The economic effects of changes in VAT legislation

Hágen István, Zsombor

Hungary has drafted her VAT legislation in respect of general sales tax in complete compliance with the European Union’s requirements and directives (with the exception of a few temporary exemptions).

There is a unified tax structure in EU member states as a result of the common VAT system, however, the rates utilised continue to differ (Table 2.). The heavier tax burden prevailing in some member states and the competitive distortion caused by this, can be counterbalanced by the actions of the authorities and/or a more favourable currency exchange rate.

The creation of a unified tax environment, stated as a long-term goal, has not yet been achieved.

Upon accession to the EU, Hungary has changed its VAT rates and instead of the previous 0% and 12% preferential rates, now utilises 5% and 15% brackets. The range of goods falling into the general 25% bracket has also increased. As a result of these modifications, Hungary now has one of the highest VAT rates among EU member states. In contrast the 6th VAT directive merely states that „the general rate may not be less than 15% and the preferential rate must be at least 5%”.

Compared with other EU states the VAT rate modifications damage the competitiveness of Hungarian businesses and, furthermore, increases inflation, as the new, higher VAT rate is also applied to value added.

Increasingly farmers and entrepreneurs are calling for a reduction in VAT rates.

It would also be more straightforward for taxpayers and accountancy professionals, if a single, unified rate was applied across the EU. This would greatly simplify the application and auditing of the general sales tax and would be the best way to meet the requirements of impartiality.

Considering the issue from the point of view of the tax authorities, clearly it is not sufficient for the legal practitioner of a member state’s tax authority to be merely conversant with fiscal or procedural rules. In order to make correct decisions in individual cases, it may also be necessary to interpret the legal norms. The rulings of the European Court can provide a basis for support in this. As a result of EU harmonisation of VAT legislation, previous rules have changed significantly and, it can be said, that the whole system has become more complicated and less transparent. More and more people are trying to take advantage exactly of these VAT complications and lack of transparency. This could explain why Hungary’s 2004 VAT revenues fell short of projections by many billions of HUF. In the interests of managing the current situation and securing budgetary revenue, Hungary’s tax authority (APEH) is individually auditing item by item all those with an EU tax number.

Experience shows that the reason behind cases of erroneous VAT refund requests is often the taxpayer’s lack of knowledge and experience rather than deliberate fraud.

Despite the more complicated VAT rules upon EU accession and the problems mentioned above, it is hoped that with time member states’ legal systems will increasingly converge allowing regulations to be simplified and made more transparent.

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