Many people who hold assets or realise income on foreign bank accounts have recently received an invitation from the Hungarian tax authority, NAV, to partake in a “support procedure”. An invitation from a tax authority is never entirely pleasant, even if its purpose is “support”. Or is there really nothing to fear?
Individuals resident in Hungary are liable to pay tax here on their entire worldwide income. This means that if someone receives income from Germany into a Swiss bank account, for example, the income is taxable in Hungary just as his/her salary from a job in Hungary would be. However, even if there’s no tax liability in Hungary on income earned abroad – for example, because Hungarian taxation has been eliminated due to a double taxation treaty or because foreign withholding tax has been offset against Hungarian tax – the individual must include this as additional information in his or her Hungarian tax returns.
Countries generally do not have sufficient information available to them to check whether a person has declared and paid domestic tax on income generated abroad and credited to a foreign bank account. That’s why information exchange agreements have been concluded and are proliferating between the various tax authorities. As part of this, a host of abbreviations of international rules and regulations – DAC, FATCA, CRS, etc. – we are facing, and taxpayers are now wondering just which countries are exchanging information about them and their incomes, and to what extent.
What does NAV see exactly?
NAV has been receiving information on the foreign data of Hungarian persons since 2015 and has recently started processing this information with increasing effectiveness. Currently, NAV receives information from 106 countries and uses this to try to find undeclared or under-declared income. According to information published by the tax authority, analysing this data has not been a fruitless exercise: the authority has hitherto conducted a so-called support procedure for nearly 3,000 taxpayers in respect of the data received in 2018 and has identified more than HUF 300 million in unpaid taxes on income of approximately HUF 4.2 billion for that one tax year alone.
When the tax authority “supports” you
If the tax authority finds that there’s a discrepancy between the information received during the exchange of information and the income declared by the taxpayer, it will initiate a so-called support procedure. The support procedure is not classed as an audit; what it basically means is that NAV – without threat of a fine – invites the taxpayer to explain the discrepancy himself and, if necessary, to correct the error through a self-audit. In the support procedure, the tax authority will therefore seek an explanation from the taxpayer as to the discrepancy between the data it has received and the income declared by the taxpayer.
Such discrepancies often arise even when the taxpayer has acted entirely prudently and in good faith. Also, experience has shown that the data provided in the context of the exchange of information is often incorrect. In some cases, the bank sends the tax authority information on the bank account balance or turnover rather than on the income. In other cases, a decimal point has been put in the wrong place. So, the fact that NAV initiates a support procedure does not mean the taxpayer is trying to hide something or is otherwise up to no good. It simply means that something’s off – which is often simply because there are gaps or errors in the information received by NAV.
When support means taking you to task...
The support procedure can end in one of two ways. It can end successfully, with the taxpayer and NAV together identifying the reason for the discrepancy. The outcome of this may be that the taxpayer realises he or she has declared something wrongly and then carries out a self-audit. It’s important to bear in mind that the support procedure is not an audit, and so during and even after the procedure, the taxpayer can simply resolve the issue by conducting a self-audit.
On the other hand, the support procedure can end up without result. For a start, it’s often impossible to find out within the available 30-day deadline what the reason for the discrepancy between the information received from abroad and the information declared by the taxpayer is. These 30 days are not always enough for taxpayers to obtain the necessary certificates and income data by engaging in lengthy correspondence with the foreign financial institutions. But there are many other reasons why it might prove unsuccessful.
If the procedure ends without result, the tax authority can initiate an audit – with NAV deciding whether to do this based on all the circumstances of the case. The audit in such cases – if NAV has suspicions in this regard – may not only cover the tax year in question, but may seek to determine whether the taxpayer’s funds held in the foreign account were derived from taxed income.
How to cover your back...
The initiating of a support procedure does not in itself mean that NAV “suspects” the taxpayer of tax evasion – it simply means the tax authority needs more information. It’s important, however, that we be ready for such a procedure in case it happens. If there’s a discrepancy, it may not be possible to obtain documents from a foreign bank within the required deadline in order to prove that the taxpayer was right. It is therefore a good idea to keep the data and bank statements you receive from your foreign bank for the duration of the limitation period, so that you’ll have them immediately at hand in the event of a support procedure.