VAT - draft returns and bad debt VAT refunds
Draft VAT returns
Based on the bill currently before the parliament, the tax authority may prepare a draft VAT return (eVAT) for companies based on the invoice data it receives. With the issuance of these draft VAT returns, the legislature aims to reduce the administrative burden associated with taxation. However, the draft returns would not automatically become valid tax returns, which would require the active cooperation of the taxpayer. It is recommended to companies to consider how they would compare their currently available records necessary for preparing their VAT returns with a new set of data provided by the Hungarian Tax Authority. It is worth keeping up with the digital advances of the tax authority and acquire software to perform the automatic comparison of the eVAT draft and the data held in the Hungarian Tax Authority databases.
E-commerce and VAT regulation changes
The domestic regulations applicable to distance selling and low-value import are going to be amended pursuant to the changes to the e-commerce VAT regulations of the European Union.
- Each member state currently applies different thresholds to distance selling (intra-community product sales and shipping to consumers at a distance): in Hungary, it is EUR 35,000. Below this threshold, a seller supplying products to Hungarian private individuals is entitled to apply the VAT rate of its own state (or may voluntarily opt to apply the Hungarian VAT rate). However, above the threshold, it was mandatory for the seller to register as a taxpayer in Hungary and pay the relevant VAT rates the same way as a domestic supplier.
The above rules are going to change on 1 July 2021 since a uniform EUR 10,000 per year threshold is being introduced across all member states. Sellers will be entitled to apply the VAT rate of their own state under the threshold (or may voluntarily adopt the VAT rate of the destination country). Above the threshold, the VAT rate of the state where the end-user of the product is resident for tax purposes will apply to the sale; however, a positive change in the regulations is that this process will not involve an obligation to register for VAT in the destination country. This means that taxpayers, residents in other states will not be required to register for VAT in Hungary.
- The one stop shop (OSS) system is also going to be adapted to these new regulations. The OSS system makes it possible for distant sellers to fulfill their tax reporting and payment obligations in their own language via a unified portal and to also comply with their invoicing obligations in accordance with the regulations of the country where they are resident for tax purposes.
- Another change is that platforms facilitating electronic commerce will also become subject to VAT as an assumed seller.
- A further change in the regulations connected to international commerce is that the tax exemption of import deliveries with a value not exceeding EUR 22 is going to be abolished. This means that after 1 July 2021, value-added tax will be payable on all goods ordered from “third countries” (foreign countries which are not EU member states).
VAT refunds for bad debt
Among changes to the VAT regulations, the rules governing VAT refunds for bad debt becoming less strict also deserves a mention. With a certain condition, business entities and private individuals will both be entitled to claim VAT refunds.
Indirectly related to the regulations concerning bad debt, this special VAT refund option allows taxpayers to claim VAT refunds directly from the tax authority in cases where the tax payable has not been paid to the taxpayer as part of the consideration for a product sold or service rendered and the possibility of future payment has been eliminated. A condition for initiating this special refund procedure is that the buyer has not exercised the right to deduct VAT with respect to the purchase in question.
Residential properties’ VAT, reverse tax
The legislature also intends to bring back the 5 percent VAT for newly-built residential properties, extending the temporal scope of the discounted VAT rate until 31 December 2020. The details of the relevant regulations are not yet known; therefore, it is unclear to what projects the extended temporal scope of the provision will apply.
The general reverse taxation rule applicable to labor-hire arrangements will be discontinued. In the future, it will only apply to construction and maintenance works related to the real property regardless of whether the works require a building permit or not.
Local business tax - OSS tax returns, stricter allocation rules
Approximately 94 thousand companies with multiple branch offices will not have to submit their local business tax return to all relevant municipalities. Based on the tax package bill, it will be sufficient to send a single tax return to the Hungarian Tax Authority. The bill also proposes that data reporting, registration, and change reporting forms should be redesigned in a uniform manner after 2021.
- A positive change for construction companies is that construction activities shorter than 180 days will no longer be subject to business tax on temporary activities.
- However, in the case of motor vehicle rental and leasing companies, a tax optimization loophole might be eliminated. The tax base allocation regulations are going to change, which means that from 2021, asset values will have to be recognized at the registered office and the branch offices in proportion to the staff costs that arose at each location. This provision prevents companies from re-allocating their tax bases to reduce or avoid their local business tax liabilities.
- According to the provisions of the Taxation Act, it was already mandatory for affiliates to take into account any deviations from the arm’s length prices when calculating their local business tax bases. In addition, the bill also contains transfer price correction rules similar to the corporate tax rules, according to which tax base corrections resulting in the reduction of the tax base can only be applied if the reducing party can produce a statement from the other affiliate in which they commit to increase their own tax base.
More favorable small business tax regulations
The upper threshold for the income/balance sheet total of companies wishing to apply for the small business tax scheme will be increased from HUF 1 billion to HUF 3 billion, while the exit threshold will be raised from HUF 3 billion to HUF 6 billion, which will result in an increase in a number of businesses falling under the scope of the tax. In addition, the tax rate of the small business tax will be reduced to 11 percent in 2021.
