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- Accounting and Tax automation
The end of the year is not only the time for annual closings, but this is also when decisions on the extent of annual bonuses are usually made. While these bonuses primarily serve as incentives, their tax implications should not be overlooked either, and so it is worth considering these, especially with a view to the upcoming deadline for filing personal income tax (PIT) returns.
In addition to traditional bonuses paid as salary, the significance of bonuses linked to the performance of the employer is also increasing. These can take various forms (e.g. stock options, phantom stocks, share-based payments) and typically include some form of vesting condition for employees. If this type of income is received by an individual from his/her domestic employer, the related tax and contribution obligations are borne by the Hungarian employer, and the individual is only obliged to file a tax return on the basis of the payer’s certificate.
However, if the benefit is not provided directly by the domestic employer, or the work is performed in more than one country during the vesting period, the individual may have tax and social security payment obligations in more than one country.
It is also important to consider the form in which the share-related payment is received by the individual. In this respect, it is worth paying particular attention to stock options where the individual does not generally earn taxable income when the stock option is acquired, only when it is eventually exercised.
Further caution is required in the case of stock options that, when exercised, are immediately repurchased by the issuer. Here, the tax liability from the exercise and sale of the option overlap in time.
There may also be cases where employees receive benefits similar to those of ordinary shareholders, but are still not considered as shareholders in the legal sense. In such cases, it is important to examine if the income earned satisfies the rules applicable to dividends.
If the bonus is calculated on the basis of the stock price of the company, it can generally be interpreted as traditional salary.
Income earned in this way is generally considered as income from employment, so in the case of a foreign payer, the individual may also be required to pay social contribution tax in addition to personal income tax. The latter payment obligation may also be assumed by the Hungarian employer from the employee. If this is not done, and the social contribution tax is not refunded to the individual, it may be taken into account in determining the tax liability. If the income is derived from abroad, it is not included in the draft tax return prepared by the tax administration, and the individual must supplement his or her tax return accordingly.
If the benefit relates to a period during which the individual worked in several countries or the income (e.g. dividends) is derived from another country, it is also important to consider whether there is a need to split the income between the countries, as well as how double taxation can be avoided.
Furthermore, it should be borne in mind that both personal income tax and social security legislation recognise the concept of reference period, which means that Hungarian rules may apply even if the individual was no longer employed in Hungary at the time of the benefit, and tax liability may arise in Hungary even then.
These last two steps are important not only for stock-related benefits, but should also be taken into account for benefits paid as salary, and – if necessary – these must be included in the Hungarian income tax return (or added to the draft tax return prepared by the tax administration).
We hope that you found the above information useful. If you have any further questions on this subject or need help in preparing your tax return, please do not hesitate to contact us.
This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.
In order to exploit the value in its data assets, as well as to increase the synergy between scientific methodologies and experience in the field of taxation, the National Tax and Customs Administration (NAV) will create an Artificial Intelligence Working Group, according to a recent issue of the Official Gazette (Magyar Közlöny).
The function of the Artificial Intelligence Working Group will be to make recommendations, as well as to provide opinions and advice. The working group will be composed of the ministers responsible for tax policy, IT and e-government, the leaders of NAV, the Hungarian Central Statistics Office, the National Data Assets Agency, the National Laboratory for Artificial Intelligence, the National Data Economy Knowledge Centre, and the Digital Wellbeing Programme as permanent members, as well as external experts, the communication writes.
The goals of the new working group are fairly general, but they clearly aim to make the most of the data assets accumulated through the strong digitisation of the tax administration in recent years.
One of the most significant sources of this data, in addition to online cash registers, tax returns and NAV’s own operations, is the Online Invoice system. Although no major changes affecting taxpayers have been made to the Online Invoice System for a year, and current communication from NAV suggests that no such changes are expected in the next 6 to 12 months either, developments in the background have not slowed down.
While the legislation has been repealed, the eVAT system is not thrown out
With the eVAT system, Hungary would have been among the first countries in the EU to offer a service whereby the tax administration prepares draft VAT returns for tax subjects, but after several delays the legislation that would have authorised this was suddenly repealed at the end of last year. However, the developments made by then were not necessarily thrown out, and the results created can be aligned well with the decision support systems that are now also being enhanced with artificial intelligence and machine learning.
