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.