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New 27% VAT rate in Hungary in 2012 |
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The new VAT rate in Hungary — how much is too much? Tax Planning International 23 December 2011
On September 16, 2011 the Hungarian Government made the surprising announcement that it plans to increase the country’s main VAT rate by two percent to 27 percent. This is a second consecutive increase of the rate, following the hike in 2009 when the current rate of 25 percent was set. The new VAT rate has been included in the proposals for the new Hungarian budget and is expected to be imposed as of January 1, 2012. Euro crisis forces VAT increase Facing an expected budget deficit (of around 2.95 percent of GDP), the Hungarian Government is urgently looking to close the financial gap, and the proposed tax rise is seen as a quick and effective method to achieve that. According to the Minister of Economy, Gyorgy Matolcsy, the VAT increase will bring an additional Hungarian Forint 150 billion to the budget. Furthermore the VAT hike is combined with additional income raising measures including those to curb tax evasion and increases to excise duties and national health contributions. The latest developments in the Hungarian economy are in keeping with the general European outlook, and according to some experts the country will have a difficult task to remain growing in 2012. The IMF still predicts GDP growth of 1.5 percent for 2012, but this rate is questionable, considering the lack of growth in 2011. The VAT increase could be seen as unexpected as only one year ago, the Hungarian Government adopted ambitious plans to slash corporate and personal taxes in order to encourage growth as well as domestic consumption. Yet 12 months later, reviewing the economy‘s figures, it seems that the plan has failed. The sharp changes of policies and measures adopted by the Government in recent years are putting more pressure on the ruling party’s ability to elaborate, execute and apply sustainable economic decisions. The expected annual inflation is already nearing 5 percent, and the increase of the VAT rate will contribute to a further soaring figure. VAT rise proves popular as fast and efficient to raise revenues Indirect taxes indeed provide an efficient method of raising income for the State budget, and in times of a deficit outlook they could be used as an emergency safeguard. The way VAT is administered and collected, together with the burden distribution which reaches each and every single person, makes it a quick and economical means of generating cash. At the same time the option for a given government to quickly adapt and change the rate makes VAT a very flexible fiscal tool. The VAT increase however may also be seen as causing undesired outcomes. The introduction of a higher rate of indirect taxation would automatically fire up inflation, limiting the expenditure of the ordinary consumer. At a rate as high as 27 percent, the results for the Hungarian economy may actually prove to be harmful rather than positive. The increased level of inflation is likely to result in additional devaluation of the Hungarian currency. Recent figures have shown that the majority of mortgages in Hungary have been issued in Swiss Francs, and the potential continuing devaluation of the Forint may lead to a wave of defaults, adding even more problems to the banking system in the country. The Hungarian super VAT rate Together with the 2 percent increase, Matolcsy also proposed the introduction of a so-called super Hungarian VAT rate of 35%, which is supposed to cover a range of luxury goods. This is a rather innovative approach to indirect taxation in the EU, where three rates are currently in force — zero rate, reduced rate and standard rate. The outcome of the introduction of such a rate should be considered carefully, as there will be a rather small range of products that would be taxable with 35 percent VAT. However, an argument for the rate is that the actual value of each product is significant, and even a small percentage of increased VAT could generate a lot of additional income. Furthermore, there is an underlying assumption that this tax should be hitting the rich hardest, and also an argument that the targeted population will not consider the super VAT rate a deterrent for making a specific purchase. Considered from the European perspective, the news of the 2 percent VAT increase in Hungary caused some controversy, especially because of the general understanding that the EU standard VAT limit is set at 25 percent. This misconception has been established widely as the general rule, and until this moment there has been no Member State going above the so-accepted maximum rate. No limit on upper European Union VAT rate Article 97(1) of Directive 2006/112/EC contains mandatory rules on the VAT rate within the EU. However, these are related to the minimum rate, which has been set at 15 percent. Indeed the discussions and consultations related to each extension of the term of this limit did include the option to impose a maximum rate of 25 percent, but this has never been approved. However the Council Directives have been adopted with a statement, which mentions the Member States’ efforts to avoid widening the 10 percent gap between the lowest and highest rates that are currently applied. The discussions on the VAT directive and the above statement demonstrate the concerns of the Member States on the present distortion between the high and low level countries. However, each Member State has the right to determine, independently, its own tax rate and the way it is administered. The current state of the European economies, the real danger of a double dip recession, budget deficits and slow growth in the other Member States adds to the expectation that the once desired European system of tax harmonisation is far from being established. Growing tax divergence, which stems from the different VAT rates and methods of administration, keep participants in the European market bound to time consuming and costly compliance procedures, the end of which is too far to be seen. Click here if you would like more FREE guidance on the 2012 VAT rise changes in Hungary. Stefan Stefanov, VAT Manager, TMF Group
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