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 is abolished with effect from the tax year starting in 2019. However, corporate taxpayers may voluntarily top-up their tax advances to the amount of their expected payable tax for 2019, and achieve a tax advantage of 7.5% in respect of the 2019 tax year on that account by allocating a portion of their corporate taxes to support spectator team sports or film productions. Special rules applies to taxpayers using a non-calendar financial year.
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. Tax audits can vary in the following ways: the tax authority can (i) re-audit tax returns, (ii) monitor the redemption of government guarantees, (iii) audit the fulfilment of certain tax obligations, (iv) gather data and information, (v) monitor compliance with duty payment obligations, or (vi) re-audit previously audited tax periods.
In accordance with the new ART, the rules for tax audits have been simplified. Instead of the previously existing seven different types, there are two types defined in the Act (note that as part of the reshuffle, four out of the five disappearing types are, in fact, remaining, but in other legislations).
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) or 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 report 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 30-120 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 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 regardless of any ongoing related tax audit or outstanding input from foreign authorities.
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.
The superior tax authority or the minister in charge of taxation (minister appointed for the supervision of the tax authority, i.e. Minister of Ministry for National Economy in Hungary) may take supervisory regulatory action on request by the taxpayer. The superior tax authority or the minister can also amend or annul the unlawful resolution, and, if it is necessary, a new procedure can be ordered. The deadline to initiate a supervisory measure has been set at one year following the final decision.
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-corrections 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.
Generally, the following categories of taxpayers may expect to be scheduled for tax audits:
- Taxpayers that perform construction activities.
- Taxpayers whose main activity is e-commerce (e.g. webshops).
- Taxpayers whose managing directors or the shareholders were changed.
- Taxpayers that provide accommodation services (e.g. hotels).
- Taxpayers that provide passenger transport services.
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. The total tax difference charged to taxpayers classified as ‘reliable’ has to be reduced by the total tax difference credited to these taxpayers during the current year and the preceding five years. ‘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, and
- the balance of the taxpayer’s total tax liability is positive.
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
- the taxpayer is not under foreclosure procedure
- 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:
- 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 has had to apply business closure measures against the taxpayer repeatedly within a year, or
- the taxpayer’s seat is located at a premise of seat service.
The classification of a risky taxpayer lasts for one year, but will be cancelled in the subsequent quarter if the taxpayer settles its tax deficit or the tax debt and the related penalty and default.
In line with the renewed profile of the tax authority as a service provider, start-up companies will be eligible for assistance as a part of a six-month mentoring period. The exact rules are currently in the development phase, but currently comprises lectures and personal consulting sessions offered to new businesses.