Stockholm University_ _ Masters Thesis (Draft) · Web viewAccording to Article 4, a taxable person means any person who independently carries out in any place any economic activity,

Stockholm University Masters Thesis International Business AcademyInstitution of Business AdministrationSupervisors: Doc. Birgitta Wadell, Doc. Claes Hägg1999 January, Stockholm

European Union Taxes

An overview and comparison of the Value Added Tax and Excise Dutiesof the EU and Hungary

Authors:Orsi Deseö

Annmari Kalbantner

Deseö, Kalbantner European Union Taxes

ABSTRACTSpring 1998 negotiations were started between the European Union (the EU) and the first group of ap-plicant countries from Central and Eastern Europe. The Central and Eastern European Countries (the CEECs) applied for membership in 1994 at the time when the Europe Agreement had been in effect in two years. Negotiations became feasible after the fall of the socialist regime when the CEECs started to build up democracy and a new political system of parliamentarism. Since then they have striven to es-tablish market economies and a functioning legal system by taking examples from Western Europe. Countries in Central and Eastern Europe have reached different stages of development in trying to es-tablish market economies. For Hungary an accession to the EU was something nobody believed was possible just a decade ago. That is why this event is of great interest to us and that is the main reason why we have chosen the subject of European taxes for our Masters Thesis. Our objective is, thus, to analyze the development of European Union taxes and how the Hungarian taxes need to be adapted to the tax legislation of the EU. We also aim at presenting how Hungarian companies evaluate their cur -rent situation and what they expect from a future Hungarian membership in the EU.

We found that there are no differences between the basic principles of the European and the Hungarian taxation concerning the system of value added tax and excise duties. The Hungarian legislative powers have attained a high level of approximation of laws but further measures are needed before accession. We assert that rates differ concerning both the value added tax and the excise duties. The Hungarian Act on VAT does not provide rules governing the tax treatment of new means of transport, distance sales and VAT warehousing arrangements. Several differences are of technical or terminological na-ture in the sense that terms relating to and events occurring in connection with inter-Community trade will have no relevance until Hungary is not a member in the Union. The Hungarian definitions are ex-tended to a larger group of taxable persons and transactions. We also conclude that the Hungarian stan-dard and reduced rates of VAT are remarkably high. The group of zero-rated transactions is more ex-tensive in Hungary. Hungarian companies have less administrative obligations than their counterparts in the Union. In contrast to the four special schemes in the EC Directive, the Hungarian Act provides for six.

Concerning excise duties we found that in Hungary there is only one Act regulating the production and holding of excise products. We assert that the general regime in Hungary is compatible with the system applied in the EU, however, the Customs Office does not seem to be mature for satisfying its legal re -quirements. In general, the rate of duty on alcoholic beverages is lower in Hungary, except for the rate on beer which is notably higher than in the EU. Another important difference is that wine is omitted from the scope of the Act on excise products though, there is a consumption tax levied on wine. We found the least differences regarding the rates of duty on mineral oils but these were also higher than the EU minimum rates.

The greatest problem of companies proved to be the large number of amendments that make strategic planning problematic. Hence, they look forward to the future changes, which will influence compa-nies’ situation positively, as a result of Hungarian accession into the European Union.

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TABLE OF CONTENTS

ABSTRACT.......................................................................................................................................................................

TABLE OF CONTENTS...................................................................................................................................................

1. INTRODUCTION..........................................................................................................................................................

1.1 BACKGROUND............................................................................................................................................................1.2 OBJECTIVE.................................................................................................................................................................1.3 RESTRICTIONS............................................................................................................................................................1.4 ASSUMPTIONS............................................................................................................................................................1.5 METHOD....................................................................................................................................................................1.6 DISPOSITION OF THE THESIS.......................................................................................................................................

2. METHOD......................................................................................................................................................................

2.1 CHOICE OF SCIENTIFIC METHODOLOGY......................................................................................................................2.2 SCIENTIFIC PERSPECTIVES..........................................................................................................................................

2.2.1 Positivism..........................................................................................................................................................2.2.2 Hermeneutics.....................................................................................................................................................2.2.3 Critical Philosophy............................................................................................................................................

2.3 SCIENTIFIC APPROACHES............................................................................................................................................2.3.1 Quantitative Approach.......................................................................................................................................2.3.2 Qualitative Approach.........................................................................................................................................

2.4 CASE STUDIES...........................................................................................................................................................2.5 INTERVIEWS...............................................................................................................................................................2.6 LITERATURE STUDY...................................................................................................................................................2.7 EVALUATION CRITERIA..............................................................................................................................................

3. VALUE ADDED TAX...................................................................................................................................................

3.1 WHAT IS A VALUE ADDED TAX?................................................................................................................................3.2 HARMONIZATION OF TURNOVER TAXES IN THE EC.....................................................................................................

3.2.1 History..............................................................................................................................................................3.2.1.1 First and Second Directives..........................................................................................................................................3.2.1.2 Towards a Single Market..............................................................................................................................................3.2.1.3 Harmonization of VAT.................................................................................................................................................

3.2.2 Abolition of Fiscal Frontiers..............................................................................................................................3.3 VAT DIRECTIVES.......................................................................................................................................................3.4 HUNGARIAN VAT......................................................................................................................................................3.5 COMPARING THE HUNGARIAN ACT WITH THE EC DIRECTIVE......................................................................................

3.5.1 Scope of the Tax.............................................................................................................................................................3.5.2 Territorial Application.....................................................................................................................................................3.5.3 Taxable Persons..............................................................................................................................................................3.5.4 Taxable Transactions.......................................................................................................................................................3.5.5 Place of Taxable Transactions.........................................................................................................................................3.5.6 Chargeable Event and Chargeability of Tax.....................................................................................................................3.5.7 Taxable Amount..............................................................................................................................................................3.5.8 Tax Rates........................................................................................................................................................................3.5.9 Exemptions.....................................................................................................................................................................3.5.10 Deductions....................................................................................................................................................................3.5.11 Persons Liable for Payment of Tax................................................................................................................................3.5.12 Administrative Obligations............................................................................................................................................3.5.13 Special Schemes............................................................................................................................................................3.5.14 Differences....................................................................................................................................................................

4. OTHER INDIRECT TAXES.........................................................................................................................................

4.1 EXCISE DUTIES..........................................................................................................................................................4.1.1 History of Harmonization...................................................................................................................................

4.1.1.1 The Commission’s General Programme........................................................................................................................

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4.1.1.2 Hungarian Legislation..................................................................................................................................................4.1.2 Alcoholic Beverages..........................................................................................................................................

4.1.2.1 Regulations in Hungary................................................................................................................................................4.1.3 Mineral Oils......................................................................................................................................................

4.1.3.1 Hungarian Legislation..................................................................................................................................................

5. CASE STUDIES AND INTERVIEWS..........................................................................................................................

5.1 RESPONDENT COMPANIES...........................................................................................................................................5.1.1 Interviewees.......................................................................................................................................................5.1.2 Respondent Companies......................................................................................................................................5.1.3 Markets.............................................................................................................................................................5.1.4 Finance.............................................................................................................................................................

5.2 VALUE ADDED TAX...................................................................................................................................................5.3 EXCISE DUTIES..........................................................................................................................................................

5.3.1 Alcoholic Beverages..........................................................................................................................................5.3.2 Mineral Oils......................................................................................................................................................

6. CONCLUSIONS............................................................................................................................................................

6.1 SELF CRITIQUE...........................................................................................................................................................6.2 SUGGESTIONS FOR FURTHER STUDIES.........................................................................................................................

7. REFERENCES..............................................................................................................................................................

8. APPENDIX....................................................................................................................................................................

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1. INTRODUCTION

1.1 BackgroundThe European Union (EU) is a unique feature in this century. If one gathers information about it, starts to understand more and it makes one wonder how the future of Europe may look. Though it is going to be a long process to achieve it, a ‘united Europe’ sounds extremely challenging.

All historical evidence demonstrates that societies and economies prosper when they are united to form a larger entity. Actually, nation states are new features of our history - they are only 200-300 years old. Previously, there had been only empires in Europe: the Ancient Roman Empire, the Holy Roman Em-pire, etc. Nation states began to develop only in the 17th century, starting with France, followed by Italy and Germany. The ancient empires were established with the help of strong military force. All the empires were heterogeneous and included numerous nations speaking different languages. In the em-pires nations kept their own culture contributing to diversity. Above all, those large entities had com-mon state administrations, common currency and well-developed infrastructures - factors that led to significant economic development. The similarities between the empires of European history and the European Union are easily recognizable. There is one difference of major importance though; currently there is no superior military force to unite Europe. The memory of the terrible experiences of two World Wars drives the process of unification in Europe. In the 1950’s Europeans, realizing that the fear of another war characterized the whole continent, voluntarily decided that it was in their common interest to join forces. Soon it was clear that political cooperation was not possible without economic cooperation. Harmonization of economic interests and cooperation between national economies seemed to be a prerequisite to establishing political cooperation.

In the spring of 1998 negotiations were started between the European Union (the EU) and the applicant countries from Central and Eastern Europe. The Central and Eastern European Countries (the CEECs) applied for membership in the beginning of the 1990’s after the fall of 40 years of socialism and a shift to democratic parliamentarism. Developing a new political system, establishing democracy and adjust-ing to new circumstances does not occur in the scope of just some years. Such a transition requires cul-tural changes and a different way of thinking, which means that closing up for the CEECs may even take decades.

Throughout our Masters Thesis we will use two expressions and abbreviations with equal meaning in most cases. One of them is the EU, the European Union, which in the broadest sense includes all politi -cal and economic cooperation of the Member States. The Union has been established on pillars, one of which is the economic cooperation between the countries and is called the European Community, the EC, including all previous Treaties and Agreements. When we refer to the regulations and directives, we will use the term EC and European Community, in other cases when a broader sense is more appro-priate, we will use EU or the European Union. We consider that the two expressions could be used equivalently.

1.2 ObjectiveAs the accession process of Hungary were started in 1998, we wonder how Hungarian taxation laws and regulations diverge from those of the EU. We would like to examine the differences in the areas of

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value added tax and excise duties. Our objective is therefore to study the differences between EC Di-rectives and regulations on the one hand and the Hungarian tax legislation on the other, which we aim to do in order to facilitate Hungarian companies’ adjustment to the new developments. This compari-son is even directed towards the European companies, which were planning to establish an affiliate or a subsidiary in Hungary but have not done it yet, due to uncertainty or the lack of satisfactory knowledge about the Hungarian tax system. We would like to provide information on the expected changes to Hungarian companies and inform foreign companies about the current differences. We intend to exam-ine how the expected changes in the regulations might affect Hungarian companies. We would also like to study whether there might be different implications for foreign owned companies (multination-als established in Hungary) and purely Hungarian companies. We would like to show whether there is a difference between how large and smaller companies will be affected.

The purpose of our Masters Thesis is to present a clear illustration regarding the adaptation of Hungar-ian taxes, of what has already been accomplished, what is left to achieve, and how the further adapta-tion may affect companies established in Hungary.

1.3 RestrictionsWe will focus on Hungarian national legislation and EC Directives regulating the area of taxation only. We would like to analyze the system of value added tax and excise duties, while we will not consider corporate and personal income taxes here. We have omitted even the discussion about the excise duty on manufactured tobacco, first because we have not had any underlying case study to illustrate the dif-ferences and because we were forced to further restrict our Master Thesis.

We will neither discuss the issues of competition law nor consumer protection. As we both are becom-ing economists and would like to address companies, we will try to adapt an economic approach in-stead of a juridical. This is despite the fact that our work, to a large extent, will constitute of analyzing and interpreting juridical text. We aim to supply a comparison between the Hungarian and the Euro-pean Union regulations, but we will not compare the taxation laws of Hungary with the same laws of the various Member States. We are aware of that EC Directives allow for a certain degree of flexibility and that differences in national legislation within the EU exist in the treatment of various tax issues.

We strive to find an appropriate balance between presenting enough detail and still not loosing the con-nection to the whole. It will be a difficult task as most of the differences between the EC and Hungar-ian legislation can be expected to be found among minor details. Describing all the tiny differences would be boring and endless, and the space and time available would not be enough. Our work is therefore to weigh the importance and scope of the difference and then decide to present or omit it from the thesis.

1.4 AssumptionsSince we know that foreign owned subsidiaries in Hungary usually have easy access to and can be more familiar with foreign taxation systems through the parent company, we assume that there will be differences in how foreign owned companies and Hungarian companies will be affected by the changes in taxation as a consequence of the membership in the EU. We also assume that knowledge about the European Union is more extensive among foreign owned companies than Hungarian companies. The reason for this is that home countries of the foreign companies in Hungary are to a large extent coun-tries which are already members of the EU. We also assume that smaller companies have little infor-mation about the EU while larger companies have already developed some knowledge based on their

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experiences in different situations occurring in international trade. Another factor, which we think can influence a company’s opinion and expectations concerning taxation, is whether a company is a manu-facturing or a retailer business.

1.5 MethodWe aimed to rely on both secondary sources and primary sources as underlying material for writing our thesis. Considering the nature of the subject, it seemed obvious that our work would consist, to a large degree, of the analysis of legal text. Thus, comparing the original text of the relevant Hungarian Acts and EC Directives was partly the basis of our primary data collection. Owing to the nature of the subject, preparing a quantitative survey did not look appropriate and that is why, for the further collec-tion of primary data, we planed to interview key persons in companies. For effecting these interviews we established personal contacts with individuals responsible for the issues of taxation in the compa-nies, and contacted the Department of EU Integration in the Ministry for Foreign Affairs. However, es-tablishing similar contacts in the EU institutions never seemed realistic. For the purpose of better un-derstanding, and for avoiding misinterpretation, we also consulted tax advisors who previously had worked for the Ministry of Finance and for the Tax Authority.

Based on the above, we adopted a qualitative approach instead of a quantitative one because it better suited our hermeneutic objective of increasing understanding about the subject matter. Our literature study relied on information from the EU authorities (official legal text of the Directives) and on infor-mation from the Hungarian State authorities (the relevant juridical material). Two main books have been used for the establishment of a rather economic than judicial aspect. We collected information by searching libraries, looking for articles, searching the Internet and visiting the official homepages of the EU (http://europa.eu.int) and the Hungarian Parliament (http://www.mkogy.hu). See more about method in the next chapter.

1.6 Disposition of the ThesisIn this first Chapter we explained why the European Union is such a peculiar phenomenon, we set the objectives of the thesis, listed the restrictions and the assumptions governing our work and provided a short introduction to the methodological part of the thesis.

After the introductory chapter, the second part of the paper deals with the different philosophical per-spectives, theories, and scientific methods. A description of the various scientific perspectives is pro-vided where we take up the basic ideas and beliefs of positivism, hermeneutics and critical theory. We conclude what approach is used throughout our study, describe how our interviews were conducted and why case studies are valuable. We also mention where we found relevant literature, how one should evaluate a study and what criteria to take into consideration when evaluating qualitative research.

Chapter 3 is the longest part of the Masters Thesis. The chapter deals with the value added tax, starting with a theoretical presentation, followed by a historical description of the developments in the area. The Sixth Directive is presented then, in an integrated form with its amendments. The EC provisions are followed by the Hungarian legislation highlighting the main differences.

Chapter 4 is similar to the above mentioned. Chapter 4 deals with excise duties, taking up their histori-cal developments, the regulation of two out of three main excises provided by some eight Directives and followed by the presentation of the Hungarian Act on the special treatment of excise products.

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Chapter 5 consists of material collected from interviews. We present the companies affected by our in-terviews and compile their answers. The interviews concentrated on several important issues. We begin with the description of the companies, their markets and products, prices and customers. After some in-troductory financial questions we focus on the two areas: value added tax and excise duties. We present facts, the opinion of the respondents, and try to reflect the answers as correct as possible.

As for the last part in our Masters Thesis, conclusions, we summarize our findings and put our own opinions about the outcome into written words.

2. METHOD

2.1 Choice of Scientific MethodologyThe choice between the different data collection methods is influenced by the kind of knowledge that is sought. The choice of approach is dependent on the scientific theoretic basis, when in the beginning the researcher states his or her basic assumptions. These basic assumptions are made about how reality is constructed, how people are and behave, about the relation to knowledge and what the researcher thinks about science and methodology. All these assumptions interact with and influence each other and that is the reason why they can not be treated isolated.1

The reason behind all data collection is that there is a question that needs to be answered. Before start-ing a data collection, the research objectives have to be formulated in advance. The scientist has to consider what the problem is and what kind of conclusions he or she is looking for. Before setting ob-jectives the researcher, thus, has to decide what kind of knowledge is valuable in the research context. Within scientific theory there are several philosophies that hold different views of knowledge, for ex-ample that people are born with knowledge, or knowledge is only generated through common sense and logic, or that knowledge is generated through experience and through people making generaliza-tions from their experiences.

The researcher’s scientific beliefs and ideals indicate his or her basic values and a picture of the world. Therefore, it is essential that the researcher carefully analyzes his or her scientific perspective, the way it influences his or her scientific work, his choice and use of method. When studying the various philosophies we sometimes found it very difficult to distinguish between trends and lines. The various trends have developed from, are related to each other and they sometimes show more similarities than differences. It was hard to avoid confusion, to draw a line between the trends and that is the reason be-hind our choice to describe three different scientific ideals that are more distinct from each other. We will not present the various lines within these main philosophies. Below we present positivism, hermeneutics and critical theory of which the first two could be characterized as two extremes on a continuum.

2.2 Scientific PerspectivesScientific perspectives can be distinguished from each other based on three sets of beliefs or ways of seeing and researching the world.2 The first belief is made about the phenomena, i.e. the subject of the study, and this aspect is called ontology. The second aspect is epistemology which deals with the prin-1 Starrin, Svensson: Kvalitativa studier i samhällsveteskapen, 19942M. Hollis: The philosophy of social science - an introduction, 1994

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ciples that the philosophy holds about the notion of knowledge, while the last aspect focuses on the be-liefs about the relationship between knowledge and the empirical world, which is called methodology.

Ontology stands for the analysis of the theoretical beliefs about the physical and social reality and how these are constructed and related to each other. There are beliefs whether the empirical world is as-sumed to be objective and hence independent of humans, or it is subjective and hence it has its exis-tence only through the action of humans in creating and recreating it. Then, there are beliefs about hu-mans and whether they act rationally or not, and whether it is their intention that comes through their action. Finally, ontology studies the beliefs about social relations, which researchers may assume to be stable and orderly in general, or primarily dynamic and conflictive.

Epistemology analyzes the beliefs about knowledge and science. Epistemological beliefs or assump-tions concern the criteria by which valid and valuable knowledge about the studied phenomenon may be constructed and how it should be evaluated.

Methodological assumptions indicate which research methods and techniques are considered appropri-ate and scientific for the gathering of valid empirical evidence. Beliefs about the relationship between knowledge and the empirical world concern the role of theory in the world of practice and reflect the values and the intentions researchers bring to their work. Methodology studies what researchers believe is appropriate to accomplish with their work, and what they intend to achieve with a given study. Some researchers pursue their research interests and certain kinds of theories to provide technical answers to specialized problems, while others pursue theory which they hope will improve the social relations or eliminate social inequalities.

2.2.1 Positivism

This perspective reflects the precepts informing the study of natural phenomena. The studied phenome-non is single, tangible and fragmentable, and there is a unique best description of any aspect of the phenomenon. The researcher and the object of inquiry are independent from each other, and the re-searcher takes a distance from the subject of the study. Positivists believe that law-like generalizations independent of time and context are possible, implying that scientific concepts are precise, having a fixed and invariant meaning. They think that real unidirectional cause-effect relationships exist that are possible to identify and to test with hypothetic-deductive logic and analysis. Positivistic scientists also believe that knowledge and conclusions can be value-free.

In ontological terminology positive science holds that there exists an objective physical and social world that is independent from humans and whose nature can be understood, characterized and mea-sured without problems. The role of the researcher is to discover that objective physical and social real-ity. Understanding phenomena is, thus, a question of modeling and measurement and it is just a matter of designing an appropriate set of instruments and an accurate set of measures to capture the essence of the phenomenon. The researcher is seen to play a passive neutral role in the investigation and should not intervene in the subject of interest.

The epistemological belief of positive science is concerned with the empirical testability of theories, whether these are to be verified or falsified by the hypothetic-deductive method. This in turn has two consequences, a search for universal laws and principles from which hypotheses can be deducted, and a discovery of casual relationships that provide the basis for generalized knowledge, the aim of which is to predict patterns of behavior across situations. Data are assumed to be identifiable and to exist inde-pendent of the method used to reveal and measure them. Sample surveys and controlled experiments

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are the primary data collection techniques, and inferential statistics is the data analysis method used to discover causal laws. The validity and reliability of identifying and measuring instruments are crucial.

Concerning the beliefs about the relationship between theory and practice, this relation is seen as pri-marily technical. If the appropriate general laws are known and the relevant conditions are manage-able, the researcher can produce a desired state of affairs, natural or social. As the inquiry should be value-free, the researcher is meant to be objective and to remain neutral.

2.2.2 Hermeneutics

In this section we deal with the premises of the hermeneutic perspective3, which has seen its popularity rising in many social science field and has developed as an answer and alternative to the principles of positivism. Hermeneutic philosophy assumes that people create and associate their own subjectivity and intersubjective meanings as they interact with the world around them. This theory attempts to un-derstand the phenomena through accessing the meanings that participants assign to them. Hermeneutics rejects the possibility of an objective account of events and situations and seeks instead a relativistic, shared understanding of phenomena. The objective of hermeneutics is to understand the intersubjective meanings embedded in social life and interpret why people act the way they do.

From an ontological perspective hermeneutics emphasizes the importance of subjective meanings and social, as well as symbolic, action in the process through which humans construct and reconstruct their reality. This perspective assumes social relations as givens. These do not exist apart from humans, hence they can not be apprehended, characterized and measured in some objective or universal way. Scientists recognize that as meanings are formed, transferred and used, they are also negotiated, and the interpretation of reality may shift over time as circumstances, objectives and constituencies change.

The hermeneutic philosophy is premised on the epistemological assumption that the social process can not be captured by hypothetical deduction, covariances and degrees of freedom. Instead, understanding involves getting inside the world of those generating it. It challenges the claim of a disjuncture between everyday social practices and the language used to describe them. Hence, understanding social reality amounts to understanding how practices and meanings are formed and informed by language and norms shared by humans working towards shared goals. Researchers construct interpretations or expla-nations that account for the way subjective meanings are created and sustained in particular settings.

Concerning the methodological part of hermeneutics, the appropriate methods here are field studies and qualitative methods for generating valid knowledge, as these examine humans with their social set-tings. The researcher approaches the field of interest with an attention to the emerging themes and cate-gories respondents use. The underlying premise is that individuals act towards things on the basis of their meanings for them, that meanings arise out of social interaction and that meanings are developed and modified through an interpretive process. This approach allows participants to use their own words and expressions and to draw on their own concepts and experiences. The primary aim is to describe, in-terpret, analyze and understand the social world from the participants’ perspective.

2.2.3 Critical Philosophy

The aim of critical philosophy is to criticize the status quo through the exposure of what is believed to be deep-seated, structural contradictions within social systems. This philosophy attempts to reveal the historical, ideological and contradictory nature of present practices. Critical researchers aim to evaluate 3M. Hollis: The philosophy of social science - an introduction, 1994

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and transform the social reality under investigation. Whereas the other two philosophies are content with predicting, explaining, or understanding reality, this perspective is concerned with criticizing the social order, seeking to reveal contradictions and conflicts that may be within their structures.

Ontologically, the central idea within the critical philosophy is that social reality is historically consti -tuted and hence human beings and societies are not restricted to exist in only one particular state. Ev-eryone has an unexploited potential and people recognizing this potential in themselves can act to change their material and social circumstances. However, people are alienated from their potentials. Thus, the aim of the researcher is to create awareness and understanding of the various forms of social domination, so that people can act and eliminate them.

The epistemological belief of the critical theory is that knowledge is grounded in social and historical practices. There can be no theory-independent collection and interpretation of evidence in order to prove or falsify a theory. Therefore there are necessarily ‘produced’ or a priori elements involved in all empirical scientific knowledge. If science is to be understood philosophically and given epistemo-logical foundations, philosophy will have to be able to describe these a priori elements.4 Due to a com-mitment to a processual view of phenomena, critical studies tend to be longitudinal. The research methods are long-term historical studies and ethnographic studies of developments and structures. The reliance on historical analyses is compatible with the belief that a phenomenon can only be compre-hended historically, through an analysis of what it has been, what it is becoming and what it is not.

Concerning the relationship between theory and practice, critical researchers hold that the relationship has to bring the restrictive conditions of the status quo to people’s consciousness, thereby initiating change in social relations and practices, and thereby helping to eliminate the basis of alienation and dominance. Social research and social theory are seen as critique, to emancipate and to develop con-sciousness. The role of the researcher is different as well, because he or she has to go beyond mere studying and theorizing to actively bring about change in the phenomena being studied. The research is also transformative, which affects both the subject of study and the researcher herself.

2.3 Scientific ApproachesTwo different approaches used to be distinguished in social sciences.5 The basis for the distinction is based on the kind of information the two approaches analyze. The most important difference is how one applies statistics and figures. Both approaches have their advantages and disadvantages so the choice of approach will depend on the problem that the researcher wants to analyze and on the scien-tific perspective he or she holds. The choice of approach will be dependent on the scientist’s view of how reality is constructed. The two approaches are the quantitative and the qualitative approach.

