Commission Report 2002 (Hungary)

• Progress since the last Regular Report
• Overall assessment
• Conclusion

Chapter 10: Taxation

Progress since the last Regular Report

Since the last Regular Report, Hungary has made limited progress with aligning its tax legislation with the acquis. The modernisation of Hungary's tax administration has continued.

In the area of indirect taxation, no progress can be reported regarding VAT. As concerns excise, the gradual increase of duty levels continued. In particular, the level of duty on lower-taxed fruit and wine brandy was increased, while the duty on sparkling and still intermediate alcoholic products was brought up to the EC minimum. Furthermore, the specific duty on cigarettes of the price category most in demand was increased as of January 2002, as well as the ad valorem duty on fine cut tobacco.

There are no developments to report in the area of direct taxation.

As regards administrative co-operation and mutual assistance, some progress was made in November 2001 with the amendment of the rules on taxation and on mutual assistance for the recovery of claims, which will only enter into force upon accession.

As concerns administrative capacity, Hungary has continued to modernise its tax administration. The legal framework for the establishment of the Central Liaison Office was adopted in November 2001. The Office will operate within the Tax and Financial Control Administration. In addition, a new central Excise Directorate was set up in order to reinforce the effectiveness of the excise administration. Infrastructure and information technology were further improved.

Hungary has taken significant steps to prepare for interconnectivity by starting to develop an in-house VAT Information Exchange System application and by preparing for the installation of CCN/CSI (Common Communications Network/Communication System Interface). Preparatory activities have also been launched for the development of the SEED (System for Exchange of Excise Data) database.

Overall assessment

In the area of indirect taxation, alignment has to be completed regarding VAT (reduced rates, refund for foreign taxable persons not established in Hungary and the abolishment of the zero-rate) and excise duty (introduction of a single rate for fruit brandies and other spirits in line with the EC minimum level).

With regard to direct taxation, further alignment is still needed in order to bring the Hungarian legislation fully into line with the acquis, in particular with regard to the abolition of the withholding tax applied to dividends distributed to EU-based parent companies of Hungarian subsidiaries. The review of legislation by the Commission to ensure compliance upon accession with the Code of Conduct for Business Taxation is in process. The Commission`s initial technical assessment of potentially harmful measures applied in Hungary is ongoing. With regard to administrative capacity, Hungary has strengthened and modernised its tax administration: both the Office in charge of direct taxes and VAT (APEH) and that in charge of excise duties (VPOP) have adequate legislative and administrative structures as well as adequate resources to ensure effective collection, enforcement and control of taxes. Preparations have started for the implementation upon accession of the Central Liaison Office and the Excise Liaison Office.

Hungary still needs to finalise work to ensure that the computerised tax information system is fully operational ahead of accession, including links with the customs information system and interconnectivity with EC systems.

Conclusion

In its 1997 Opinion, the Commission concluded that the acquis in respect of direct taxation should present no significant difficulties. It further noted that, as regards indirect taxation, provided that sustained progress continued in these areas, Hungary should be able to comply with the acquis concerning VAT and excise duties within the next few years. The Commission added that it should be possible to start participating in mutual assistance as the tax administration developed its expertise in this respect.

Since the Opinion, Hungary has gradually continued its alignment with the acquis, although a number of weaknesses remain to be addressed. Hungary has also made progress with developing the necessary administrative capacity to implement the acquis in this area, but further progress is still needed to ensure its proper and effective functioning upon accession.

Negotiations on this chapter have been provisionally closed. Hungary was granted transitional periods until 31 December 2007 to continue applying a reduced VAT rate not lower than 12% on the supply of certain heating products, on district heating services and restaurant services. Hungary was also granted a transitional period until 31 December 2007 to apply a lower excise duty rate (not lower than 50% of the standard rate) to alcoholic products distilled under the ``hire distilling'' scheme in distilleries producing more than 10 Hl of pure alcohol a year, but not more than 200 Hl. In April 2002, Hungary requested the re-opening of the chapter. Hungary is generally meeting the commitments it has made in the accession negotiations in this field.

In order to complete preparations for membership, Hungary`s efforts now need to focus on finalising alignment - except for areas where transitional arrangements were agreed oe in the areas of VAT and excise, including intra-Community transactions, and on further pursuing the measures taken to modernise and reinforce the tax administration.

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