Fundamentals Level Skills Module, Paper F6 (HUN)

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2 Fundamentals Level Skills Module, Paper F6 (HUN) Taxation (Hungary) 1 Mr Darabos June 2011 Answers and Marking Scheme Marks (a) (i) Taxation of the holiday coupons Holiday coupons provided by an employer are a taxable benefit in kind. Holiday coupons with a value of up to 73,500 per annum are taxed at 25%. 1 Above this limit tax is payable at 54%. 1 The benefit in kind tax is payable by the employer. The tax payable on the benefit in kind received by Mr Darabos is: On the first 73,500 at 25% 18,375 On the remaining amount: (300,000 73,500) x 54% 122, ,685 4 (ii) Taxation of the low interest loan Loans at a discounted interest rate provided by an employer are a taxable benefit in kind. The taxable income is the difference between the interest paid and the deemed market rate of interest calculated by using the official rate of the National Bank of Hungary on 31 December of the tax year increased by 5% points. 1 The tax rate is 54%. 1 The benefit in kind tax is payable by the employer. The interest paid by Mr Darabos is: 10 million x 5% x 9/12 = 375,000 The deemed interest is: 10 million x ( )% x 9/12 = 768,750 Taxable income: 768, ,000 = 393,750 Tax payable: 393,750 x 54% = 212,625 4 (b) (c) Bonus issue: Income arises when an individual receives securities for below market value. 1 Income is determined as the difference between the price paid and the market value of the securities. No taxable income arises, however, if the securities are acquired as part of a capitalisation of the reserves of the issuer. 1 A bonus issue is a capitalisation of reserves, so no taxable income arises for Mr Darabos and thus no tax is payable on this transaction. Tax payable on selling the statue Income from selling moveable assets is income taxed separately at 25%. 1 From the revenue from the transfer the taxpayer may deduct: the acquisition cost and other relevant expenditure any value increasing investments the expenses relating to the transfer 3 13

3 The taxable income and tax payable of Mr Darabos is: Selling price 6,000,000 Less: acquisition cost (1,000,000) Less: restoration costs (500,000) Less: cost of transfer (1% x 6 million) (60,000) Taxable income 4,440,000 Tax at 25% 1,110,000 5 (d) Taxation of the five-year saving deposit (i) A long-term deposit is either taxable at a favourable rate of 10% or is tax free if the following conditions apply: the maturity of the deposit at inception is a minimum of three years which can be extended to five years 1 the deposit is placed with a financial institution the minimum amount deposited is 25,000 the original amount of the deposit cannot be increased except for the interest credited to the principal amount For a three-year deposit the tax rate is 10% on interest received. For a five-year deposit the interest income is tax free. If the deposit is fully or partially terminated before the original expiry date, tax is payable at the rate of 20% on the interest earned. 4 (ii) If Mr Darabos terminates the deposit on 31 December 2010 the tax payable is: 20 million x 5% x 11/12 x 20% = 183,333 1 (e) Personal income tax liability for 2010 Consolidated tax base Notes and references Non-independent activities Salary from Pieces Kft (800,000 x 12) 9,600,000 Holiday coupons Note 1 Loan at a discounted rate Note 1 Total consolidated tax base 9,600,000 Tax base increasing amount (27%) Note 2 2,592,000 Total tax base 12,192,000 Tax on consolidated tax base On the first 5,000,000 at 17% 850,000 On the remaining at 32% 2,301,440 Calculated tax 3,151,440 1 Income taxed separately Tax on income from selling statue as per part (c) 1,110,000 Tax on long-term deposit Note 3 0 TOTAL PIT LIABILITY 4,261, The tax on benefits in kind (holiday coupons and the loan at a discounted rate) is to be declared and paid by the employer, as per part (a) so they do not appear in the personal income tax return of the private individual The consolidated tax base must be increased by 27% (the social security contribution payable by the employer) in order to determine the amount on which the tax rates are applicable If the savings deposit is not terminated, then as a five-year deposit, no tax is payable