2.3.1 Quantitative Approach

Quantitative methods are formalized and well-structured while the argumentation is based on numbers and on the systematic statistical relations between the variables. Quantitative methods used to be ap-plied by scientists of the positivistic philosophy. In quantitative analysis the starting point is the search for differences between observation units in terms of different variables. The core of the analysis is the findings of statistical regularities in the way different variables are associated and correlated with each other.

4Stockman: Antipositivist theories of the science, 1983, p 44.5 Holme, Solvang: Forskningsmetodik - om kvalitativa och kvantitativa metoder, 1991, p 11.

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The researcher controls the method and the process. He defines the criteria and conditions that are of special interest in the study. The possible answers are dependent on the method. The design and the planning are characterized by selectivity and distance from the source of information. All this is neces-sary in order to make a formalized analysis and comparison, and to prove that the results are valid for every entity in the population.

2.3.2 Qualitative Approach

Qualitative methods are less formalized and the objective is rather understanding. Qualitative methods characterize the hermeneutic scientific philosophy. The researcher does not aim to prove the generality of the findings. The focus is on a deeper understanding of a complex problem by gathering information in different ways. The study aims to describe the whole and the context in it. Closeness to the source of information characterizes the method. One has to explain all reliable pieces of information known to belong to the problem being solved in such a way that they are not in contradiction with the interpreta-tion presented.

We have applied the hermeneutic scientific perspective. We did not try to find clauses and causes, but strove to better and deeper understand the studied phenomenon. As the social reality is continuously changing, time and space had special importance even in our study. Being aware of this, we tried to study taxation systems in their continuous development, and not at a single moment. The Hungarian national law and the Union’s acquis are prerogative, constantly developing and changing and that is why it was difficult not to make a comparison that looses its value the next day. A lot has happened since we started our study and it will be outdated in a year, despite all our efforts. Every little detail was important to us - even if we are not going to present many of them - still they helped us in seeing the complex whole and improve our understanding.

Hermeneutics also holds the view that each and every case has its own characteristics and has to be un-derstood out of the specific context. It is a special time and a unique situation in Hungary, as never be-fore has Hungary had to harmonize its laws to the European Union’s provisions and it is most unlikely that this will happen again in the future after the country has become a member in the EU. We spent a lot of time arguing, explaining and exchanging opinions with the respondents.

2.4 Case StudiesA case study is a form of research, which studies a smaller group of respondents, for example individu-als or an organization. This type of study is based on a perspective of the whole, i.e. it analyzes a larger number of variables in detail regarding a smaller number of research objects, in contrast to surveys. The objectives of case studies are usually to study processes, developments and changes.6 Yin defines case studies as empirical studies that analyze a phenomenon in its real context, where the border lines between the phenomenon and context are not clear and in which multiple sources of proves are used. 7

The strength of case studies is that they allow for a great variation of data. In general, case studies are best applicable in research situations where the questions that the researcher seeks to answer are ‘how’ and ‘why’. Case studies are appropriate tools when the researcher has no or little control over the events and when the research object is a current development of the real world. Such a case study aims at explaining the real world.

6 Patel, Tibelius: Forskningmetodikens grunder, 1987, p 62.7 Yin: Application of case study research, 1989, p 23.

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Other features, case studies have, are that they stress the importance of the whole and they give an overview, which in turn makes thick descriptions possible. The researcher can make use of multiple sources and methods which gives him/her the ability to get better acquainted with the case through his long-term presence, which makes deeper understanding easier. The researcher can consider the subject matter from every angle and provide a complete description that can become the basis for further dia-logue.8

2.5 InterviewsThe empirical research has been conducted in the form of interviews. An important prerequisite for the application of interviews as method is that language is seen as a source of information, which provides data about contents, context, events and handling. Interviews differ in their degree of standardization. On the one end, there are questionnaires where the researcher strictly predetermines the sequence of the questions and the possible answers are given for the respondents. On the other end, there are the wholly open and free interviews, which have the objective of understanding the meaning of the phe-nomenon. The questions are not formulated in advance but develop under the interview process. The researcher has little control - except for the given objectives and the theoretic approach - and lets the respondent describe his ideas and opinion with his/her own words, as free as possible.

Another factor that distinguishes interviews from each other is their structure. A well-structured inter-view is focused and oriented towards the information sought. The objective of the interview has been set in advance, all the main questions and the follow-up questions have been defined in order to sup-port a consequent and systemic analysis of the subject matter. A less structured interview has a wider context and is less focused on facts and data. The objective with these kind of interviews is to let the respondent value the situation, tell his own opinion and attitude because these are seen equally impor-tant as the facts and data. Concerning our subject, we found the qualitative method and interviews to be most appropriate. It is characteristic of qualitative research to collect materials which make many kinds of questions and problematics possible. One has to be able to change the viewpoint and to gather data that consists of different observations.9 In qualitative interviews one does not only make notes of the answers to the questions, one also ought to make detailed notes of the situation in which the interviewer presents the questions.

2.6 Literature StudyOur literature study is based on two main works concerning the Directives of the EC. Organizations that publish laws and commentary on taxation are the International Bureau of Fiscal Documentation, Ernst and Young, Coopers and Lybrand. The International Bureau of Fiscal Documentation, the IBFD, is an independent, non-profit foundation devoted to research in the fields of international tax law and foreign investment legislation. Today, the IBFD enjoys a unique worldwide reputation among tax and business professionals as the premier source of clearly presented systematic descriptions and analyses of changes and trends in global taxation and investment.

The IBFD’s “A Guide to the European VAT Directives - Commentary on the Value Added Taxes of the European Community” comprises five binders. The authoritative analysis, backed up by a compila-tion of documentation and information on the subject, provides truly comprehensive coverage of all as-8 Norén: Tolkande företagsekonomisk forskning, 1990, p 4.9 Alasuutari: Researching culture – qualitative method and cultural studies, 1995, p 42.

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pects of the European Community Directives on VAT. Compiled by Professor Ben Terra and Advocate Julie Kajus - both recognized experts in the field - this is the only publication currently available to re-produce the full texts of the Directives in all nine official languages of the Community.

The other important source in our work is the book of A.J. Easson, “Taxation in the European Union”. He takes up all the fields of taxation and provides a detailed explanation and discussion of the various aspects.

Regarding the Hungarian regulation, we used the original texts of the relevant acts. We have found plenty of articles on the subject of harmonization and approximation of laws. However, only a few dealt with the area of taxation. In finding the main differences between the Hungarian legislation and the EC Directives, three books provided great help. One of them is the published version of the Com-mission’s White Paper for Central and Eastern European Countries. Another source is the book con-taining the Questionnaire of the EU and Hungary’s answers to it. The last source of special importance is the Commission Opinion on Hungary and the evaluation of its development stage in the process of preparing for accession into the EU.

2.7 Evaluation CriteriaThe following evaluation criteria are based on Madelenine Leininger: “Evaluation Criteria and Critique of Qualitative Research Studies”.10 According to Leininger, there are six evaluation criteria for evaluat-ing qualitative research.

1. Credibility: This criterion stands for the value or the believability of the research findings through prolonged observations, engagements and participation with the informants. Credibility refers to the truths as known, experienced and felt by the people being studied. The informants are the primary gatekeepers, while the researcher is the secondary gatekeeper. In order to grasp the informants’ world in its fullest known and credible form, the researcher has to take this phenomenon into account. Active listening, reflection and empathetic understanding are essential factors. The researcher should let the informant interpret what is credible for him or her and not impose his/her own interpretations onto statements.

2. Confirmability: It refers to the repeated direct participatory and documented evidence observed or obtained from primary informant sources. Confirmability means obtaining repeated affirmations of what the researcher has heard, seen and experienced with respect to the phenomenon being studied. One should get evidence from the informants about the findings. It requires feedback from the people involved. It is a form of control in order to ensure consequent interpretation.

3. Meaning-in-context: It refers to data that have become understandable within holistic contexts or special referent meanings to the informants or people studied in different or similar environmental con-texts. The criterion focuses on the contextualization of ideas and experiences within a total situation, context or environment.

4. Recurrent patterning: This criterion refers to repeated instances, sequence of events, experiences that tend to be patterned and recur over time in designated ways and in different or similar contexts. Repeated experiences reflect identifiable patterns of sequenced behavior.

10 J.M. Morse: Critical issues in qualitative research methods14


5. Saturation: It stands for the full immersion into phenomena in order to know it as fully and compre-hensively as possible. The researcher has to do an exhaustive exploration of whatever phenomenon is being studied. He/she has to gather in-depth information and thick data to know the subject fully. It is achieved when the researcher can not find further explanation and no more information is forthcoming from the discussion with the informants.

6. Transferability: It means that the particular findings from a qualitative study can be transferred to another similar context or situation and still preserve the particularized meanings, interpretations and inferences from the completed study. The research does not lose its in-depth understanding and knowl-edge of the particular phenomenon, as the transferability criterion focuses on the general similarities of findings under similar environmental conditions.

The researcher has to understand the significance of each and every of the above criteria before initiat-ing a qualitative study, because these criteria should be used throughout the whole research. The crite-ria can help the researcher in his study by that that they should be integrated in the documentation and taken into account, rather than only using them at the end and in the evaluation process.

After providing the methodological background we will now take up the discussion of the value added tax, its regulation in the EC and Hungary.

3. VALUE ADDED TAXThis section is based on one major contributing work of authors: Prof. B. Terra, Adv. J. Kajus: A Guide to the European VAT Directives - Commentary on the Value Added Taxes of the European Com-munity.

The value added tax is not a new phenomenon. In Europe turnover taxes carry with them a fate that in almost all countries introduction of these taxes was associated with trouble and frustration, as they were related to war and crises. This can be seen from the dates, on which these taxes were introduced: Germany in 1916, France in 1920 and Belgium in 1921. The turnover taxes were introduced in order to cover the ever increasing government spending resulting from the First World War. In the Netherlands a similar tax was levied in 1933 after the Great Depression, and England introduced a turnover tax in 1940. The reasons for the introduction of these taxes fell into a major pattern. The depression reduced revenue from other taxes at the same time as relief needs were increasing. The sales tax, with its low rate, large yield and relatively painless collection, was especially attractive.

3.1 What is a Value Added Tax?The purpose of a turnover tax is, in short, to tax goods destined for personal consumption; in other words it taxes goods on their way to the consumer. Services should also be included in the scope of a turnover tax. The legal character of a turnover tax can be described as a general indirect tax on con-sumption. The objective of a tax on consumption is to tax expenditures made by private persons. Here, private persons should not be understood literally, because in most countries all non-entrepreneurs are taxed on their expenditures, i.e. churches and government also included. The indirect nature of the tax stems from its feature that the actual payers of tax are separated from those who bear the tax burden. A turnover tax is intended to tax all private expenditures, the tax thus, should not discriminate between goods and services, as they both represent consumption. This seems to be quite self-explanatory, since in many instances a certain good is a close substitute for a particular service. For example: replacing

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defective parts of the car or have them repaired, buying a washing machine or have one’s laundry done by a third party.

Furthermore, there should be a relationship between the tax burden and the amount spent by the indi-vidual. A minimal requirement, here, is that the amount of tax payable per individual consumer is mea-surable. In order to correlate the expenditure of individual taxpayers with the tax burden, it is necessary that the amount of tax is certain, and is expressed as a percentage of the retail price, i.e. the amount has to be equal for identical products. The general character of the turnover tax thus demands, that the equal is treated equally and the unequal in proportion unequally. From the equality requirement it fol-lows that it should not make any difference whether expenditure is related to goods produced in the country of consumption or to imported products. This is based on the assumption that imported prod-ucts have left the country of origin ‘tax-free’.

The turnover tax is a tax on consumption, but here even the word ‘consumption’ needs to be specified more clearly. Some goods can be consumed fully and immediately, while the consumption of other goods is a continuous process. The turnover tax should focus on the expenditure, in order to attain con-sumption. A distinction between immediate and continuous use is not to be made. The tax is due as soon as the consumer has made the expenditure; the tax is levied from the person by whom the money has been spent. A definition of the indirect tax could be: a tax that is not levied directly upon the per -son on whom it ultimately falls, but charged in some other way, especially upon the production or im-portation of goods, the price of which is thereby augmented to the consumer, who thus pays the tax in the form of increased price. This definition is based on the assumption that indirect taxes are fully shifted forward to the consumer and thus are fully reflected in product prices, while direct taxes are fully shifted backward to the producer and thus have no price effect.

Another important aspect for understanding turnover taxes is the destination principle. It comes from the general character of the tax, that it should not make any difference whether the expenditure is re-lated to goods produced in the country of consumption or to imported products. A turnover tax usually comprises a tax on importation, since otherwise no tax would be paid on the consumption of foreign products. However, it is possible that imported products are already taxed in the country of production, so that the compensatory tax on importation results in double taxation. To avoid this type of double turnover taxation between independent states, the country of destination has been accepted as the lead-ing principle. This destination principle taxes goods where they are consumed, refunding the tax on ex-port goods and imposing a turnover tax on imports. Alternatively, the ‘origin principle’ would tax goods where they are produced - which is more comprehensive with the value added principle. The ad-vantage of the destination principle is that all products bear the same tax burden when finally sold to the consumer, while its disadvantage is that border tax adjustment always seem necessary.

3.2 Harmonization of Turnover Taxes in the EC

3.2.1 History

The growing acceptance of the value added tax did not really start until the European Economic Com-munity was established in 1957. The EEC Treaty (1957, the Treaty of Rome) instructed the EU Com-mission to consider how the legislation of the various Member States concerning turnover taxes, excise duties and other forms of indirect taxation, can be harmonized in the interest of the common market. In 1960 the Commission appointed three working groups and the Fiscal and Financial Committee to study the tax systems of the Member States. The conclusions of the working groups’ report and the Fiscal

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and Financial Committee recommended that the Member States must abolish the cascade tax and adopt the value added tax in its place. The Fiscal and Financial Committee was led by Professor Fritz Neu-mark from Germany, and that is why the report is usually referred to as the Neumark report. The rec -ommendation to adopt the value added tax, was rather peculiar at that time since the tax existed only in one Member State: France.

The EEC Commission agreed with the findings of the reports and proposed in a draft directive that har-monization should proceed in three stages. In the first stage Member States should abandon their multi-stage cumulative turnover taxes and replace them by a non-cumulative system. During the second stage the non-cumulative systems should be replaced by a common value added tax system. The last stage should result in the abolition of intra-Community tax-frontiers. The Internal Market Committee of the Parliament in its ‘Deringer report’ - after the chairman of the Committee, M. Arved Deringer - advised that the three stages should be reduced to two. There seemed little point in changing to non-cumulative systems, as a temporary measure, if a VAT was to be introduced eventually in all states.

3.2.1.1 First and Second DirectivesThe First Directive instructed the Member States to replace their present turnover taxes, not later than 1 January 1970, by the common system of value added tax. The deadline stated in the First Directive was later extended by other Directives. The common system of the value added tax was set out in the Second Directive. It was stated that the value added tax should apply to the supply of goods and the provision of services within the territory of the country by a taxable person against payment and to the importation of goods. The tax should be calculated on the basis of the consideration or price for the supply of goods and provision of services, or in the case of importation, on the customs value of the goods. Member States were free to establish their own standard rates and to subject certain goods and services to increased or reduced rates. The application of zero rates was strictly limited, while Member States were free to determine their exemptions.

The implementation of the First and Second Directives was the first stage in the harmonization of the turnover taxes in the Community. The common system based on these Directives however permitted the Member States such discretion that in 1973, in practice nine different and separate systems of na-tional laws existed, rather than one common system. The major areas that were treated differently were: agriculture, the retail stage, exemptions, deduction of tax on imports and the treatment of ser -vices across frontiers. The major objective thereby was not achieved: the result was double taxation or the absence of taxation, still distorting intra-Community trade.

3.2.1.2 Towards a Single MarketOn 29 June 1985, the Commission published a White Paper for the Council of the EU with the objec -tive of setting out more in detail a programme and timetable in order to achieve a single market by 1992 thereby creating a more favorable environment for stimulating enterprise, competition and trade within the Community. It was not intended to cover all issues, which affect the integration of the eco-nomics of the Member States. The White Paper classified the measures that need to be taken under three headings: the removal of the physical barriers, the removal of technical barriers, the removal of tax barriers.

In the Commission’s opinion, complete harmonization was not essential and for that reason we should use the term approximation. Next, the Commission referred to the situation in the United States, where there are no tax frontiers as such, and differences of up to 5% in tax rates are acceptable even between neighboring states. On this basis, it was argued that if a target rate was to be introduced by the Com-munity, the margin on either side of that rate should be +/- 2,5%. According to the Commission, ap-

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proximation presented a manageable budgetary problem which could be solved by most Member States and would not seriously disturb the existing relationship between direct and indirect taxation. Given adequate time, flexibility and political will, approximation would cause no more difficulty than many Member States have encountered in determining their domestic tax policy. The approximation of VAT focused on three areas: (1) the common base, (2) the number of rates and (3) the level of rates. As far as the number of rates were concerned, the Commission found that despite the predominance of multi-rate systems, there were strong arguments in favor of a single rate. VAT and excises should be treated together when proposals for common rates were to be drawn up, because it often turns out that high VAT yields exist side by side with low excise yields and vice versa.

3.2.1.3 Harmonization of VATIn August 1987, the Commission issued a series of proposals concerning the measures in the field of indirect taxation as a follow up to the chapter on tax barriers in the White Paper. The Commission of the EU issued a Global Communication, where it proposed four major changes in the system of indi-rect taxation within the Community. First, it proposed an approximation of the VAT and the main ex-cise duties. Second, it proposed to eliminate the distinction made between supplies within a Member State and supplies to another Member State. Third, a revised VAT clearing mechanism was proposed. Fourth, for VAT purposes the Commission suggested to change the place of taxable transactions re-garding services.

Although in theory a VAT system with only one rate is the simplest and most efficient structure, clearly such an approach would have had disruptive consequences for all other Member States and was unlikely to be acceptable as a whole. The choice was between a three-rate (reduced, standard and in-creased) and the two-rate system (reduced, standard). In the Member States applying increased rates, their abolition would have not created undue financial problems since they were applied only to a rela-tively small proportion of the tax base. For this reason the Commission preferred a two-rate system. Regarding the coverage of the rates, the reduced rate should apply to items of basic necessity - mainly foodstuff, energy products for heating and lightning, water, pharmaceuticals, books, newspapers and passenger transport.

The clearing system as proposed in the White Paper was designed to operate on the basis of bilateral flows between Member States. In its proposals of 1987 the Commission had come to the conclusion that this was not necessary and that it could operate simply on the basis of money owed to or from a central account. Into this account - serviced by the Commission and operated exclusively in terms of ECU - net-exporting countries would be required to pay and net-importing countries would receive payments from the account. As it turned out, these proposals were considered too bold and radical. In May 1989 the Commission offered new, more moderate proposals.

3.2.2 Abolition of Fiscal Frontiers

On 16 December 1991 the ECOFIN Council finally agreed on the text of a Directive on the abolition of fiscal frontiers. The Directive has dramatically changed the VAT system within the Community and required persons liable to pay VAT to comply with new extensive administrative obligations. The start-ing point of the Directive amending and supplementing the Sixth Directive with a view to the abolition of fiscal frontiers was that purchases by private individuals would be, as a general rule, taxed exclu-sively in the country of purchase. There are however two exceptions to this rule during the transitional period: (1) with regard to purchases of new cars and other new means of transport and (2) with regard to distance sales.

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The adoption of Directive 91/680/EEC merely created a framework for a VAT system without fiscal frontiers; simplification measures were deemed to be necessary. On 18 December 1992 Directive 92/111/EEC amending the Sixth Directive and introducing simplification measures regarding the tran-sitional system was adopted. The Sixth Directive provided that the Council, acting unanimously on a proposal from the Commission, must adopt before 31 December 1977 a Community taxation system to be applied to used goods, works of art, antiques and collectors’ items. After many years in which the Council failed to do so, finally, in 1994 the Council adopted Directive 94/5/EEC supplementing the common system of value added tax.

On 2 March 1994 the Commission tabled its proposals to amend the Sixth Directive and to introduce new simplification measures. Finally, on 20 March 1995 the Council adopted the so-called ‘Second Simplification Directive’. Member States were required to implement the Directive by 1 January 1996 at the latest. The Directive deals, inter alia, with: supplies under a contract to make up work, the na-tional leg of transportation directly linked to an intra-Community transport of goods, the value upon importation, an adjustment period of 20 years relating to immovable property, the right to deduct input tax, and the special exemptions linked to international goods traffic.

3.3 VAT DirectivesThe 1985 Commission proposals contained the adoption of the ‘origin principle’. VAT payments and VAT refunds would then be settled between Member States by means of a clearing house mechanism. As there was insufficient belief that such a mechanism could be made to work and as, due to the insuf -ficient harmonization of VAT rates, the introduction of the origin principle was postponed. It is still in-tended to move to the origin principle but the original deadline of 1 January 1997 was not met. The transitional regime has been extended automatically until the date of entry into force of the definitive system.

The Directive 92/77/EEC of 19 October 1992 sets minimum rates, but no maximum rates. In its pro-posal for a new Directive on the level of the standard rate, the Council introduced a minimum of 15% and a maximum of 25%. Under the new rules, most cross-frontier sales between businesses in the EU are still taxed in the country of destination of the goods. Before 1993, this goal was achieved by ex-empting (also known as zero-rating) the export of goods in the country of origin and by taxing the im-portation of goods in the country of destination. Since it is now no longer possible to levy import VAT on cross-frontier sales at the border, rules have been implemented, which further allow the taxation of goods in the country of destination. On the basis of the new rules, the intra-Community supply is ex-empt from VAT in the country of departure of the goods. In the country of destination, there is a new taxable transaction, the intra-Community acquisition of goods. As the VAT due on the acquisition can no longer be paid at the border, the VAT payment is shifted to the VAT return of the person acquiring the goods.

The Commission has provided proposals for a new common system of VAT with the title A Common System of VAT - A Programme for the Single Market. The Commission intends to present suitable proposals for shifting over to a new common system of VAT, which is suited for the single market. The proposed system should make it possible to achieve the completion, implementation and unob-structed operation of the single market. In its document the Commission proposes that the new system should be operational by 2001. In this part the main features of the transitional system of VAT are ana-lyzed, as introduced by the following Directives:

77/388/EEC the Sixth VAT Directive

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91/680/EEC on the abolition of fiscal frontiers92/77/EEC on the approximation of VAT rates92/111/EEC on the introduction of simplification measures94/5/EEC on second-hand goods, works of art, collectors’ items and antiques94/4/EEC and 95/5/EEC on the allowances for tax-free shopping94/76/EEC on the introduction of transitional measures95/7/EEC on definitive changes to the Sixth Directive96/42/EEC.

In the text references are made to the integration of the Sixth Directive and the Directives mentioned above, hereafter referred to as ‘the Directive’.

3.4 Hungarian VATThe present tax system was designed in the end of the 1980s. The modern tax system - with personal income tax, VAT and corporate income tax - was introduced 1 January 1988. The original design and formation of the Hungarian taxation system, and so the VAT, are based on Western European exam-ples. The last ten years have been characterized by making do and mend. The ‘patchiness’ of the tax system is due to the tremendous number of amendments during the previous years. In Hungary the value added tax has a short but lively history during which mistakes have been discovered and neces-sary adjustments to the domestic conditions been made. The VAT legislation have been amended at the end of every year and even several times during the years, which have naturally caused uncertainty among tax payers. Two other factors have also driven the development in the tax legislation: budgetary constraints and the requirement of approximation to the EC Directives. In most cases the amendments were not carefully designed and tested, so the legislative powers recognized the shortages and draw-backs of certain measures after the act became effective. Another sign that pointed to the lack of expe-rience was that related acts and regulation were inconsistent with each other. For example, the act on VAT, the act on accounting and the act on corporate tax provided different provisions for the deduc-tion of VAT. These mistakes needed to be corrected as soon as possible, often during the same ac-counting year. Such shortcomings gave rise to tax avoidance which in turn resulted in lower income from the VAT and extra expenses in the detection of fraud. We could say that today’s VAT legislation is a product of an evolutionary process, which has hopefully reached its end. This, however does not mean that further changes could not be expected, as we will see in the following section. In Hungary the regulations regarding the system of value added tax is provided by the Act LXXIV of 1992 as amended, hereinafter referred to as ‘the Act’.

3.5 Comparing the Hungarian Act with the EC Directive

3.5.1 Scope of the TaxEuropean UnionArticle 2 of the Directive defines the transactions subject to value added tax. Thereby VAT applies to the supply of goods and services and to intra-Community acquisitions of goods effected for considera-tion within the territory of the country by taxable persons acting as such and to the importation of goods. By way of derogation and under certain conditions the intra-Community acquisition by a tax-able person or a non-taxable person is not subject to VAT and these are: the intra-Community acquisi-tion of goods subject to excise duties and the intra-Community acquisition of new means of transport effected for consideration.

