In a recent article on economic news site portfolio.hu, journalist Gergely Csiki talked with several tax experts on Hungarian Prime Minister Viktor Orbán’s recent announcement that his government intends to lower the corporate tax rate starting next year.
The current corporate tax rate is split into two brackets; companies with an annual revenue below 500 million forint (1.6 million euro) pay a 10% tax on corporate revenues, while larger companies, with revenues above that level, pay 19%. Under the new plan, announced yesterday at the Regional Digital Summit in Budapest, these brackets would be replaced with a single, 9% flat corporate tax rate (read our article on Mr. Orbán’s announcement here).
According to Gábor Beer, head of the tax consulting arm of Swiss-based professional service company KPMG , there is no reason to worry that lowering the corporate tax rate will cause funding problems for government services. By way of example, he referenced Hungary’s tax reduction in 1994-95, which brought the corporate revenue tax down from 36% to 18%, a move which caused panic about the future of state finances. “To everyone’s surprise, however, tax revenue did not drop in a dramatic fashion, and I believe that that is how things will work out this time as well” Mr. Beer added.
In addition, Mr. Beer expressed his opinion that this move on the part of the government could be enough of a bold move to make financial services companies such as banks insurance agencies, many of whom are currently based in London, to take notice of Hungary. He added that, while in the past there has been much discussion about how to transform Hungary into “the Luxembourg of the region” (meaning a country with low corporate taxes and high levels of wealth and investment), this reduction of the corporate tax rate “is a step in this direction.”
At the same time, the decision to bring Hungary’s corporate tax rate down to 9% is not without risk. As Ákos Burján of internatoinal auditing firm PricewaterhouseCoopers (PwC) pointed out, this new rate will place Hungary among the ranks of those countries with the world’s lowest tax rates. This is not definitively a positive thing, as being in the same category as Gibraltar, Cyprus, and Qatar is not necessary good for a country’s optics. Mr. Burján added that this may cause investors and corporations to be warier about doing business in Hungary, since the reputation of many of these low-tax-rate countries is often quite negative.
According to Sándor Hegedüs, partner at tax consulting mutinational RSM, one of the reasons behind the government’s planned reduction in the corporate tax rate is to compensate for the planned minimum wage hike that Mr. Orbán’s government also recently announced (read our article about the planned minimum wage increase here, as well as another article on details of the wage increase here). The problem with this, according to Mr. Hegedüs, is that the largest employment sector in the Hungarian economy is made up of small and medium sized companies, for whom the tax reduction will be far less impactful. This is due to the fact that many of these companies have annual revenue below 1.6 million euros, meaning that the new tax policy will only bring them a 1% reduction in their corporate taxes, as opposed to the 10% reduction to be enjoyed by larger corporations.
Mr. Hegedüs also added, echoing the sentiments of several other experts, that there are several sectors that benefit directly from corporate tax write-offs, such as sports teams, musicians, and other performing artists, who will see reduced corporate donations. This is due to the fact that, if the corporate tax rate is halved, it can be expected that the cap for donations that can be written off for tax purposes will be lowered as well.
For more details, check out the full Hungarian-language article here.
Image via the Guardian