4 (f) Net salary for the month of January 2010 Calculated tax on the salary as per part (e) 3,151,440 The monthly personal income tax advance to be deducted by the employer is 3,151,440/12 = 262,620. Social security contributions payable are as follows: Monthly salary from Pieces Kft 800,000 Pension contribution (800,000 x 9 5%) 76,000 Health insurance contribution (800,000 x 7 5%) 60,000 Thus in total 398,620 (262, , ,000) is deducted from Mr Darabos employment income in January This gives a net salary of 401,380 (800, ,620) Topaz Kft (a) Correct accounting profit before tax Renovation expenses: VAT on the renovation costs of the yacht is not deductible so must be expensed, because this is an expense not incurred for business purposes. The tax consequences must be booked for the year 2010, as the declaration was received before the date of preparation of the financial statements. Accounting profit before tax 000 Preliminary profit before tax 700,000 Irrecoverable VAT (1 million at 25%) (250) Late payment interest and default penalty (200, ,000) (250) Accounting profit before tax 699,500 2 (b) Corporate income tax base for the year 2010 Note Profit before tax as per part (a) 699,500 Increasing items: Renovation costs 1 1,250 Tax penalties Impairment of non-current assets 3 8,000 Thin capitalisation 5 3,960 Transfer pricing adjustment 6 1,680 Accounting depreciation ,973 Decreasing items: Tax losses utilised 4 20,000 Tax depreciation 7 1,250 Dividend received 8 50,000 Royalty income 9 3,500 (74,750) Tax base 640, Costs not incurred in the ordinary course of the business are tax base increasing items Tax penalty and late payment interest imposed by the tax authorities are not deductible for tax purposes and must be added back to the tax base. 1 15

5 3. Impairment losses on non-current assets are not deductible for tax purposes. If there is a subsequent write back of previous years impairment losses, however, they will be tax base decreasing items Tax losses realised in previous tax years may reduce the tax base in future years A company is thinly capitalised if the average daily balance of the interest bearing liabilities exceeds three times the average equity. Interest on the excess liability is not deductible for tax purposes. 1 For the purpose of this calculation, bank loans are excluded. 1 Average equity means equity during the year excluding revaluation reserves and current year s profit. 1 Thus, equity was 17 million at 1 January The limit is then 3 x 17 million = 51 million. As bank loans are excluded, the average daily balance on interest bearing liabilities is 300,000 x 280 = 84 million. This means that the thin capitalisation rules apply. The excess liability is 84 million 51 million = 33 million. Interest on the excess liability is 33 million x 12% = 3,960, Note: The thin capitalisation adjustment is independent from the transfer pricing adjustment. 6. As per the main rule, expenses in relation to a CFC are not recognised expenses. The only exemption from this rule is the case where the taxpayer can prove that the expenses served a business purpose. Since Topaz Kft can do so the interest expense is deductible. 2 However, since the interest paid and expensed was in excess of market rates, Topaz Kft must increase its tax base by the difference between the market rate and the rate paid. 1 The tax base increasing amount will be: 300,000 x 280 x (12% 10%) = 1,680, VAT on the passenger car purchases is irrecoverable, so the amount capitalised is 6 million x 1 25 = 7 5 million. If an asset is purchased from a previously created development reserve, only that part of the cost of the asset above the development reserve amount ( 7 5 million 5 million = 2 5 million) is depreciable for tax purposes. Accounting depreciation in 2010 is (7 5 million 1 5 million)/6 x 10/12 = 833,333. Accounting depreciation increases the tax base. Tax depreciation: 7 5 million x 20% x 10/12 = 1,250,000. This is within the limit of 2 5 million. Tax depreciation decreases the tax base. 8. Dividends received are a tax base reducing item unless they come from a CFC. Hungarian companies are never CFCs % of the royalty income is exempt from tax, i.e. the tax base is decreased by 50% x 7 million = 3 5 million. This is less than the total allowed reduction of 50% of the pre-tax profit (i.e. 50% x million = million) (c) Corporate income tax liability (i) In 2010 the corporate tax base must be time apportioned between the first and the second halves of the year. This is because the rules and limits for the lower 10% tax rate are different in the two halves of the year. 1 16