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HungaryArticle 3 of Act LXXIV. of 1992 as amended defines the transactions subject to VAT. Thereby VAT applies to the same transactions as in the EU with the exception of intra-Community acquisitions. By way of derogation cigarettes are not subject to the Hungarian Act but subject to VAT, and special pro-visions are applicable to cigarettes prescribed by the Act CIII. of 1997 on excise products. We can point out that the term ‘intra-Community acquisition of goods’ is left out from the definition of the Act, as it has no relevance in Hungary not being a member of the Union.

3.5.2 Territorial ApplicationEuropean UnionThe territorial application is defined in Article 3, mainly by referring to the territorial application of the EEC Treaty. Three terms are defined such as the territory of a Member State, the territory of the Com-munity and the territory of third countries. According to the Sixth Directive, for the purposes of the Di-rective the territory of a country is the area of application of the EEC Treaty as defined in Article 227 establishing the European Economic Community. The territory of the Community is defined by the ter-ritory of the Member States. The territory of third countries is any territory not being part of the terri-tory of a Member State.

HungaryThe territorial application of the Act is provided in Article 1, defined as being the territory of the Re -public of Hungary. Here, again the ‘territory of the Community’ is not defined because it is irrelevant. We can note that several differences stem only from the fact that Hungary is not yet a member of the European Union. The introduction of the formulations and phrases, such as ‘the territory of the Com-munity’ and the distinction of ‘intra-Community acquisition’ and supply of goods from exports and imports should not lead to serious problems later.

3.5.3 Taxable PersonsEuropean UnionAccording to Article 4, a taxable person means any person who independently carries out in any place any economic activity, whatever the purpose or result of that activity. Any person may be a taxable person and therefore entitled to recovery of input VAT. Whether a person is subject to VAT depends on the performance of taxable economic activities. An economic activity is specified to comprise all activities of producers, traders and persons supplying services, including mining and agricultural activ-ities, and activities of professions and the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis. Moreover, everyone is considered to be a taxable person when importing goods. Thus, in this one instance when a private person imports goods the VAT loses its indirect character. Despite these definitions, there are still certain illegal transactions that fall outside the scope of the Directive, such as for example the importation and supply of drugs.

Initial investment expenditure incurred for the needs of and with the view to carry on an enterprise should be considered an economic activity, according to the ruling of the Court. On the other hand, the requirement that a taxable person acts in an ‘independent capacity’ excludes employees from an obli-gation to charge value added tax on their services provided to their employers. Directive 91/680/EEC extended the concept of a taxable person to all circumstances, in which any person effects an intra-Community acquisition of new means of transport and to any person who occasionally performs an in-tra-Community supply of new means of transport.

Hungary

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Article 4 of the Hungarian Act provides a definition of taxable persons equal to the definition of the EC Directive. However, in the Hungarian Act on VAT there are two further groups defined as taxable persons. In the case of tangible or intangible property in joint use and ownership, the group of owners are considered taxable persons. Since the beginning of 1998 even foreign companies are included in the scope of the Act and should be treated as taxable persons. Companies established outside Hungary are considered taxable persons who carry out economic activity through their affiliates and are taxable to the extent of the affiliate’s activity. The inclusion of foreign affiliates into the scope of the Act was necessary because their legal status is twofold. An affiliate is a separate legal entity which indepen-dently carries out economic activity, can enter into contractual relations, etc. but on the other hand, there is no minimum capital requirement to establish such an affiliate. The lack of minimum capital re-quirement together with limited liability does not provide enough protection for the various interest groups who can claim payment from the affiliate, including the tax authority. This advantageous legal status of the affiliate provided incentives for tax fraud.

Economic activity is defined equally in the Act, more precisely: agricultural activity, mining, construc-tion, processing, commercial activity, supply of services, including the activities of professions. Not considered a taxable activity the economic activity if it is carried out in the form of employment or other employment like legal relationship, membership of a cooperative, or other legal relationship whenever there is a subordination present.

3.5.4 Taxable TransactionsEuropean UnionAccording to Article 5 of the Directive a ‘supply of goods’ means the transfer of the right to dispose of tangible property as owner. Tangible property includes electric current, gas, heat, refrigeration and the like. Transfers, made in connection with a compulsory transaction or pursuant to a contract for hire/purchase or a conditional sale, are also considered supplies. The private use by a taxable person or other application for non-business purposes must also be treated as a supply made for consideration. The transfer of goods pursuant to a contract, under which commission is payable on purchase or sale must also be considered a supply of goods.

The mere transfer of economic ownership and not the legal ownership does not prevent transactions to be treated as supplies. If the legal transfer were decisive for the occurrence of a taxable supply, VAT would be imposed at different intervals in the various Member States depending on whether property was transferred by contract (as in France, Italy, Belgium) or by formal act of delivery (as in the Netherlands). Member States may consider the transfer of certain interest in immovable property and rights in rem as taxable supplies. The fact that the taxability of these transactions is optional reflects a misperception of consumption. If consumption in its literal sense, and not expenditure, is regarded as the basis for taxation, then it does not seem appropriate to include the sale of land itself in the tax, land being a commodity, which can not be consumed.

An optional taxable supply is the application of self-constructed goods. Taxation of such self-supplies may be necessary to prevent regular supply patterns from becoming meaningless. When the tax is not fully deductible, the application of self-constructed goods results in a lower tax burden since wage (and profit) components are not taxed. Member States may consider that no supply of goods has taken place in the event of a transfer of a totality of assets or part thereof. In that event the recipient is treated as the successor to the transferor. This provision prevents large amounts of VAT from becoming due, which are deductible anyway.

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‘Supply of services’ is defined in Article 6 of the Directive on a residual basis and means any transac-tion, which does not constitute a supply of goods. The use of services for non-business purposes is treated as a taxable transaction. Member States may derogate from this rule, provided it does not lead to distortion of competition. The taxation of private use is allowed where the input tax on goods was not deductible or in so far as the use includes services, on which VAT was not deductible. Further-more, Member States may subject the self-supply of services to taxation.

‘Importation of goods’ means the entry into the territory of the Community of goods, which do not ful-fill the conditions of Articles 9 and 10 of the EEC Treaty, i.e. the customs formalities have not yet been complied with and the duties are not yet paid. With regard to intra-Community transactions, as a general rule, supplies of goods by taxable persons to another Member State are exempt from VAT. As the direct counterpart of supplies of goods that are exempted in the country of departure, the corre-sponding intra-Community acquisitions by taxable persons and non-taxable legal persons are taxable in the country of destination. The VAT due on the acquisition is deductible in so far as the goods are used for activities, for which a right to deduction exists. Thus, non-taxable legal persons are also subject to VAT when they effect an intra-Community acquisition. Intra-Community acquisition of goods is de-fined as “the acquisition of the right to dispose as owner of movable tangible property dispatched or transported to the person acquiring the goods by or on behalf of the vendor or the person acquiring the goods to a Member State other than that from which the goods are dispatched or transported”.

However, when farmers, eligible for the flat-rate scheme, taxable persons not entitled to deduction of VAT and non-taxable legal persons purchase goods (excluding new means of transport and excise products) in another Member State for an amount not exceeding ECU 10.000, such purchases are ex-cluded from intra-Community acquisitions or, formulated more exactly, their acquisitions are not sub-ject to VAT and as a consequence the purchase is taxed in the Member State, from which the goods are dispatched or transported. Conversely, when the above mentioned persons exceed the threshold or when they exceeded the threshold in the previous calendar year, such purchases are treated as intra-Community acquisitions (and they are taxed in the Member State of destination).

The following transactions should be treated as supplies of goods effected for consideration followed by an intra-Community acquisition of goods:

· the delivery to another taxable person of contract work under certain conditions, “that is to say delivery by a contractor to his customer of movable property made or assembled by the con-tractor from materials or objects entrusted to him by the customer for this purpose whether or not the contractor has provided any part of the material used”. Such supplies are treated as services. Also the above mentioned permission to zero-rate the services not qualified as con-tract work has expired. The Second Simplification Directive has introduced the new rule with regard to the place of supply of contract work and other such services.

· the transfer by a taxable person of goods from his undertaking to another Member State. Certain transactions not qualifying as supplies of goods should nevertheless be treated as supplies of goods. They are referred to as ‘deemed supplies’. The transfers by a taxable person of goods from his undertaking to another Member State, are deemed to be intra-Community supplies for consideration followed by an intra-Community acquisition.

Businesses often dispatch goods on consignment to their distributor in another Member State. There is no transfer of ownership at the time the goods are dispatched to the other Member State. The ownership of the goods only passes when a buyer has been found for the goods or if the distributor himself buys the goods. The Directive does not exclude goods sent on consignment from being a

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deemed supply. This means in principle that the owner of the goods must register for VAT in the Member State where the goods on consignment are stored.

HungaryAccording to Article 6 a supply of goods means the transfer of the right to dispose of tangible prop-erty as owner. Similar to the provisions of the EC Directive, transfers made in connection with a compulsory transaction or pursuant to a contract for hire or purchase or a conditional sale are also considered supplies of goods. Further transactions that are considered taxable are the transfer of goods on consignment, the transfer of property by contract or by formal act of delivery. Even sup-plies under a contract to make up work from customers’ materials is considered a taxable transac-tion (supply of goods) while it is treated as supply of services in the EU. Contract work is thus de-fined equally but treated differently in Hungary.

The Hungarian legislative powers took advantage of the option to treat the application of self-con-structed goods as taxable supplies and chose to tax the self-construction of immovable property. Moreover, the transfer of the right to dispose of goods as owner without consideration (presents), the use of goods for non-business purposes and private use is also considered to be taxable transac-tions where the input tax on the goods was partly or fully deductible. These provisions are in com-pliance with EC regulations. But in Hungary the use of fuel (leaded or unleaded petrol) for the di-rect operation of a passenger car is also considered a taxable supply. We will see the significance of this provision later.

The supply of services is defined similarly as well. The transfer of interests or rights in immovable property are considered supply of service. The use of services for non-business purposes is treated as a taxable transaction. Supply of services without consideration, private use of services and self-supply of services are also taxable transactions, where the input tax was partly or fully deductible. Not considered to be taxable supply of goods or services when an otherwise taxable public body transfers assets or parts thereof, used in its economic activity, to another taxable legal person with-out or for consideration given that the recipient taxable person uses the property for business pur-poses and not opted for non-taxable status. In this case the recipient is treated as the successor to the transferor. This is an optional provision in the Union’s Directive, which has special importance in Hungary where the privatization process has not yet come to an end.

Importation of goods means the entry into the territory of the Republic of Hungary. Note again that the category of intra-Community transactions is not mentioned here as it is irrelevant in the case of the Hungarian VAT regulation.

When goods are exported the supply is exempt with the right to deduction (zero-rating). The export of goods is defined as a transaction which has the consequence that the customs formalities end with the exit of the goods from the territory of the country. Similar to this, goods placed in free zone, in a free warehouse, placed under customs warehousing arrangements are also considered to have left the territory of the country.

3.5.5 Place of Taxable TransactionsEuropean UnionThe doctrine of the place of supply in VAT does not play a role in transactions which are restricted to one tax jurisdiction. As soon as several tax jurisdictions are involved, either because goods are moved to another territory or services are rendered to a person established elsewhere, there is not necessarily a clear answer to the question of whether an activity is performed within or outside a territory. The general rule in the Directive in regard to the place of supply of goods is, at least, clear.

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Goods that are not dispatched or transported are treated as being supplied at the place where the goods are when the supply takes place. The question of allocation will occur only when goods are transported or dispatched, by the seller or purchaser. In this case the place of supply is deemed to be where the transportation commences. When goods are exported the supply is exempt with the right to deduction (i.e. zero-rated). When goods are installed or assembled by or on behalf of the supplier, the place of supply is deemed to be the place where the installation or assembly takes place. In cases of sales by connected contract, the so-called ‘ABC-contracts’, the Directive provides that the sup-plies by the importer and any subsequent supply is deemed to take place in the Member State of im-portation.

The main rule with regard to the place of services is that it is deemed to be the place where the sup-plier has established his business, or has a fixed establishment, from which the service is supplied. A large number of exemptions to this rule have been introduced. The importation of services is not a taxable event in Europe, which results in elaborated schemes of allocating the place of supply of services. Consequently, services supplied in connection with immovable property, including the ser-vices of real estate agents, contractors and architects, are deemed to be performed where the prop-erty is situated. Other services such as cultural, artistic, sporting, scientific, educational or entertain-ment activities, ancillary transport services and valuation of or work on tangible movable property are deemed to be performed where they are physically carried out. The Second Simplification Di-rective provides that valuations and work on tangible movable property - the latter even in the case of contract work - to be treated as these services were to take place where the VAT identification number of the client of these services has been issued, provided the goods serviced are returned to the client. When the place of supply is moved to the place where the client’s VAT identification number has been issued even the VAT liability is shifted to the client. This is the so-called ‘reverse charge mechanism’.

The rules relating to the place of supply of hiring out of movable tangible property caused too many distortions therefore, the Tenth Directive was issued, which prescribes the same treatment as pro-vided for intangible services. Such services rendered to persons outside the Community are taxable where the recipient of the service is established. These services include advertising, the transfer and assignment of copyright, patents, trade marks and similar rights, the services of consultants, engi-neers, lawyers, accountants, data processing services, banking, financial and insurance services and the services of agents who act in the name and on the account of another. When the place of supply of these services is deemed to be in another Member State, than the one where the supplier of the service is established the reverse charge is applicable, i.e. the recipient of the service becomes liable for the VAT, which he has to report in his periodic VAT return and pay to the revenue in so far as he is not entitled to deduction of the amount due at the same time.

With regard to the place of intra-Community acquisition of goods, the Directive provides that this place is deemed to be the place where the goods are at the time when dispatch or transport to the person by whom they are acquired ends. In intra-Community transactions the final destination is not always known, especially in the ABC-contracts when the same goods are subsequently sold by vari-ous parties. It is not until the end of the chain of transactions that it becomes known that the goods are to be delivered by the first party directly to the last party in the chain. Under such circumstances the place of acquisition is deemed to be within the territory of the Member State that issued the VAT identification number, under which the goods are acquired, without prejudice to the main rule, which prescribes that the place of acquisition is where the dispatch or transport ends. This seem-ingly complicated simplification has indeed simplified chain-contracts between three (or more) par-ties located in different Member States.

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HungaryArticle 14 defines the place of supply in case of goods. According to the provisions of the Article when goods are transported or dispatched by the seller or acquirer, or by a third party, the place of supply is the place where the goods are when the transport commences. However, when the goods are abroad when the transport starts and the purchaser is importing the goods, then the place of sup-ply is deemed to be the territory of Hungary.

When goods are assembled or installed the same provisions apply as in the EU. In any other case not specified, thus the general rule is that the place of supply of goods is the place where the goods physically are when tax liability arises. We can state that the place of supply of goods is determined similarly in Hungary and the EU, except for the differences, concerning importation, that arise from the fact that Hungary is not a member in the EU.

The place of supply of services is defined in Article 15 and is determined as in the EC Directives concerning services supplied in connection with immovable property and the construction of it, in-cluding the services of real estate agents, contractors, architects and experts, are deemed to be per-formed where the property is located. In case of transport services the place of supply is determined having regard to the distances covered. The following services are supplied where they are physi-cally carried out: cultural, artistic, scientific, educational, entertainment and sport activities. Ancil-lary transport services, especially warehousing, storage and securing transport devices, work on movable tangible property and work of experts take place where these services are physically car-ried out. Thus, the Hungarian provision mirrors the EC Directive.

The so called intangible services are identical in Hungary and the EU. To the determination of the place of supply the same rules apply and the reverse charge is applicable. Here, we can see that the text of the Hungarian Act is almost identical with the text of the EC Directive, except that hiring out of human resources is also included. The difference lies in how the client is defined: in the Hungar-ian Act the recipient of the service is prescribed by its fix establishment, while in the EU the client is identified by its VAT identification number.

3.5.6 Chargeable Event and Chargeability of TaxEuropean UnionArticle 10 of the Sixth Directive provides that the chargeable event (i.e. the occurrence by virtue, of which the legal conditions necessary to charge VAT are fulfilled) occurs when the goods are deliv-ered or the services are performed. Thus, tax becomes chargeable at the time of delivery or perfor-mance. The delivery occurs when the right to dispose as owner is transferred. If the goods are trans-ported, this will take place, depending on the delivery conditions, either at the time of departure or at the time of arrival of the transport. Although the delivery of goods or the performance of services triggers a taxable event, the Sixth Directive also provides that a taxable event may arise, or at least tax liability occurs, when a supplier issues an invoice for goods or services. A taxable person mak-ing taxable supplies is, in general, liable for payment of the tax. However, where a payment on ac-count is made before the goods are delivered, the tax is chargeable on that amount at the time of re-ceipt of the payment.

As regards imported goods, VAT becomes chargeable at the time the goods enter the territory of the Community. The chargeable event with regard to intra-Community acquisition of goods occurs when the acquisition is effected. The tax becomes chargeable on issuance of the invoice or, at least, on the 15th day of the month following that, during which the acquisition is effected. For exempt intra-Community supplies the tax becomes chargeable on the 15th day of the month following that,

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during which the goods were delivered. However, if the invoice or a document serving as invoice is issued before the 15th day of the month following that, during which the goods were delivered, then the tax becomes chargeable on the date that the invoice was issued. These principles also apply for deemed supplies of goods. Consequently, if no invoice was issued by the 15th day, then the tax be-comes chargeable on the 15th day of the month following that, during which the supply occurred; no tax should become chargeable on payments on account made before the goods are delivered.

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HungaryArticle 16 of the Act LXXIV of 1992 provides similar regulations to the treatment of the chargeable event and of transfers by contract or by formal act of delivery. The delivery of goods and the perfor-mance of services should be determined according to the provisions of the Civil Code. Considering such hire purchases of goods or performance of services (such as a financial leasing), payments used to occur at the end of previously defined time periods. Concerning the performance and payment of hire purchase the taxable event arises when the supplier issues an invoice for the goods or services. Thus tax liability arises at the time of every issuance of invoice on a periodical detailed payment. When goods are delivered on consignment the date, when the chargeable event occurs, is the day the consignee sells the goods in his name, or in case of purchase, buys the goods and the right to dis-pose as owner is transferred to him. If importation is also involved in the consignment agreement, and the consignee is considered the importer, the date when tax liability arises for the transaction between the consignee and a third party in case of sale, or between the consignee and the consignor in case of a purchase, is the day when tax liability arises upon importation.

Where a payment on account is made before the goods are delivered or the services performed (ad-vanced payment) the VAT is chargeable on that amount at the time of receipt of the payment. In these cases the recipient of the payment should treat the advance payment as one which already in-cludes the amount of tax due. When services or goods are used for non-business or private purpose the chargeable event occurs when the services are actually performed and the goods actually deliv-ered. In case of self-construction of assets, tax liability arises when the asset is formally taken into use.

The provisions concerning imported goods are provided in Article 21. Upon importation tax be-comes chargeable at the time the goods enter into the territory of Hungary, the Customs Office has accepted the declaration and the customs formalities have been effected.

3.5.7 Taxable AmountEuropean UnionThe taxable amount is defined in Article 11. VAT rates are expressed as a percentage of the taxable amount defined as everything, which constitutes the consideration, which has been or is to be ob-tained by the supplier from the purchaser, the customer or a third party. Separate provisions deal with self-supplies and internal supplies, i.e. applications for non-business purposes: in general the purchase price or cost price is applicable. The taxable amount in respect of imported goods is the value for customs purposes determined in accordance with the Community provisions in force indi-cates what must be included in the taxable amount: incidental expenses, such as commission pack-aging, transport and insurance costs, incurred up to the first place of destination within the territory of the importing Member State. The method for the determination of the taxable amount for intra-Community supplies is the same as the one applicable to local supplies. For deemed intra-Commu-nity supplies the taxable amount is the purchase price of the goods or of similar goods. In the ab-sence of a purchase price, the taxable amount is the cost price determined at the time of supply. If the taxable amount is expressed in a foreign currency, it has to be converted into the currency of the Member State where the taxable transaction takes place. For supplies of goods the exchange rate ap-plicable is the latest selling rate recorded on the most representative exchange market of the Mem-ber State concerned.

HungaryArticle 22 provides the definition of the taxable amount. In case of goods supplied, services per-formed and importation, the provisions are identical to the provisions of the EC. The Act provides

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for derogations when the taxable amount should not be everything that constitutes the consideration but instead the current net market price. These cases include when the consideration for the goods or services in question is not in proportion compared to the actual market price and when goods are de-livered and services are performed to a specific group of persons: current or former owners of the taxable legal person, legal persons with close economic and financial relationship, employees, the taxable person’s auditor, members of the Board of Directors and their relatives.

In case of exchange of goods, barter and any other transaction where the consideration is not ex-pressed in terms of money, the taxable amount is the market value (net purchase price) of goods de-livered or services performed in exchange. If part of the consideration is expressed in terms of money, it should be added to the market value (net purchase price) of the goods delivered in ex-change. In case of goods and services used for non-business or private purposes, the taxable amount is the net purchase price of the products or services. If there is no such price, then the goods’ cost price should be considered the taxable amount. As regarding the self-construction of assets, the tax-able amount is the cost price of the assets at the time the tax liability arises.

3.5.8 Tax RatesEuropean UnionVAT rates across the Community have not yet been harmonized. This was one of the main reasons for the introduction of the transitional measures. Member States were permitted to apply increased or reduced rates to certain categories of supplies, provided that each reduced rate is fixed at such a level that deduction of the total input tax is permitted in the normal way. This is necessary due to the refusal to grant tax refunds. From a theoretical point of view this can hardly be justified, since the burden of tax falls ultimately upon the consumer.

Zero rates: Since the Sixth Directive permits deduction of the total input tax in relation to reduced rates, it follows that zero-rates, in principle, are regarded as incompatible with the VAT system. A somewhat confusing aspect in this objection is that the Directive itself prescribes a whole range of zero-rated transactions, albeit under the name of exemptions. Basically, these exemptions, with a right to deduction or refund of the value added tax, are related to international transactions. The in-tention is to safeguard the principle of the country of destination, which requires that exports be ex-empted; the nature of these exemptions is of a purely technical character. However, zero rates cause problems. Although the transactions remain in the tax system and tax returns are filed, so that a Member State can calculate the amount of tax due to the Community (own resources decision), the application of zero rates results in a subsidy of those transactions at a percentage equal to the tax rate imposed by the Community on them. The same is true for tax rates reduced below the level of the Community tax rate.

VAT rates: Member States must apply a standard rate, which may not be less than 15%. This rate must apply to the supply, the acquisition and the import of goods, and the supply of services. Mem-ber States may also apply one or two reduced rates, which may not be less than 5%, and may only apply to the supplies of the categories of goods and services specified in Annex H of the Directive, which lists goods and services, deemed as basic necessities, or have a social or cultural character. Member States may apply a reduced rate even to supplies of natural gas and electricity provided that no risk of distortion of competition exists. Each reduced rate should be fixed so that the amount of VAT resulting from the application thereof should be such as in the normal way to permit the de-duction therefrom of the whole VAT deductible. As being a transitional provision a series of dero-gations are permitted. These are discussed below in order to show how complicated Community rules become when an agreement on the basic rules can not be reached.

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HungaryIn Hungary the value added tax is 25% of the taxable amount in the case of goods supplied, services performed and in the case of importation. The applicable tax rates are provided by Articles 28 to 31 in the Hungarian Act on VAT. According to the provisions of the EC Directive Member States must apply a standard rate not less than 15% and not higher than 25%. This indicates that the Hungarian VAT rate of 25% would be one of the highest, if Hungary became a Member of the Union tomor-row. The high rate of value added tax has been criticized in Hungary and the new government has the intention of reducing it. A reasonable reduction would be to lower the standard rate to 22%.

In Hungary there is one reduced rate of 12% applicable to the goods and services specified in Annex 1 of the Act. The lower rate applied in Hungary is fairly high regarding the EU minimum require-ment of 5%. The Hungarian reduced rate is only some percentage points lower than the minimum standard rate of 15% applied in several Member States. Annex 1 provides for 71 types of products and 48 different services that are taxed at the reduced rate. The group of products includes natural gas, electricity, heating and water, medical appliances, glasses, contact lenses, pharmaceuticals, edu-cational appliances, and a large number of foodstuff. The group of foodstuffs includes meat, milk, preserved food except for fruit juice and baby food, bread, pasta, sugar and oil. These goods and products can be considered the basic necessities that are allowed to be taxed at the reduced rate even in the European Union. The services that are also taxed at the lower rate of 12% are the agricultural services, publishing, the supply of energy, gas, heating and water, medical supply and services, transport, warehousing, postal and telecommunication services, research and development, and the services of experts in connection with the aforementioned services.

A great number of social services are also taxed at the reduced rate, furthermore, film and connected services, artistic and performance services, circus, librarian services, sport and its organization, the use of bath and swimming-pool and related services, and finally funeral and related services. Com-paring the Annexes of the EC Directive and the Hungarian Act on VAT, we find that the group of goods and services that can be taxed at the lower rate are basically the same. There are only some negligible differences between the two lists. However, the EC Directive also provides that the re-duced rate may apply to supplies of natural gas and electricity provided that no risk of distortion of competition exists. In Hungary there is no competition in the supply of electricity, gas, heat and wa-ter so distortion of competition is not a factor. However, we assume that this condition has to apply to the other goods and services as well, and it would be interesting to prepare a study which ana-lyzes whether and how the application of the reduced rate influences competition in other sectors.