It is not enough to be good, you must also look good
The Online Invoice system will be four years old this year, and its scope has been extended to all Hungarian taxpayers for a year. The tens of millions of invoices submitted each month can paint a pretty comprehensive picture of economic transactions and actors. Every mistake made when submitting invoices online can distort the picture that the tax administration has on our company and our customers. With the developments by NAV, the importance of transmitting accurate data about our company to the tax authorities’ systems is constantly increasing.
In the framework of our tax IT services, we are pleased to offer our assistance in checking and reviewing online invoice data, and in supplementing missing or incorrect data.
The very first month of 2022 has already passed, closing the previous year from an accounting and tax point of view is imminent: this is the first and perhaps most important task of publishing the annual report. In this newsletter, we cover some of the tax liabilities in connection with the year 2021, as well as the related tax duties.
As a starting point – based on our professional experience spanning several years – it can be stated that the correct management of tax liabilities during the annual closing is of paramount importance for two reasons: on the one hand, the report prepared, in accordance with the provisions of the Accounting Act, gives a reliable and true picture of the assets and financial position of the company. On the other hand, because, as an extra return, plenty of tax risks can be determined, the benefits of which (both in terms of material and time) will be realized most in connection with a subsequent tax audit that closes without a finding.
So let’s see what tasks can await taxpayers.
Checking the tax balance
Although it is basically recommended to perform this task on a monthly or quarterly basis, even if it did not take place with such frequency in 2021, it is recommended to start the tax tasks of the annual closing by checking the tax balance of the given company.
In this connection, it is necessary to examine whether, according to the official records of the Hungarian Tax Authority (henceforth: “HTA”; abbreviated in Hungarian as “NAV”), the tax declared and paid by the company under (“internal”) investigation in 2021 is in accordance with the company’s books and accounts, furthermore with the tax liabilities recorded in the general ledger.
If there were any discrepancies, there is no cause for concern: on the one hand, this is mostly due to an incorrectly submitted tax return, which HTA was then unable to process as intended by the taxpayer. On the other hand, in this case, of course, there is a possibility of self-revision, which, if it does not generate a surplus of tax payments, does not even involve the payment of any statutory fee.
It is also possible that the taxpayer’s payments do not appear on its tax balance due to some administrative or technical error. In such cases, the reconciliation of the tax balance initiated at HTA usually means a quick solution in the possession of the documents confirming the transfer.
Local business tax calculation
It is an undisputed fact that in the case of companies with several establishments in different municipalities, one of the most complicated tasks of the annual closure may be the calculation of the local business tax (henceforth: “LBT”; abbreviated in Hungarian as “HIPA”). Adding to the complexity is the fact that the tax return must not be submitted on the old, “ordinary” municipal interface, but on the HTA’s form (called “21HIPA”).
In addition, there has been a change due to the COVID19 pandemic, more specifically the changes adopted and applied last year are also in force during 2022. Please find more information about these special LBT rules in our newsletter written on 3 February.
Corporate income tax (or, if applicable, small business tax) calculation
You will only think that the preparation of the LBT return is difficult until the moment when you should prepare the corporate income tax (henceforth: “CIT”; abbreviated in Hungarian as “TAO”) return or, if the taxpayer opted for this, the small business tax (henceforth: “SBT”; abbreviated in Hungarian as “KIVA”) return.
In the next part of our newsletter, we will present in detail that with the various increasing and decreasing items of the CIT base and other CIT benefits, the CIT otherwise payable as well as the CIT advance can be significantly reduced, not to mention the fact that even those affiliated corporate income taxpayers, that are not form a CIT-group, can share some deductible items with each other.
To the latter, “shareable” category belongs e.g. the possibility of reducing the tax base related to research and development, however, we would like to point out that a rather complex set of conditions must be met when applying this deduction item, therefore it is definitely recommended to examine it with a tax specialist, since much may depend on the different standpoint of the HTA.
With regard to all three tax types concerned (LBT, CIT and SBT), it is important to examine whether the prices applied in transactions with affiliated companies are within the normal market price range (at arm’s length), if not, increasing and, in some cases, decreasing items are required concerning all 3 tax types mentioned.
