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Hungary: Transfer pricing

Alessandro PasutTransfer pricing: in case related parties decide to use the new accounting method, differences relating to the current year are to be accounted for in the general ledger of the current year’s balance sheet preparation day at the latest. The authorities have also confirmed that the correction cannot be treated as a modification to the consideration of original and individual transactions if the correction solely aims at the proper profitability in accordance with the contract concluded between the parties. This practically means that issuing a correction invoice mentioned in the VAT Act is not required; the accounting is to be treated as falling out of the scope of VAT and it can be substantiated by any kind of document being considered as acceptable proof according to the Accounting Act. The above rules may significantly ease the operation of companies and clarify the year-end adjustment accounting practice. However an appropriate contractual background and the availability of proper documents are required.

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Hungary: tax audit focuses

Tax audit focuses. Regarding VAT, the main areas of focus will be the compliance with invoicing obligations, and the verification of transactions on the basis of which invoices were issued. In addition, tax audits will continue to focus on the most typical forms of fraud, including chain transactions.

Together with taxpayers involved in VAT fraud and companies deemed risky from a tax perspective, the natural persons related to these taxpayers who acquire revenue in connection with the operation of these companies will also be subject to tax audits.

In corporate income tax, the following topics will remain crucial: the audit of the adequacy of applicable transfer prices used between related parties, specifically in case of non-conventional price determining methods and the legality of the application of the research and development allowance to the tax base.

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Hungary: new tax laws

Alessandro PasutHUNGARY

The Hungarian Parliament adopted some modifications to certain tax laws.

Sport sponsorhip. The popular team sport sponsoring system is modified in the sense that the sponsor of a team sport will be subjected to supplementary sport development subsidy in order to take advantage of the tax credit. The value of such assistance has to be at least 75% of the tax advantage in line with the agreement as stipulated on the support package certificate. However, according to the new regulations the amount of the supplementary development assistance rendered under sponsorship or support agreements are not acceptable for corporate taxation purposes.

The taxpayer has 8 days to notify the Tax Authority about the financial settlement covering support packages. In the case of a failure of such notification there is no possibility for the submission of a verification request.

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Hungary: Corporate Income Tax

Alessandro PasutIn addition to the taxpayer, its related company may also deduct the direct costs of the taxpayer’s own research and development efforts from its pre-tax profit, in the proportion agreed between them. The tax base decreasing item may be applied, if the R&D activities carried out by the related company are related to both the taxpayer’s and the related company’s business activity, and the related company declares the direct costs of the research and development activities and the amount that may be used by the taxpayer. The parties will be jointly liable for the contents of the declaration, and both parties will have to provide information concerning the event in the corporate income tax returns.

The rules of loss carry-forward relating to transformations have been supplemented. In the case of a transformation, the legal successor may deduct the legal predecessor’s negative tax base from its profit before tax for the first time in the tax year that includes the day of the merger.

From 1 January 2014, when determining whether a company qualifies as an owner of real estate, the proportion of the assets/real estate shown in the financial statements must be calculated on the basis of the book values, instead of the market values.

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Hungary: Limitation on cash payments

As of 1 January 2013 the companies that are obliged to open a bank account are allowed to cash out a maximum of HUF 1.5 million in the course of a calendar month in consideration of the supply of goods or services provided based on a single contract. (The amount is considered to include VAT).
In order to prevent the abuse, the new provisions also prescribe that multiple contracts will be considered as pertaining to one single contractual cash payment if it can be undoubtedly argued that the contracts have been concluded only with the aim to avoid the set limitation.
However, since the act only provides framework rules and the practice of the tax authority is yet unknown, certainty could only be obtained through non-binding rulings tailored to specific cases. The penalty arising from the incorrect practice of the provisions is 20% percent of the amount exceeding HUF 1.5 million for both the payer and the recipient.

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Hungary: Transfer pricing

The Ministry for National Economy has issued a decree introducing several amendments to transfer pricing reporting obligations which have become effective on 1 January 2012. Under the new rules, taxpayers can apply the amendments when complying with reporting obligations related to tax obligations of the fiscal year 2011, provided the deadline for submitting reports is on or after 1 January 2012.

