As a significant development in the area of tax administration in Hungary, a new Act on Rules of Taxation has been introduced with an effective date of 1 January 2018 (new ART). Along with its modified content and structure, the governing rules for tax procedures and tax audits have been set out in a separate new act, the Act on Tax Administration Procedure.
The primary goal of the above revamp is a change in the overall perspective of the tax authority, an aim to create a regulatory environment that is brief, transparent, and easy to follow for taxpayers. In addition, the new Act aims to strengthen the service provider nature of the tax authority. Note that to a large extent this major change is a reshuffle of the rules among different pieces of legislation in order to achieve a more coherent and transparent situation.
CIT must be calculated by reference to the accounting year, which is either the calendar year or, for company groups, the group’s accounting year.
Returns must be submitted by the last day of the fifth month following the last day of the accounting year (31 May for a calendar year taxpayer). The tax payable is determined by self-assessment.
Tax returns may be submitted either electronically or in paper format. However, those who are legally obligated to submit monthly tax and contribution returns (e.g. employers and payers) may only submit tax returns electronically.
From 1 January 2017, entities subject to LBT may file their tax returns with the competent local municipality through the national tax authority. The national tax authority will forward tax returns to the competent local tax authorities in an electronic format only.
Payment of tax
CIT instalments must generally be paid quarterly or monthly (above HUF 5 million tax payable). The final payment is due by the last day of the fifth month following the last day of the accounting year (31 May for a calendar year taxpayer).
The tax advance top-up liability for CIT purposes was abolished with effect from the tax year starting in 2019.
Tax audit process
Generally, the tax authority selects the taxpayers subject to tax audit based on certain criteria, which are communicated to the public, and an elaborate risk assessment model. However, in contrary with the previous practice, in general
the rules for tax audits have been simplified in accordance with the new ART (i.e. there are two types of tax audits: i) general tax audit and ii) compliance audit, defined by the Act).
During a compliance audit, the tax authority may inspect whether the taxpayer complied with its individual administrative tax obligations prescribed by relevant legislation, and, in addition, may gather data and may inspect the authenticity of economic events concerned.
When carrying out a tax audit, the tax authority inspects whether the taxpayer’s tax assessment and the taxpayer’s obligation to file tax returns have been fulfilled.
A tax audit period can cover any years that are not lapsed (five years after the last day of the calendar year in which the taxes should have been declared or reported, or paid in the absence of a tax return or declaration) and not closed by a re-audit of tax returns. The tax audit starts when a company receives the notice of audit and finishes when that company receives the minutes containing the tax authority’s findings.
The deadline for the completion of the tax audit has also been re-codified. According to the general rule, a tax audit is to be completed within 90-120 days, although in special cases (e.g. related tax audit, request for assistance from foreign tax authorities) can be extended three times by 90 days. In terms of deadlines, shorter deadlines apply to compliance audits.
In order to avoid audits lasting for several years, tax audit deadlines cannot be suspended in special cases either (see above), and the audit shall not exceed 365 days.
Once the tax authority has completed the audit process, it issues its minutes. The minutes detail all the findings of facts of the audit and serves as the background of the tax assessment, and the basis on which the tax authority will pass its first-instance resolution. Upon receipt of the minutes, the taxpayer has the opportunity to submit its remarks to the minutes and raise any disagreement with the findings of the audit.
As one of the most important amendments as of 1 January 2018, the rules for the taxpayer to dispose new evidence during tax proceedings have been significantly modified. Upon the receipt of the minutes, the taxpayer is able to submit its remarks to the minutes and present evidence supporting its case within a 30-day deadline (increased from 15 days). In the course of subsequent proceedings (e.g. if a taxpayer submits an appeal regarding the first-instance resolution), taxpayers will not be able to allege any new facts or present any new proof that the taxpayer was already aware of but did not disclose upon the request of the tax authority in its remarks to the minutes.
In case of a dispute, the tax assessment of the tax authority may be appealed and challenged before the second-instance tax authority, which has the right to annul the first-instance resolution and decide on the merits of the case, or to instruct the first-instance tax authority to carry out a new audit if the facts and circumstances have not been appropriately and fully developed.
The decision of the second-instance tax authority is final and binding. Following the receipt of this decision, the company may litigate the case before the courts in Hungary. The court may uphold, amend, or annul the Resolution of Second Instance and, if it is necessary, may order a new process in relation to the tax audit.
Statute of limitations
In general, the statute of limitations is five years from the end of the calendar year in which the tax return should be filed. Certain self-revisions interrupt the term of limitation.
Topics of focus for tax authorities
The tax authority will take more stringent measures against ‘aggressive tax planning’ (tax planning that takes advantage of unintended administrative or legal loopholes) using its international experience and cooperation agreements. The tax authority will also focus on protecting the revenue of the central budget and supporting the competitiveness of the national economy.
The tax authority will also pay more attention to risky taxpayers, risky activities, and priority taxpayers.
Special taxpayer categories
From 2016, the tax authority classifies the payers into three difference categories: risky, general, and reliable. The taxpayer status is quarterly revised by the tax authority. ‘Reliable’ taxpayers receive benefits, while ‘risky’ taxpayers fall under stricter rules.
The tax authority classifies a taxpayer as ‘reliable’ if all criteria defined are met, including:
- at least three years of continuous operation (or being VAT-registered)
- no more than HUF 500,000 net tax debt
- not being classified as a risky taxpayer
- the balance of the taxpayer’s total tax liability is positive, and
- the taxpayer is not under foreclosure procedure started by the state tax authority and was not in the previous four years.
Further conditions are that in the year in question and in the preceding five years:
- the tax difference on the taxpayer’s expense should not be more than 3% of the total calculated tax liability of the year in question, however, the total tax difference charged to the taxpayer has to be reduced by the total tax difference credited to the taxpayer
- the taxpayer is not under bankruptcy or under liquidation procedure, forced cancellation, or enhanced regulatory supervision by the tax authority, and
- the taxpayer’s tax number is not under suspension or cancellation procedure.
Furthermore, the taxpayer cannot be classified as reliable if the sum of the default penalties in the previous two years before the year in question is more than 1% of the total calculated tax liability of the year in question.
The tax authority classifies as ‘risky’ those taxpayers that are amongst others:
- not under liquidation or forced cancellation, but are
- publicly listed due to a high tax deficit, tax debt, or
- employing an unreported workforce, or
- if the tax authority had to apply business closure measures against the taxpayer repeatedly within a year, or
In general, the classification of a risky taxpayer lasts for one year, but in certain cases may be cancelled in the subsequent quarter if the taxpayer settles its tax deficit, the related penalty and late payment interest and the tax debt.
In line with the renewed profile of the tax authority as a service provider, new companies may be eligible for assistance as part of a six-month mentoring period. The participation, however, in the mentoring program is based on the individual decision of the taxpayer. The mentoring program comprises amongst others free information on the taxpayer’s tax obligations and personal consulting sessions with the taxpayer.