Market Talk: Wanted, Better Language Skills, More Digitization, Fewer Taxes

BBJ: Is Hungary’s tax and accountancy regime reasonably stable, or have there been significant changes for 2023?

István Nemecz: The 2023 tax package sets out new important transfer pricing rules, forcing the synchronization of year-end tasks. A completely new requirement is the introduction of a data reporting obligation as part of the corporate income tax returns, which is applicable for filings in 2023. There are no significant changes on the accounting side in 2023; the Act on Accounting has been a stable law, albeit with continuously increasing signs of IFRS harmonization.

György Boár: In the past few years, the significant changes in the Hungarian accounting regulations were related to the introduction of IFRS and, in parallel, a slight shift in Hungarian accounting principles towards IFRS in certain areas. Otherwise, accounting regulations were stable, and changes were generally easy to follow.

As regards tax regulations, some principles and concepts seem to be cornerstones in the Hungarian tax system (such as the focus on indirect tax revenues in the budget and low corporate tax and personal income tax rates) that provide a certain level of predictability. There are several principles based on EU guidelines, which could also be viewed as instruments enhancing the stability and predictability of our tax regulations.

Hungary, however, has a long history of changing tax regulations; it was rather usual that tax laws were changing at least once, if not twice, a year. The recent years’ economic (and budgetary) challenges increased the turbulence of tax law changes and, for 2022 and 2023, made the changes in areas like the “extra profit” surtaxes hard to predict. OECD and EU initiatives like reporting systems and obligations, or anti-tax avoidance directives, add another layer of complexity to regulations and would bring fundamental changes to tax systems at a fast pace.

István Nemecz

Péter Hajnal: We see the regime as stable and very attractive for foreign investors. Hungary is a good location for foreign companies and foreign private persons from a taxation point of view.

Lajos Bagdi: The accounting regulations are reasonably stable; however, significant tax changes occurred for FY23. For example, transfer pricing regulations have been considerably amended; there is a new reporting obligation in the corporation tax return. In the coming months, we do not expect significant changes (except the introduction of the global minimum tax rules).

András Szalai: The accountancy regime is stable, with no significant changes for 2023. There were more changes in taxation, though still without significant impact or changes in the trend. The Hungarian concept continues focusing on higher taxes on consumption with lower taxes on income (corporate or individual). That is despite international trends aiming to increase income taxes, such as the global minimum tax and various global regulations on income data exchange. Highlights of the most critical tax changes include the extra profit taxes and the new transfer pricing data provision regulation.

Gábor Fajcsák: Hungary’s tax and accountancy regime can be considered reasonably stable. Among the tax changes applicable in 2023, the so-called “extra-profit taxes” should be highlighted, which are supposed to stay with us until the end of 2023. These measures are exceptional, as they were implemented under emergency legislation following the COVID-19 pandemic and the war in Ukraine. However, the Hungarian government has guaranteed that these provisions will be abolished at the end of the current year.

György Boár

Zoltán Lambert: The general tax rates (PIT at 15%, social security at 13%, and CIT at 9%) remain unchanged, but this was possible as a result of introducing windfall taxes in specific sectors (energy, retail, banking, etc.) and increasing the rates of some extraordinary taxes. A significant part of these changes hit multinationals, and the question remains, how long do we have to plan with them? The 2023 tax and accounting changes were not fundamental, but companies must still review the effect of smaller tax law changes on their business.

Gyöngyi Ferencz: The most significant change was the introduction of the new extra profit taxes announced last summer and levied on companies for the business years 2022-2023, which are primarily aimed at ensuring budgetary equilibrium and providing resources to back up the utility cost reduction, similarly to the special taxes introduced in the 2010 crisis. We have a positive outlook regarding the regulatory changes for the coming years and do not expect to have to deal with any additional burdens that would discourage companies from investing.

Péter Hajnal

BBJ: What are the crucial trends you expect to dominate this year and in the immediate future?