Furthermore, it should be borne in mind that the examination of the normal market price is only one of the requirements: a company that is not a small-sized enterprise on the last day of its tax year, a grouping (in Hungarian: “egyesülés”), a European limited company, a cooperative society (in Hungarian: “szövetkezet”), a European cooperative society and the foreign entrepreneur (with the exception of the non-profit company, and the taxpayer in which the state has a direct or indirect majority influence) is also required to prepare transfer pricing documentation in accordance with the legal requirements until the submission of its CIT return, failure to do so can be penalized with a fine of up to several million forints.
Reviewing of the invoicing processes
Reviewing the invoicing processes and the system settings connected is a bit different from the tasks mentioned above, as this would not only be necessary at the annual closing, but the closing could be an excellent excuse to do so.
In the course of our work, we have repeatedly found that system-wide mismanagement of invoices occurs even at large companies (these includes typically incorrect exchange rate setting and usage; improper correction of invoices; inaccurate use of advance and final invoices; erroneous handling of periodic invoices; false beliefs of electronic invoicing; etc.).
The “correct adjustment” of invoicing is also especially important because, despite the postponement of the e-VAT system promised for 2021, the HTA clearly sees the future in digitalisation and can examine all of the outgoing invoices of all taxpayers registered in Hungary thanks to the real-time data system.
It is therefore of the utmost importance that the taxpayer is aware of the data that HTA manages in relation to the taxpayer’s company, which the HTA can use for tax audits and which the HTA shares with the taxpayer’s business partners through the Online Invoicing System. Thus, missing or faulty online invoice data report services involve not only tax risk, but also business risk, as more and more taxpayers recognize the benefits of using data available from the Online Invoicing System, even in an automated way, in their internal processes, such as accounting.
Should you be interested in the above, should you may need any support in the calculation of your company’s annual taxes or during the preparation of the transfer pricing documentation, or should you would like to take advantage of the efficiency gains in automating tax and accounting processes, Grant Thornton’s experts are gladly at your disposal.
This newsletter is based on information available at the date of its publication and is for general information purposes only and does not in any way constitute or replace personal tax advice.
The pre-Christmas amendment of the tax laws extended for 2022, with by and large unchanged provisions, the application of the 1% capped HIPA rate for SMEs in 2021, as well as the possibility of the 50% reduction of the HIPA prepayment.
Conditions
The application of the 1% capped Local Business Tax (“HIPA”) rate is subject to the condition that the economic operator qualifies as an SME within the meaning of Act XXXIV of 2004 on the first day of the tax year, with the following differences:
- the total number of employees must be less than 250, AND
- the annual net turnover cannot be more than HUF 4 billion OR
- the balance sheet total cannot exceed HUF 4 billion.
In accordance with the above, micro and small enterprises satisfy the criteria, but medium-sized businesses will have to undergo a new qualification. It is important to note that the 50% reduction of the HIPA pre-payment for 2022 also applies to businesses that satisfied the above SME qualification criteria in the tax year ending 2021, but no longer satisfy them in 2022!
The rule of the Government Decree differs from the provision of the Small Businesses Act only in terms of the net turnover and the balance sheet total amounts, which means that all other provisions of the Small Businesses Act are applicable for the qualification, except the “two-year rule”. (“Two-year rule”: If the values thus calculated, on an annual level, exceed or fall behind the employee headcount and financial thresholds, then the company only loses or receives the status of SME in case the values exceed or fall behind the relevant thresholds in two consecutive reporting periods.)
- the partner and affiliated enterprises of the economic operator must be identified;
- the data of the last consolidated financial statement or, in the absence of the above, the data of the annual financial statement or simplified annual financial statement are to be used;
- in the case of a newly created business that has not filed a financial statement yet, the business plan for the year under review must be taken into account;
- the data of affiliated enterprises not included in the consolidated financial statement must be aggregated at 100%, while the data of partner undertakings at the proportion of the capital held or the proportion of voting rights, whichever is higher;
- as a general rule, an enterprise in which the state or a municipality has a holding of 25% or more cannot be considered an SME.
