Thresholds and specific SMEs regulations

Effective Micro and Small Business Compliance Management –

Tax Policy and Administrative Solutions

International Tax Dialogue (ITD) Conference

VAT rules in Hungary

5th of May 2011, Tbilisi

General overwievHungarian economy - Key facts

Location: East-Central Europe Official name: Republic of HungaryArea: 93 030 km2 Capital: BudapestTime zone: GMT + 1 hour 

Population: app. 10 million  Ethnic groups: Hungarian 96.9%, Roma 1.9%, German (0.6%), Slovakian (0.2%), Croatian (0.2%), other (0.2%)

GDP: 200 billion $Per capita GDP (at purchasing power parity): $19,700 Currency: Forint (HUF)Composition of GDP: agriculture: 3.2%; industry: 31.9%; services: 65%GDP growth rate in 2010: 1,2%Doing Business Rank in 2010: 46th of 186 countries

General overwievTaxation facts - State sector tax revenuesState sector tax revenues: cca. 33,8 billions of €, 91 % of total state sector tax revenues collected by National Tax and Customs Administration

47.5%

12.0%

28.6%

3.1%0.4% 1.4%

0.5%6.6% Central budget tax revenues from

tax administrationCentral budget tax revenues from customs administrationSocial contributions collected by tax administrationTax revenues of separated state funds collected by tax administra-tionTaxes collected on behalf of local municipalitiesTaxes collected by other administra-tive bodiesSocial contributions collected by other administrative bodiesLocal taxes collected by municipali-ties

VAT revenues

2009 7,7 bill. €

2010 8,4 bill. €

2011 Est. 9,3 bill. €

General overwievTaxation facts – Tax administration

National Tax and Customs Administration:

• Customs and Tax Administration merged into a single administration as of 1st January 2011

• Government expectations

more effective and economic collection of state revenues more focus on the fight against financial crimes better flow of information in taxation matters single public contact centres for all administrative matters simplification of procedures

• National competence in all tax- and customs- related matters• Independent central budgetary organisation

General overwiev of the hungarian economyTaxation facts – Number of taxpayers

  2009 2010

Number of VAT taxpayers 496 620 505 471

 Number of taxpayers 2009 2010

1. Economic organisations with legal entity 303 635 337 594

2. Economic organisations without legal entity 217 485 213 851

3. Other organisations 75 801 90 053

4. Private entrepreneurs 370 290 383 509

5. Budgetary organisations 9 142 9 200

Total (without private persons subject to PIT) 976 353 1 034 207

SME definition for general tax purposes

The indicators and threshold are harmonized with the EC recommendation 2003/361:

Difference in the national law: Any enterprise in which the state or any local self-government holds, either directly or indirectly and either solely or jointly, 25 per cent or more of the capital or voting rights shall not be classified as an SME.

! Different tresholds apply for specific tax purposes, e.g. turnover thresholds for certain VAT simplification purposes, or profit and turnover thresholds that influence tax audit frequency.

Thresholds for SME classification

Value added tax in HungaryMain characteristics (1.)

• Introduced in 1988, Value Added Tax is now regulated by Act. CXXVII. Of 2007 („VAT ACT”)

• The new Hungarian VAT legislation came into effect on 1 January 2008, and it is fully harmonized with the EU Directive 112/2006/EC.(2006/112/EC a recast of the Sixth VAT Directive of 1977)

VAT rates:

• The standard rate of VAT is 25 percent

• The following supplies of goods and services are exempt from VAT by the type of the activity:

• public postal services, hospital, medical care, certain education activities, insurance and reinsurance transactions, payment transactions, gambling services etc.

• Since 1 July 2009, a new reduced rate of 18 percent has been applicable to dairy and bakery products and hotel services (from 9 July) and from 1 August 2009, also to central heating.

• Reduced rate of 5 percent for the sale of most medicines, medical instruments, books, newspapers, and magazines.

Value added tax in HungaryMain characteristics (2.)

Non-deductable goods and services:

• the purchase of goods or services that are used or utilized for purposes other than the business activities subject to taxation

• fuel directly for the operation of a motor vehicle • the purchase or renting of passenger cars, motorcycles above 125 cc, yachts,

sporting, and leisure boats • the purchases of foodstuffs and beverages (except, if the purchase is for the

purpose of resale) • services of public catering services, entertainment services • purchases and services received in connection with the operation and

maintenance of passenger cars • taxi services, parking and highway usage services (excluding vehicles over 3.5

tonnes) • purchase of residential properties (except for taxable persons use or utilize the

purchases for reselling or renting residential properties with respect to the residential properties rented out)

• thirty percent of the tax charged on telephone services

Value added tax in HungaryVAT groups and reverse charge

VAT groups:allowed, group taxation is available to taxable persons who meet all of the following criteria:

All members of the group are:• taxable persons established in Hungary; • related companies; and • involved in one group only at any given time.

The group is considered as a single taxpayer obliged to fulfill its VAT liabilities using a single VAT number and filing common VAT returns. All transactions (supply of goods or services) performed within the group is outside the scope of VAT. Incurred input VAT is recoverable.

Reverse charge:VAT is to be paid by the taxable person acquiring the goods or services in connection with construction and similar works, waste realization, used accumulators, suplly of carbon emmission rights, goods or assets sold during liquidation process or insolvency.

