Extra profit surtaxes: major mid-year tax package arrives

On 26 May, Márton Nagy, Minister for Economic Development presented the long-awaited fiscal measures necessary as a result of escalating budget deficit and economic slowdown. Besides the banking sector, the energy sector, retail chains and telecommunication firms, the pharmaceutical distributors and airlines are also hit by the proposal, as well as the advertising tax is set to be reintroduced again.

For 2022, the Hungarian government targets the budget deficit at 4.9% of the GDP, whereas next year’s deficit is set at 3.5%. Deficit targets are expected to be met by 60% from cuts in ministries’ budgets, rescheduling and postponing public investments and encouraging market-only investments, while additional revenues generated by newly introduced sectorial surtaxes will contribute 40%.

The so-called extra profit surtaxes affect eight sectors – over HUF 815 billion tax revenue is expected due to their introduction. Noteworthy, the new surtaxes are mostly levied on top of the already existing sectoral surtaxes, with a government plan to maintain them only on a temporary basis in 2022 and 2023. The logic of the new levies is that profits generated in the sectors concerned should be broken down into normal and extra profit based on economic calculations and the extra profit thus calculated should be subject to surtax.

Special surtaxes introduced

Sectors affected by the special surtaxes are as follows:

1. Banking sector

Financial institutions are facing a new sectoral surtax in response to the interest margin growth,  i.e. the spread between lending and deposit rates. due to rising inflation. The tax will therefore be based on net interest income plus on income from fees and commissions. Although the precise tax rate is not published yet, it is known that the annual tax burden of HUF 250 billion expected from the sector will be distributed proportionally between the various financial institutions. In addition, financial transaction tax will be extended, with an additional HUF 50 billion of revenue, totalling HUF 300 billion per year expected from the banking sector with respect to special surtax revenues.

2. Insurance sector

The surtax is supposed to tax the extra profit realized from the continuously growing demand for self-empowerment due to the covid pandemic and the war in Ukraine, combined with the increased insurance premiums driven by inflation. The expectation is a revenue of HUF 50 billion per year on a sectorial level both for 2022 and for 2023.

3. Energy sector

Due to the additional profits from hydrocarbon extraction, power generation, fuel refining, etc., because of the soaring energy prices, the energy sector will also pay a special surtax with a foreseen annual contribution to the budget revenues of HUF 300 billion. The surtax will mainly affect MOL (the Hungarian Oil and Gas Company) as it will be introduced in the form of an increase in mining royalties and as a tax on refinery spreads. Furthermore, bioethanol, ethanol and biofuel companies will become subject to the income tax of energy suppliers also known as Robin Hood tax.

4. Retail sector

Retailers are expected to contribute as much as HUF 60 billion a year to the treasury, due to the increase in their annual turnover. Instead of implementing a new surtax, the existing sectoral –surtax would be raised. Tax tax is determined by net sales revenues from retail activities increased by the revenues from services provided to suppliers and the amount of discounts granted by suppliers. Flat tax rates will change as follows:

  • Tax base not exceeding HUF 500 million continues to be exempt.
  • Tax rate of 0.1% remains applicable for the part of the tax base between HUF 500 million and 30 billion.
  • Tax bases between HUF 30 billion to HUF 100 billion will be subject to a tax rate of 1.0% instead of the current 0.4%.
  • Over a tax base of HUF 100 billion, the tax rate increases from 2.7% to 4.1%.

5. Telecommunications

This sector is also to be charged with a special surtax as a result of the exponentially increasing data transmission and resulting increase in sales revenues; the government expects to collect HUF 40 billion additional taxes per year from this. Details are under preparation, but most likely revenues from roaming, internet and cable TV services will be subject to the tax.

6. Airlines

An unexpected measure of taxing airlines was reasoned bythe government by the rapid growth of air travel due to realization of earlier postponed travels. The planned annual surtax revenue is HUF 30 billion, to be levied on airlines at a rate of around EUR 10-15 per passenger departure. According to the explanation of the Minister for Economic Development, the special sectoral surtax might be considered as a green tax.

7. Pharmaceutical distributors

The government expects to collect HUF 20 billion surtax on the sales of pharmaceutical products increased as a result of the pandemic. The surtax is planned to affect only companies with no manufacturing capacity in Hungary, whereas small pharmacies would not be subject to this tax. The surtax will be based on the social security subsidy paid back to the budget, rising from the current level of 20% to 24%.

8. Advertising tax

From 1 January 2023, the advertising tax on media companies will be reintroduced, or more accurately, the suspension of the tax imposed upon an EU decision is to be lifted. Media companies, publishers, users of outdoor advertising space, Internet advertising and, in certain cases, advertisers ordering advertising media, will have to pay the surtax on the advertising revenue or cost. Advertising tax is expected to yield an annual revenue of HUF 15 billion.

The government decrees to introduce the above special surtaxes are expected to be announced in the coming days. For tax year 2022, all surtaxes but advertising tax will be collected.

Further tax measures

Further tax measures are expected to bring in an additional HUF 100 billion in tax revenue, on top of special surtaxes under introduction. These measures will include:

  • an increase in excise duties on tobacco and alcohol products,
  • and increase in the public health product tax,
  • changes in the company car tax system.

Restructuring the KATA system (a tax on small entrepreneurs) is also back on the table as part of the tax package. No specifics are yet available, but according to reports, the aim is to reduce the personal scope of the tax while raising the qualifying threshold of the preferential tax base from the current HUF 12 million to HUF 18 million.

The government is also going to decide on the future of the price freezes of certain petrol, interest, and food products by mid-June.