The procedures to follow
Taxpayers do not have to submit a separate declaration to apply the HIPA rate capped at 1%. They only need to indicate on the main page of their 2021 HIPA tax return that they are a micro, small, or medium-sized enterprise, thereby satisfying the conditions.
However, there are different rules applicable to the 50% reduction of the HIPA prepayment, and a declaration may be required to claim this reduction in 2022, as follows.
To qualify for the 50% reduction of the 2022 HIPA pre-payment, a business that has already made a declaration in 2021 under Section 2 (4)-(6) of Government Decree 639/2020 (22 December 2021) does not need to submit a new a declaration, provided that it does not have a registered office or other establishment that it has set up after making the above declaration.
Businesses that do not satisfy the above condition must submit a declaration to the National Tax and Customs Administration (“NAV”) by 25 February 2022 to receive a 50% reduction of the 2022 HIPA pre-payment.
The declaration, which is to be submitted on the form created by NAV for this purpose, is to the effect that the taxpayer:
- qualified as a micro, small or medium-sized enterprise in the tax year ending in 2021 or is expected to qualify as such in 2022; and
- does not have a permanent establishment within the meaning of the Act on Local Taxes which has not been declared to the National Tax and Customs Administration.
- intends to consider the amount corresponding to the grant equivalent of the tax advantage due to the reduced business tax rate:
– as de minimis aid, taking into consideration the thresholds applicable to the taxpayer, or
– as temporary aid.
Two types of declaration can be submitted to claim the 50% reduction:
- 22NYHIPA and
- “Declaration by a primary agricultural producer not having a tax number on the application of the reduction of the HIPA pre-payment”
Further, it is important to note that no declaration is required for subjects of KATA (itemised tax of small businesses) that opted for the lump-sum business tax base assessment.
We would also like to draw your attention to the fact that although the failure to meet the deadline of 25 February 2022 does not result in the forfeiture of rights – a justification request nay be submitted, separately for each municipality – but by meeting the deadline and submitting a single declaration, businesses can claim the reduction in the tax advance with less administrative burden, as they only need to submit one declaration, which NAV will then forward to all municipalities concerned on the basis of the business establishment already declared or to be established and declared during the year.
We hope that you found the above information useful. If you have further questions or need any help in connection with this topic, we are glad to assist you.
The pressure to comply with legislative changes rarely allows organisations to leverage the potential inherent in new technologies in the course of their mandatory introduction. Grant Thornton Digital intends to help its clients achieve real reduction in administrative burdens with the promise of smart and sustainable automation.
Grant Thornton is building its new digital business line on the the leaders of its existing and regionally strong tax and accounting business lines, as well as a newly hired technology consultant. The founders of the new Grant Thornton Digital team include József Vizer, Balázs Szentirmai and Péter Kóczé, experts in the fields of tax, accounting and technology, respectively.
Balázs: “What see is that while accounting and taxation are among the areas most affected by digital transformation these days, there are few experts in these fields with comprehensive knowledge and experience to help companies with automation, which is inherent not only with new expectations but also opportunities.”
József: “In order to really reduce administrative burdens, a close collaboration between the tax, accounting and technology areas is needed to use the ever-expanding technological possibilities to re-think and simplify workflows, which are often becoming increasingly complex.”
Péter: “The number of tax authorities around the world adopting e-invoicing and other electronic data disclosure solutions continues to increase, presenting a significant challenge not only to taxation, but also to technology teams.”
All three of them agree that there is a significant task and responsibility today for experts and software development workshops that can help prepare both IT systems and the staff who work with them, in a professional way, to meet the new challenges. The team aims to further strengthen the consultancy community as a new player with complex tax technology competences.
Further information: https://grantthornton.hu/en/services/digital-services
We asked the management of Grant Thornton Hungary to evaluate the 2021 financial year in terms of what was their greatest success, the biggest challenge they had faced, what words they would use to characterise last year, how market trends affected their business line, and what their plans are for 2022.
In the following, we have compiled and will now also share with you GT Hungary’s review of the year 2021, and the further goals set by the leaders and teams of each division.
What was the greatest success you achieved in 2021?