The Act specifies a group of goods that are zero-rated with the right to deduction. This specific group includes the raw materials of pharmaceuticals, odontological medicines and human nutritive preparations. Furthermore, the Hungarian Act on VAT provides that the tax rate, in case of goods exported and the like transactions, is 0%, as well as international transport and ancillary services thereto are zero-rated.

3.5.9 ExemptionsEuropean UnionIt follows from the own resources decision that it was necessary to standardize exemptions in order to achieve a common basis of assessment. Title X of the Sixth Directive lists the exemptions. These are listed as exemptions within the territory of the country and exemptions with the right to deduc-tions, which is in fact zero-rating. These are exemptions on importation, exportation and exemptions relating to international goods traffic.

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Exemptions within the territory of the country: There are two lists of exemptions, one concern-ing activities exempted in the public interest and one concerning other exempted activities. The for-mer includes postal, medical, social, educational and cultural services. The other exemptions include insurance and reinsurance transactions, leasing and letting of immovable property, the letting of premises and sites for parking vehicles and the hire of safes, banking and financial transactions. Member States are allowed to continue to tax some activities, which are exempt (Annex E of the Di-rective), to continue to exempt some taxable activities (Annex F of the Directive) or to grant taxable persons the option to choose for taxation or exemption (Annex G of the Directive).

Exemptions relating to international transactions: The Directive also provides for various ex-emptions of imports, exports and like transactions and international transport, mainly to safeguard the destination principle. Exemptions applicable to importation include those, which are applicable to the supplies made by taxable persons within the country, which guarantee external neutrality. In addition, various exemptions are enumerated in the Directive, which either have their source in cus-toms formalities, like transit, temporary importation arrangements and the like, or in the exemptions from customs duties. The supply of services in connection with the importation of goods is ex-empted, but included in the taxable amount.

For a period ending on 30 June 1999, Member States exempt supplies by tax-free shops of goods to be carried away in the personal luggage of travelers on intra-Community flights or sea crossings to other Member States. The exemption applies to goods, of which total value does not exceed the lim-its applicable to travelers between third countries and the Community. The supply of goods ex-ported from the Community and international transport are also exempted. The Directive on the abolition of fiscal frontiers provides for exemptions linked to intra-Community transactions. As mentioned earlier, intra-Community supplies are exempt followed by an intra-Community acquisi-tion. Sometimes this acquisition is also exempt, namely if the supply of the goods would be exempt within the territory, if the importation would be exempt, or if the person acquiring the goods would be entitled to full reimbursement of the VAT.

HungaryWe have seen which transactions are zero-rated in Hungary. The provisions regarding exempted transactions are provided in Article 30 and the exempted goods and services are listed in Annex 2 of the Hungarian Act on VAT. The group of exempted transactions include the sale, letting and leasing of land and sites, the letting, leasing, utilization and sale of immovable property except for the sale before the completion and the first sale after the completion of the immovable property. Further ex-emptions are the letting of devices and immovable property for educational purposes, collage ac-commodation, postal services, banking and financial services except for the hire of safes and finan-cial leasing, letting of immovable property for sport and cultural purposes, transfer and assuming a debt, transfer of credit or right representing ownership, property management, services of experts on assignment from the court or other public authority, services of lawyers and legal representation.

Most of the above mentioned exempted transactions are in compliance with the provisions of the EC Directive and some more medical, social and educational services are activities exempted in the public interest: health services, organization of scientific arrangements, public administration, social and health insurance, education, spread of scientific knowledge. Broadcasting and radio sending is also exempted, as well as sport except for professional sport, librarian, museum and other cultural services. Even gambling and game of chance services are exempted. It could seem that there is overlapping in the group of exempted services and the list of services to which the reduced rate is applicable. However, because every service is identified with its statistical classification number, confusion can be avoided. We can imagine how many different services may be provided around a

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sport event or other cultural, scientific or educational arrangement. In the case of a sport event the distinction is made along the line of popular or professional sport. Services provided in connection with popular sport are exempted services while services provided on an professional sport event are taxed at the reduced rate.

In case of library and librarian services, the service provider is free to determine whether his service should be levied by the reduced rate or remains an exempted service. If he or she opts for taxation he/she is not allowed to opt for the other type of classification in the subsequent two years.

3.5.10 DeductionsEuropean UnionThe essence of the VAT is the deduction of input tax by non-consumers. Under the Sixth Directive a taxable person has the right to deduct from the tax, for which he is liable in respect of his supplies, the tax invoiced to him on goods or services supplied to him, or acquired or imported by him. This right arises at the moment when the deductible tax becomes chargeable, in other words, as soon as the invoice has been issued. Member States may decide that the excess must be carried forward to the following tax period when deductions exceed the amount due.

The right to deduction or refund of VAT is restricted to goods and services used for the purposes of taxable transactions, including taxable transactions in another country, if the transactions would be eligible for deduction of tax had they occurred in the territory of the home country. Accordingly, no deduction is permitted for goods and services supplied regarding exempt transactions or non-busi-ness purposes. A trader who uses goods and services supplied for both taxed transactions and other purposes - exempt or non-business - may consequently deduct only the proportion of the tax attrib-utable to the former transactions. The Directive provides for calculation methods, the so-called pro-rata calculations to determine the deductible proportion. The main rule is that the deductible propor-tion is made up of a fraction having as numerator the total amount of turnover, exclusive VAT, at-tributable to transactions, in respect of which VAT is deductible, and as denominator the total amount of turnover exclusive VAT.

The right to deduct is granted for intra-Community acquisitions, for deemed intra-Community ac-quisitions, for exempt intra-Community supplies and deemed intra-Community supplies. Further-more, the Directive provides various rules governing the right to deduct, such as the holding of an invoice drawn up in accordance with the applicable rules or the holding of an import document. If a taxable person entitled to the deduction is not established in the Member State, in which VAT can be deducted, then the deduction is, in principle, granted by means of a refund procedure. Taxable persons are only entitled to a refund when they do not perform taxable activities within a territory, for which they have to register. When they have to register and report the (output) VAT on a peri-odical return, the (input) VAT can be deducted from the VAT due.

HungaryA taxable person is entitled to the right to deduct from the tax for which he is liable the tax invoiced to him on goods or services supplied to him by another taxable person. He is also entitled to deduct the tax paid by himself upon importation, the tax charged and paid upon services that he ordered in his own name, and upon self-construction of immovable property. The right to deduction or refund is restricted even in Hungary to goods and services used for the purposes of taxable transactions, in-cluding transactions in another country, if the transactions would be subject to deduction of tax had they occurred in the territory of Hungary. Consequently, no deduction is permitted for goods and services supplied regarding exempted transactions or non-business purposes. All this is in accor-dance with the provisions of the EC Directive. However, the Hungarian legislative powers thought

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that there are further risks for tax fraud and extended the group of non-deductible transactions to other cases. Accordingly, the taxable person can not deduct the tax invoiced to him on fuel used di -rectly for the operation of a passenger car, on passenger car and on taxi services for personal trans-portation whatever the distance of the route. Furthermore, the input tax can not be deducted when the taxable person makes a cash-payment beyond the limit of HUF 1.000.000 concerning the per-mitted amount for cash-payments.

The Act provides various rules governing the right to deduct. Only those taxable persons who keep detailed records and have single- or double-entry book-keeping, have the right to deduct. Taxable persons eligible for a special scheme are exempted from this provision. The right to deduct can only be exercised if the taxable person holds an invoice or simplified invoice drawn up in accordance with the applicable rules. Other documents, which undoubtedly prove the value or amount paid, may also serve as basis for deduction, such as an import document or a decision of a public author-ity. The right to deduct arises at the moment when the invoice has been issued, thus the tax becomes chargeable. In case of import, the right to deduct arises the day after the tax has been paid, while in case of self-construction of immovable property the same day the tax becomes chargeable.

A taxable person who uses goods and services supplied for both taxable and exempted purposes is required to keep separate detailed accounts for the different types of transactions and may deduct only the proportion of the tax attributable to the taxable transactions. The calculation method pro-vided in the Act is equivalent to the method prescribed in the EC Directive.

3.5.11 Persons Liable for Payment of TaxEuropean UnionOnce the place of supply is known, it is then necessary to determine who is liable for the payment of the tax on the transaction. The Sixth Directive provides that under the internal system the following persons are liable to pay VAT:

· taxable persons who perform taxable transactions other than intangible services, which are deemed to be carried out in the country of the receiver of the services. These services are sub-ject to the reverse charge, i.e. the receiver is liable to pay the VAT if he is a taxable person established in the Community.

· persons receiving the above mentioned intangible services, or· any person who mentions VAT on an invoice.

On importation the person or the persons liable to pay VAT are those who are designated or ac-cepted as being liable by the Member State, into which the goods are imported. The introduction of a new taxable event ‘intra-Community acquisition of goods’ made it necessary to provide that any person effecting such a taxable transaction is liable to pay VAT. The Directive also provides that where such acquisition is effected by a person established abroad, the Member State may designate another person liable for payment of the tax: the other person can be a tax representative, or it can be the customer. Where the appointment of a tax representative is not required, Member States ei-ther hold the taxable person established abroad liable for the payment of the tax and sometimes re-quest direct registration or shift the liability to the customer.

The Member States are authorized to lay down rules for the making of declarations and payments, which are in general provisions copied from the rules applicable to customs declarations. However, Member States may provide that the VAT payable on importation of goods by taxable persons, or by persons liable to the tax, need not be paid at the time of importation, on condition that the tax is

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mentioned as such in the return, which is regularly submitted regarding the internal supplies. This system is referred to as the ‘postponed accounting system’. The Directive allows Member States that someone other than the taxable person shall be held jointly and severally liable for payment of the tax, except for the case where VAT is due for the reason that it was mentioned on an invoice or on a document serving as an invoice.

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HungaryRegarding the determination of the person liable to pay VAT, the Act provides as a main rule that the person liable to pay tax is the person who carries out taxable transactions and supplies goods or services. Concerning the work on, valuation of, planning of immovable property, which are deemed to be carried out at the place where the property is located, and sport, artistic, educational, scientific and cultural services, which are deemed to be performed where these services are physically carried out - the person liable to pay tax is the person who orders the service in his own name, if the re -ceiver of the service is not established in Hungary. Thus, similarly to the provisions of the EC Di-rective, the reverse charge is applicable.

In the case of goods and services used for non-business purposes, provided without consideration, used for private purposes where the tax was partly or fully deductible, for fuel used for the direct operation of a passenger car, the Act provides that the person liable to pay tax is the person per-forming those transactions. When self-construction of immovable property occurs, the person liable to pay tax is the person who actually constructed the property. These provisions cover cases where tax fraud is possible but are not mentioned in the EC Directive. The EC Directive allows Member States that someone other than the taxable person shall be held jointly and severally liable for pay-ment of the tax. In Hungary this option was applied to cases where the taxable person entitled to de-duction has not, or not fully, paid the consideration, inclusive VAT, invoiced to him by another tax-able person. The Hungarian Act provides that the receiver of the goods or service should be held jointly and severally liable, thus becomes a guarantor, for the payment of VAT due on the net amount if he has not fully paid the consideration to the supplier. This rule has been based on the Hungarian experience that many tax-payer has failed to fulfill his liability to pay VAT referring to the fact that the receiver of the services or goods has not paid the amount invoiced to him. The dis-putes between contractual partners left the tax authority with lower than expected revenue.

3.5.12 Administrative ObligationsEuropean UnionIn order to replace frontier controls, Member States must set up control mechanisms for intra-Com-munity trade. The Directive on the abolition of fiscal frontiers provides for eight interrelated obliga-tions with regard to administrative obligations for persons liable for payment of VAT: registration, identification number, keeping accounts, keeping a register, issuing invoices, submitting a return, submitting a statement and submitting a recapitulative statement.

1. Registration: Every taxable person must state when his activity as a taxable person commences, changes or ceases. Acquisitions above the threshold of ECU 10.000 by flat-rate scheme farmers, taxable persons not entitled to deduction and public bodies or because they have opted for taxation, trigger the obligation to register since in such cases they effect intra-Community acquisitions of goods.2. Identification numbers: Member States must identify - by an individual identification number, having a prefix, by which the Member State of issue may be identified - every taxable person. 3. Keeping accounts: Every taxable person must keep accounts in sufficient detail for VAT to be applied and for the records to be inspected by the taxing authority. 4. Keeping a register: Every taxable person must keep a register of certain goods, which he has transported or dispatched, to another Member State. As mentioned, the transfer of goods by a tax-able person from his undertaking to another Member State is a deemed supply and taxable as such. 5. Issuance of invoices: The general rule is that every taxable person must issue an invoice relating to transactions with another taxable person or public body. This obligation is extended to all dis-tance sales and intra-Community supplies of goods. The obligation to issue an invoice is not appli-

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cable to goods that are transferred by a taxable person from his undertaking in one Member State to another. The invoice must clearly indicate: the price excluding VAT, the amount of VAT at each rate applied as well as any exemption. In cases of intra-Community transactions the invoice must also indicate the VAT identification number of both the supplier of the goods and the person acquir-ing the goods. 6. Submitting a return: Returns must be submitted by a deadline, not later than two months after the end of the tax period. The tax period may be fixed at one or two months or a quarter at the dif -ferent periods provided they do not exceed one year. In addition to the information necessary to cal-culate the tax payable, the return must also set out several other details. 7. Submitting a statement: Member States may require a taxable person to submit a statement, in-cluding all the particulars, which have been mentioned on the returns, concerning all transactions carried out in the preceding year. The statement must provide all the information necessary for any adjustment.8. Submitting a recapitulative statement: Every taxable person identified for VAT purposes must also submit a recapitulative statement of the persons acquiring the goods identified for VAT pur-poses to whom he has performed intra-Community supplies of goods, the so-called ‘listing’. The re-capitulative statement must be drawn up for each calendar quarter within a period and in accordance with procedures to be determined by the Member States.

HungaryIn Hungary every taxable person must state when his activity commences, changes or ceases, thus even Hungarian companies are obliged to register. The taxable persons are identified with an indi-vidual tax identification number (serving not only for VAT purposes), which he has to indicate on every invoice issued by him. Every taxable person must keep sufficiently detailed accounts for the charging, declaring, and refund or payment of VAT so that the records could be easily inspected by the tax authority. The rule is that every taxable person must issue an invoice when supplying goods or providing service. When the consideration is paid in cash, the taxable person can issue a simpli-fied invoice. When the consideration is not money, when the taxable person himself is not liable for payment of tax on goods or services supplied by him (the reverse charge is applicable or it is a present), the taxable person has to issue a document substituting the invoice.

In Hungary the tax liability is calculated, determined and declared by the taxable person himself. There are taxable persons who should calculate the tax due for a given period of a month and there are other taxable persons who are obliged to calculate and submit a statement on a quarterly basis. The tax payable is the total amount of tax charged by the taxable person on every supply of goods and services in a given period. From this total output tax the taxable person can deduct the amount of tax charged to him by other taxable persons (the input tax). If the difference of the above calcula-tion is positive the taxable person is obliged to make an actual payment of the difference to the tax authority. If the difference is negative the taxable person can claim a refund of the tax or a carry over to the next taxation period.

Finally, our research shows that the Hungarian companies have considerably less administrative obligations in relation to the declaration and payment of value added tax. In contrast to the compa-nies in the EU, they are not obliged to provide such detailed information when submitting a return, neither do they have to submit a statement including all the particulars concerning all transactions and they do not have to submit a recapitulative statement indicating the VAT identification number of contractual partners and everyone to whom they have supplied goods or services in the home country or abroad.

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3.5.13 Special SchemesThe Sixth Directive offers four special schemes: for small undertakings, farmers, travel agents and second-hand goods. The Hungarian Act on VAT provides for six special schemes in contrast to the four in the EC Directive. These are for small and medium-sized companies, commercial accommo-dation service providers, farmers, small retailers and second-hand goods.

Small and medium-sized enterprises in the EU: Taxable persons are required to keep records of their sales and purchases, which may be beyond the capabilities of certain retailers and other small taxpayers since they often do not issue invoices to their customers or make any written or printed record at the time of sale. The special scheme for small undertakings allows Member States to use simplified procedures such as the flat-rate scheme for charging and collecting the tax, but also re-quires that the tax can not be reduced. The intention of this provision is to reduce the administrative burden on small enterprises and not the amount of tax, as is the intention of reduced rates and ex-emptions. Member States are permitted to exempt taxable persons with an annual turnover not ex-ceeding ECU 5.000. This sales related exemption clearly results in both administrative simplifica-tions and a tax reduction.

Small and medium-sized companies in Hungary: As the EC Directive allows Member States to use simplified procedures in order to reduce the administrative burdens of small enterprises, Hungary exempts taxable persons with an annual turnover not exceeding HUF 2.000.000 (ECU 8.621) which is higher than the ceiling of ECU 5.000 provided by the EC Directive. Domestic enterprises may opt for the exemption if their annual turnover did not exceed the limit in the previous accounting year and can not be expected to exceed it in the accounting year in question. Those taxable persons who opted for exemption are neither liable to pay VAT nor are they entitled to deduction of the tax. These taxable persons are not required to calculate and pay tax, to keep detailed accounts, submit a statement or declaration. However, they are required to keep accounts and declare in case of goods and services used for non-business or private purposes, fuel used for the operation of a passenger car, in case of self-construction of immovable property and importation. Taxable persons opt for one accounting year and are allowed to choose again at the end of that year. The exemption ceases when the taxable person’s annual turnover - excluding exempted transactions and agricultural activ-ity - exceeds the HUF 2 million in the given accounting year. Tax should be charged on the first transaction with whose value the limit is exceeded.

Farmers in the EU: The second special scheme is restricted to the agricultural sector, because farm-ers are considered to be another group that may be burdened by the keeping of detailed records nec-essary for VAT return. Unlike the vast majority of small businesses, the administrative problems of farmers, so it was believed, can not be solved by exempting them up to a certain level of turnover. In contrast to most small businesses, which sell to final consumers, farmers sell primarily to manu-facturers, wholesalers and other taxable persons. An exemption would consequently lead to accumu-lation of taxes. In order to avoid this and to ensure tax neutrality, the Directive offers a special scheme, the common flat-rate scheme, in which the following mechanism is applied: supplies by a farmer under the special scheme are exempt, but the farmer is compensated with a flat rate to offset the value added tax charged to him on inputs. The compensation, which can be deducted by the cus-tomers/entrepreneurs (in effect the deduction, which would otherwise be available to farmers is passed forward to their customers) is calculated as a percentage fixed by the Member State and ap-plied to the farmer’s turnover.

Farmers in Hungary: Taxable persons whose scope of activity is restricted to the agricultural sector are neither liable to pay value added tax nor are they entitled to deduct the VAT charged on them by

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other taxable persons. These provisions are not applicable in the case of importation. Farmers are not liable to VAT, are not required to issue invoices, calculate, declare the tax due, and submit a statement. Those who purchase from farmers are required to pay a special compensation (a fix per-centage of the price) as part of the consideration, beyond that price the parties have agreed on. The farmer must issue an identifying document to the purchaser. In return the purchaser issues a certifi-cate, that has to be retained by the farmer, on the handing over of goods. The certificate has to indi -cate a serial number, the name, address and tax identification number of the purchaser, the name, address and tax identification number of the seller (farmer), the name, value and quantity of the products, the price, the rate and amount of the compensation and, finally, the signature of both par-ties. This certificate serves as invoice when the purchaser prepares his VAT declaration, because the compensation is deductible by the buyer. The right to deduct arises at the moment the buyer pays the consideration to the farmer. The rate of the special compensation is 12% in case of vegetable goods and products, such as potato, vegetables, fruits, etc., and 7% in case of animals and animal products such as meat, poultry, fish, etc. Thus, the above mentioned mechanism is in compliance with the EC Directive which allows Member States to exempt supplies of farmers, but the farmer is compensated with a flat rate to offset the value added tax charged to him on inputs. Customers can deduct the compensation and this way the deduction, which would be available to farmers, is passed on to their customers, circumventing the administrative problems of farmers.

Travel agents in the EU: The special scheme for travel agents is basically a simplification and com-pliance scheme with the destination principle. Without special rules a travel agent acting in its own name, using the supplies and services of other taxable persons in the provisions of travel facilities, would be confronted with foreign VAT on such transactions (or national VAT, not necessarily at one rate). Problems arise with regard to the deduction or refund of the VAT and the qualification of the supply by the travel agent. The Directive stipulates that the travel agent provides a single ser-vice; the VAT on the supplies and services of other taxable persons of travel facilities is not de-ductible and the taxable amount is the margin, i.e. the difference between the payment of the travel minus the costs of the supplies by other taxable persons for the direct benefit of the traveler. As far as the services of the agent relate to activities outside the Community the margin is zero-rated. The result of this is that the traveler pays the VAT, if any, on the supplies he purchases via the travel agent, at the rate applicable where the supply is subject to VAT and that the service of the travel agent is subject to VAT where the agent is established, unless it relates to travel facilities outside the Community.

Travel agents in Hungary: The provisions regarding travel agents is identical to the rules laid down in the EC Directive. The travel agent is not entitled to deduct the VAT charged on the supplies and services of other taxable persons of travel facilities. Travel agents are taxed according to the margin scheme, where the VAT is 20% of the margin. In the calculation of the margin, amounts have to in-clude VAT.

Second-hand goods, works of art, collectors’ items and antiques in the EU: The special position of second-hand goods under turnover taxes should be mentioned. The fact that an expenditure may occur more than once regarding the same product has led to mitigating measures. The Directive per-mitted Member States to retain national systems, which generally allow a lower taxable amount to be applied to used goods, works of art, antiques and collectors’ items, until the Council has adopted, upon a proposal from the Commission, a Community taxation system to be applied to these goods. A new Article was inserted into the Directive in respect of supplies of second-hand goods, works of art, collectors’ items and antiques effected by taxable dealers. Member States must apply special ar-rangements for taxing the profit margin made by the taxable dealer, hereinafter referred to as the

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‘margin scheme’. Member States may determine to apply the margin scheme or a scheme providing for a special taxable amount in cases of supplies of second-hand goods and the like. The taxable amount of the supplies of goods by the taxable dealer is his profit margin, less the amount of VAT relating to the profit margin. The profit margin is equal to the difference between the selling price charged by the taxable dealer for the goods and the purchase price. The selling price is everything, which constitutes the consideration including subsidies directly linked to that transaction, taxes, du-ties, levies and charges and incidental expenses such as commission, packaging, transport and insur-ance costs charged by the taxable dealer to the purchaser, but excluding the suspense accounts. The purchase price is everything, which constitutes the consideration as defined above, obtained, or to be obtained, from the taxable dealer by his supplier. Apparently, the margin includes costs for re-pair, on which VAT, if any, is deductible.

In 1994 the Council of the European Union adopted Directive 94/5/EEC “supplementing the com-mon system of value added tax and amending Directive 77/388/EEC – Special arrangements appli-cable to second-hand goods, works of art, collectors’ items and antiques”. Second-hand goods are defined as tangible movable property that is suitable for further use as it is or after repair, other than works of art, collectors’ items or antiques and other than precious metals or precious stones as de-fined by the Member States. From this definition it may be derived that the special scheme for sec-ond-hand goods is not applicable to immovable property and that second-hand goods are by defini-tion used goods, since they must be suitable for further use. The provisions for second-hand goods do not apply to intra-Community supplies of used, but nevertheless qualified as ‘new’, means of transport.

Second-hand goods, works of art, collectors’ items and antiques in Hungary: Those taxable per-sons who purchase works of art, collectors’ items, antiques and or tangible movable property suit-able for further use from non-taxable persons or from persons subject to the margin scheme, are subject to special provisions. Used, second-hand goods, works of art, antiques and collectors’ items are defined equally to the classification of the EC Directive. However, we can not find waste or refuse, which is included in the Act as suitable for further use, in the EC Directive. Taxable persons who buy from non-taxable persons for the sake of further sale or auction may opt to be subject to the margin scheme. This means, similarly to the provisions applicable to travel agents, that the tax is calculated on the difference between the price (excluding the value added tax) charged by the tax-able person and the cost price (including the VAT paid upon importation and VAT passed on the taxable person) paid by the taxable person. The taxable persons subject to the margin scheme are not entitled to deduction of tax, neither can they charge or mention VAT on invoices issued by them. The tax is calculated backwards: the rate is 20% in case of products which are otherwise levied by 25% and it is 10,71% in case of goods subject to the reduced rate. In contrast to the EC Directive, the Hungarian Act provides that the margin scheme can not be applied to goods whose purchase or cost price is higher than HUF 50.000 (ECU 215,5) while there is no such limit in the Union. Another difference, as we mentioned earlier is that waste material is also included in the margin scheme, and moreover, taxable persons dealing with waste material and purchasing for fur-ther sale, are obliged to pay tax according to the scheme. However, it is not considered further sale if the taxable person processes the wastage and transforms it to secondary raw material.

Special rules applicable to taxable persons providing commercial accommodation services in Hungary: Those persons who provide commercial accommodation (paying-guest service), and whose annual turnover did not exceed HUF 4.000.000 (ECU 17.241) in the previous accounting year and can not be expected to exceed this limit, have the right to tax according to the flat-rate scheme. The taxable person may have agricultural activity but no other economic activity parallel

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with the commercial accommodation service in order to be eligible for the flat-rate scheme. The taxable person, subject to the flat-rate scheme, must pay 6,8% of his actual income, derived from the commercial accommodation service in the given taxation period, as value added tax. Taxable persons subject to the flat-rate scheme are not entitled to deduction of VAT charged on goods and services supplied to them by other taxable persons. The taxable person is no longer eligible to the flat-rate scheme when his annual turnover exceeds the limit and the procedure is identical to the one mentioned regarding the exempted SMEs.

