of the Act on Corporate Tax

The tax base may also be influenced by the planning of depreciation. The Act on Accounting provides that depreciation must be determined based on the useful life and expected residual value of assets. However, the Act on Corporate Tax prescribes pre-determined linear depreciation for a wide range of assets and in many cases it also gives taxpayers the option to apply depreciation at a higher rate than under the main rule. Accordingly, if the company chooses the depreciation rate based on the Act on Corporate Tax that is higher than the one chosen for accounting for a high-value asset, then in the first years of the useful life of the asset, it may reduce its corporate tax base as, while depreciation under the Act on Accounting qualifies as a tax base increasing item, depreciation assessed according to the Act on Corporate Tax is a tax base reducing item. 

Please note that this method also comes with deferred tax payment obligation as the tax base increasing item will be higher than the tax base reducing item in a later stage of the useful life of the asset and upon the de-recognition of the asset from the books! 

5.Allowance for employees with altered working capacity

If the company's average headcount does not exceed 20 and it also employs persons with altered working capacity, the company's corporate tax base may be reduced by the amount of the wages paid to these employees monthly but maximum the amount of the minimum wage. 

6.Allowances relating to school-system vocational training

If the company participated in school-system vocational training, it may apply as a pre-tax profit reducing item, 24 percent of the minimum wage in the case of a student contract relationship and 12 percent of the minimum wage in the case of a cooperation agreement concluded with the school for each student and each commenced month of training with regard to the practical training provided. 

7.Tax base allowances relating to special employees

Companies should examine their staff carefully as the corporate tax base may be reduced (subject to other conditions) by the amount of social contribution tax paid during the term of employment but maximum 12 months in the case of continued employment of students mentioned in the previous point who successfully pass their professional examination and employment of workers who were previously unemployed and the employment of workers within 6 months of their release from prison or parolees. 

8.Tax base allowance on research and development activity performed by a related party

If none of the above opportunities are applicable to the company but the company has a related party performing research and development activities in Hungary, reconciliations should be started with the related party as to whether the related party is willing to assign all or a part of the amount assessed under the Act on Corporate Tax with regard to the direct cost of the research and development activity performed within its scope of activities. 

Please note that the research and development activity performed by the related party must also relate to the taxpayer's entrepreneurial, income earning activity and a written declaration from the related party with the appropriate content must also be provided until the filing of the tax return. 

In addition to the far-from-exhaustive list above, a number of other tax base and tax reduction opportunities are also available during corporate tax calculation, which may cut the company's corporate tax payment obligation in accordance with the decision made in advance and based on proper documentation. However, having regard to the complex and strict conditions relating to these allowances and in order to avoid tax risks, not only tax expert knowledge but also a precise understanding of company data is necessary for the judgment of tax and tax base reduction opportunities and the preparation of calculations. 

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