Tamás Fehér

In our traditional beginning-of-year review, we again counted the number of taxes levied in Hungary today. This time we got 59. Although the number of taxes has decreased by one since last year, the scale and structure of the tax system has not changed. In terms of tax revenue generated, VAT continues to top the list, bringing in approximately HUF 3,300 billion in 2016.

Swings and roundabouts

The number of tax types in Hungary has decreased by one since last year, so at the moment the government has to generate its revenues through 59 different types of tax. But while the extent of the change may be disappointing, its direction is encouraging.

The “credit institutions’ contribution”, which is basically linked to interest-subsidised loans, has been discontinued since last year, while the healthcare contribution payable by tobacco companies has also been abolished. The latter is due to the fact that the European Commission declared it to be in breach of EU law, and the government decided it would be more prudent to eliminate it completely. So no more spats with Brussels are expected in this regard.

But the same can not be said of the newly introduced tourism development contribution. This tax, which has already been passed into law, kicks in on 1 January next year, the very same day when the VAT on restaurant services, which is still 18% this year, will drop to 5%. The new tax will be payable on the (net) revenue derived from precisely this same category of services, but at a rate of 4%. The new levy, however, could breach the EU VAT Directive on a number of points, so the European Commission will almost certainly have a few comments to make.

Is constance a virtue?

Apart from the minor changes described above, this year’s tax structure doesn’t differ materially from that of last year, and not even the all-time low rate of corporate tax, now at 9%, makes any difference to this. We continue to retain tax types that produce hardly any revenues at all, such as the tax payable on domestic workers, which failed to add more than HUF 32 million to the state coffers in 2016.

The vast majority of our tax revenues continue to be produced by VAT (approx. HUF 3,300 billion in 2016, on a par with the previous year), which is hardly surprising given Hungary's world-beating 27% VAT rate. It’s followed in the ranking by the social contribution tax and personal income tax.

An improvement in 2017, however, is the reduction in taxes on wages: the 5% decrease in the social contribution tax will, hopefully, contribute to a whitening of the economy. And it is about time too, because in 2015 Hungary still came 4th among the OECD countries ranked by the extent of taxes burdening wages.

The number of taxes is also important

In a sense, any hand-wringing about the high number of tax types might seem pointless when experience shows that a country can also operate successfully with a lot of taxes (take for example Australia or the USA, whose tax systems reportedly have 125 and 97 different taxes respectively). But nevertheless a review of the various types of tax in Hungary suggests that their rationalisation, and the discontinuation of certain taxes, could contribute greatly to the reduction of the administrative burdens of businesses, and in this way to the development of the economy, without any loss to public finances.