IN: A substantial part of tax-related procedures (tax returns, communication, audit, and selection for audit) are digitalized, data-driven, and automated. We expect that the focus will remain on specific IT improvements.

GB: Implementation of Pillar 2 (the Global Minimum Tax) and Pillar 1 frameworks will likely reshape the global taxation system and require local regulations to be amended accordingly.

PH: Using foreign currencies (EUR, USD) more extensively in accounting, taxation, and labor fields could become crucial to avoid unnecessary financial risks. This is an expected trend by foreign investors.

LB: The tax inspectors receive more information regarding taxpayers due to the digital developments, which can highly support their focus on issues to be examined (and thus levy penalties). Therefore, companies should attach great importance to their taxation and accounting processes. Furthermore, numerous legal conditions may be applied solely until the end of the state of emergency (currently June 27, 2023), after which, if the legislators want to keep them, these should also be changed.

Lajos Bagdi

ASz: There seems to be an increased focus by the tax office on leveraging information technology, collecting online data, building databases, and using digitalization and big data to gather information about taxpayers. Hopefully, this will help reduce the administrative burden on taxpayers.

ZL: Changes to transfer pricing rules will affect many companies. For those with a business year matching the calendar year, time is running out to prepare proper transfer pricing documentation by the end of May and report information connected to transfer prices in their corporate income tax returns. The new legislation will increase administration, although the threshold of HUF 50 million, under which no TP documentation is needed, has been increased to HUF 100 mln.

GyF: The uniform taxation of large international corporations is becoming an increasingly important question in Europe and worldwide. The OECD has been working on developing global minimum corporate tax regulations since 2019, which most European countries, including Hungary, signed up to last year. The question of transfer pricing is also being given an ever more significant emphasis in the financial regulations of most European countries. A new element in the corporate tax returns for 2022 is the data reporting and return obligation regarding transfer pricing. This is a significant change for a broader range of companies operating in affiliated structures that must devote the necessary attention in due time, well before the tax return filing date in May.

András Szalai

BBJ: Are there specific areas where you would like legislation changed in Hungary? Do you see any hope this might happen?

IN: Some provisions still make certain tax procedures lengthy or inflexible and should be simplified in the future. It would be helpful if Hungarian accounting could be brought closer to IFRS rules, thus freeing international companies from difficulties.

PH: Reducing the administrative burden has been a focus for years, although we still see lots of space for further action here. The initiative to negotiate with professional experts is a good direction, but these contributions should be built into the legislation faster. Automation and digitalization are key areas and highly supported by the government but, in parallel, we need to reduce the administrative burdens as well.

LB: The potential remaining hidden employment could be whitened more if social taxes were further reduced. Also, as the local business tax is a significant and particular tax type in Hungary, the simplification of the system would be improved if it were canceled permanently and, for example, the current 9% corporate tax rate was increased a bit (but we do not think it will change soon). Generally, it would be favorable if the government would consult more with practical experts and consider their views. Furthermore, in numerous cases, the new regulations are quite complex to interpret and must be applied quickly.

ASz: It is difficult to select any particular area. Generally, longer preparation time before implementing changes and more communication would be welcome. We would also be happy to see a more up-to-date accounting law that follows business and technology changes more frequently.

GF: There are several topics on our wish list. Following the end of the commenting phase of an audit carried out by the Hungarian National Tax and Customs Administration (NAV), taxpayers no longer have the opportunity to submit any new supporting evidence or facts. Consequently, the current regulation is incompatible with the right to a fair trial.

Gábor Fajcsák

NAV classifies taxpayers into three categories: “risky,” “general,” and “reliable.” Penalties are assessed by the authority based on this. We believe this should be amended; sanctions should not be established based on criteria established by NAV but rather on the actual circumstances of each specific case that led to the imposition of a penalty. With the current practice, even a minor administrative error could lead to “risky taxpayer” status and thus might result in an unfair fine.

