Tax Audit Plan Published by Hungarian Tax Authority

The National Tax and Customs Administration (NAV) has published its audit plan for 2021. This year’s audits will increasingly rely on digital data collected by NAV. There will be a special emphasis on online invoice data which will be available to NAV for the total of the Hungarian VAT volume from this year on. Another important source of data is constituted by tax returns and the international exchange of tax information.

The focus of audits this year will be on activities with significant budgetary risks, such as construction, computer products, trade in motor vehicles and automotive parts, and other commercial sectors such as e-commerce. The audit of key taxpayers and that of small businesses within the KATA tax break system are expected to increase this year as well.

What are the main risks?

The Hungarian Tax Authority is relying increasingly on digitalized systems to gain information on businesses and specific taxation areas. Data received from digital systems is evaluated and risk profiles are created, leading to an increased probability of tax audits for the taxpayers concerned. Risk areas that are typically spotted by the Tax Authority include VAT,  employment taxes, transfer pricing, corporation tax, R&D and internet sales, just to name some of the most prominent hotspots.

The main risk of tax audits in Hungary lies most often in VAT, which at a rate of 27 percent is the highest in Europe. In some cases, VAT audits lead to outcomes where the VAT incurred can not be recovered at the end of the process, due to the underlying Hungarian legislation. Also, Hungary is known for draconic tax fines ranging form 50 to 200 percent, alongside further sanctions and arrears tax interest. Therefore, tax compliance is an important element of general risk management when operating a business in Hungary.

An important focus of tax audits for 2020 is the concealed employment of small entrepreneurs that benefit from a tax break called the “KATA” system by larger businesses. According to a recent announcement of the tax authority NAV, such subcontracting relationships will be audited more frequently with the aim of uncovering the non-payment of employment taxes through misuse of the KATA tax break.

How is the tax audit conducted?

Generally, taxpayers are notified in writing about the launch of the audit.  The audit may take place through the inspection of the taxpayer's documentation in the premises of the tax authority or as an on-site examination. The authority may examine the documentation and computer systems of the taxpayer and ask the representative of the business, it’s commercial partners and employees for information.

In any case, it is advisable for the taxpayer to actively participate in the tax audit process. The taxpayer has the right to be present when the examination is being conducted and to make a statement to be entered into the minutes of the audit. Taking a stand for being continuously informed on the progress of the audit and making statements that can clarify certain issues can contribute to obtaining an optimal result at the end of the audit.

The foundation of efficient defence: the written statement

Before the examination phase of the tax audit is closed down by the Hungarian Tax Authority, the taxpayer has the opportunity to file a written statement concerning the findings contained in the minutes of the tax authority.

By the time the written statement is to be filed, the taxpayer will already have made preparations to defend the issue at stake by having collected supporting evidence and legal arguments. Generally, taxpayers are best advised to strive for completeness in formulating the statement and to make sure that it contains all the facts, attachments and legal arguments the taxpayer wishes to bring forward. Otherwise there is a risk that if the issue is brought before a court, the court will disregard additional or divergent submissions by the taxpayer.

If the tax audit establishes a tax difference to the debit of the taxpayer, in many cases the taxpayer will acknowledge the error made and accept to pay the default tax. In such cases the next important step is to make use of all legal possibilities to reduce the 50 percent tax penalty and default interest.

Tax self-audit can reduce cost

In frequent cases non-compliance arises though incorrect settings in integrated accounting systems or from similar, seemingly trivial errors. Depending on the type of tax audit, the taxpayer may have the right to submit a self-audit for the period in examination, thus avoiding the tax penalty and default interest.  If the tax audit is carried out as a so called “legal compliance verification”, the taxpayer may correct tax returns in a self-audit retrospectively, paying a smaller charge for the self-audit and avoiding the 50 percent tax penalty and default interest.

How to achieve a 50 percent reduction of the tax penalty?

When the default tax is undebated by the taxpayer, but the law does not permit a self-audit, it is a good option to waive the right of appeal in the first instance which will reduce the basic, 50 percent rate of the tax penalty by 50 percent (i.e. a maximum of 25 percent). The same applies to the default interest.  

It is important to note that taxpayers with a “reliable” qualification will automatically be awarded a 50 percent reduction on fines, which can ultimately reduce the draconic 50 percent tax penalty to a final 12.5 percent. Therefore, preferential treatment in tax audits is an important incentive for taxpayers to obtain a “reliable” qualification, which will automatically be awarded to corporate taxpayers for good tax-compliance after 3 years of operation.

Additionally, if the taxpayer can plausibly demonstrate that non-compliance was not attributable to the taxpayer, then, in exceptional cases, the Tax Authority can decrease or erase the tax penalty. This applies also to the fee for the self-audit, in cases where a self-audit is permissible by law and it is initiated by the taxpayer.

If confrontation is unavoidable

What if the taxpayer debates the findings of the tax authority? First of all it is important to have brought forward all relevant facts and evidence to defend the case in a written statement before the audit was closed. Failing to supply important evidence may lead to the rejection of the case if that evidence is submitted to a court in a later phase of the proceedings.

The next step is to make use of the right of appeal and if necessary, bring the case before a court. The first step here is to look for formal, procedural mistakes in the tax audit. For example, if the tax authority has missed certain deadlines, that can save the taxpayer the 50 percent penalty, if the taxpayer contests that mistake in the appeal. Also, bringing complex cases before a court has the advantage that the tax case will be examined within the context of the entire legal system and EU law, not just under the narrower angle of tax authority practice.