Special rules applicable to small retailers in Hungary: Taxable persons whose economic activity fulfills the requirements of small retailer shops may opt for taxing according a simplified procedure where the calculation of the tax in a given period is based on the changes of the stock. This measure was intended to reduce the administrative burden of small retailer shops, but the calculation method provided in the Act is very complicated.

3.5.14 DifferencesIn this section the differences between the regulation of the value added tax in Hungary and the Eu-ropean Union will be summarized briefly. By following the same structure in the legislation, it be-came apparent that the Hungarian Act on VAT does not provide rules governing the tax treatment of new means of transport, distance sales and VAT warehouses. As we had no legislation to compare the regulations in the EC Directive with, we omitted the discussion of these three sections entirely. We have seen that the value added tax is non-deductible in case of passenger cars in Hungary. We would assume that the main rule provided by the EC Directive applies even in Hungary without set-ting out detailed regulations in the Hungarian Act on VAT. Distance sales are not regulated in Hun-gary in any way, because it is not a developed form of business yet. The existing TV shop, cata-logue, or telephone ordering must be restricted to domestic sales where the problems of foreign VAT does not arise. When joining the EU, Hungary will be required to implement measures gov-erning distance sales as well. It will be also necessary due to Hungary’s extensive trade relations to the neighboring countries most of which will not become a member at the same time as Hungary. We can note that even VAT warehousing arrangements are missing from the Hungarian system of value added tax.

As we have mentioned in the beginning of the analysis of the Hungarian value added tax, several differences are technical or terminological in the sense that terms relating to and events occurring in connection with intra-Community trade will have no relevance until Hungary is not a member in the Union. We do not think that the introduction of these new terms would lead to serious difficulties. As regarding taxable persons, the Hungarian definition is extended to a larger group of taxable per-sons because properties’ group of owners and foreign companies’ affiliates have been also included moreover of the persons defined in the EC Directive. Besides the transactions taxable in the Union, the self-construction of immovable property and the supply of fuel for the direct operation of a pas-senger car are also considered supply of goods in Hungary. According to the EC Directive contract work is treated as supply of service while it is considered a supply of goods in Hungary.

The rules how the place of the supply of goods or services is determined are identical in Hungary and the Union, the only difference being how the recipient of the service is defined when the reverse charge is applicable: in Hungary the client is defined by the place where he has his fix establishment while in the EU the client is defined by his VAT identification number. In Hungary there are special provisions applicable to cases when the consideration is too low, when goods are delivered and ser-vices are performed to a special group of people and to barter businesses. In these cases the net mar-

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ket/purchase price should be applied. The Hungarian VAT rate of 25% and the reduced rate of 12% are remarkably high. Moreover, the group of zero-rated transactions is more extensive in Hungary.

In Hungary taxable persons can not deduct the VAT invoiced to them in the case of fuel if it is di-rectly used for the operation of a passenger car, in the case of purchase of passenger car and when using taxi for personal transportation whatever the distance of the route. Furthermore, the input tax can not be deducted when the taxable person makes a cash-payment beyond the limit of HUF 1.000.000 concerning the highest permitted amount for cash-payments. Hungarian companies have less administrative obligations than their counterparts in the Union. In contrast to the EC Directive, the Hungarian Act provides for six special schemes. Taxable persons providing commercial accom-modation services are subject to a flat-rate scheme, and small retailer shops are allowed to calculate and declare their tax liability according to the changes in their stocks.

4. OTHER INDIRECT TAXESArticle 99/EEC provides the basis for the harmonization of turnover taxes, excise duties and other forms of indirect taxation. These terms are not defined and the distinction between direct and indi-rect taxation is not always an easy one to make. Any national tax must be consistent with the princi-ples established in Article 95 and 96 of the EEC Treaty, where Article 95 is concerned with excise duties and other forms of indirect taxation. Further, the VAT Directives prohibit Member States from levying any ‘turnover tax’ other than the VAT. Member States are, though, permitted to main-tain or introduce taxes on insurance contracts, on betting and gambling, excise duties and stamp du-ties and other taxes, duties or charges that can not be characterized as turnover taxes.

4.1 Excise DutiesWhereas the distinction between excise duties and turnover taxes is an important one, because of the prohibition against turnover taxes, that between excise duties and other indirect taxes would seem to be of no consequence. Typically, the term ‘excise duty’ is used in reference to specific taxes on cat-egories of products, leaving a number of miscellaneous taxes that are imposed on transactions or services. Thus, a special tax on bananas might be classified as an excise duty, but not a tax on the-ater or cinema performances.

There has been a close historical relationship between excise duties and customs duties, since some of the more important excises were imposed on products that were predominantly imported. Two factors have operated to reduce both the number and the importance of specific taxes on products: one has been the adoption of general sales taxes - such as the VAT - to replace specific taxes, and the other has been the tendency in most countries to rely more heavily upon the ‘big three’ excises - on alcohol, tobacco and motoring. Nevertheless, excise duties remain an important source of rev-enue in most Member States and the role of excises other than the three main ones is far from in-significant. All Member States impose substantial duties on alcohol, tobacco and mineral oils, though the distribution of the tax burden among those three categories varies widely. In addition to the three main excises, duties are imposed on a wide variety of other products, such as sugar, coffee, tea, cars, etc. as an alternative to special taxes.

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4.1.1 History of Harmonization

The need to harmonize excise duties was expressly recognized by the authors of the EEC Treaty, and a working party was established to study the question as early as 1960. The Neumark and De-ringer Committees both emphasized that work on excise duties must parallel those on turnover taxes, yet in contrast to the achievements in the field of value added tax, progress on excise duties has been extremely slow. Differences in national excise duty systems were considerable, not only with respect to coverage and rates but also to the methods of assessment and payment. Distortions and discrimination were caused by national excise rules on the classification of products, on the conditions, upon which tax preferences were granted, on the basis of assessment, on the method of calculation of tax, and on the time and conditions for payment of tax. Part of the problem was that excise duties had traditionally been used as instruments of national economic and social policy as much as they had been regarded as means of raising revenue. The antiquity of some excises ac-counted for their often peculiar nature. In very few countries had any serious attempt been made to harmonize and rationalize excise duties, with the result that they have justly been described as ‘the orphans of tax policy’.

4.1.1.1 The Commission’s General ProgrammeDespite the fact that studies had commenced some twelve years earlier, it was not until 1972 that the Commission was able to present its programme for a general harmonization of excise duties. Mean-while, a proposal for a Directive on the harmonization of taxes on tobacco had been submitted to the Council in 1967, and one relating to mineral oils in 1971. The essential feature of the proposed pol-icy was that harmonization should proceed in stages: first, the structures of the various excises should be aligned, and later, the rates of duty would be approximated in order to facilitate the re-moval of fiscal frontiers. The first task was to determine which products should be subject to har-monized excise duties. According to the Commission’s opinion, the primary objective of excise du-ties should be the raising of revenue, though there may be a subsidiary aim to reduce consumption of products that are detrimental to health. The Commission proposed that only those excises whose yields are significant should be retained while duty should not be imposed on essential commodities and, as far as possible should not apply to raw materials used by industry. Consequently, it recom-mended that harmonized excise duties should be restricted to three broad categories of products, namely manufactured tobacco, alcoholic beverages and mineral oils.

The most important of the other excises from a revenue point of view were those on coffee and sugar, which should be abolished in any event. On coffee, because it is mostly imported from lesser-developed countries, and on sugar, because it is an essential commodity and a raw material for in-dustry. Some other excises could be incorporated into the general VAT system while others could be maintained without causing serious difficulties. The Commission therefore proposed that Mem-ber States be permitted to impose special excises on products other than tobacco, alcohol and oil, provided that these do not involve border tax adjustments and do not distort the conditions of com-petition.

Following the publication of the 1985 White Paper, the Commission resumed work and in 1987, produced new proposals for the harmonization of the systems and rates of the main excises. These proposals were further modified in 1989 and 1990. Under the new proposals a general regime was to be established regulating the holding and movement of goods subject to excise duties and the payment of those duties. The structure of the main duties on tobacco, alcohol and oil, would be har-monized, and there would be a substantial approximation of rates. Commercial movements of du-tiable goods were to take place under a suspension-of-duty scheme, between linked bonded ware-

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houses, with Member States being primarily responsible for controlling and monitoring of the sys-tem.

Agreement was finally reached on a solution to the excise duty problems in 1992. The general ar-rangements for the charging of excise duties, and for the holding, movement and monitoring of products subject to duty, are set out in Directive 92/12, as later amended by Directive 92/108 in the same year. These arrangements essentially follow the proposals outlined above. The concepts of ‘authorized warehousekeeper’ and ‘tax warehouse’ were introduced, and dutiable goods may move between registered warehouses in different Member States under a ‘suspension arrangement’, with duty becoming payable only when the goods are released for consumption. This is designed to en-sure that goods are taxed in the country of final consumption. In order to reduce the risk of tax fraud, Member States may require that products released for consumption in their territory should carry tax markings or national identification marks (tax stamps).

The following description of the Hungarian legislation provides a comparison between the Hungar-ian law and the EC Directives.

4.1.1.2 Hungarian LegislationSince 1 January 1998 the Act CIII of 1997 on excise duties and special regulations concerning ex-cise products, provides the legal basis for the production, holding and movement of excise products. The concepts of ‘authorized warehousekeeper’, ‘tax warehouses’ and ‘suspension arrangement’ have been introduced this year. In Hungary there is thus only one Act compared to the eight sepa-rate Directives in the Union that have established the general regime, the definition of the various products and product groups, as well as the minimum rates defined in the individual Directives. All these are integrated into one Act in Hungary.

Generally, we find that Hungarian excise duties are compatible with the EC regulations. Excise duty is levied on the production and importation of excise products. Products subject to excise duty may only be produced or held in authorized warehouses. Products may only be released for consumption if the duty has been paid on them. The Act defines excise products as mineral oils, alcoholic prod-ucts, beer, champagne, intermediary products and manufactured tobacco. Thus, wine is left out of the scope of the Act. The provisions of the Act are applicable to those who produce, store, hold, im-port, export or some other way possess excise products. The Customs Office (Vám- és Pénzü-györség Országos Parancsnoksága, VPOP) is considered to be the competent authority regarding ex-cise matters.

The Act defines tax warehouses as being places physically separated from other entities, where the authorized warehousekeeper is allowed to produce, store or hold excise products, on which pay-ments have not been made. Release for consumption is considered to take place when excise prod-ucts leave the tax warehouse or the establishment of the exempted user and they are not moved to another registered warehouse. Tax liability arises when excise products are produced or imported. According to the law, suspension of duty means the postponement of statement and payment of tax until the products, subject to duty, become released for consumption. Suspension of duty may be ap-plied until the products are kept in the tax warehouse by the authorized warehousekeeper, kept within the establishments of exempted users or moved to another registered warehouse under the suspension arrangement. Suspension of duty applies even when goods are imported and transported into a registered warehouse. Products transported under the suspension scheme must be accompa-nied by special documents. These documents must contain the indication of origin, the quantity and value of the products, should contain records of each movement in and out of registered ware-

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houses, data about the authorized warehousekeeper, of the handing over to exempted users or leav-ing of the country’s territory. Suspension of duty ends when the authorized warehousekeeper or the importer acquits his tax liability. Acquitting is possible only if the product subject to duty has been admitted into and accepted by another registered warehouse or exempted user, or left the country. The person liable for the payment of the duty is the one from whose warehouse the product is re-leased for consumption.

Tax warehouses can only be operated by authorized warehousekeepers approved by the Customs Office. There are detailed and complicated requirements, related for example to the physical charac-teristics of the warehouse, that the authorized warehousekeeper has to satisfy in order to obtain an authorization. Among others he has to keep up-to-date, detailed accounts and registers - showing the quantity and value produced, and sold to the different customers - that makes monitoring and con-trol of the produced excise products possible for the competent authority. He also has to establish an electronic database that is linked to the Customs Office, through which he submits the required in-formation and his declaration directly. However, this provision presupposes that the Customs Office has the necessary technical equipment to carry out such a control, which is currently doubtful. An-other question is the protection of the data and information obtained from the taxpayers. Consider-ing equal conditions and neutrality of competition, it is essential that only the Customs Office has access and technical ability to control companies’ internal data.

In order to become authorized the warehousekeeper has to provide a certain amount of bonding. This bonding requirement is supposed to ensure that the state can collect the duty even if the per-sons liable try to avoid payment of tax. The required amount of bonding depends on the expected annual quantity of the goods produced or held in the warehouse. The amount is thus calculated as one twelfth of the tax content of the duty on the annual quantity of the products produced. The bond can take the form of a bank guaranty or cash deposited in a central, non-interest bearing account. The bonding has a higher and a lower limit amount, which depends on the excise product in ques-tion. The Act introduces the term of ‘reliable debtor’ who needs to pay only half of the calculated amount of bond, because he has been classified as a creditable taxpayer who has not owed any pub-lic dues or has not defaulted in payments and has produced excise products with authorization in the last two years.

As it was stated earlier, this general regime of producing, holding and moving of excise products is fairly new in Hungary even though some elements of the regime had existed previously - such as the authorization. We conclude that the new regime is very similar to the provisions of the EC Direc-tives and the legal basis has been laid down. However, it is questionable how the general regime will function in practice, since businesses, today, have not got enough practical experience to evalu-ate the new provisions, but it is clear already that further development and refinement will be neces-sary.

In the next section we go into details, and compare how the two more important groups out of the three groups of excise products are regulated and taxed in the Union and in Hungary.

4.1.2 Alcoholic Beverages

No element of the national tax systems has produced so much litigation in the European Union as has the taxation of alcohol. As the Court’s jurisprudence demonstrates, taxes on alcohol have been widely used for purposes of protectionism. Harmonization was complicated by agricultural and pub-lic health considerations and by the diversity of national tax rates and systems. As with the duty on

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tobacco, there was something of a north-south division within the Union. The taxes were generally imposed at a much higher level in the northern states than in the southern countries. Whether be-cause of the additional tax factor, higher prices or cultural differences, total alcohol consumption is also somewhat higher in the South. Even more marked was the difference in the consumption and taxation of wine. Some Member States do not produce wine and tax it fairly heavily, while others produce wine surpluses and impose low or no tax. Other factors that complicate the harmonization process stem from differences in the national tax systems. Typically, alcoholic beverages are di-vided into three or more categories, each of which is taxed in a different manner. Sometimes the es-tablishment of those categories can have a protectionist effect. Since all alcoholic beverages stand in a competitive relationship - even if it is not always so close - attention must be given to the relative tax burdens imposed on each category of products. There were differences in the basis of assess-ment, and some Member States provided special tax advantages to small breweries, wines grown in certain regions, or the products of agricultural distilleries.

In 1985 the Commission proposed a Directive whereby the rate of duty on wine would be restricted so that, on a volume basis, the rate of duty might not exceed the rate on beer by a ratio greater than the ratio of the alcoholic strength of the two products. The proposed restriction operated in one di-rection only: since all Member States produce substantial quantities of beer, Article 95 did not pro-hibit a tax that protected wine against beer.

No progress was achieved in respect of the above proposals, the principal objection being to the in-troduction of excise duty on table wines which were not subject to duty at all in some Member States and were considered an essential component of the daily diet. The imposition of the tax would, it was feared, be highly regressive, inflationary and politically suicidal. In 1987 the Com-mission presented its proposals for the adoption of uniform rates. The proposals envisaged six cate-gories of products - spirits, fortified wines and other intermediate products, sparkling wines, table wines, beer and undenatured ethyl alcohol used in the production of perfumes and certain other products. Each category would have been taxed at its own rate.

It soon became apparent that some flexibility would be necessary if the proposals were to be ac-cepted, and the Commission replaced its original concept of a single fixed rate with one, in which minimum rates would be established, with gradual move towards fixed target rates. In establishing the rates the Commission’s point of departure was the Community average. The primary aim was not to establish an optimal system of taxation, but rather to make necessary changes as revenue neu-tral as possible. In the category of spirits, which are produced and consumed in all Member States in fairly comparable quantities, a simple average seemed most appropriate. Wine however presented a problem, with relatively high duty imposed in Denmark, Ireland and the UK, and with no duty at all in five of the other Member States. Since the high tax countries produce little or no wine and con-sume little, an arithmetical average rate would have been inappropriate and unacceptable for wine producing countries. A weighted average, based on consumption would also create problems if ap-plied to both beer and wine, since it would have resulted in beer being taxed twice as heavily as wine, which would have been unacceptable for non-producing countries. As a consequence, the Commission’s proposed rates represented a compromise, under which beer and wine would be taxed at the same rate on a volume basis. Even with the greater flexibility permitted in the proposals, the suggested rates would have led to significant increases in duty in some states and dramatic reduc-tions in others.

The 1989 revised proposals on rates of duty were followed by a further proposal on the structure of excise duties on alcohol in 1990. The overall aim was to establish broad and clearly defined cate-

45


gories that ensure that all alcoholic beverages fall into one (and only one) or other of the categories. Thus table wines and sparkling wines had to be distinguished, as had to be wines and fortified wines. Fortified wines and other intermediate products with an alcoholic strength in excess of 15% and not exceeding 22% constitute a separate category, with stronger drinks forming the highest taxed category, taxed on the basis of their strength. Lower rates of duty would be permitted for small breweries, with an annual output not exceeding 60.000 hl. of beer, though the reduced rate should not be lower than the minimum rate. Lower rates would be allowed even for some natural sweet wines, and it is permissible to exempt home brewing and home wine-making, since there is little chance that these will cross-frontiers. Beverages with very low alcoholic content (not exceed-ing 1,2%) would also be exempt.

Finally harmonization of excise duties on alcoholic beverages has been achieved in 1992. Directives 92/83/EEC and 92/84/EEC provide for the harmonization of the structures in respect of alcohol and alcoholic beverages. Directive 92/83 provides common definitions for, and distinguishes from each other, the various categories of dutiable products, prescribe the method of applying the duty, and deal with matters such as the permissible exemptions or rate reductions. Directive 92/84 prescribes the minimum rates of duty for alcohol. The rate prescribed for beer remains the same as was pro-posed in 1989 though Member States are now given the choice of taxing beer on the basis of the al-coholic content of the finished product. The minimum rate for spirits, at ECU 550 per hectoliter of pure alcohol, is less than half of that previously proposed, though Member States that presently charge higher rates are not permitted to reduce these below ECU 1.000, and the minimum rate for wine (both still and sparkling) is stated to be ECU 0. Whether prescribing a minimum rate of zero can be described as approximation seems to be questionable. Excise duties for alcoholic beverages are thus:

46


· ECU 550 for spirits (per hl. pure alcohol),· ECU 45 for intermediate products (per hl. volume)· ECU 0 for wine (still and sparkling),· ECU 0,748 for beer (per hl./degree Plato) or 1,87 per hl./degree of alcohol.

In the following, we provide a comparison with the relevant regulations in Hungary applying to the various categories of alcoholic beverages and highlight the main differences between the two kinds of legislation.

4.1.2.1 Regulations in HungaryThe regulations regarding alcohol and alcoholic beverages are laid down in Act CIII of 1997. Chap-ter X defines alcoholic beverages as products with an alcoholic strength in excess of 1,2%. Conse-quently, alcoholic beverages with a strength less than 1,2% are excluded from the scope of the Act in accordance with the provisions of the EC. The process of denaturalization is also defined which is, in turn, prescribed as a procedure that makes the product unsuitable for human consumption. The definition of the Chapter is somewhat misleading because, though the term ‘alcoholic beverages’ is used, later it becomes clear that the expression concerns spirits only. The rate of duty is HUF 1.270 per hectoliter volume. This equals ECU 5,47 which is clearly far below the EU minimum. Besides, there is one reduced rate of HUF 970/hl. vol. (ECU 4,18) applied in this category of alcohol prod-ucts, which is applicable to the traditional Hungarian aqua-vitae made of fruits. There is another re-duced rate of duty applicable in this context, which concerns contract distilling up to quantity of 100 hectoliter. In this case the rate of duty is only HUF 390 (ECU 1,68). We can clearly see the proofs of protectionism in the national legislation as discussed earlier.

Alcohol used for pharmaceutical purposes is exempted, as well as alcohol used in chemicals, in the production of cosmetics, used for bonbons up to an alcoholic strength of 8,5% hl. vol. per 100 kg, and for other foodstuff up to an alcoholic strength of 5% hl. vol. per 100 kg. The required minimum bond is HUF 40 million while the highest amount is limited to HUF 200 million for warehouses that produce or use spirits. Spirits can only be released for consumption after tax has been paid, which is shown by the tax label attached to the bottle. The Act does not give any further information about the tax label. There is no information about the value of the tax label, what it represents and what kind of data it should contain. The reason behind this is that its practical application is easier, as the tax label does not need to show the price, is not linked and does not vary with price, and is not the way of collecting the tax. It is simply a sign of that the product has been taxed.

Chapter XI defines beer as being a mix of beer and non-alcoholic beverages with an alcoholic strength above 0,5% hl. vol. but not exceeding 18%. The rate of duty is HUF 285 per hl./degree Plato. Surprisingly, this is considerably higher than the EU minimum, because it equals ECU 1,228, while we have seen that the Directive established a minimum of ECU 0,748. The difference is above 64% (1,228/0,748=1,64), which might partially be explained by the continuous depreciation of the HUF. Still, the difference is remarkable, as the 64% higher tax equals HUF 1 per bottle of beer (0,5 l). Beer brewery warehouses have to provide a minimum bond of HUF 40 million but it is limited to HUF 200 million on the highest end.

The next Chapter defines sparkling wines as alcoholic beverages bottled under pressure of at least 3 bar of Carbon-dioxide, and with a minimum alcoholic strength of 1,2% vol. but not exceeding 15%. The rate of duty is HUF 60 per liter (ECU 0,26) which should be compared to ECU 0 in the Union.

47


Thus, sparkling wines are charged by excise duty in Hungary while it is duty free in the EU. The re-quired level of bonding is at least HUF 5 million and not more than HUF 50 million.

The last category of alcohol is intermediate products, which are defined in Chapter XIII. This cate-gory has two subgroups: still and sparkling intermediate products. Regarding sparkling intermediate products the definition provides that these are products produced under pressure of at least 3 bar and with an alcoholic strength between 13% and 22% vol. Still intermediate products are, on the other hand, the remaining alcohol products with an alcoholic strength between 1,2% and 22% vol. The rate of duty is HUF 60/l for sparkling and HUF 80/l for still intermediate products. Using 232 HUF/ECU as an exchange rate and changing liter to hectoliter, the figures are ECU 25,86 and ECU 34,48, both of which are below the EU minimum of ECU 45 for intermediate products.

As we have seen, the Hungarian legislation provides lower rates of duty on alcoholic beverages than the minimum rates prescribed by the EC Directives, except for beer and sparkling wine where the Hungarian rates are higher than the EU minimum rates. Furthermore, we can also conclude that the Act CIII. provided different groups of alcohol products than the Directives described previously. The largest difference seems to be that the legislative powers in Hungary have omitted wine from the scope of the Act. This means that wine producers do not face the strict regulations regarding ex-cise products, the large administrative burdens and the requirements of keeping detailed registers and accounts. This also means that wine production can not be controlled in the same way as the production and distilling of other alcoholic beverages. This is quite understandable because Hun-gary is a traditional wine producing country and wine production is a part of rural agriculture taking place in small farms and wine cellars. It is not so difficult to imagine what kind of problems would have arisen if the farmers were to satisfy the administrative requirements discussed earlier. It is in-teresting to note, though, that they were required to do so during the 1960s and 1970s.

In the legislation of excise duties in Hungary and the EU, the most important difference is the treat-ment of wine. Though wine is excluded from the scope of the Act on excise duties, there is a turnover tax (consumption tax in the Hungarian terminology) of 11% levied on wine11 at the whole-sale stage in Hungary, while, according to the provisions of the EC Directives, wine is zero-rated in the EU. In Hungary the tax is levied on wine with an alcohol content up to 18%. The tax becomes due at the retail stage, thus tax liability arises with production and importation. The persons liable to pay tax are the producers, importers and wholesalers who purchase from non-taxable producers. In contrast to other alcohol products, excise duty on wine becomes payable in the wholesale stage in-stead of the retail stage. The differences concerning wine are thus controversial, and it is hard to say whether the objective of protecting farmers or political considerations lay behind the decision.

4.1.3 Mineral Oils

Of the three main duties, that on mineral oils, is by far the most important revenue producer in most of the Member States in the European Union, accounting for more than 70% of the ‘big three’ rev-enues in France, Italy and Portugal. As with alcohol there were considerable variations in rates from one country to another and within each country variations in rates applied to different types of prod-ucts. The task of harmonization was further complicated by the fact that, unlike tobacco and alco-hol, mineral oils are widely used commercially as well as for personal consumption, and by the need to take into account the Union’s policy on energy, the environment and transport.