6 (ii) 000 Corporate tax base for the first half year (640,723/2) 320,362 Tax on the first 50 million at 10% 5,000 1 Tax on the remaining amount (320,362 50,000) at 19% 51,369 Total corporate income tax payable for the first half year 56,369 Corporate tax base for the second half year (640,723/2) 320,362 Tax on the first 250 million at 10% 25,000 1 Tax on the remaining amount (320, ,000) at 19% 13,369 Total corporate income tax payable for the second half year 38,369 Total corporate income tax liability for , Tutorial note: In the second half of the year it is necessary to time apportion the limit for the 10% band, i.e. only 250 million (500 million/2) is eligible for the lower rate. 3 Midi Kft (a) Corporate tax relief available Midi Kft is entitled to the development tax relief available for small and medium sized entities. The relief is 80% of the corporate tax payable. 1 To qualify for the relief, the following conditions must be met: the net present value of the investment is a minimum of 500 million; 1 the company must be a small or medium sized entity; 1 the investment results in the creation of new assets, the extending of existing facilities, or in a fundamental change in the product or service or in the production process. 1 The first year of eligibility is either the year of putting the investment into operation or the following year (at the discretion of the taxpayer). 1 The tax relief can be claimed for a maximum of ten years, but the final year when it can be claimed is the 14th year following the submission of the initial application for the relief. 1 There is no other requirement in the first year of eligibility. In the next four years of eligibility, however, the entity must meet one of the following employment related conditions: 1 either the average number of employees is increased by 20 or 50 employees for small and medium sized enterprises respectively. 1 The reference year is either the year preceding the start of the investment or the average of the three years preceding the start of the investment (at the discretion of the taxpayer); or 1 there is an increase in the salary expense of at least 50 or 100 times the official minimum wage at the start of the tax year for small and medium sized enterprises respectively. 1 The reference year is again, either the year preceding the start of the investment or the average of the three years preceding the start of the investment (at the discretion of the taxpayer)

7 (b) Calculation of the corporate income tax liability for For the first half of the year: Corporate tax base (200,000 x 6/12) 100,000 Tax at 19% 19, % of the tax liability (15,200) Tax payable 3,800 For the second half of the year: Corporate tax base (200,000 x 6/12) 100,000 Tax at 10% 10, % of the tax liability (8,000) Tax payable 2,000 4 Note: In the first half of the year 2010, Midi Kft loses the right to apply the 10% tax rate due to the fact that it takes advantage of the development tax relief incentive. From the second half of 2010 however, all companies may apply the lower 10% tax band on the first 250 million of the tax base Tavi Kft (a) Value added tax (VAT) liability/refund for August 2010 Notes VAT payable August sales 1 Consignment contract 2 1,250 Old laptop taken out of business 5 25 Advertising services ,450 VAT deductible Supplier invoices 3 20,000 VAT on laptop purchase Advertising services Lease agreement 8 2,000 (22,275) VAT refund (20,825) 1 1. The place of performance in respect of the processing and providing of information is the seat of the party ordering the service, i.e. in this case the USA. 1 This is an export service, which is outside the scope of Hungarian VAT law, so no VAT will be charged on the sales invoices. However, any input VAT relating to the generating of revenue from export services is deductible even if VAT was not payable on the making of the sale. 2. The transfer of the right of disposition over a product in a consignment contract qualifies as a sale of goods. 1 VAT must be paid on the market value of the product when the consignment contract is formed and the asset is taken over. Therefore, VAT of 5 million x 25% = 1,250,000 becomes payable in August As stated in Note 1 input VAT related to export sales is deductible, i.e. 80 million x 25% = 20 million is deductible. 4. VAT on purchases for business purposes is deductible. 400,000 x 25% = 100, If goods are taken out of the business for no consideration it constitutes a taxable sale of goods. VAT must be paid on the fair market value of the asset transferred for no consideration. 100,000 x 25% = 25,000 VAT is payable. 1 18