Due to its simplicity, this tax type was already a favorable option for businesses with higher staff costs or under certain conditions, companies with a need for investment; however, due to the low entry threshold and the high upper limit, only a small group of companies fitting the strict specifications were able to access it. Because of the special tax base calculation rules of the small business tax, it is not a more favorable alternative to corporate tax in the case of all companies. The planned amendment will make this option available to numerous businesses that could benefit from choosing small business tax.
The change in the regulations, which states that a tax debt calculated to exceed a net value of HUF 1 million will no longer result in the taxpayer status being immediately withdrawn, will also help businesses stay within the scope of small business tax since taxpayer eligible for this status will be entitled to pay their tax debt before the resolution abolishing their eligibility becomes final and enforceable, thus preserving their taxpayer status. The bill also details the rules on switching to corporate tax.
Small business tax
The bill plans to change the rules of the itemized tax of small business taxpayers, which will become effective on 1 January 2021, based on the taxpayer’s foreign interests. The change will concern the income received by the small taxpayer from a foreign legal person classified as an affiliate or from foreign customers and the relevant taxes.
If the income of a taxpayer eligible to pay the itemized tax is received from a foreign affiliate or in the case of income exceeding HUF 3 million, from a foreign customer, the small taxpayer will be subject to the 40% tax but the tax base will only be 71.42 percent of the portion of the income that exceeds HUF 3 million.
Wider availability of automatic tax payment assistance
The upper threshold of automatic tax payment assistance will be doubled in the case of both reliable taxpayers and private individuals, allowing the discount to be applied to a wider scope of taxpayers.
- Reliable taxpayers will be entitled to make use of the 12-month long automatic payment assistance option once per year next year up to a value of HUF 3 million with respect to their tax liabilities not paid until the relevant deadline.
- The threshold of penalty-free installments will be approximately doubled in the case of private individuals as well, regardless of whether they perform business activities or not: in the first case, it will be increased from HUF 500 thousand to HUF 1 million, while in the latter case, it will be raised from HUF 200 thousand to HUF 500 thousand. In addition, the option to pay in installments is being extended to 12 months in the latter case as well, from the earlier 6 months.
These measures will significantly reduce the burden on the tax authority in terms of the number of ongoing tax payment assistance cases while making the process easier and faster for the taxpayers and private individuals.
The classification rules will become more favorable for group taxpayers as well since the group will not lose its reliable taxpayer classification when a newly-founded company is added to the group.
Changes concerning corporate tax and company taxation
- Changes will be made to the corporate tax discount system as well. The scope of options for creating development provisions will become wider, the corporate tax base discount will be available up to the value of the profit before tax, the HUF 10 million limits will be abolished.
- When purchasing passenger vehicles and electric passenger vehicles, the tax discount for investments serving energy efficiency purposes will not be available (the discount will be limited to passenger vehicles with a large cargo capacity).
- The branch office rules will become stricter. Providing services will create a branch office for corporate tax purposes even without a physical location, provided that the length for which services are provided by employees/natural persons exceeds 183 days. Another change is that if there is a double taxation treaty in place, that is what should be used for determining whether a branch office exists, which means that regardless of the provisions of the Corporate Tax Act, a branch office is created in all cases where one would be created under the treaty.
- Among controlled foreign companies, foreign persons from non-cooperating (so-called blacklisted) states will not be able to apply the relevant exemption rules. The portion of the dividends and capital gains related to actual legal transactions will be exempt from corporate tax.
- According to the bill, the option for paying the exit tax in installments will be available not only when the principal place of business is being relocated but also in the case of the relocation of assets or business activities performed by domestic branch offices.
- The base correction rules concerning dividends (waiving unpaid dividends, rules applicable to the members of the company paying the dividends) are repealed by the proposed legislation, in light of the fact that such operations do not affect profits.
Changes concerning personal income tax
- The personal income tax discount system will become more uniform; the discount provided to people living with severe disabilities will be transformed from a tax discount into a tax base discount. As for its place in the priority sequence, the above-mentioned discount will be enforceable behind the discount of mothers with four or more children but before the first marriage discount and the family discount. The value of the discount will be equal to one-third of the minimum wage.
- The tax exemption of epidemiological screening will be applicable even retroactively after the legislation takes effect.
- The scope of SZÉP Card benefit options will be widened even in the public sector. The recreational threshold will become uniform across sectors, meaning that from 2021, the HUF 450 thousand upper limits, currently applicable to private employers, will apply to the employees of the public sector as well.
- Furthermore, the proposal to maintain the current SZÉP Card thresholds and the social contribution tax exemption until the middle of the next year would affect all employers.
Changes concerning excise tax
Due to the mandatory application of the regulations included in the Tobacco Tax Directive of the European Union, the excise tax of tobacco products will increase in two stages after 1 January 2021. The value of the excise tax will reach the minimum level required by the EU on 1 April 2021.
Other tax items
Tourism development contributions will not be payable on mediated services.
From 2021 onward, the taxation duties related to domestic motor vehicles will be handled by the Hungarian Tax Authority, which means that vehicle tax revenues will also have to payable to the Hungarian Tax Authority.
A significant portion of first-instance administrative procedures will become duty-free in 2021.