Hungary also grapples with tax reform
Poland hasn't been alone this year in trying to push through tax reform. Hungary has also put together a reform package for 2000, but the changes are expected to make things harder and costlier instead of simpler and cheaper for Hungarian companies, tax specialists said.
Hungary overhauled its corporate tax system in 1995, when it introduced a sweeping cut that brought income tax rates for companies down to 18% and simplified the entire system. Tax experts said that changes planned for 2000 move in the opposite direction, however, increasing the bureaucracy associated with value-added tax (VAT) refunds.
"We don't agree with (the proposed change) as it is now," said Peter Gerendasi, a tax partner at PricewaterhouseCoopers. "We don't want to see a negative impact on companies, which are legally entitled to reclaim VAT."
Proposed changes to Hungarian law would give that country's national tax office 45 days to make VAT refunds, up from the 30 days the office has now. Furthermore, companies will only be allowed to submit VAT reclaims in every third month. This will increase the period during which companies need to finance VAT from their own sources to as long as five months, specialists said.
The new regulations will have a harsh impact on companies financing large investments, especially construction companies and export-oriented businesses, tax consultants said.
Executives of Arcadom Constructing, the general contractor for the Westend City Center shopping mall in Budapest, said the changes would force them to rethink their operations.
"It will be crucial for companies that finance developments for months without getting paid," said Jutka Zsakai, economic director of the company. "Right now we get paid for our services every month, so currently it doesn't affect us. But it may well in the future."
Tax consultants said they had anticipated the proposed reform would introduce more drastic alterations, such as more progressive changes in corporate taxation, applications for tax allowances and other tinkerings that would have put Hungary's code more in line with European Union (EU) standards.
"It would have been nice to see more of (these) changes," said Andrew Lapa, partner and head of tax at Arthur Andersen. "From the technical point of view, there is still a high level of uncertainties in the tax system."
In addition, VAT cannot be reclaimed in the future on the basis of invoices that have not been paid. This requires that companies' VAT records match their account-payable records. Also companies aiming to be exempt from VAT in 2000 are required to file their request with the tax office before the end of this year.
In the area of personal income tax, a lack of changes in tax brackets will mean a higher burden for taxpayers because of inflation-fueled "bracket creep."
Social security contributions will not be reduced next year, despite earlier promises by the government. Social security charges are a huge burden to all business operating in Hungary, tax consultants stressed.
One positive change is that pension fund contributions paid by employers to their selected employees will be tax-free. However, personal income tax waivers after such contributions have been reduced from 50%, or a maximum of Ft 130,000, to 30%, or a maximum of Ft 100,000.
In the field of corporate taxation and local business taxes, no significant changes will be introduced. The basic corporate tax rate remains 18%, while the maximum local business tax rate will be increased from 1% to 2%. There will be a new clause, however; to authorize the government to extend the 10-year tax holiday for major investments under certain conditions.
Earlier plans by the government to require local municipalities to levy the previously optional local business tax have been abandoned, meaning towns will still enjoy independence when increasing or introducing new local taxes next year. As local municipalities will get central funding from the government budget differently next year, many town officials complained that they had no alternative but to impose new taxes or increase the existing local business tax.
Tax consultants said more centralization and redistribution of funds would not automatically push towns to introduce new taxes.
"If these towns are interested in keeping the businesses that are already there, they won't impose new taxes," PwC's Gerendasi said.
Szekesfehervar offers a successful example of a town attracting investors by offering a favorable tax climate. Philips Hungary, for example, hopes for more positive changes in the tax code.
"We tried to lobby for our interests, which is not yet common in Hungary," said Andrea Kovacs, the company's chief accountant. "But how could we manage, when sometimes there is a dispute even between the Finance Ministry and the tax office?"
Another new element in the tax system that has been seen as positive is that manufacturing companies will be allowed to deduct their total material costs from the tax base, resulting in a lower tax burden.
Monika Csanyi is a reporter with the Budapest Business Journal.
