Lowering of the VAT Threshold Would Only Affect Hungary
At the EP’s plenary session on Wednesday, MEPs green-lighted further steps taken towards implementing a definitive VAT system in the European Union. According to the proposal, VAT would be maximized at around 25%. If executed, this would involve significant changes to the Hungarian tax system as the government currently applies the highest percentage in the EU – 27%.
According to the EP’s press release, two pieces of legislation were put to vote. While the first aimed to facilitate trade primarily for SMEs, the other dealt with setting up a clearer system of VAT rates in order to reform the VAT system and improve cross-border clarity. Countries would still be able to apply VAT reductions in certain circumstances, and some goods would be exempt. The European Parliament suggests a maximum of 25% and a minimum of 12-15%.
One of the rapporteurs, Danish Jeppe Kofod, said that the current patchwork of VAT systems in Europe is full of loopholes and black holes; this has led to a growing loss of VAT revenue. The other rapporteur, Hungarian Socialist MEP Tibor Szanyi, stated that the reforms would promote SMEs, support social and environmental dimensions and reduce discrimination between member states while maintaining flexibility. Futhermore, he also claimed that the EU finally finds the amount that Hungary’s residents are taxed by Orbán’s government to be unacceptable.
The Hungarian tax system underwent significant changes after the Fidesz government took office in 2010. Instead of reducing the income coming from the taxes, and with the aim of reducing deficits, the government regrouped the taxes. As a result, tax liabilities haven’t decreased. Amid criticism from the left, the government abolished the two-rate personal income tax (PIT/ SZJA), and property-tax is still almost non-existent. In addition, by increasing it from 25% to 27% (raised from 20% to 25% by the left-liberal Bajnai-govt in 2009) in 2012, VAT became the key income-tax of the government – with Hungary having the highest VAT in the EU and worldwide.
Hungary Today spoke with the senior analyst of ING Bank, Péter Virovácz, who warned that the proposal is still very far from implementation, and added that a long process, a number of debates and votes are still ahead. He also highlighted that even though VAT is the Hungarian government’s largest source of income, the government shouldn’t have major problems in economizing and implementing the VAT decrease, besides restructuring and postponing other VAT reductions. In addition, a lower VAT might potentially increase consumption, thus reducing the loss of income.
He added, however, that although a standardized VAT within the EU would definitely make things clearer and fairer, a 2% reduction wouldn’t have much effect on the whitening of the Hungarian economy. At first, he definitely expects the government to oppose the proposal; Although, given that a number of issues are being debated by Hungary and the EU, compromises and tactics might incite the government to back the cut.