8 6. The place of performance of advertising services is determined by the seat of the ordering party, which in this case is Hungary. 1 This is an imported service. Tavi Kft must self-assess the VAT on the incoming invoice and this is payable and deductible at the same time, provided that the taxpayer uses it for VATable activities. 1 As stated in Note 1, export services qualify as VATable activities so VAT is deductible on the advertising invoice. 2,500 x 280 x 25% = 175,000 is payable and deductible. 7. VAT on entertainment and services and restaurant invoices is not deductible. This means that VAT of 120,000 x 25% = 30,000 is irrecoverable A lease agreement where the transfer of ownership is not definite qualifies as a provision of service 1 (rental agreement) for VAT purposes. VAT is charged on each periodic fee. 8 million x 25% = 2 million is deductible in each month. 12 (b) Information appearing in an invoice-amendment If a taxpayer wants to modify the tax base or the amount of VAT retrospectively, an invoice-amendment has to be issued which includes: the date of issue of the invoice-amendment the identification number of the invoice-amendment reference to the original invoice amended identification of the data amended a description of the nature of amendment the effect of the amendment expressed in monetary terms, if applicable Csoki Bt (a) If a car is legally registered by a Hungarian organisation, company car tax becomes payable. 1 There is no exemption from this rule, so even if Csoki Bt is an EVA-qualified company that cannot deduct expenses, it is still liable to pay company car tax. 1 2 (b) Company car tax payable Notes Quarter 1 Quarter 2 Quarter 3 Quarter 4 Date of payment 1 n/a 20 July October January 2011 Amount 2 & ,000 21,000 21, The deadline for payment is the 20th day of the month following each quarter In the case of a finance lease the tax liability arises on the first day of the month following the month of entering into the lease agreement. This means that the first day of tax obligation is 1 May The cubic capacity of the car is less than 1,600 cm 3, so the amount of tax payable is 7,000 per month. 4 19

9 (c) (d) Marks EVA-advances payable Date of payment Notes Calculation of EVA-liability Quarter 1: 3 million x 1 25 x 30% 1,125, April & 2 Quarter 2: 3 2 million x 1 25 x 30% 1,200, July & 2 Quarter 3: 5 million x 1 25 x 30% 1,875, October & 2 Quarter 4: 4 million x 1 25 x 30% 1,500, December & 3 Total 5,700, The rate of EVA is 30% and it is payable on gross revenue, i.e. the net sales revenue increased by the amount of VAT The deadline for paying the EVA-advances is the 12th day of the month following the quarter for the first three quarters of the tax year By 20 December the taxpayer must assess the total EVA payable for the year and pay it as an advance. The deadline for filing the annual EVA-return and paying any remaining EVA-liability is 25 February following the tax year. Net cash dividend Total net sales revenue in the tax year 15,200,000 Total gross sales revenue in the tax year (including VAT) 19,000,000 Less: EVA (as per part (c)) (5,700,000) Less: gross salary expenses (1,520,000) Less: contributions on salary expenses at 27% (410,400) Less: other expenses (105,000 x 1 25) (131,250) 1 Less: company car tax (as per part (b)) (56,000) Less: lease payments and fuel expenses (120,000 x 9) (1,080,000) Net cash dividends 10,102, Tutorial notes: 1. The EVA regime replaces both income taxes and value added tax (VAT). 2. Employers must pay total contributions of 27% on wages. 3. Under the EVA regime no VAT can be deducted by the taxpayer, so input VAT is an expense for the company. 5 20

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