For the Tax Advisory division, the beginning of the year started with a fairly significant transformation, as there was a change in the management, and then from the beginning of April József Vizer became the sole person responsible for the management of the Tax division, who is now also a Group Partner. “The handover of the tasks was quick and smooth, and the tax division remained stable also afterwards.”
In the Transfer Pricing Advisory business line, success came in the form of new clients, thanks to many years of constructive work, as well as the opportunities offered by the Group. There has been a shift in the market since, in addition to legislative changes in recent years, access to the databases used has also become more expensive, which accentuated the quality gap between market players, to the benefit of GT.
In the Accounting area, Balázs Szentirmai said that “in the interest of the more efficient handling of our own company processes, as well as providing a higher level of service for our clients from an accounting and controlling point of view, in a parallel way with the introduction of our new ERP system, we have also changed the organisational structure of the accounting department. This serves the purpose of using the automated data processing capabilities offered by our new system to the maximum extent possible.” Balázs is also a GT Partner starting from this year.
In connection with the HR department, the business unit newly established in 2021, Zsófia Vajna highlighted the following, and perhaps most important success of the year: “Our launch was the success itself!” She further highlighted the success of her well-functioning and stable team, as well as the positive impact of the development of internal human resources functions.
Judit Gittinger, leader of the Audit division, believes that last year’s success was in the growth in terms of clients, turnover and staff, which she says was due to the satisfaction of the clients and more familiarity with their work. In Judit’s words, “we have no idle periods.”
Anna Szabadfalvi believes that the success of the Payroll division is due to the professional recognition of her colleagues by clients. Further, she said that “last year, several of our clients relied on our colleagues’ work, in outsourcing arrangements, performed at their premises as on new tasks within their company or taking over the tasks of their staff that left the company.”
The head of the Valuation division considered the highest volume of revenue in the company’s history as one of the biggest successes of last year. According to Ágoston Jakab, this is due to the fact that “Based on the current trends in the real estate market, we received a higher number of inquiries and assignments than in previous years in the field of real estate valuation and technical advisory services for banks,” and he also underlined the orders received from 17 banks in a contractual relationship.
Szabolcs Nagy, the managing director of M&A Consulting, attributed the success of the business line to the positive feedback from his clients, and stating that “We have been able to secure business thanks to our positive references, and the decisions to choose us was not primarily made by the clients based on our fees.”
What were the biggest challenges last year?
Here, the recurring responses concerning the main challenges identified by the management included how to correctly handle the situations arising due to COVID and the difficulties that this caused. These included the provision of professional support for colleagues working in home office, maintaining team spirit and motivation, organising and carrying out work abroad, travelling, as well as the difficulties of building contacts and ensuring the availability of the suitable equipment and technical systems.
In addition, the challenges also included the tasks related to starting the new HR business line and, last but not least, the change of management within the Tax and Accounting divisions.
What are the 3 words that best describe last year from a business perspective?
Unsurprisingly, one of the most frequently used expressions was Home Office, as this was and still is the safest mode of operation both for the employees and the company last year and also currently.
Based on the previous phrase, the words Innovation/Digitalisation are not a surprising answer either, as this is a necessary precondition for our colleagues in home office and the clients being able to work together efficiently.
And last but not least, Growth. By this we mean growth in terms of headcount, revenue, awareness of our company, inquiries received and clients.
What impact, if any, has the market had on each business line?
Here, of course, a different impact can be observed for each business line. For example, for Accounting, it was digitalisation (processes and demands for automated data processing), while in case of the Tax division, it was the social media presence of competitors.
In turn, it can be said that each division has seen an increase in the demand for its services.
Plans for 2022
Like all companies, one of our top priorities is to increase our market share. In addition, it is very important for us to keep our existing clients satisfied and properly served. We are also planning to further develop our current services, as well as to implement new ones, thus expanding our portfolio to provide a more complex and professional service to our existing and future clients.
We place particular emphasis on employee satisfaction, as we consider it important to provide a suitable working environment, given that our employees are our most important resource.
Thank you to the management of Grant Thornton Hungary for taking the time to answer our questions! We hope that we have been able to give you an overview of last year’s performance, as well as this year’s objectives.
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