Government introduces changes to tax system
Instead of tax bands, Hungary will have a flat rate of personal income tax with family benefits. The new system aims to compensate for the budget deficit, increase Hungary’s economic competitiveness and support families and childbirth. To replace the missing tax revenue, the government has introduced special taxes for major sectors such as the financial sector and modified the pension system. Increases in the duty on tobacco and alcohol will also offset lost tax income.
Why change the tax system?
Since being elected in April 2010, the FIDESZ-KDNP government has introduced major changes in the tax system in Hungary. The aim of the changes is to:
- compensate for the budget deficit;
- increase Hungary’s economic competitiveness;
- support families and increase their willingness to have children.
To fulfil these goals, 10 changes to the tax regulations and two new special taxes have been approved by parliament, which passed the government’s 2011 tax bill in November 2010 by 259 votes to 104 votes with one abstention (the government parties approved the changes and the opposition parties rejected them). The Minister of National Economy, György Matolcsy, has announced that the changes would take place progressively between 2011 and 2013.
A number of public dues changed in 2010 and hundreds of sections of the tax law were amended. The personal income tax (PIT) law underwent the most extensive changes in terms of both volume and structure. Other types of tax are less affected by the changes.
To replace the lost tax revenue, the government has introduced some special taxes for major sectors (telecommunications, financial, retail and energy) and had modified the state pension scheme. Tax on cigarettes and alcohol will also be increased to help offset the lost income to the state.
Details of the changes
Personal income tax will be charged from a two rate system of 17% and 32% to a uniform single rate of 16%. The new flat rate corresponds to 20.3% of the income to the state before ‘super grossing’ instead of the 21.6% calculated using the old lower rate. Super grossing is a method introduced by the previous government in July 2009; the idea is that, for transparency, employees should see details of their whole salary (that is, gross wage plus employer’s social security contributions). The present government ended the concept of super grossing in 2010 and it will be gradually phased out by 2013.
There are two major exceptions to the 16% tax rate.
- Individual entrepreneurs with annual profits below HUF 500 million (€1.86 million as at 29 June 2011) will be subject to a tax rate of more than 19%, with 16% tax applied to cost-based withdrawals or dividends taken.
- The tax on long-term investments will drop to 10% after three years. After five years investments will be tax-free.
Minimum and average wages
On 1 January 2011, the monthly gross minimum wage increased by 6.1% to HUF 78,000 (€290) and the granted monthly gross minimum wage for skilled workers increased to HUF 94,000 (€350). These values were approved by the National Council for the Reconciliation of Interests (OÉT). The Economic and Social Council (GSZT), to which the main employer organisations belong, did not contribute to the discussion.
Average salaries in Hungary are predicted to increase by 4%–6%, though this figure is only an estimate because private sector companies make their own decisions about wages.
Although the government has announced it will do anything necessary to foster the increase in the average wage, the employers have warned the public that the situation will be influenced by the impact of the economic crisis and budget deficit.
The employers’ claim that the flat tax rate will mean higher salaries for most employees is doubted by the trade unions. For example, János Borsik, President of the Alliance of Autonomous Trade Unions (ASZSZ) said, that ‘97% of 24,000 VOLÁN [state-owned bus company] workers will get less salary because of the tax changes’.
Tax credits and family tax allowance
Tax credits will continue to be available, though the rate will be reduced as of 2011 to 16% of the total amount of salaries and tax base addition. Tax credits are capped at HUF 12,100 (€45) per month. They will be fully available for annual incomes not exceeding HUF 2,750,000 (EUR €10,225) and partly available (in gradually decreasing amounts) for annual incomes of up to HUF 3,960,000 (€14,724).
The family tax allowance, which supports even the first child, is not linked to a wage limit and is deducted from the aggregate tax base: HUF 62,500 (€232) for one and two dependants and HUF 206,250 (€767) for three and more dependents can be deducted for each month of eligibility for family allowance.
Social security contributions
Under the changes the pension contribution rate paid by employees into the social security system increased on 1 January 2011 from 9.5% to 10% of their gross wage. The old system incorporated a contribution of 8% to an occupational pension plan (OPP) or a contribution to the state pension scheme if the employee did not have an OPP account. In addition, employees have to pay their 24% pension tax per employee as before from their gross salary.
Many tax payers are affected by the retroactive repeal for 2010 of the obligation to apply typical incomes specified for the different types of activities pursued by full-time entrepreneurs. With the phasing out of the super grossing scheme, the minimum contribution base will be the minimum wage.
Effect of the changes in personal taxation
The changes are intended to simplify the tax system and to increase salaries while keeping the budget mostly in balance. Although the flat system’s rate is less than the lower rate of the previous system, many low-income workers will receive smaller net earnings than before once super grossing and the removal or reduction in some benefits and tax return possibilities are taken into account. The greater the salary, the greater will be the increase in income with the switch to a flat rate of tax. To help poorly paid civil servants, the 2011 budget contains a HUF 22 billion (€81.8 million) compensation fund.
In its manifesto, the seventh Congress of the National Federation of Hungarian Trade Unions (MSZOSZ) declares that the ‘single rate and proportional personal tax transforms the incomes scheme disproportionately and unfairly, making it more favourable for people on higher incomes at the employee’s expense’.
The family tax allowance (like all tax allowances) is now more favourable for those on higher salaries. However, many studies have shown that low-income families in general have more children; thus, they are more in need of the allowances.
The wage and tax monitoring committee set up by the government parties to explore the damage caused by the tax changes has been dubbed the ‘tax commando’ by the media. The committee is also responsible for auditing wage increases in the private sector based on the OÉT’s recommendations. According to János Borsik (ASZSZ) and the Democratic League of Independent Trade Unions (LIGA), this measure is an admission of the problems caused by the tax changes. Ferenc Dávid, President of National Association of Entrepreneurs and Employers (VOSZ) also raised his voice against the idea of auditing the private sector since the OÉT’s recommendations are not compulsory under Hungarian law.
The new corporate income tax rate is 10% up to an annual tax base of HUF 500 million (€1.86 million). In addition, a special tax (‘bank tax’) has been imposed on financial institutions which will have to pay tax at a rate of 30% on their profits based on the modified balance sheet total at the end of 2009. The credit institutions tax can be deducted from the tax amount calculated on the basis of the balance sheet total.
This special tax was introduced in order to:
- comply with the budget deficit rate imposed by EU regulation;
- reduce Hungary’s public debt;
- comply with these conditions without having a direct impact on the population through changes to pensions, VAT, etc.
The excise tax charged on certain products will also change. On 1 January 2011, the excise tax on tobacco products increased to a rate which complies with EU guidelines.
Of the corporate tax changes, the special tax on financial institutions has attracted most attention. The government refers to the economic crisis as the reason for their need to impose the bank tax, while others suggest that the revenue raised could pay for the cut in personal taxation or be intended to help those with mortgages. The affected companies (mostly German corporations) have asked the European Commission to investigate whether the tax is compatible with European agreements.
Sándor Mátyási and Márton Gerő, Solution4.org