Transactions concluded between Hungarian resident taxpayers and the related companies of their branch office located in a foreign country with which Hungary has a double tax treaty are exempt from the reporting requirement. This rule applies if the income from the branch office that is subject to taxation abroad is exempted from tax in Hungary under the treaty. It also applies to transactions concluded between related parties for which the state Tax Authority established the arm’s-length price by way of resolution during the validity period of the resolution.

Exemption from the reporting obligation is also granted for the purchase of third-party goods and services that are not related to the company’s principal business activity, provided that the costs are recharged to a related company without a surcharge, for cash subsidies and for transactions with a value of less than HUF 50 million, if certain conditions are met.

The amendments introduced by the decree allow simplified reporting for low value adding intra-group services subject to specific conditions (the value of transactions may not exceed 150 million forints in the tax year under review, 5% of the service providers’ annual net revenues and 10% of the recipient’s annual operating costs and expenses in the tax year). These requirements must always be examined from the perspective of the party that prepared the documentation.

Related-party transactions qualify as low value adding intra-group services if they have a low risk and routine nature, are not related to the company’s principal business activity, do not exceed the above mentioned value threshold and the recipient is provided with economic or commercial value.

Sanctions for defaulting on transfer price reporting obligations will be heavier from 2012. Fines for repeated default may reach a maximum HUF 4 million per report, while repeated default concerning the same report may cost up to a maximum of HUF 16 million.

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Hungary: proposed tax changes for 2012

VAT. The standard value added tax (VAT) rate in Hungary will be increased from 25% to 27% as of 1 January 2012, while the lower VAT rates of 5% and 18% will remain unchanged.

VAT refund. Following a judgment of the European Court of Justice, at the end of September Parliament repealed the domestic VAT provisions incompatible with the EU VAT Directive and introduced an extraordinary refund mechanism.
Taxpayers, whose input VAT in relation to unpaid invoices could not be refunded but only carried forward for use in subsequent tax periods, may file a refund request with the tax authority by 20 October 2011. Alternatively, the amount can be reclaimed in the regular VAT return.

The tax authority is obliged to complete the refund within 30 days (or within 45 days in the event of refunds in excess of HUF 1 million). Furthermore, under a transitional rule, taxpayers may initiate a special procedure aimed at the revision of the tax penalties and late payment interest imposed before 27 September 2011.

The new legislation ensures that the repealed provisions may not be applied in ongoing audits and procedures.

Measures to combat evasion. With regard to certain tax violations, the government is considering a system allowing for tax numbers to be revoked quickly if a taxable person cannot be contacted or if they fail to comply with certain major obligations. Another measure regards the possibility to not limit the period of an investigation that could be extended if deemed necessary for any reason. Finally in the agricultural sector the application of a reverse charge method similar to the regime already existing in the construction industry and the recycling business is proposed.

Personal income tax. The envisaged personal income taxation on “super gross income” will be abolished as of 2012. At the same time, the system of tax credits will also disappear. These measures will mean that the effective personal income tax burden will be 16% at all income levels.

Excise duties. Parliament introduced various increases to the rates of excise duties in all product categories. With effect from 1 November 2011, excise duty rates applicable to petrol (13%), spirits, beer and certain other alcoholic drinks (generally 5%) , as well as cigarettes (8%) and other tobacco products, will increase. In addition, with effect from 1 May 2012 and 1 November 2012, cigarettes and tobacco products, respectively, will be subject to further gradual excise duty rate increases.

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Hungary: Tax Audits

A directive concerning the 2010 tax audits has been issued, which describes the main areas that will come into focus. The Tax Authority will take more severe measures against tax planning that takes advantage of unintended administrative or legal loopholes.

Therefore the following categories of taxpayers can expect to be subject to tax audits in 2010: taxpayers whose records show frequent changes in registered address or ownership; businesses that have operated for several years with substantial loans from their shareholders; taxpayers who declared significant amounts of payable and deductible VAT during the period during which the company was under registration; and companies that have continued to operate despite continuing losses, with particular regard to the financing of large accumulated losses.