11 Act LXXVIII. of 1991 as amended48


Following the publication of the Commission’s General Programme on excise duties, a proposal for a Directive was submitted to the Council in 1973, dealing with the structure of duties on the various categories of mineral oils. Again, no real progress was made until 1987, when the Commission sub-mitted comprehensive proposals for the unification of rates of duty. As with the other proposals on excise rates, this proposal had to be modified in 1989 to permit a degree of flexibility, and was fur-ther revised in 1991. A further proposal established the structure of duties on oils in 1990. Eight cat-egories of products were identified: standard petrol, unleaded petrol, road diesel (DERV), heating gas oil, heavy fuel oil, liquid petroleum gases (LPG), kerosene and lubricants. Of these it was pro-posed that lubricants should be exempt from duty, as was done in most Member States. Other ex-emptions or relieves were to be provided for public utilities, railways and international travel. The proposal also dealt with definitional and other technical matters, concerning production, and envis-aged a coordinated scheme for identification marking and coloring, which would be the subject of further study.

The Commission’s starting point, with respect to rates of duty, was the Union’s arithmetical aver-age. In case of petrol, the most important category and accounting for approximately two-thirds of revenue, the arithmetical average was considered a satisfactory solution even though major adjust-ments were required by many Member States. It was considered that a substantial advantage was justified for unleaded petrol for environmental reasons. Diesel presented more of a problem, due to the wide variation in rates and its overwhelmingly commercial use, since major changes might have been expected to have a significant impact upon competition.

The 1987 proposal was for a single uniform rate of duty for each category of product. These rates varied considerably from one category to another, but since there is a relatively low degree of sub-stitution between categories this was not considered to be a problem. Overall, it was anticipated that the necessary changes would result in a loss of revenue in some countries - for example, in Den-mark and France - and an increase for some others - for example, Germany. As with the other ex-cise duties, the 1989 revised proposal accepted the need for greater flexibility and, in the case of petrol and LPG, it proposed the adoption of minimum and target rates in place of uniform rates. However, at that time it was not possible to set appropriate targets and these were established in a further proposal in 1991. Because of their commercial importance, minimum rates were considered for diesel, heating oil and heavy fuel oil, and the Commission proposed the establishment of rela-tively narrow rate bands instead, which would permit some flexibility without unduly distorting competition or trade. It was apparent that concern for energy conservation and for the environment had assumed greater importance by the time the 1991 revised proposals were formulated, since these showed a marked increase in the target rates for petrol, as compared with the 1987 rates, as well as a greater differential in favor of unleaded petrol.

Directive 92/81/EEC provides for the harmonization of the structures of excise duties on mineral oils. The Directive provides common definitions for the various categories of mineral oils, prescribe the method of applying the duty, and deal with matters such as permissible exemptions - mineral oils used in air or water navigation. The minimum duties on petrol and diesel, prescribed by Direc-tive 92/82/EEC are as proposed by the Commission in 1991. Luxembourg and Greece were allowed to charge lower rates for a transitional period. Minimum rates, at much lower levels as in 1991, are also prescribed for heating oil, LPG, methane and kerosene. A Council Decision (92/510) permits exemption from duty, or the charging of reduced rates in all Member States and in a wide variety of circumstances, most notably for public passenger transport. The rates have been established at the following levels:

49


· ECU 337 for leaded petrol (ECU per 1.000 litters)· ECU 287 for unleaded petrol· ECU 245 for diesel and kerosene (as propellant)· ECU 18 for heating gas oil· ECU 13 for heavy fuel oil· ECU 100 for LPG and methane (as propellant).

In the following we present the provisions applying to mineral oils in Hungary. We highlight the differences though they are the least in this field.

4.1.3.1 Hungarian LegislationThe excise duties on mineral oils are very important in every country. The change in rates of duty and in the price of mineral oils affects most of the companies either directly or indirectly due to their wide commercial use. Several times the increase in the prices of mineral oils has resulted in heated public discussions and political resistance in Hungary. Consequently, it is important to give special attention to the regulations regarding the rates of duty on the various categories of mineral oils.

We find the provisions concerning mineral oils in Chapter IX of the Act CIII of 1997. Excise duty is levied based on the quantity of the mineral oil in question. The rate of duty for unleaded petrol is HUF 77 per liter, which equals ECU 0,332. This rate is higher than the EU minimum rate estab-lished at ECU 0,287. The excise duty on leaded petrol is HUF 83,1 (ECU 0,358) per liter in Hun-gary while the EU minimum is ECU 0,337. The same rate is applicable for paraffin and other types of petrol. In the case of diesel, kerosene and heating gas oil the excise duty is HUF 67,6 per liter (ECU 0,29) while this rate is ECU 0,245 in the Union for diesel and ECU 0,018 for heating gas oil. Liquid carbon hydrides used for fueling vehicles are levied on a duty of HUF 86,7 per kg (ECU 0,374) while gas carbon hydrides also sold for road use are charged by a duty of HUF 41,8 per m3

(ECU 0,18). The duty on benzene, on benzene homologues and concentrated natural gas is HUF 83,1 per liter (ECU 0,358). The rate of duty applicable for lubricants is HUF 60,8 per kg (ECU 0,262). Any other petrol sold for road use is charged by a duty of HUF 83,1 per liter while on any other diesel or gasoline sold either for road use or for heating purpose a duty of HUF 67,6 is levied. In case the mineral oil does not satisfy the Hungarian standard requirements, an additional HUF 20 per liter (ECU 0,086) has to be paid as excise duty.

The cases of exempted usage of mineral oils are also listed and specified in the Act. According to the provisions, users of mineral oils are exempted from the payment of tax if the mineral oil be-comes an inseparable part of the new product. Mineral oils are also exempted from excise duty if they are used for the fueling of military aircraft or in the production and supply of electricity. The bonding in these cases is limited to HUF 100 million. The level of bonding varies widely depending on the mineral oil in question. However, most warehouses fall into the category, which has to pro-vide a minimum of HUF 200 million and a maximum of HUF 2 billion bond.

Here we would like to mention that the revenue from the excise duties levied is divided into three parts. The law specifies that 3% of the excise duty is due to the Central Foundation for Environmen-tal protection. On certain products there is a special fee levied on, which is in connection with their pollutionary effects on the environment. So the special fee is payable on three categories of mineral oils: lubricants, heating oils not satisfying the Hungarian standards, and heating oil with a sulfur content exceeding 2,8%. The amount of fee is HUF 60,8 per kg in the case of lubricants and heating

50


oil not satisfying the Hungarian standards, thus the whole amount of excise duty, and HUF 2 in the case of heating oil with a sulfur content above 2,8%.

Part of the excise duty charged on every category of mineral oils is due to the Road Foundation. The proportion of duty that has to be paid to the foundation is 26,32%. This part of the legislation has raised a lot of questions and caused many discussions in Hungary. The contribution to the Road Foundation is considered to be relatively high, still the roads are in unsatisfactory condition, espe-cially minor roads. Not only the maintenance of existing roads does not fulfill the expectations of the citizens, but the construction of new roads and highways are also far from satisfying the needs of a developing infrastructure. This has become even more apparent in the last few years when the number of registered cars and car owners has been increasing in an accelerating manner. Run-down roads have given a headache and a lot of problems for car owners, as reparation and spare parts be-came more and more expensive.

Finally, we can conclude that the regulation of and rates of duty on mineral oils are the most com-patible with the provisions of the EC Directives. In this area the approximation of laws has reached the best results. In general, the excise duty on mineral oils is higher in Hungary than the minimum rates in the EU.

After providing an analysis of the legislation in the EC and Hungary we will now turn to the case studies in order to show the differences in reality and present what the companies think about the expected changes.

5. CASE STUDIES AND INTERVIEWSAs stated earlier case studies allow an investigation of a smaller group of respondents where a large number of variables can be analyzed in detail. The method is thus appropriate for the detailed analy-sis of the differences in the tax legislation in the EU and Hungary. With case studies the researcher is able to study processes, developments and changes, consequently, the method suits our approach of following the developments of the tax legislation and analyzing it in its real context. Another ob-jective of this study has been to give a thick description of the existing differences between the two kinds of regulations for the sake of deeper understanding. One disadvantage of the chosen method was that by analyzing a smaller group we could not cover all the areas of differences in the taxation. If we wanted to illustrate every difference with one case study, it would have required a consider-ably larger number of interviews. In this case we would not have been able to concentrate on the re-lationship between the parts and the whole, on many variables and on the context but we would have got lost in the details missing the holistic understanding. Moreover, the results, our conclusions and the statements are not valid in Hungary as whole and do not represent all Hungarian companies’ opinion and situation due to the small number of respondents and the way they have been chosen.

The interviews12 in this study have had four important parts based on the issues and objectives in this Masters Thesis. The first part of the interview concerned the companies. The beginning of the interview was well-structured and standardized as we wanted to focus on data about the companies and receive background information. The following parts dealt with issues in the three areas of taxes, though only two will be presented here. Regarding these questions, the respondents could talk more open and free, because we considered their opinion and evaluation of the situation important. We prepared an interview guide so that we could retain some control and that no problem area

12 See Annex 151


would be omitted. However, we did not follow the interview guide strictly, the sequence of the questions varied, some questions were left out, as we adjusted the interview guide to the specific company, to the information that was shared with us and to other circumstances that formed the in-terview situations. These parts of the interviews were less structured and standardized, but not com-pletely free.

According to our objective and assumptions, we intended to make a comparison between foreign owned and Hungarian companies, between small and large companies, and between manufacturer and wholesaler/retailer companies regarding VAT and excise duties. We believed that the various types of companies would think differently about the taxation issues and the expected changes and that they would have different opinions about the Union. We assumed that the expected changes in the tax legislation would cause distinct problems for and affect the enterprises to a varying degree. We were also interested in studying whether knowledge and information about the EU differed across these categories of companies.

When it came to the choice of companies we had established selection criteria in order to capture the variance in the responses of the different companies. The criteria were size, ownership and busi-ness activity. The factors, thus, became small/large, foreign/domestic and manufacturer/retailer. The combination of these variables gave us eight groups of companies, namely:

· small, Hungarian, manufacturer· small, Hungarian, retailer· small, foreign, manufacturer· small, foreign, retailer· large, Hungarian, manufacturer· large, Hungarian, retailer· large, foreign, manufacturer· large, foreign, retailer.

After combining the criteria we knew what types of companies we needed for our research and asked BDO Kontroll Ltd., an auditing and consulting company, to recommend companies that fulfilled our criteria and represented one of the groups. We attained the names and addresses of several potential re-spondent companies. We chose five out of the companies suggested by BDO and the choices of three further companies were based on our own judgment. We note that the period of April and May was an unfortunate time to effect the interviews as almost every company was preparing its profit and loss statement on the previous accounting year and executives in higher positions were all very occupied. We motivated them by stressing how important our thesis was from the future membership’s point of view and convinced them that we might even help them answering some questions they had about the Union. One interview had been postponed several times until finally we were not able to effect it. The interviewee canceled the appointments due to the lack of time. Hence, we present the answers of seven respondent companies.

After the appointments had been made, in order to help and prepare the interviewees, we sent them let-ters explaining the aim of our research, introducing ourselves and motivating them to support our work. We believed that it was important that they received the interview questions in advance to be able to prepare themselves and to see that our purpose was to make a serious work. Some of our ques-tions were not easy to answer because they required specific detailed information and in certain cases we had to give some time to the companies for the collection of requested data. We assured the respon-

52


dents that we would not exploit facts, which they did not give permission to because the information would be classified as secret for anyone outside the company.

The respondents welcomed us warmly, were very helpful, friendly and communicative. The interviews lasted from one and a half to three hours nevertheless, none of the interviewees regretted that he or she met us and they even found our meeting useful for their future work. The respondents were thankful for the new information that we provided them about the EU. The first interview took place on the 22nd

of April 1998 with Mrs. Bajkai at Kunststoffwerke Nordenia. We interviewed Mrs. Török at Lekker-land on the 27th of April 1998. The third interview was effected on the 29th of April with Mrs. Filák at Centrum Department Stores, while the fourth interview was on the 4 th of May with Mr. Tóth in Pécs (Pécsi Brewery). The interview with Mr. Kiss from Bekomold was on the 6 th of May. We interviewed Mr. Kalbantner on the 7th of May and Mr. Tóth from Press Air on the 13 th of May 1998. During the in-terviews we used a dictaphone to be able to recall all details. Dictaphone is a perfect device even though it only records the verbal side of the situation. The interviews were then analyzed and summa-rized question by question and therefore, they are presented in an integrated form. As the results have been integrated into an unbroken text, only the most interesting responses are highlighted and pre-sented in detail. We use tables to better illustrate the basic facts about each company. The outcome of the interviews are presented below.

5.1 Respondent CompaniesConcerning the size of the respondent companies, small enterprises have been distinguished from large enterprises according to their number of employees. Those firms have been selected as small compa-nies which have a number of employees below 100, a limit that has been chosen by us. The nationality of the enterprise was determined in accordance with the nationality of the owners. Hence, those com-panies were considered Hungarian whose majority of shares were in the hands of Hungarian individu-als or organizations and where Hungarians participated in the operative management of the firm. Our last criterion concerned the enterprises’ scope of business where we looked for manufacturing compa-nies whose main scope of business was the production of goods (with own production facility and equipment) while those enterprises have been selected for retailers or wholesalers whose turnover is mainly generated by trading activity.

As small, Hungarian manufacturer Kalbantner and Son Ltd. has been chosen, which produces wooden home doors and windows. The small, Hungarian retailers have been represented by Press Air Ltd. the distributor of BOGE compressors. The next group, small foreign manufacturers have been represented by Bekomold Ltd. which produces injection molding tools. From the group of small foreign whole-salers Lekkerland Hungary Ltd. was chosen. Our respondent from the large Hungarian producers’ side was the Pécsi Brewery Inc., while large Hungarian retailers were represented by Centrum Department Stores Inc., a clothing, household and electronic equipment retailer with a chain of department stores. The selected company from the group of large foreign manufacturers was Kunststoffwerke Nordenia Ltd. which produces polyethylene foils and clingfilm for the purposes of packaging foodstuff and de-tergents. The last respondent company would have been the Michelfeit Inc. representing large foreign retailers but this interview could not be effected for the reasons mentioned earlier.

5.1.1 Interviewees

The aim of the following table is to briefly introduce the informants who participated in the research. Concerning the interviewees, it is important to note that at every enterprise we contacted the person in the highest position with the responsibility to supervise the area of taxation. We found it somewhat sur-

53


prising that the taxation issues belonged among the tasks of the chief accountant in four out of seven cases and of the managing director in two cases. Though they were highly educated people with expe-rience in important positions, they did not graduate in taxation law, they all received an economic in-stead of a legal training. Consequently, their knowledge was often incomplete or not up to date. How-ever, the respondents obtained qualifications in taxation issues through experience, on-the-job training and self-education.

54


Company Interviewee Position No. of years at

company

Bekomold Ltd. Mr. Kiss, István Chief Accountant 2

Centrum Department Stores

Inc.

Mrs. Filák, Józsefné Vice Director and Director of Financing 35

Kalbantner and Son Ltd. Mr. Kalbantner, Géza Managing Director 3

Kunststoffwerke Nordenia Ltd. Mrs. Bajkai, Andrásné Director of Human Resources and Chief

Accountant

5

Lekkerland Hungary Ltd. Mrs. Török, Jánosné Chief Accountant 5

Pécsi Brewery Inc. Mr. Tóth, Zoltán Chief Accountant 8

Press Air Ltd. Mr. Tóth, Gábor Managing Director 1.5

Table 1: The respondents

As it is implied in the table above, every interviewee has worked for his or her company more than one year which indicates that they were all acquainted with their company’s situation and able to provide well-founded answers to our questions. Three out of seven respondents were female. One respondent, the Managing Director of Press Air Ltd., was 27 years old while all the others were beyond 40 years. All the interviewees were Hungarian executives so the interviews were effected in Hungarian.

When the interviewees were asked how well-informed they felt they were regarding the developments and events in the EU, none of the interviewees responded that he/she felt him/herself well-versed con-cerning the Union. Moreover, the degree of acquaintance varied among the respondents, as one inter-viewee felt he knew little, one informant had received a training about the EU, and one was relatively well-informed due to his interest in the European Union. To the question whether they were interested in and followed the news about the European Union, all respondents showed considerable interest. They conceived the news and information about the EU interesting and important especially from a professional point of view. Every interviewee gathered his or her information from the electronic and printed media as much as their time allowed them to. In general, it seemed that the informants’ knowl-edge did not exceed the knowledge of an open-minded average citizen watching television and reading newspapers. Most of the interviewees would welcome more printed information, would participate in a short training if an opportunity occurred and their work allowed them to.

5.1.2 Respondent Companies

Table 2 provides background information about the companies, taking up their scope of business, capi-tal and owner structure, number of employees and annual turnover. In the second column there is an abbreviation: Kunststoffwerke Nordenia Ltd. manufactures polyethylene packaging materials and pro-duces clingfilm for detergents and foodstuff. In the third column we present the capital and owner structure of the companies indicating the nationality of the various owners, their share in the equity and

55


whether the owner is a private person or an organization. The next column shows the number of em-ployees at each company. We thought that it might be interesting to know whether international com-panies employ foreign expatriates to integrate international knowledge and experience into the opera-tional work of Hungarian subsidiaries. The last column indicates the annual turnover of the companies in million HUF in 1997.

Two of our respondent companies were incorporated joint-stock companies and five limited liability firms. The enterprises’ scope of business varied widely from the production and distribution of indus-trial machines, through clothing, doors, windows and polyethylene foils to foodstuff. Thereby we man-aged to cover a broad variety of products and activities. Two of the companies were wholly owned by a Hungarian private person while 100% of the shares of one enterprise were held by a German com-pany.

Company

Scope of business Capital and owner

structure

No. of

employees

No. of for-

eign em-

ployees

Ann.

turnover

HUF million

Bekomold Ltd. Injection molding tools 50 - 50% of two German

companies

80 4 - 5

Romanians

1.000

Centrum Depart-

ment Stores Inc.

Clothing and miscella-

neous manufactured goods

55% Hungarian comp.

25% Hungarian inst. inv.

20% employees

1.900 0 15.000

Kalbantner and

Son Ltd.

Wooden doors and

windows

100% Hungarian

private

30 0 60

Kunststoffwerke

Nordenia Ltd.

Polyethylene pack. materi-

als, prod. of clingfilm

100% German company 270 20

Germans

6.000

Lekkerland

Hungary Ltd.

Foodstuff wholesaler, al-

cohol, soft drinks, sweets

49% German comp.

51% German priv.

50 0 2.500

Pécsi Brewery Inc. Beer brewery 91% Austrian comp.

6% employees

3% Austrian compet.

250 3

Austrians

4.000

Press Air Ltd. Compressor distributor 100% Hungarian private 4 0 80

Table 2: The companies

The owner structure of Pécsi Brewery is very complicated and needs explanation. From the table it may seem that Pécsi Brewery can not be treated as Hungarian since 91% of the shares are in the hands of an Austrian company, three further percents are held by an Austrian competitor while only 6% of the shares belong to the Hungarian employees. However, the Austrian company, that holds 91% of the shares, is owned by a Hungarian individual to 50% who actually takes part in the operative manage-ment of the company. Accordingly, 51,5% of the shares can be considered owned by Hungarians and 48,5% is foreign owned. The situation of Centrum Department Stores can also lead to confusion. The majority of shares is owned by the Skála Group which is a Hungarian company but whose owner is a German group thus, 55% of Centrum indirectly is in the hands of foreigners albeit not participating in the operating management of the Department Stores. One fourth of the voting rights is held by Hungar-

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ian institutional investors, while the remaining 20% of the company is owned by the employees. It is interesting to note that only three countries occurred in the list of the companies’ nationalities, namely Germany, Austria and Hungary.

The small companies had a number of employees below 100. The enterprises were the Bekomold Ltd., Lekkerland Hungary Ltd., Kalbantner and Son Ltd. and Press Air Ltd. with a number of employees varying between 4 and 80 persons. Two other firms could be considered middle-sized companies with 250 and 270 employees but they were treated as large companies for the sake of the research, an argu-mentation that could be strengthened taking their annual turnover into account. There was one truly large enterprise among the respondent companies, Centrum Department Stores Inc. which employs 1.900 persons. We believed that it was characteristic of international companies to employ persons with foreign nationality taking advantage of international experience. However, the proportion of for-eign employees proved to be insignificant in most of the cases, except for Kunststoffwerke Nordenia Ltd. where it was 7,5%. The small enterprises generated an annual turnover between HUF 60 million and 1 billion while the turnover of the large companies varied from HUF 4 billion to 15 billion.

Bekomold Ltd. is considered to be a subsidiary of a German enterprise while Centrum Department Stores Inc. is part of the Skála Group, indirectly belonging to the German Tengelman Group. Neither Bekomold nor Centrum have any subsidiary. Two companies, Kunststoffwerke Nordenia and the Pécsi Brewery classify as subsidiaries and they, in turn, are owners of two further companies. Even Lekker-land Hungary has established a subsidiary. On the other hand, Kalbantner and Son Ltd. and Press Air Ltd. are neither subsidiaries nor do they own one. These answers were important partly as background information and partly from a corporate tax point of view concerning the requirement of consolidating the companies’ results.

To the question whether the company follows the developments in the EU, four of the respondents an-swered that the progress in the European Union is relatively monitored within the firm. Three other thought that they were too small to be affected by such international developments. Only one company, Pécsi Brewery Inc., considered itself being acquainted with the EC Directives and regulations. In three cases the respondents believed that it was the German owner’s or the parent company’s responsibility to monitor the EC regulations. The three remaining companies knew nothing about the legislation in the Union. None of the companies have a person or a group assigned to be responsible for the monitor-ing and accumulation of information about the EC legislation. Press Air Ltd., Pécsi Brewery Inc. be-lieved that they would need one person in the future to help and provide them with information about EC Directives. Centrum Department Stores Inc. thought that they would need to establish an EU group to prepare the company for the forthcoming changes. We conclude that the companies have insufficient information and knowledge about the European Union and are not fully aware of its significance upon their future business strategies. The government and interest organizations need to implement measures to increase awareness and need to find the most appropriate channels to effectively distribute informa-tion. Parent companies in the countries of the EU will also play a significant role in the preparation for the membership in the Union.

5.1.3 Markets

In the next table we will summarize the description of the respondent companies’ markets. The second column shows the goods that the various enterprises produce or distribute. Centrum Department Stores provide a broad coverage of clothing, household and electronic equipment. The prices and the price setting policies of the companies are described in the third column. The fourth column aims at summa-rizing the characteristics of the customers highlighting their size and number while the last two col-

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umns show the international trade profile of the respondents presenting the proportion of export and import in total trade or production.

Company Products Prices Customers Exp. Imp.

Bekomold Ltd. Injection molding

tools

Very expensive,

individual prices

Few, large customers,

50% within the group

80% 50%

Centrum De-

part-ment Stores

Inc.

Broad, clothing,

househ., electr.

equip.

Modest, in the middle

range

Large no. of consumers from

middle income group

1% 25%

Kalbantner and

Son Ltd.

Doors and windows

made of wood

Fix margin, in the low

range

90% wholesalers, 10% private 0% 0%

Kunststoffwerke

Nordenia Ltd.

Polyethylene foils,

clingfilm

Individual prices,

higher range

Many foodstuff and detergent

prod., small, large

66% 90%

Lekkerland

Hungary Ltd.

Sweets, soft drinks

and alcohol

Middle, fix margin Large no. of gas station shops

and retailers

0% 30%

Pécsi Brewery

Inc.

Beer Cover every price range Large no. of retailers, pubs,

restaurant, small, large

0% 30%

Press Air Ltd. Compressors and

components

Individual, in higher-

middle range

Large no. of industrial prod.,

both small and large

0% 100%

Table 3: The markets

There are two distinct groups of enterprises in the research concerning the price setting policies of the companies. Three companies, Centrum Department Stores, Kalbantner and Son and Lekkerland Hun-gary determine their prices in advance calculating a fix margin. Pécsi Brewery applies a mix of policies relying on both fix and contractual prices. The remaining three firms, Bekomold, Kunststoffwerke Nordenia and Press Air take several factors into account before handing in a tender. As these compa-nies usually provide a more complex product with relating services, delivery, maintenance etc., the price for an individual customer is dependent on the delivery and financial conditions, on special re-quirements and the bids of the competitors. Kalbantner and Son supplies cheap products to both retail -ers and private customers. Pécsi Brewery offers a wide range of products with differing quality thereby covering the whole price range. The product prices of Press Air, Lekkerland and Centrum are consid-ered to be in the middle range. Two companies provide expensive products in the high price range: Kunststoffwerke Nordenia and Bekomold.

Bekomold is the company which has only few large customers. Bekomold supplies half of the produc-tion to members of its own group of companies. All the other enterprises have many customers. Five companies have small and large customers, both companies and individuals, while the Centrum De-partment Stores offers its products to consumers.

As regards the competitive environment of the respondent companies Bekomold believes that it does not have any serious competitor in the Hungarian market owed to the superior quality of Bekomold’s tools. Bekomold has 50% market share in the domestic market. Considering the international competi-tion, Bekomold has many competitors. The range of tools is very wide so every manufacturer tries to focus on a segment of the market. The tools of Bekomold are internationally competitive because they are high quality goods produced for relatively low price. The company’s strength lies in the cheap but

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highly educated work force. The disadvantages of Bekomold are comprised of communication prob-lems, longer distances and additional administration due to border crossings.

