Areas of Strength
- Hungary continues to invest into the digitalisation of its tax administration. Structural reforms are ongoing with a comprehensive digital transformation strategy, including the development of a data asset management system. The authority has been using machinelearning algorithms and has been further rolling out the use of AI from data governance processes to data analytics. Hungary has high e-filing rates for VAT, PIT, and CIT returns. In addition, the Hungarian tax administration provides a variety of additional online tools and services to taxpayers reducing compliance costs.
- Hungary performs relatively well in terms of value added tax (VAT) collection including in the fields of registration and identification of taxpayers, tax filings, compliance risk management, audit, payment and collection, and debt collection. It has well-developed VAT administration practices. There are nevertheless some areas identified for improvement in the Commission’s Ninth Report on VAT Administration including the automatic exchange of information between the tax administration.
Areas for Improvement
- Currently, Hungary does not provide any official estimates of Personal income tax (PIT) or corporate income (CIT) tax gaps. Hungary could consider introducing policies to monitor such tax gaps, which would help as a diagnostic tool to see where tax collection problems arise per tax type and to understand the underlying drivers of such collection issues.
- Hungary could consider taking concrete actions to reduce tax expenditures also in light of the ongoing excessive deficit procedure. Several existing tax deductions and exemptions have notable budgetary costs, while their effectiveness is not well substantiated in some cases. The Hungarian tax expenditure overall was estimated at about 2.1% of GDP in 2022. Reviewing and optimizing existing tax exemptions and incentives could also help targeting financial support and improve the efficiency of tax expenditures.
- While Hungary has a flat rate system for both PIT and CIT, the Hungarian tax system remains complex due to the high number of tax incentives, exemptions, and sector specific taxes. Simplification of the tax system could lower administrative expenses, make compliance easier for taxpayers, and enhance overall revenue collection efficiency. This simplification aligns with Hungary's commitment under the RRP to reduce the number of sector specific taxes. Hungary has already taken some steps toward this goal in recent years. The phasing out of the remaining sector-specific taxes could contribute to a more transparent and efficient tax system.
Tax Complexity
Hungary ranks 9th out of the 27 Member States in the Tax Complexity Index (TCI), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Hungary 10th among the Member States with regards to Tax Framework Complexity, and 13th with regards to Tax Code Complexity. This suggests a performance of the country close to the average, though the authors identify some areas among the tax processes carried out by the tax authorities with clear room for improvement (notably, regarding enactment), as well as among the structure of the tax regulations (particularly with regards to additional taxes).
However, the proliferation of tax expenditures adds complexity to Hungary’s tax system. The TCI by construction does not capture some features that likely increase the complexity of national tax systems like complexity induced by tax expenditures. Hungary has a flat rate tax system for both personal and corporate income tax purposes with relatively low tax rates as compared to other EU countries. However, the availability of multiple tax incentives, exemptions, special regimes and sector specific taxes make the system fairly complex. As indicated also in the section on tax expenditure, Hungary committed to reduce the number of sector specific taxes under the RRP.
The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Hungary can be found here.
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