The Abolition of Hungarian Special Taxes: Where Will the State Make Up The Shortfall?

The Abolition of Hungarian Special Taxes: Where Will the State Make Up The Shortfall?

Hungary
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Significant changes are expected in the Hungarian tax system in the coming years, which could have a major impact on economic operators and individuals alike. As a result of the changes, the State is likely to lose significant revenues and the means to replace these revenues are not yet known.

On one hand, reform of the personal income tax is on the table for a long time. A government-civil working group tasked with planning the simplification of the personal income tax system should have started working in the first quarter of 2023. Previous plans were to remove tax credits deemed ineffective or unnecessary, but the reform will almost certainly not be implemented in the following years.

In the contrary, the special taxes imposed by the government on retailers, the oil industry, banks, insurers and pharmaceutical companies as a response to the energy crisis could be abolished next year, and will only be collected after the tax year of 2022 and 2023. The only known exception is the environmental tax on airline tickets to offset carbon emissions from travel, which will remain. The abolishment of these measures is expected to decrease public revenues while lowering inflation. The reason for the abolishment is that it is a part of the commitments made by the Hungarian Government to access the recovery plan created by the EU to combat the economic consequences of the coronavirus epidemic.

Considering that the special taxes amounting to up to HUF 800-900 billion in revenue for the state yearly, their abolition is expected to have to be compensated to maintain a balanced budget. A possible medium-term solution is the mandatory introduction of the global minimum tax, as the relevant proposals shall be debated in Parliament soon. The package would increase the burden on multinationals from the current 1-9% to 15%. This action – which was opposed for a long time by the Hungarian Government – would jeopardize the Hungarian tax advantage, while increasing tax income. The global minimum tax would affect more than a hundred companies in Hungary, including MOL and OTP among the domestically owned ones.

Although the challenges surrounding the economic environment in the next few years mean that the future of the economy, thus taxes is not known, one thing is certain: significant changes are expected.

By Bálint Éberhardt, Attorney at Law, KCG Partners Law Firm