As tax advisers, we are often asked what kind of information the tax authority has about the assets and income position of individuals and businesses. On a high-level basis, we examine this question in two articles. In the first article we review the Hungarian situation, namely the implemented developments in recent years, and in the second article we summarize the main facts on the exchange of information within the European Union.
In order to prevent tax avoidance and to monitor more transparently the tax obligations, many innovations have been introduced in Hungary in recent years. The innovations can be divided into two groups. The first includes information technology (IT) solutions and opportunities of digitalism, that have been established based on Hungarian initiation or development and with which the tax authority is able to collect and analyze data on the national economy level. The second group contains international processes, that facilitate the exchange of information regarding taxation among the national authorities .
The Hungarian innovations of recent years have mostly aimed at VAT, which is the largest tax revenue. As a result of the developments – based on the survey of the European Commission prepared in September 2020 – the VAT gap has significantly decreased in Hungary, as illustrated in the following graph. As it is generally known, the VAT gap is the amount of VAT that has not been paid into the national budget based on the tax authorities’ statistics.
(source: Study and Reports on the VAT Gap in the EU-28 Member States, page 41)
The Hungarian economy has progressed on a large scale in the terms of VAT whitening in the past few years. Indeed, the Hungarian improvement in the VAT gap has been the largest on the European Union level in 2018 (from 13,5% to 8,4%).
Let us take a look at the developments concerning taxation and introduction of systems, that are behind the improvements in Hungary and what other innovations have been and are expected to be introduced.
2014 – Connecting cash registers online
With the introduction of online cash registers and the extension of the obligors, essentially all affected businesses’ sales (receipts and simplified invoice) information can be tracked in real time by the tax authority. For example, if they look at a particular shop or catering unit, the change of the turnover can be followed on a day-to-day basis and thus, the income of the business can be monitored in a targeted way.
2015 – Introduction of EKÁER
Due to EKÁER (Electronic Public Road Trade Control System), which was created to cut back VAT fraud, since 2015 it is possible to control the fulfilment of tax obligations related to the transport of goods by roads, both within Hungary and goods leaving from or arriving to Hungary from any of the EU Member States, if the transport was carried out by lorries of 7.5 tons or more. Not only the quantity (weight) but also the value of the goods can be followed by the excise officers. Moreover, the Hungarian tax authority also has information on where products are loaded and unloaded on a given vehicle and by whom, ensuring more efficient tax collection and, last but not least, law enforcement and the prevention of tax fraud.
2017 – Introduction of ePIT
The biggest achievement of 2017 was undoubtedly the draft PIT return prepared and issued for individuals by the Hungarian tax authority, which aims to minimalize the administrative burden of filing the tax return and encourage compliance. Since then, the number of people affected has continuously increased. Today, all income data of individuals for which Hungarian employers and disbursers provide data in the monthly tax and contribution returns are included in the draft PIT return. As a consequence, income received from foreign persons, companies or non-disbursers are not included in the draft document.
Accordingly, the NAV has access to all employment income (wage, sick pay, etc.), income in connection with real estate utilization (lease out) and capital income (e.g., controlled capital market transactions) received from Hungarian disbursers. However, for instance incomes received from individuals in connection with the sale of movable and immovable property or income from lease out to individuals are not included in the draft document. Nor will we find those separately taxable (e.g., dividend, capital gains, income from the sale of movable and immovable property) and other income (e.g., cryptocurrency transactions), that we realize from abroad or on foreign bank accounts.
It is important to know, that these incomes are mostly monitored by the tax authority (except from some foreign incomes), but the IT system is not yet able to connect these data with the ePIT return. Thus, on a voluntary basis, we must indicate these incomes in our return to avoid sanctions.
2018 – Launch of online invoice-data reporting system
The online invoice-data reporting system has been introduced gradually starting from 1 July 2018. Currently, the tax authority has information on all invoices issued according to domestic invoicing rules regardless of (tax)threshold. This also applies to the correcting invoices, credit notes and documents treated as invoices, with some exceptions.
2021 – BIREG, Register of ultimate beneficial owners (UBO) and eVAT
In 2021, the BIREG (Advance Electronic Licence Registration System)has been launched, which is intended to partially replace the abovementioned EKÁER. Essentially, all goods transported on roads by lorries with a gross weight of over 3.5 tons will be subject to the supervision and control of the tax authority, which will concern not only the Hungarian or EU consignments, but also the ones arriving from third countries. During the registration process, the excise officers will receive real-time data on the given consignment from both parties involved in the transport, therefore in case of incorrect registration or possibly illegal cargo, they can carry out pre-planned inspections.
A new feature for 2021 is the UBO,which aims to make the ownership of companies more transparent and to improve the efficiency of actions against money laundering and terrorist financing. Within the system, which also enters into effect gradually starting from June 2021, financial institutions and safe deposit providers that hold payment accounts, provide information to the tax authority e.g. on the nature and extent of ownership interests. Details on this topic can be found in our previous article .
The other new development of 2021 will be the eVAT, which – similarly to the ePIT return – will be prepared and issued in draft form for businesses by the Hungarian tax authority. With some exceptions, the draft tax return will be available from 12 November 2021 for the month of October. Therefore, due to the eVAT, the Hungarian businesses can expect draft return based on the data of their outgoing and incoming invoices and receipts. Moreover, their VAT-balance can be monitored up to date.
2022/2023 – SAF-T, the newest economy whitening tool
In 2019, the tax authority started the development of the so-called Standard Audit File – Tax, or commonly known as SAF-T. The system is designed to make tax audits more efficient. The SAF-T system imposes an extended and standardized data transfer obligation on Hungarian companies, and therefore the tax authority will monitor not only their accounting, invoice turnover and master data, but also other management / financial data, e.g., data relating to fixed assets or stock movements.
The following graph illustrates the timeline of the newly introduced developments concerning taxation summarized above:
In summary, the Hungarian tax authority has implemented several major IT developments since 2014, started with the online connection of the cash registers in 2014, through EKÁER (2015) and ePIT return (2017) to the online invoice-data reporting system (2018), which are constantly being extended and developed, to steer the taxpayers towards voluntary compliance .
Moreover, the process has not stopped in Hungary since then, as EKÁER is partially being transformed into BIREG, eVAT returns will be prepared and issued to the businesses this year and the tax authority’s commitment to introduce the SAF-T system in 2022-2023 is also visible, since IT developments are already underway from 2019.
If all these innovations are introduced and the tax authority’s IT system is also improved, the Hungarian tax authority will be able to analyze and control potential tax avoiding processes even more effectively. As a result, we can expect a further improvement in the tax gap (not only in case of VAT) and a reduction in the rate of tax evasion.
In the following article on this topic, we will review the tax information that EU Member States share with the Hungarian authorities within the framework of the European Union’s information exchange.