A tax reform committee involving government, opposition and non-governmental members held its opening session last week, but it is not expected to set the direction of changes sooner than a month from now.
The committee promises to set the framework of overall tax changes that will take effect in 2006 and 2007, the earliest, while opposition party Fidesz urges tax cuts as early as July 2005.
While the overall reform is in an embryonic state, HVG has learnt that ideas are probably the most advanced in the field of VAT (ÁFA). However, EU rules make it harder to reform VAT laws than other tax regulations. EU laws allow member states to apply two special VAT brackets and one regular bracket, which levies at least 15% tax, and prescribe the types of goods which can be taxed in the special – subsidized – brackets.
However, a former proposal supported by Finance Minister Tibor Draskovics would not be against the EU rules. The proposal says the current system involving 5%, 15% and 25% VAT brackets could be replaced with a two-bracket system, in which the high bracket involves 19% tax. At the same time, the government would probably increase excise taxes on gasoline and tobacco products, because it would not want to make these goods cheaper or suffer from a loss of sizeable central revenues.
One area that is expected to be left mainly unchanged by the committee is the simplified tax for entrepreneurs (EVA). The flat tax introduced in recent years has been chosen by more than 100,000 entrepreneurs and small businesses to date; and based on the revenue it generates for the state, it is considered as a successful type of tax.
The tax reform committee faces the hardest task by reforming local industrial tax, which is levied on the net total revenue of businesses, and the majority of the proceeds goes to local municipalities where the businesses operate. This type of tax has been attacked for several reasons, mostly because it is levied on loss-making companies, as well, and the basis of the tax is revenues, rather than profit. In a recent study, consulting powerhouse Ernst & Young said local industrial tax violates EU principles. Since local industrial tax is levied on revenues, it can be considered a volume based tax, goes the reasoning by E&Y, and EU principles state that member states cannot apply volume-based taxes besides a few, specific types such as VAT.