The competitors of Centrum Department Stores include the black market and small boutiques regard-ing the area of clothing. However, this competition is not severe. On the other hand, they face serious competition concerning the electronic and household equipment market, in the form of brand stores. Centrum holds 6-7% of the clothing market while 2-3% of the electronic and household equipment market. There are many actors present on these markets and none of them has large market share. The strength of Centrum lies in the chain of department stores offering a wide range of products and the fo-cus on the service quality. The advantages of an old traditional organization imply the disadvantages as well. These are the high maintenance costs of the chain of stores and the rigidity of the organization which is slow in adapting to changes in the environment. Kalbantner and Son Ltd. does not feel threat-ened by competitors, they have no difficulties selling the products in the whole country. They could not estimate the company’s market share. The competitive edge of Kalbantner and Son is the low price of the products for relatively good quality.

Kunststoffwerke Nordenia has one competitor which produces polyethylene foils and clingfilm but in smaller quantity and of lower quality. Kunststoffwerke satisfies 90% of the domestic demand. There is a severe competition in the international market but the enterprise is competitive even there thanks to its high quality products. Several factors contribute to the competitiveness of Kunststoffwerke Norde-nia: it has the most modern production facility in Europe, which enables the company to manufacture goods of very high quality. Another advantageous factor is that Kunststoffwerke Nordenia employs well-trained labor force for relatively low wages which in turn lowers production costs and prices. The disadvantage of the company is that it is located in the edge of the European market which somewhat increases transport costs and thereby prices. Lekkerland Hungary Ltd. competes with one major whole-saler, its most important competitor, and numerous smaller wholesalers. The competition was severe some years ago but the market seems to consolidate. There are many actors in the market and none of them holds a significant market share.

Regarding the competitive situation of Pécsi Brewery Inc. there is severe price competition in the beer market. Pécsi Brewery is an old traditional organization which has seen better times. Before the en-trance of foreign competitors into the Hungarian market, the domestic beer breweries had divided the market among themselves securing a stable and calculable income. Since the changes, five large and strong rivals have emerged which all have grown greater than the Pécsi Brewery. The largest beer brewery satisfies almost 50% of the Hungarian demand. There is a serious price competition taking place which results in prices below the production costs. In the long term such a competition leads to large losses which requires sacrifice from every actor and is suicidal unless a company has stable and strong financial situation. Pécsi Brewery has a market share of about 6-7 percent. The strength of Pécsi Brewery is the quality of its beer. In recent years Pécsi Brewery has invested large amounts in quality improvement. The disadvantage of the Brewery is that it is weak in some while not represented in some other regions of the country. The company has lost 50% of its market share since 1993.

The situation of Press Air Ltd. is the opposite of Pécsi Brewery. Even Press Air has a number of large and strong competitors. However, Press Air is a relatively newly established young business winning over the market share of its competitors. Press Air has one Hungarian and six foreign competitors. There is a serious price competition and the firm is often forced to go below the purchase price. An-other difference is that the compressor market is not yet a mature market as in the case of beer. Press Air holds 5% of the market which is growing due to the recovery of industrial production. The strength of Press Air lies in the flexibility of the organization, in the high quality of the products and the supe-

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rior maintenance service. The greatest problem for the company is corruption in the industry and the strong capital requirement of the compressor business.

Kalbantner and Son Ltd. has neither export nor import. Press Air being a dealer of a German compres-sor brand does not export and imports 100% of its products from Germany while its maintenance ser -vice could be considered domestic using foreign components. Two other companies, Lekkerland and Pécsi Brewery, do not have any export while they import 30% of their purchases from Germany and Austria, both of which have a share of 50%. Bekomold exports a large proportion of its injection mold-ing tools, 66% of which are delivered to Member States in the EU, 14% is exported to other countries, such as Poland, Brazil, Egypt and Turkey while 20% of the production is sold in Hungary. Bekomold imports half of the raw materials, equipment and machines needed in the production, 40% of which stems from Germany, another 40% is imported from Austria while the remaining 20% is imported from other EU member countries (100% of import from EU). Centrum exports very small proportion of its goods to the former Soviet Union while 25% of the products is imported, of which 80% is stem-ming from EU countries and 20% is imported from other countries, such as Turkey and the Far East. Kunststoffwerke Nordenia exports 66% of its production to the Member States of the EU and 90% of the raw materials is imported from Germany, though the proportion shows a decreasing tendency. Six out of seven companies participate in international trade. Three of them have both export and import and three companies import only. Generally, the most important trading partners are the Member States of the EU where Austria and Germany play especially significant roles.

The opinions of the respondents were generally similar regarding the role of customs duties. We asked the informants about the customs duty levied upon importation and about the duty that becomes liable abroad when the respondent companies export their products. Concerning the Hungarian customs duty, both the number and rates of duties have been constantly reduced in recent years, a favorable develop-ment welcomed by every interviewee. Mrs. Filák at Centrum aptly expressed the functioning of duties stating that the purchase price and the customs duty are closely related to each other. Customs duties do not influence the purchase price as they are considered part of the price. During the negotiations Centrum strives to remain below a target price, thus the foreign partner is forced to reduce the price and thereby, the customs liability is shifted back to the seller. In the case of high customs duties the seller must establish the price at such low a level that it still should be profitable for Centrum to make the purchase with the duty included. What concerns compressors, customs duty is levied only on the components. Mr. Tóth at Press Air drew our attention to the fact that in case of components and spare parts, the purchaser often does not have an alternative but to buy the special component belonging to a certain brand no matter what the price is.

Concerning the customs duties in other than EU countries, Mr. Kiss at Bekomold told us that duty is taken into account in every agreement and constitute a part of the deal. Thus foreign customs duties do not affect the price. The prices of Bekomold are relatively low and consequently, foreign duties cause them less problems than for the competitors. Mr. Tóth at Pécsi Brewery mentioned one example when a business came to grief owed to high customs duties. Pécsi Brewery was trying to win new markets south of Hungary and started to export beer to Romania. One week after the first delivery the customs duty on beer was raised by 20% and suddenly the business was no longer profitable.

5.1.4 Finance

Concerning the financial situation of the companies we conclude that all companies have made some investments in order to increase the value of their assets. Bekomold has invested HUF 10 millions into production machines and equipment since 1991. The division between debt financing and own re-

60


sources was equal. Centrum has invested HUF 1,5 billion into the renovation of two department stores and the method was debt financing. Kalbantner and Son Ltd. used debt financing when purchasing new machines for some millions. Kunststoffwerke Nordenia has made the largest investments for HUF 5 billion using its own resources for building a new factory in Poland. Lekkerland purchased new trucks for about HUF 14 million from its own resources. Pécsi Brewery has made maintenance investments for HUF 10 millions financing from debt. The company’s investment possibilities are limited by the large stock of debt. Press Air Ltd. financed the purchase of new cars and investment into the stock of components for some million from its own resources because of the usual difficulty of small compa-nies to gain access to bank loans. Financing from own resources is as common as debt financing how-ever, smaller companies tend to use the profits generated by themselves while large companies rely more on debt financing. The difference is not unique for Hungary, small companies face the problem of raising funds all over the world.

Concerning the companies’ book-keeping, only one company, Press Air Ltd., has its books kept by an-other independent Hungarian company. The other companies have internal book-keeping. The books are kept in HUF at all companies and according to the Hungarian Act on accounting. The results of five enterprises, Bekomold, Centrum, Kunststoffwerke Nordenia, Lekkerland, Pécsi Brewery, are con-solidated into the income statements of their parent companies. Three firms are required to prepare consolidated profit and loss statements in order to integrate the results of their subsidiaries: Kunststof-fwerke Nordenia, Lekkerland Hungary and Pécsi Brewery.

The books of Bekomold, Pécsi Brewery, Kunststoffwerke Nordenia and Lekkerland are audited by BDO Kontroll Ltd. The audit of books at Kalbantner and Son and Centrum Department Stores is made by another auditing firm. Press Air is not required by law to audit its books. Regarding tax matters, the companies usually take care of operational routine issues internally, such as the VAT declaration, pay-ment of pension and health insurance contributions, payment and declaration of personal income taxes. In case the firms face an unusual problem or a special situation, they turn to experts for consultation and help to solve the problem. It is often the companies’ accounting or/and auditing firm.

To the question what the respondents’ opinions are about the Hungarian tax legislation, the intervie-wees, with one consent, believed that the rates are too high and there are too many types of taxes. The only acceptable rate, according to most of the respondents, is the corporate tax rate of 18%. The inter-viewees agreed that the text of the Acts and the tax legislation is extremely complicated and impossible to comprehend which causes serious difficulties even for tax experts and consultants. Financial and tax experts give several different interpretations of one single point of the regulation. Not only the text is complicated but the rules and procedures are also difficult to apply. Mr. Tóth at Pécsi Brewery drew our attention to the fact that, as a result of the constant changes in the tax legislation, the references to other articles and points of the same or of other Acts are incorrect. Mrs. Filák at Centrum Department Stores believed that there is not any degree of flexibility in the tax legislation but rather a special rigor built in based on the assumption that every tax payer is a fraud or tries to avoid payment of tax. Tax fraud, avoidance or any offense is impossible at Centrum Department Stores because of its closed sys-tem controlled from every angle. She held the opinion that the legislative powers base the design of the Acts on situations and mechanisms of small undertakings and as a consequence, the provisions do not suite or are impossible to apply to large tax payers. She believed that large organizations function dif -ferently and have very distinct procedures from small companies. The Hungarian legislative powers do not seem to realize this fact, or if they did realize they could not constitute Acts that are applicable to both small and large enterprises.

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Mrs. Bajkai at Kunststoffwerke Nordenia described the Hungarian tax legislation as one that makes planning problematic. All the other financial executives had similar opinions. Both short and long term plans need to be reviewed and modified whenever a change occurs in the regulations. Companies are occupied with the daily operation of the firm and can not follow the weekly changes of the tax legisla-tion. The Hungarian tax legislation needs to be consolidated before Hungary gains access into the Union otherwise domestic companies will face serious difficulties outside their control and a worsen-ing of the competitive situation. According to the opinion of Mr. Kiss at Bekomold Ltd., the Hungarian State intervenes in the economy too much whereby the tax revenues become centralized and the econ-omy over-regulated. Moreover, the firms complained that the tax legislation does not encourage invest-ment and development but restrains the prospering of businesses and entrepreneurship.

Among the greatest difficulties the companies mentioned the problem of planning that arises from the endless amendments of the tax legislation. If an entrepreneur establishes a business in a profitable for-mation with a good and marketable idea, the legislative conditions may change so much within some years that he or she might be forced to lay off the activity. The greatest problem for Centrum Depart-ment Stores is that the tax legislation is designed for small companies. A change in the tax or account -ing rules, especially in the personal income taxation or the pension and health insurance, causes serious problems for the company as 1.900 declarations need to be reviewed and sometimes even the whole in-formation system has to be modified. Employees in the department of finance at Centrum often feel that they work for and do the job of the tax authority when taking care of every employee’s tax matters and declaration. As a consequence, the company recurs significant additional costs and considerably higher administrative burden.

A common problem for Kalbantner and Press Air is that the purchase of any fixed asset beyond HUF 30.000 can not be treated as cost and the value of the asset can only be depreciated throughout several years, thus the amount increases the taxable profit at the end of the year. In many cases the purchase of such an asset is not a real investment and, though the cost actually occurs in the specific year, only a fraction of the amount can be recovered in that year which negatively influences the cash-flow of a small company. The limit of HUF 30.000 is very low in relation to the current prices and crucial for small undertakings, especially if one considers that the price of a PC is eight to ten times that amount. Many of the companies have problem with the rule restricting cash-payments to HUF 1.000.000. Still, the 1 million limit affects the small undertakings the most as they are often required to pay cash due to their low credibility. As mentioned earlier, cash payments beyond 1 million increase the tax base and the value added tax is not deductible is case of such expenses. These two differences are unique for the Hungarian tax legislation and place small companies at a disadvantage. The two limits will need to be lifted when Hungary becomes a member of the Union and will improve small companies’ situation.

Another problem that was common for the small companies of the study, is that due to the high level of state intervention and redistribution, the deprivation is very high which prevents small undertakings from employing more individuals. There is a lot of work and a need to recruit new employees but the costs of employing an additional person are so enormous that the firm can not bear such an immediate increase in costs. The consequence of this is that less people are employed who have to deal with larger work load for relatively low wages. If the deprivation decreased the small companies could generate new jobs and the rate of unemployment would be lower. Moreover, there is another burden for small companies that can not be justified, the compulsory membership fee payable to the respective chamber of commerce. Small companies are not provided any service by the chamber of commerce, in return for the fee, and the firms complained that the only mail they receive from these organizations is the check arriving for the payment of the fee. These biases will need to be eliminated but there is no one specific measure that the EU could require from Hungary to restore balances.

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Regarding the question whether the tax legislation places constrains on the competitiveness of the com-panies, three out of seven enterprises did not consider themselves having a problem. As for Pécsi Brewery Mr. Tóth declared that in the times before there was any foreign company established in the Hungarian beer market, there was no competition and therefore no need for marketing either. The com-petition, the marketing expenses and modern procedures arrived together with the foreign producers. However, the costs of marketing were not acknowledged by the tax legislation of excise duties. This resulted in increasing distribution costs which were included in the basis of assessment. Those compa-nies that did not recognize the need for the separation of production and distribution early enough, in-curred very high costs and tax liability loosing their competitiveness. Pécsi Brewery was one of them. Today, it does no longer constitute a problem as the excise duty is calculated based on the alcohol con-tent of the beer. Centrum considered their disadvantage to be the company’s size because changes in the tax legislation result in considerably higher costs and more work for the Department Stores than for the smaller competitors. Besides Centrum, Bekomold regarded the VAT rules to be disadvantageous from a competitive point of view. At these two companies large amounts of value added tax become payable which influences their cash-flows negatively. Bekomold is obliged to charge, then claim re-fund of VAT on its exports which binds significant resources.

Most of the companies found it difficult to estimate how harmonized the Hungarian tax legislation is with EC regulations. The estimations ranged from 50% to 90%. Most of the respondents were aware of the fact that the Hungarian legislation has been approximated and harmonized to the EC Directives. The interviewees believed that the differences become less and smaller. Mrs. Filák at Centrum thought that the objective of the latter amendments was to harmonize laws and that the basic principles and mechanisms are already equivalent with only the rates differing according to budget requirements.

5.2 Value Added TaxIn this section we will analyze how companies are affected by the Hungarian system of value added tax and present the respondents’ opinions about the regulations. We asked the interviewees what they thought about the forthcoming changes as a consequence of a future Hungarian membership in the EU. Every company is affected mainly by the VAT rate of 25% both regarding purchases and sales. Con-cerning the purchases of the companies, almost every respondent answered that nearly 100% of the to-tal purchase value is levied by 25% value added tax. Some percentage of the total value is levied by the reduced rate of 12% and these purchases include financial services, renting of immovable property, transport services, postal services, etc. In the case of Lekkerland, the proportion of total purchase levied by the standard rate is lower, it is about 70% because the company purchases and imports food-stuff a part of which is subject to the reduced rate. The value added tax on almost one third of Lekker -land’s procurement is 12%.

Summarizing the effects of the value added tax on the sales of the companies, Centrum Department Stores, Kalbantner and Son, Pécsi Brewery and Press Air supply goods that are subject to the standard rate of 25%. At Lekkerland the ratio of the two rates regarding the total sales equals the ratio relating to purchase, thus 70% of the goods are levied by 25%. The total sales of Bekomold and Kunststoffw-erke Nordenia should be divided into two categories. The part of the production that is sold in the do-mestic market is subject to the standard rate, which is 20% at Bekomold and 25% at Kunststoffwerke Nordenia. The remaining 80% and 75% respective, is exported and consequently, zero-rated. None of the other companies have any sale that is levied by 0%. It was rare that the companies had acquisitions exempted from the value added tax. Such exempted transactions included the renting of apartments for

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expatriates at Kunststoffwerke Nordenia, and some financial transactions and services at Centrum, but the value of these were negligible.

Three of the companies, Bekomold, Kunststoffwerke Nordenia and Press Air had temporarily imported production equipment. It is not a characteristic event for any of the companies, but it was usual at Bekomold some years ago. The value of the temporary importation reached HUF 50 million. Tempo-rary importation meant that the machines entered the territory of the country and Bekomold knowing that the goods will leave Hungary, registered the machines for temporary importation. The customs duty and the value added tax was determined and became liable but Bekomold did not need to make any payment upon importation, instead it received authorization to utilize the equipment for a certain time period. If the machines had left the country before a predetermined point of time, tax liability ceased, otherwise Bekomold had to pay the tax and the customs duty.

Two companies, Centrum Department Stores and Pécsi Brewery apply consignment agreements. Con-signment agreements are interesting concerning the point of time when tax liability arises. Such agree-ments are occasional at both companies. Centrum used to be the consignee accepting the sale of other firms’ products. In these cases the tax liability arises when Centrum sells the products. Pécsi Brewery in turn, applies consignment agreements for the purposes of winning new regional markets and acts as consignor. In such situations tax liability arises when the retailer, the pub or the restaurant sells the beer. Settlement of accounts happens at the end of the season or every month thus, the retailer charges VAT earlier in time that VAT have been charged for him.

Three companies had experience of installation and assembly on behalf of the supplier where the place of the supply is deemed to be the actual place of installation or assembly. None of the companies ap-plied triangulation. The companies do not apply distance selling. Neither do the companies deal with second-hand goods, works of art, collectors’ items and antiques.

When Hungary gains accession to the EU, the administrative burdens of companies can be expected to increase. The enterprises will be required to list every foreign partner to whom they supply or from whom they acquire goods. We wondered whether the companies thought that it would require addi-tional administrative work. Generally, the respondents declared that they already keep detailed ac-counts and register the data of every partner. Most of the companies have modern information systems that will be able to deliver the additional facts and summaries for the VAT declarations. Every infor-mant believed that the administrative requirements already are too much but they are ready for the bat-tle. Furthermore, according to the respondents it is the tax authority that has serious problems handling the paper work and will not be able to easily process the incoming information. Today, the tax author-ity can not accept declarations on electronic information bearers which implies that the companies are forced to do the work manually.

Another expectable consequence of a Hungarian membership in the EU is that the tax authority will ef-fect increased monitoring and control to avoid tax fraud. We asked the interviewees how they would evaluate such an increased transparency. The companies had varying experiences with control from the tax authority’s side, as a controlling unit occurred at the enterprises with different regularity. The tax declarations of Bekomold are controlled every other month while Lekkerland, Kalbantner and Son and Press Air was not controlled by the competent authority yet. To our greatest surprise, every intervie-wee responded that they would welcome an increased control. The reasons behind this were twofold, one group of the respondents motivated their opinions by that a control procedure would assure the company that the internal accounting and operational mechanisms are correct and that they can not commit mistakes. One mistake or a misinterpretation of a point of the legislation usually concerns

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large amounts of money and serious penalty payments that companies try to avoid. However, the bene-ficial effect of the increased control presupposes the professionality, speed and flexibility of the control procedure. The other group of the interviewees answered that an increased control could prevent tax fraud and would force back the black economy leading to increased revenue from taxation which in turn might result in decreased tax burden for them.

To the question what the respondents think the results of decreasing the standard rate of VAT from 25% to 20% would be, the answers varied widely. Many interviewees believe that it would lead to a general increase in the aggregate demand, positively affecting both the company and the economy. A reduction of the rate would lower prices leading to an improvement in the competitiveness. Most of the companies would benefit from the positive developments indirectly as their customers are other legal persons entitled to deduction or refund of VAT. Another advantageous feature of such a decrease in the rate would be the reduction of the resources bound that could improve the cash-flow management of the companies. Half of the interviewees thought that the effects would be temporary. Exporting compa-nies expressed the view that the reduction would not have any effect on their international businesses and competitiveness due to the zero-rating of exports. Mrs. Filák at Centrum Department Stores was not so optimistic about the consequences of the reduction. Her experiences show that the consumer does not react to any price reduction or discount below 20%. She does not believe that the lowering of the rate would lead to any change. Most of the respondents could not estimate how the reduction would influence profits.

The respondents expect similar to the above or no changes as a consequence of lowering the reduced rate from 12% to 8%. One interesting answer was that the supply of services and goods subject to the reduced rate take up greater and greater share of the total costs. For example, communication and en-ergy prices rise with an accelerating rate and affect total costs negatively.

Assuming that the transitional system with the destination principle applicable will be replaced with the new common system of value added tax with the clearing house mechanism and the origin princi-ple when Hungary gains accession into the EU, the following questions concerned the future. We ex-plained to the respondents how the new common system is expected to function and asked their opin-ion about the changes. The interviewees do not think that the new system will affect the basic mecha-nisms of charging VAT, deduction of input tax, declaration and refund which are the basic concerns of the companies. They consider the shift from the destination principle to the origin principle a technical change. It is a problem that can easily be solved with today’s modern technology and with the far reaching development in the software programs. However, the combination of the greater number of tax rates and the blend of foreign and domestic rates can become a new source of error.

The exporting companies would welcome the abolition of the fiscal frontiers whereby the administra-tive obligations at the borders would be abolished. Mr. Tóth at Press Air raised the question that when the rate of the input tax no longer equals the rate of the output tax - as it is today according to the desti -nation principle - because the foreign VAT rate is some percentage lower than the domestic VAT rate, companies will be required to make larger tax payments. With equal rates the VAT is charged on a company’s value added, however lower foreign rates increase the differential between the input and the output tax which in turn leads to greater than actual value added. Companies will pay more tax than they currently do. Mrs. Török at Lekkerland Hungary Ltd. drew our attention to another potential problem. Most companies are required to submit their declaration to the tax authority at the end of ev-ery quarter. This means that there can be several months between the date of payment of invoice with VAT included and the date of refund of tax. Problems will arise when the payment is made in another

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currency in relation to which the HUF depreciates during those months. Thus, exchange rate changes may become a source of profit or loss in the new common system.

5.3 Excise DutiesFrom the beginning of 1998 the regulation of excise duties in Hungary has become harmonized with the EC Directives. In this section we mainly base the analysis on the answers of two companies. The regulations regarding alcoholic beverages concerned two companies: Pécsi Brewery Inc. and Lekker-land Hungary Ltd. Every company in the study was indirectly affected by the legislation concerning mineral oils due to their fuel consumption because we have not selected any enterprise importing min-eral oils. Neither will we provide an analysis of the rules governing the production, holding and import of manufactured tobacco.

5.3.1 Alcoholic Beverages

In the scope of the new legislation the Customs Office (VPOP) has been appointed to be responsible for the collection of excise duties. There seems to be no practical significance of this measure for the companies. The respondents have no experience of how the Customs Office and the tax authority can cooperate with each other and the interviewees would expect the relationship to be problematic. Ac-cording to the respondents, the procedures and mechanisms of the Customs Office are underdeveloped, the authority does not complete the administrative work correctly and is therefore unreliable.

The system of duty suspension has been introduced in Hungary, which includes the delay of duty pay-ment until excise products are released for consumption. As Lekkerland is a wholesaler and has a bonded warehouse, thus it is a kind of intermediary, it does not actually need to make payment of duty. The goods are just temporarily stored at Lekkerland. The situation of Pécsi Brewery is more compli-cated. Pécsi Brewery has established a subsidiary distributing the products. The subsidiary is not an au-thorized warehouse, thus Pécsi Brewery becomes liable to pay the excise duty when it sells the beer to its own subsidiary. Other wholesalers and retailers are not usually authorized warehousekeepers as an authorization does not lie in their interest. The wholesaler has considerably smaller stocks and there is a short time period between his payment of duty and receiving the same amount of duty through the customer paying the price including the duty. Contrary to this, Pécsi Brewery is obliged to pay duty at the time of delivery to any wholesaler but receives the amount of duty months after delivery when set-tling accounts with the wholesaler. The time period is thus much longer and the amounts, binding the resources of Pécsi Brewery, are significant. We conclude that the suspension-of-duty does not function in the practice of Pécsi Brewery. Theoretically, payment of duty should occur when the beer is released for consumption, thus at the retail stage, but in reality Pécsi Brewery is making payments right after the production stage.

In order to get a license and authorization to operate a warehouse, the companies are required to pro-vide bonding. The respondents believed that from the company’s point of view the burden of bonding is too high but from the Government’s point of view it is realistic to demand a bond. The revenue from excise duties has to be ensured even in the case of defaulted payments. The bonding is high concerning that it is a non-interest bearing fix capital that binds significant resources which in turn could be in-vested for considerably higher return. Both companies paid cash in the previous accounting year but today the bonding takes the form of a bank-guaranty. Lekkerland has to provide a bond of HUF 15 million while Pécsi Brewery is a reliable debtor providing half of HUF 110 million. Both respondents believed that the introduction of the term ‘reliable debtor’ was an important measure reducing the com-panies burden of providing the bond.