Fiscal representations are crucial in ensuring that the taxes levied on foreign companies not established in Hungary are incorporated into the Hungarian budget. We think the rules are partly outdated and incomplete, thus open to abuse. That could lower the inflow of revenues to the budget and also significantly complicates the operation of financial representatives acting as intermediaries between the related foreign businesses and the Hungarian public finances.

We have already sent our proposals for amending legislation on the abovementioned issues to the Ministry of Finance’s Department of Taxation and Customs Administration. We hope the legislators will consider and adopt our constructive and forward-looking suggestions.

ZL: The number of tax types in Hungary is still very high compared to other countries. There is still room the reduce or aggregate specific tax types. A major improvement would be a complete change of the local business tax system by adding more tax base-decreasing items (labor or investment costs) or building this burden into CIT. This is not something we expect to happen in the near future. Additionally, we would be happy to see a decrease in the number of tax types that cannot be categorized simply as direct or indirect taxes, as some Hungarian special taxes are based on turnover rather than profit. The classification of such tax types is also problematic in cross-border transactions involving double-tax treaties.

GyF: Hungary is at the forefront of developing digital tax administration processes. This can generate significant savings in resources and money. VGD Hungary’s team of tax experts was involved in developing and piloting these digital solutions. As an auditor, I can honestly say that reducing the financial administration of companies represents a very positive direction for Hungarian legislation, and companies react positively to all such changes. I trust that the coming years will also see many new developments and simplifications.

Zoltán Lambert

BBJ: Are the tax and accountancy fields still attractive to young graduates? Are you able to source the workforce you need and retain it?

IN: Modern tax and accounting solutions, such as automation and system integration, make the profession more attractive, but accountants must be more prepared to analyze data. The overall problem is that even fresh graduates have no proper level of English knowledge. Our company invests considerable resources into language training for employees.

GB: Finding new talents is a common issue in consultancy, and tax and accountancy are no exceptions. However, the expected fundamental changes in this industry (digitalization, reshaping tax systems) could still make these areas attractive to young people and offer exciting career opportunities.

PH: This has been the most challenging area in our business life in previous years. The tax and accountancy fields are changing, and this transformation should be presented in a more attractive way to young graduates. The borders between different professions (accounting, controlling, taxation) are fading, and a more complex approach and attitude are necessary. These could also be selling points for graduates since they seek interesting and challenging positions. Companies need to recognize that the new generation should be managed and motivated in a totally new way.

Gyöngyi Ferencz

LB: These fields are still quite attractive. Regarding accounting, we can source the necessary workforce (however, the fluctuation rate is relatively high, and the work experience may be troublesome). However, finding employees specifically for the taxation and audit field is quite challenging. The government is keen to help by introducing a PIT-free status for young employees under 25.

ASz: Yes, although the competition in the labor market to source and retain talent remains intense despite the recent economic slowdown.

BBJ: Is there anything else you would like to add?

IN: In the tax and accounting field, there are many challenges due to the increasingly demanding requirements for efficient data services (online invoices, online cash register, online communication, etc.) This implies there is, or will be, significant IT development in our sector.

GF: Generally speaking, although it is also specifically relevant to the financial sector, the biggest issue is the need to improve our education system. More well-trained graduates are required with English knowledge. We would like to see more attention and financial resources provided to improve education.

Our Market Talk Panel:

• István Nemecz, managing director, Accace Hungary

• György Boár, partner, Andersen Tax

• Péter Hajnal, partner and managing director, Moore Hungary

• Lajos Bagdi, partner, Niveus Consulting Group

• András Szalai, partner and managing director, Process Solutions Kft.

• Gábor Fajcsák, partner and head of tax service, RSM Hungary

• Zoltán Lambert, managing partner, WTS Klient Business Advisory Ltd.

• Gyöngyi Ferencz, partner, VGD

This article was first published in the Budapest Business Journal print issue of February 24, 2023.