Value added tax in HungaryRegistration treshold

The taxpayer must fulfil its registration obligation prior to the commencement of its business activity on the territory of the Republic of Hungary

As the tax number generated upon registration also serves as a VAT identification number, no separate registration is necessary in respect of VAT

„One-stop-shop” system:• Private entrepreneurs: Document Office of the local municipality• Companies: Court of Registration• Private individuals without tax ID code: Tax authority

Taxable person decides on VAT during registration process:• VAT exempt by the type of activity;• VAT subject or not;• EU VAT number.• Application of special taxation methods (special scheme for farmers –

barter overcharge, touristic operators, options to tax (sale or rent of properties) etc.

Value added tax in HungaryRegistration treshold

Obilgatory VAT registration:

annual turnover over 5 mill. HUF (18 200 €), under the treshold VAT is voluntary. (Non VAT taxpayers between 10 000 € and 18 200 € annual turnover in 2009: 40 575)

VAT registration treshold is stable in Hungary

the effective margin slowly decreases

2010Private entrepreneursVAT 105 088 Non VAT 233 921 Economic organisationsVAT 400 383 non VAT 164 102 SET taxpayers 96 010 Total VAT taxpayers 505 471

Value added tax in HungaryFrequency of VAT returns

As a general rule, taxpayers are obliged to submit VAT returns on a quarterly basis. • if the amount of tax payable exceeds HUF 1 million (approximately EUR

3,600) in the tax year preceding the previous closed tax year VAT returns should be filed on a monthly basis.

• if the amount of tax either payable or refundable did not exceed HUF 250,000 (approximately EUR 900) in the tax year preceding the previous tax year, VAT should be reported annually

• if taxpayer has EU VAT number, the tax returns must be submitted at least quarterly

• VAT grops must submit monthly VAT returns

If the tax payer reaches the above limits during the course of the tax year, they have to switch to more frequent filing

Average number of different VAT returns

  monthly quarterly annual

2009 121 343 191 659 183 618

2010 118 220 198 634 188 617

Value added tax in HungaryRecapitulative statements

As a general rule, tax payers are obliged to submit recapitulative statements (RS) of intra-community acquisitions and supplies of goods must be submitted quarterly, by the 20th day of the month following the quarter.

• Taxpayers obliged to submit monthly VAT return must submit RS also monthly;

• If quarterly VAT taxpayers quarterly turnover on EC sales exceeds 100 000 € must switch to monthly RS;

• Number of recapitulative statements (2010):• Monthly: 29 482• Quarterly: 20 881

Value added tax in HungaryUse of electronic tax returns

Widespread and general use of electronic tax returns:From 2007 onward, each and every business entity must file all its tax returns electronically.

Base of compliance strategy: permanent expansion of electronic services

VAT (quarterly)

VAT (monthly)

CIT returnsPIT

Total

0

50

100

year 2008

year 2009

year 2010

datas in %

The ratio of main tax returns filled in by software available on the Internet

Value added tax in HungaryRefund of VAT - invoices

Negative VAT can be reclaimed in the VAT return.

If amount of reclaimable VAT

• exceeds 1 million HUF (3600 €) at monthly taxpayer;• exceeds 250 000 HUF (900 €) at quarterly taxpayer;• exceeds 50 000 HUF (175 €) at annual taxpayer.

The reclaimable VAT must be decreased with the amount of VAT on non-paid purcheses. Not reclaimed VAT can be deducted from the next periods VAT.

Invoices:Taxable persons must issue an invoice or simplified invoice if the purchaser is an other taxable person, or in case of IC trade and in case of distance selling.

For taxpayers who carry out only tax exempted activities it is allowed instead of issuing an invoice to use any other documents qualified as an accounting certificate.

Simplified Entrepreneur TaxSpecific tax regime for SMEs

• Introduced in 2003• can be used if the entrepreneur fulfills special requirements (form of the

enterprise, activity of the enterprise etc.);• it substitutes the Personal Income Tax/Corporate Tax, VAT and some rules of

the Accounting Act

Taxable income: All income acquired by the taxpayer (no deductions)Tax rate: 30% (started with 15%)

Main conditions:• permanent and unchanged operation;• no public debt and default penalty;• the annual revenue cannot exceed HUF 25 million (90 000 €)• conditions connected to business activity:

inland current bank account, no activity that falls under the Excise Tax Act, no Community Tax Number, • can not be indirect re-presentative regulated under the custom rules;

• was not subject to a dissolution procedure or liquidation procedure by court order;

Simplified Entrepreneur TaxSpecific tax regime for SMEs

  2006. 2007. 2008. 2009. 2010.

Number of SET taxpayers 98 133 97 546 95 380 97 608 96 010

SET tax revenue (millions of EUR) 522 556 606 617 661

2006. 2007. 2008. 2009. 2010. -

20,000

40,000

60,000

80,000

100,000

120,000

Number of SET taxpayers

Number of SET taxpayers

2006. 2007. 2008. 2009. 2010. -

100

200

300

400

500

600

700

SET tax revenue (millions of EUR)

SET tax revenue (millions of EUR)

Lowering the administrative burdenGovernmental action plan

Creating the “Strong Europe” chosen for the motto of the European Union’s Hungarian Presidency;

Strong European economy requires fast and consistent implementation of structural reforms designed to serve rapid recovery from the crisis.

Programme to reduce administrative burden of enterprises in Hungary

Simplifying tax administration; Narrowing the scope of audit requirements; Elimination of overlapping traits in administrative and statistical data

collection by the Government Making fining practice the authorities’ more predictable; Simplifying employment administration.

Programme focuses on small and medium eterprises

Thank you for your attention!