Special focus will be given to the accounting of expenses aimed at minimising the amount of taxes payable, spending a significant portion of the sales revenues on services, the use of tax base decreasing items, tax allowances and subsidies related to investments under the Corporate Tax Act, the use of tax base incentives for research and development and the operation of companies that regularly declare input VAT which they either leave on their tax accounts or have it transferred to another tax type.

The Tax Authority will also pay more attention to the actual content of transactions conducted between related parties and to the methods companies use to determine the arm’s length price. Compliance with the rules of investment tax benefits will also be strictly controlled.

Companies (sole traders) who pay their contributions on an income that is less than the “typical income” specified for the type of activity that they pursue will be subjected to closer scrutiny in order to ensure that the full amount of social security contributions due are paid and that taxpayers comply with their tax liabilities with reference to the minimum contribution base, incomes not exceeding twice the minimum wage, and typical incomes specified for the different activity types.

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Hungary: Tax Audits

A directive concerning the 2010 tax audits has been issued, which describes the main areas that will come into focus.
The Tax Authority will take more severe measures against tax planning that takes advantage of unintended administrative or legal loopholes.
Therefore the following categories of taxpayers can expect to be subject to tax audits in 2010: taxpayers whose records show frequent changes in registered address or ownership; businesses that have operated for several years with substantial loans from their shareholders; taxpayers who declared significant amounts of payable and deductible VAT during the period during which the company was under registration; and companies that have continued to operate despite continuing losses, with particular regard to the financing of large accumulated losses.
Special focus will be given to the accounting of expenses aimed at minimising the amount of taxes payable, spending a significant portion of the sales revenues on services, the use of tax base decreasing items, tax allowances and subsidies related to investments under the Corporate Tax Act, the use of tax base incentives for research and development and the operation of companies that regularly declare input VAT which they either leave on their tax accounts or have it transferred to another tax type.
The Tax Authority will also pay more attention to the actual content of transactions conducted between related parties and to the methods companies use to determine the arm’s length price. Compliance with the rules of investment tax benefits will also be strictly controlled.
Companies (sole traders) who pay their contributions on an income that is less than the “typical income” specified for the type of activity that they pursue will be subjected to closer scrutiny in order to ensure that the full amount of social security contributions due are paid and that taxpayers comply with their tax liabilities with reference to the minimum contribution base, incomes not exceeding twice the minimum wage, and typical incomes specified for the different activity types.

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Hungary: Changes to the local business tax

For the business years starting in 2010, taxpayers will have to submit their local business tax returns and make the payments to the state Tax Authority. However, since the competent local tax authority is responsible for matters related to local business tax for 2009, in accordance with the relevant transitional provisions, the local business tax return for 2009 must be filed with this authority.
Another transitional provision is that the first local business tax advance for 2010 will have to be paid to the competent local tax authority. Taxpayers using a non-calendar business year must pay all their tax obligations for the business year starting in 2009 to the competent local tax authority. Regarding the tax periods before 1 January 2010, the right to establish tax will cease on 31 December 2011, and thus there will be only two years to carry out audits and self-revisions.
The procedural rules on taxpayers with more than one permanent establishment will also change. From next year, they will have to file a single tax return, including local business tax, divided into the single permanent establishments. Taxpayers will have to make payments to the account for local business tax held by the state Tax Authority.
Reconciliation of taxpayers’ tax accounts at the end of 2009 will be of special importance, because the local business tax balance recorded at the competent local tax authorities as of 1 January 2010 will be the opening balance for this tax type at the state Tax Authority. Any further reconciliation at a later stage might be difficult as the local business tax functions of the local municipalities will gradually be terminated.
Although the task of auditing local business tax will also be transferred to the state Tax Authority, the competent local tax authorities will continue to conduct on-site audits for the purposes of data collection at taxpayers pursuing business activities on a temporary (occasional) basis and will provide the state Tax Authority with the data from such audits by the last day of each month.

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