Hungarian tax procedures: rebooted
It is indeed very usual for Hungarian tax laws to be amended significantly at the end of each year. This year, however, is a bit special, as the focus of the changes is not so much the substantive tax rules, but rather the procedural ones. They fit into a wider scheme to completely overhaul how tax audits and tax procedures are conducted in Hungary; and not just at the authority level, but also at court level. The significance of these changes should not be underestimated. These will have a real impact on how taxes are levied, paid, audited – and challenged. We provide a brief overview of these expected changes.
The Hungarian government just submitted the proposal for a complete shake-up of the current organisation of the tax authorities. This system is well-known to be rather fragmented. There are 22 different directorates at county level, which are supervised by further seven regional directorates. And: all these are duplicated for customs and tax, respectively. Centrally, there are special directorates for various special taxpayers, and the entire organisation is led by the president of the Hungarian Tax and Customs Authority.
The past few years have shown that this fragmentation often leads to differences in legal interpretation and in the way tax audits are conducted. It also impedes the free flow of information within the tax authorities which, in turn, leads to inefficient and lengthy tax audits. Furthermore, the tax authority has enjoyed a fairly high level of independence from the Ministry for National Economy, and this has often led to it chasing its own agenda.
A proposal which is yet to be discussed and finalised by the Parliament will bring about significant changes to this system. These will involve a move towards centralisation and the demise of the regional directorates; and put an end to the duplication for customs and tax.
This means at least two significant changes for taxpayers: firstly, all appeals will now be decided by a single “Directorate of Appeal” instead of seven separate directorates. Secondly, the Ministry will now have direct control of the tax authority.
On the one hand, this should bring increased consistency of decisions and more concentrated knowledge of relevant case law and best practices. On the other hand, taxpayers will, no doubt, be faced by an even better prepared opposition if they bring their tax cases to court. They should, therefore, now more than ever, seek professional support whenever possible.
The government has itself recognised that lengthy, never-ending tax procedures increasingly put Hungarian businesses at a competitive disadvantage. Indirectly, therefore, these impede the economic growth of the country. This has prompted the introduction of a few measures which aim to make it easier for taxpayers to go about their business with a bias towards well-behaving taxpayers.
To this end, the new rules introduce two new categories of taxpayers: “trustworthy” taxpayers and “risky” taxpayers. Trustworthy taxpayers will now enjoy a number of benefits compared to the general rules. In particular, trustworthy taxpayers may not be subjected to tax audits for more than 180 days which is a significant benefit compared to tax audits which sometimes last up to 4-5 years. Further, tax fines are halved for trustworthy taxpayers and no administrative fines may be levied unless the taxpayer is first reminded to fulfil its obligations.
The real benefit of these rules is that it is not that difficult to become a trustworthy taxpayer. This means that taxpayers who usually pay their taxes when due and have been conducting their business for at least three years may generally benefit from this favourable status. Hopefully, this should put an end to the complaints of many of our clients who feel to be part of a witch hunt when, following years of impeccable tax records, they are severely fined by the tax authority just because of one smaller mistake.
In contrast, risky taxpayers are those who appear on one of the “black lists” of the tax authority for having accumulated significant tax arrears and the like. These taxpayers will need to wait longer than usual to get their VAT reimbursed; the tax audits conducted against them will be longer than usual; and they will face higher fines and late payment interest than normal taxpayers.
A big plus is that the classification of taxpayers will be automatic so that it will not place additional administrative burden on the taxpayers themselves.
(Almost) no tax returns for individuals
For a number of years, the Hungarian government has been trying to relieve most individual taxpayers from the need to fill in and submit complicated tax returns. The success of these experiments has been rather varied. For instance, the number of taxpayers eligible for automated tax returns was limited due to the complicated rules concerning income to which these rules would not apply.
From next year, the government tries to cure this by introducing a general rule on “draft tax returns” for those taxpayers who have the necessary electronic gateway access to the government system. This draft tax return will be prepared on the basis of the data available to the tax authority, and then the taxpayer may decide whether he/she is ready to accept it as is; or if any amendments are necessary. According to the expectations of the government, this should now relieve a large number of taxpayers from having to fill in their tax returns themselves.
It seems that the government really is trying to reform tax procedures globally and is not merely providing patches. This is evident from the fact that from 2017, the tax litigation process is also likely to be changed. Most of these changes (such as the introduction of a separate act on administrative procedures) will only be interesting to lawyers and other professionals. However, a few may also be of interest to the general public.
Most significantly, according to some plans, a new administrative court of appeal may be established. Very few ideas have yet been communicated about the planned changes. What is significant though, is the idea of having specialised administrative courts including, hopefully, more specialised judges that decide on tax matters.
Today, it is not entirely uncommon to end up in court in a tax case, and to come before a judge who has admittedly not decided on tax cases before. This is extremely unfortunate, as both the tax authorities and most lawyers who represent clients in courts in tax cases have significant experience in tax law which is, by any standard, a highly specialised area of law. Hopefully, the new procedural code and the establishment of more specialised courts will result in more predictable, if not favourable, decisions for the taxpayers.
We will certainly be watching very closely.
Jalsovszky Law Firm
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Tamás Fehér is one of the leading tax lawyers of the firm. He joined the firm in 2014. In the previous 12 years he worked at the Budapest tax group of a leading international law firm. His main area of expertise is tax litigation.
Tamás represents clients during all phases of tax administration and tax litigation procedures. He participates in tax structuring projects in the field of income taxes and VAT. Tamás is a recognised tax lawyer at Chambers Europe and Legal 500.
Tamás can be contacted on +36 (1) 886 7875 or by email at firstname.lastname@example.org