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We asked the interviewees how difficult it is to satisfy the detailed administrative requirements of the excise products, keeping an up-to-date register of the stock and recording every event and data about the products. The respondents told us that it lies in their own interest to have an up-to-date register for keeping track of the products and the stock, being able to always deliver on time. The companies’ soft-ware can handle the administrative requirements and they do not have any problem with the electronic register. Pécsi Brewery uses a software developed internally while Lekkerland has purchased a German software that satisfies every requirement of the German system of excise duties whose provisions are equal to the Hungarian legislation. The companies do not need to further invest into the information system as they are ready to report to the Customs Office through a direct electronic way. The tight con-trol mechanisms can not be effective until the Customs Office is not competent and able to satisfy its own legal requirements. From the competition’s point of view it is important for the companies to know how much and what kind of confidential data is accessible through the electronic way of connec-tion whose security is questionable.

Generally, the rates of excise duties on alcoholic beverages are lower in Hungary than in the EU. When we asked the respondents why they thought this was the situation, they could not find an explanation for the lower level of Hungarian rates. To the question what they expect the effects of an increase in the rates would be they responded that a temporary fall in the demand might be possible. In contrast to the lower rates, the excise duty on beer is 64% higher in Hungary than in the EU. We wondered how the higher rate of duty on beer influences the companies. Mr. Tóth at Pécsi Brewery told us that the whole quantity of beer consumed in Hungary is also produced by Hungarian breweries, accordingly, the higher excise duty affects every producer and competitor equally. There is no international compe-tition where the difference would constitute a disadvantage. Mr. Tóth could not explain why the Hun-garian duty should be higher. When the rates were raised, the revenue from the duty diminished be-cause the increase in the rate was accompanied by a fall in demand. The lower sales figures were due to decreased marginal propensity to spend and to the fact that wine was not subject to the Act on excise products. Lack of control resulted in a large quantity of cheap, low quality wine. The price of one bot-tle of wine (0,7l) equaled the price of one bottle of beer (0,5l).

Wine and beer can not be substituted with each other because there is a culture connected to the con-sumption of these products. Beer is usually consumed while being with friends in a cozy surrounding leading to a happy mood. Brand loyalty among beer consumers is relatively high. Mr. Tóth made a dis-tinction between two consumer segments. The consumption of the first group is situation-dependent. For example, summer heat, having guests, being on vacation are occasions leading to increased beer consumption. The other consumer segment buys the products owed to their alcohol content. They often buy the cheapest sort of wine or beer and they choose the product with the lowest price. Lekkerland is not affected by the different treatment, rate of duty or change in the legislation considering the rela-tionship between wine and beer, as the company is trading both. What Lekkerland loses on one prod-uct, gains on the other.

Mr. Tóth has an interesting opinion about consumption tax on wine. The fact that wine has been omit-ted from the scope of the Act on excise products leads to uncontrolled production and sale of wine. He would welcome the measure of including wine in the scope of the Act and a situation where wine pro-ducers had to satisfy rigorous legislative requirements. He believes that wine producing farmers would be able to cope with the requirements as they were obliged to report and submit a declaration during the 1960’s. However, the tax authority is lacking the ability to control the numerous farmers producing wine. Grapevine yards are all registered so the quantity of production could be calculable. In the cur-rent situation ‘wine factories’ can produce large quantities of bogus adulterated wine without a conse-

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quence. As a result, small producers who grow grapevine with great care in their own yards, face diffi -culties selling their wine that has the traditional high quality. Farmers dislike administration but for the sake of the Hungarian wine’s reputation and for the purposes of profitability they would be ready to fulfill legal requirements that are aimed at safeguarding quality. Improved quality of wine would lead to higher prices which in turn would make small farmers’ businesses more profitable.

5.3.2 Mineral Oils

Every company operates its own cars or trucks for business purposes. Thus, all of the respondent com-panies are affected by the excise duty included in the prices of mineral oils. Most of the companies had at least 5 vehicles for personal transportation used mainly by traveling salespersons. Press Air had only two cars while Centrum and Pécsi Brewery had a number of cars beyond 40. Most of the vehicles used for operational purposes are driven 60.000 to 100.000 km annually. Only Bekomold uses the vehicles considerably less. Two companies, Kalbantner and Son and Lekkerland take care of the transportation of goods within the scope of their business activity. Kalbantner and Son has one truck and Lekkerland has 15 trucks. The other companies hire independent transport firms for the dispatch of products. Three companies render the services from Hungarian transport companies while Bekomold and Press Air en-trust foreign firms with delivery. According to the estimation of the respondents transportation costs make up 5% to 10% of total costs.

We asked the respondents why they thought that the Hungarian duties on mineral oils are higher than the rates of duty in the Union. The interviewees believed that it is highly dependent on budget con-straints and that the duty on mineral oils is a form of taxation that is relatively well accepted by the so-ciety. Hungarians are very found of cars and the number of car owners is high relative to the living standards. Cars are considered a symbol of status whereby consumption of fuel can be strongly taxed and is a reliable source of revenue. The prices of mineral oils include a large proportion and different categories of taxes. The tax content of fuel prices is beyond 50%.

The companies are directly affected by the prices of mineral oils through the utilization of their own vehicles. However, for most of the companies the greatest effect is indirect, because the companies bear the burden of an increase in the prices of mineral oils as transportation firms shift forward fuel costs in the prices of their services. None of the interviewees would expect a decrease in the duty on or in the price of mineral oils, it is more realistic to hope for a lower rate of price increases. Most of the respondents do not think that a reduction in the prices of the mineral oils would significantly affect their businesses. Only one respondent believed that lower fuel prices would increase the company’s competitiveness as transportation costs are build in the company’s product prices. A reduction in the prices of mineral oils would be beneficial for Kalbantner and Son because fuel is used in the operation of their production machines as well.

We have now seen the opinion of the companies and presented the results of our empirical work. Last but not least, we will briefly summarize all our conclusions and the findings of this Master Thesis.

6. CONCLUSIONSWe conducted our research applying the hermeneutic scientific perspective. We strove to understand the subject matter in depth and tried to give good description of the differences between the Hungarian and European taxation systems. For the purpose of the research and for obtaining primary data we chose a qualitative approach where case studies seemed to suit our objectives best. We studied a small

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group of respondents where we were able to analyze large number of variables. The way we gathered useful data was through interviews with the responsible persons in each selected company. Interview questions were asked according to an interview guide designed in advance, where the beginning of the interview was more structured and standardized while the questions about the taxation systems were less structured and respondents could talk more freely. We were satisfied with the interviews and all the material we obtained, and were able to establish good personal contacts with the respondents. The only negative aspect was that we did not have the possibility to make follow-up interviews with the re-spondents evaluating the results of our cooperation.

Summarizing the findings we can assert that there are no differences between the basic principles of the European and the Hungarian taxation systems relating to value added tax and excise duties. The Hungarian legislative powers have attained a high level of approximation of laws but some differences still remain. We found that rates differ concerning both the value added tax and the excise duties on al -coholic beverages and mineral oils.

As we have mentioned in the beginning of the analysis of the Hungarian value added tax, several dif-ferences are technical or terminological in the sense that terms relating to intra-Community trade will have no relevance until Hungary is not a member in the Union. As regarding taxable persons and tax-able transactions, the Hungarian definitions are extended to a larger group of persons and transactions. We also conclude that the Hungarian VAT rate of 25% and the reduced rate of 12% are high. The group of zero-rated transactions is more extensive in Hungary. In Hungary taxable persons can not deduct the tax invoiced to them in the case of fuel if it is directly used for the operation of passenger cars. Furthermore, the input tax can not be deducted when the taxable person makes a cash-payment beyond the limit of HUF 1.000.000. Hungarian companies have less administrative obligations than their counterparts in the Union. In contrast to the EC Directive, the Hungarian Act provides for six spe-cial schemes.

Concerning excise duties we found that in Hungary there is only one Act governing the production and holding of excise products. We can conclude that the general regime in Hungary is compatible with the regime applied in the EU, however the Customs Office does not seem to be mature for fulfilling its function. In general the rate of duty on alcoholic beverages is lower in Hungary except for beer that is levied by a 64% higher rate. Another important difference is that wine is omitted from the scope of the Act on excise products though, there is a consumption tax of 11% levied on wine. We found the least differences regarding the rates of duty on mineral oils but these were also higher than the EU minimum rates.

Considering our assumptions, we found a number of differences between the answers of small and large companies that are due to the Hungarian tax legislation. The largest problem of small companies is the restriction of cash-payments to HUF 1 million. Because of their lower credibility, smaller com-panies are often required to pay cash. The greatest problem for large companies is that the tax legisla-tion is designed for small enterprises not taking into account that the mechanisms of large organiza-tions are entirely different. By amendments of the legislation large companies incur additional costs and greater administrative burden. These differences are specific to Hungary while the remaining dif-ferences in the responses of small and large companies are valid world-wide and occur in every coun-try because of the nature of small and large companies.

Concerning our criteria of nationality there was no considerable difference in the situation and knowl-edge of Hungarian and foreign companies. What we found is that foreign owned companies are more involved in international trade so they are affected by the VAT provisions that concern exports and im-

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ports. We should be cautious making statements about the foreign owned companies because in our re-search only the foreign owned enterprises exported, which made their situation different from others, but is not valid to the population of exporting companies. Exportation involves additional administra-tion and exporting companies, thus foreign firms of the research, would welcome a simplification of border-crossing procedures and the abolition of fiscal frontiers. Generally, we conclude that companies are not afraid of the future Hungarian membership in the EU and look forward to the expected changes. We did not identify any measure or expected amendment that would influence the situation of small/large, Hungarian/foreign or manufacturer/retailer companies to a significant degree.

6.1 Self CritiqueEven before we commenced our Masters Thesis we knew we had chosen a complex and broad subject. As we progressed it became more visible and apparent that we had to narrow down the content of our study. Doing so meant that we had to omit interesting and significant issues. An important remark con-cerning this paper is that the laws, directives, regulations and acts, that we have spent more than six months studying, are parts of an ever changing jurisdiction. This means that the development of a legal system is infinite as laws need to be adapted when situations alter and modern rules are necessary to govern newly evolved situations. A series of amendments will soon invalidate the results of this thesis and the conclusions will therefore be out-dated in a year. However, it does not necessarily mean that we have conducted a study in vain because we have gained significant knowledge about European and Hungarian taxes and hopefully we have provided valuable information to both Hungarian and interna-tional companies. Our work will also be used to improve the consultant services in BDO Kontroll Ltd.

As for the credibility of our case studies we did not amend or form the answers of respondents in order to make them better suit our interest, theoretical orientation and experiences. We did not try to alter the opinions of the participants but we let the interviewees speak freely about their experiences. Neither did we try to distort the information gathered but tried to grasp the respondents’ picture of reality in or-der to present it in the most credible way. During the interviews we were actively listening, making re-flections and encouraging the respondents to interpret their own statements.

Regarding confirmability we asked the participants to repeat and explain any opinion when there was a chance to misunderstand the meaning. We tried to obtain repeated affirmations of what we have heard, which made continuous feedback possible. We focused on obtaining correct, more than enough infor-mation and over-explanation from the informants. The interviews were long and there was time for de-tailed answers, however the informants might have been tired at the end of the interview which some-what decreases the value of the answers given to the last questions.

Regarding the criterion of meaning-in-context, the analysis of laws together with data obtained from the case studies make our thesis understandable in a holistic context. We studied the facts, experiences and opinions of the respondents having regard to the companies’ situation. We evaluated and summa-rized the answers with the specific situation and the context in mind.

When evaluating our work taking recurrent pattering into account, we should state that we had no pos-sibility to return to the companies and make a completion of the interview. We had the opportunity to contact our respondents by telephone or fax to complete or correct any answer which was insufficient despite all our efforts. We did not record any experience that tended to be patterned or recurred over time as we did not repeat our study in the same or any different way and design. Neither were we able to identify patterns of sequenced behavior because we effected the study once and in only one context.

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As regarding saturation, we made a serious literature study obtaining as much information about taxa-tion as possible. When we encountered an area that we did not fully understand we turned to experts to obtain help. We have striven to know our subject as adequately and comprehensively as feasible. How-ever, we believe that we can still improve our knowledge about taxes, partly because the writing of the Masters Thesis is a learning process itself and partly because acquisition of knowledge in the area of taxation, which is a complex and broad subject, requires several years of experience and practice.

What concerns the transferability of our findings, we doubt that they could be moved to a similar con-text or situation. The reason behind the non-transferability of our findings is that there are no other similar situations and contexts where the results and conclusions could be applied. It is a specific place and time, which ceases when Hungary becomes an effective member in the EU. One might think that the findings of this thesis are transferable to other Central and Eastern European Countries but it is un-likely that the taxation systems of the CEEC are identical.

6.2 Suggestions for Further Studies As stated earlier we were not able to include some valuable and interesting issues in this paper. One of the problem areas we could not exploit is how the laws concerning manufactured tobacco are affecting the market. For example, it would be interesting to study how manufacturers, wholesalers and retailers will divide the profit arising from the sale of cigarettes, cigars and cigarillos. We wonder how competi -tion is affected since the retail price is determined by the producer or importer. It is worth an analysis how the sale of tobacco will be effected in practice. If the retailers’ profits on cigarette sales are too low, they will not care about purchase, delivery and sale but let the manufacturer install a cigarette au-tomata with full responsibility for the filling and maintenance of the vending machine for a fix rent.

Although we had considerable theoretical and practical information about the differences in corporate tax legislation we were not able to present them here. It would have been interesting to include the is-sue of corporate taxes in the scope of the thesis because there are greater, more interesting and signifi -cant differences in the area compared to value added tax and excise duties. We chose to omit corporate taxation because the other two taxation areas, the system of value added tax and excise duties, are closely related to each other. Another interesting field to investigate could be the question how service companies would evaluate their situation from a taxation point of view and what their opinions are about the forthcoming changes. We excluded service companies from this research for the reason that these type of companies are neither affected by excise duties nor do they perform importation and ex-portation as business activities.

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7. REFERENCESAlasuutari, Pertti: Researching Culture – Qualitative Method and Cultural Studies, Sage Publi-cations Ltd., London, 1995

A Magyar Köztársaság Külügyminisztériuma: Magyarország a ‘90-es években – A Magyar Kor-mány válasza az Európai Unió kérdõívére, (Ministry of Foreign Affaires: Hungary in the 90’s – the Hungarian Government’s Answer to the Questionnaire of the European Union), Ministry of Foreign Affaires, Budapest, 1997

Binning, Kenneth and Futó, Péter: “A Jogharmonizációs Szabályozás Gazdasági Hatásvizs-gálata, (“The Regulatory Impact Appraisal of the Harmonization of Laws”), Statisztikai Szemle pp. 101-113, 1997. No.2, Budapest, 1997

Commission Opinion on Hungary’s Application for Membership of the European Union, Inter-net: http://europa.eu.int

Easson, A.J.: Taxation in the European Community, The Athlone Press Ltd., London, 1993

Európai Közösségek Bizottsága: Közép- és Kelet-Európa Társult Országainak Felkészülése az Európai Unió Egységes Belsõ Piacába Történõ Integrációra – Fehér Könyv, (European Commis-sion: Central- and Eastern European Countries Preparation for the Integration into the Internal Market of the European Union – White Paper), Commission Proposal, Brussels, 1995

Dr. Ferenczy, Endre: “A pénzügyi tárgyú törvényhozási joganyag harmonizálásának prob-lémáiról”, (“Harmonization problems of the fiscal regulation and law”), Pénzügyi Szemle pp. 298-310, 1995. No.4, Budapest, 1995

Hitiris, T.: Az Európai Unió Gazdaságtana, (Economics of the European Union), Mûszaki Könyvki-adó, Budapest, 1995

Holme, I.M, Solvang, B.K: Forskningsmetodik - om Kvalitativa och Kvantitativa Metoder, Stu-dentlitteratur, Lund, 1991

Kecskés, László: EK-jog és Jogharmonizáció, (EC Law and Harmonization of Laws), Közgazdasági és Jogi Könyvkiadó, Budapest, 1997

Mádl, Ferenc: ”Magyarország EU Tagsága – Érvek és Ellenérvek” (”Hungarian Membership in the European Union – Pros and Cons”) pp. 41-55

Norén: Tolkande Företagsekonomisk Forskning, 1990

Patel, Tebelius: Forskningsmetodikens Grunder, 1987

Starrin and Svensson: Kvalitativa Studier i Sammhällsvetenskapen, 1994

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Stockman, Norman: Antipositivist Theories of the Sciences, D. Reidel Publishing Company, Netherlands, 1983

Prof. Terra, Ben and Adv. Kajus, Julie: A Guide to the European VAT Directives – Commen-tary on the Value Added Taxes of the European Community, International Bureau of Fiscal Docu-mentation, IBFD Publications, 1997

United Nations: International Cooperation on Tax Matters, United Nations, 1992

Dr. Vastagh, Pál: “A Magyar Jogharmonizációs Folyamat az EU-hoz való Csatlakozás Je-gyében”, (“The Hungarian Harmonization Process in the Light of a Membership in the EU”), Gaz-daság és Gazdálkodás pp.1-4, 1996. No.7-8., Budapest, 1996

Dr. Verebélyi, Aranka: “A Fogyasztási Adó Szabályozása az Európai Unión Belül és Mag-yarországon”, (“Regulation of Excise Duties in the European Union and in Hungary”), Pénzügyi Szemle pp. 762-771, 1995. No.10, Budapest, 1995

Yin: Application of Case Study Research, 1989

Dr. Õry, Tamás: “Az EK Adóharmonizációs Tevékenységének Áttekintése”, (“An Overview of the Tax Harmonization Activity of EC”), Adó pp. 37-44, 1997. No.6, Budapest, 1997

Act CXVII. of 1995 on Personal Income Taxes (and its amendments)

Act CIII. of 1997 on Excise Duties and Special Regulations Concerning Excise Products

Act LXXXI. of 1996 on Company Taxes and Tax on Dividends (and its amendments)

Act LXXIV. of 1992 on Value Added Tax (and its amendments)

Act LXXVIII. of 1991 on Consumption Taxes and Subsidies on Consumption Prices (and its amendments)

Act XCIII. of 1990 on Duties (and its amendments)

Directive 67/227/EEC, First VAT Directive

Directive 69/463/EEC, Third VAT Directive

Directive 77/388/EEC, Sixth VAT Directive

Directive 79/1072/EEC, Eighth VAT Directive

Regulation 218/92/EEC, on Mutual Assistance

Directive 74/651/EEC

Directive 78/1035/EEC

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Directive 86/560/EEC, Thirteenth VAT Directive

Directive 91/680/EEC, on the Abolishon of Fiscal Frontiers

Directive 92/77/EEC, on the Approximation of VAT Rates

Directive 92/111/EEC, on the Introduction of Simplification Measures

Directive 94/5/EEC, on Second-hand Goods, Works of Art, Collectors’ Items and Antiques

Directive 94/4/EEC and 95/5/EEC, on the Allowances for Tax Free Shopping

Directive 94/76/EEC, on the Introduction of Transitional Measures

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Directive 95/59/EEC

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8. APPENDIX

INTERVIEW GUIDE

A.1. The respondent:

Name: Position:Number of years at the company:How well informed do you think you are regarding the European Union? Are you interested and do you follow the news about the European Union?

A.2. Description of the company:

Name of the company:Scope of the business:Capital and owner structure (proportion of foreign ownership):Organization (mother company - subsidiaries):Number of employees:Number and proportion of foreign employees:Turnover, income:Does your company follow the developments in the European Union? How well do you think your company is acquainted with the EC Directives and regulation? Is there someone or a group appointed whose responsibility is to follow the news and gather infor-mation about the EC legislation? Do you plan to establish such a group?

A.3. Description of the market:

Product groups and products:Price categories and prices:Customers, clients and consumers:Competition (largest competitors, their size, behavior, foreign vs. domestic):Market share (in %):Exports: Which countries, how large proportion in the total (%)?Imports: Which countries, how large proportion in the total?What is the significance and role of the Member States of the EU in the total sales or purchase?

Imports from third countries or exports to third countries? How high are the customs duties in these cases? What do you think the effects of customs duties are on the sales?

In case of exports:How competitive do you think your company is (products or services) in international trade? How competitive do you think your company is on the internal market of the EU?

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What are your prospective and possibilities in developing or increasing your competitiveness?What is your company’s greatest competitive advantage?What is your company’s greatest disadvantage in the competition with the European companies?

A.4. Finance:

What is your company’s preferred way of financing new investments (debt financing or financing from own resources)? How are your company’s books kept? Inside the company or outsourced? In which currency? In accordance with which country’s legislation?Is your company obliged to prepare a consolidated P/L statement (mother company - subsidiaries)? How are books audited? Inside the company or outsourced?How do you deal with tax matters? Inside or outside?

What is your personal opinion about the Hungarian tax legislation?What do you think constitutes the greatest problem, difficulty or disadvantage for your company?Which rule do you think constitutes the greatest disadvantage for your company concerning com-petitiveness?How far do you think the Hungarian tax legislation has been harmonized with the EC regulations? In %?

B. The value added tax:

What is the value or proportion of your purchase, on which 25% VAT is levied (net, in relation to total purchase)?What is the value or proportion of your sale, on which 25% VAT is levied (net, in relation to total supply of goods or services)?What is the value or proportion of your purchase, on which 12% VAT is levied (net, in relation to total purchase)?What is the value or proportion of your sale, on which 12% VAT is levied (net, in relation to total supply of goods or services)?Do you have any exports (0% VAT)? What is the value or proportion of it?Do you have any purchase or sale that is exempt from VAT?What is the value or proportion of exempt purchase?What is the value or proportion of exempt sale?

Have you ever imported assets (machines, tools or cars) temporarily when the asset has left the country within one year? What was the value of this import?

Have you ever dispatched goods on consignment?

Do you install or assemble goods on behalf of the supplier, thus goods leave the country after pro -cessing? What is the value of this kind of contract work?

Have you ever bought or sold goods through an intermediary or agent in a third country (triangula-tion)?

Have you ever bought or sold goods through distance selling? What was the value of the transac-tion?

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Do you have any activity that concerns second-hand goods, works of art, collectors’ items and an-tiques?

Do you have any kind of activity or purchase that would fall into the category of agriculture?

When Hungary becomes a Member of the European Union, there will be several changes that will affect a large number of companies. As a consequence:How great administrative burden do you think it will be to report every export and import (intra-Community) transaction, to keep records of every customer and supplier with their VAT registra-tion number and prepare detailed reports to the tax authorities? Similarly, in order to combat fraud and tax evasion, greater control can be expected from the tax authorities’ side. What do you think the consequences of greater control will be in general?

The Hungarian VAT rates, both the standard and the reduced rate, are highest compared to those applied in the Union. What do you think the consequences of a reduction from 25% to 20% would be? (in terms of prices, competition, demand and supply, profit) What do you think the effects of a reduction from 12% to 8% would be?How would it influence your company’s situation?

With some exceptions, the destination principle is applied in the EU. However, these rules are tran-sitional and sooner or later the origin principle will be adopted. This is a precondition for the truly free movement of goods and services. This means in practice that the VAT on export goods will be liable and paid in the country of the seller/supplier, thus 0% of VAT will cease to exist. In case of import the foreign VAT will be paid while the buyer will be allowed to deduct the amount of tax in his domestic VAT return (declaration).What do you think the consequences of this system will be in practice?In the new system companies will be required to register for VAT registration number in every Member State they conduct business (thus supply to or acquire from). Do you think that it will be a simple process or would you expect difficulties and complications concerning foreign registration?

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C. Excise duties:

From the beginning of 1998 the regulation of excise duties and the general regime in Hungary has become harmonized with the EC Directives. In the scope of the new legislation the Customs Office (VPOP) has been appointed to be responsible for the collection of excise duties and it is considered the competent authority in excise matters.What do you think is the practical significance of this measure?Is there any effect, and in this case, what is the effect of this on your company?

The system of duty suspension has been introduced in Hungary, which includes the postponement of payment of duty. From January 1998 tax becomes liable only when goods are released for con-sumption (at the retail level).What is the effect of this measure concerning your company?

The newly established system of fiscal warehouses is connected to the suspension of duty. How-ever, in order to be authorized to operate a fiscal warehouse it is required to provide bonding. The size of the bond depends on the duty levied on the quantity of annually produced or purchased products. It is one twelfth of this tax amount in the form of cash or a guaranty granted by a bank.How great burden is this bond for your company? Is it realistic or too high?What is the significance of bonded warehouses?

The law introduces the category of reliable creditors as well. The size of the bond is reduced to half for those who classify as reliable creditors.Do you think that this is a serious reduction? What is the significance of the reduction?

Exempted usage and processing of these products also require a license, which gives the exempted user the authorization to purchase and hold a restricted quantity of the excise product necessary in the production. How ‘exempt’ such a producer can be considered when he also has to provide the same amount of bond to get the license (though even here it is possible to become a reliable credi -tor)?How great a burden is it in reality?

The new legislation introduces considerable administrative requirements. As a consequence fiscal warehouses need to keep detailed registration and income statements that are easily controllable by the Customs Office. The product and tax reporting liability is supposed to be fulfilled through the electronic and computerized direct linkage between the taxable person and the Customs Office.How great additional burden do you think it is to fulfill the rigorous administrative requirements?What kind of changes and investments are needed to develop the electronic linkage?How great are they?

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Alcohol:In general, excise duties on alcoholic beverages are lower in Hungary than the minimum rates (amounts) in the EU. Exceptions are the beer, wine (consumption type of duty) and the intermedi-ate products, on which the Hungarian excise duty is substantially higher.Why do you think the Hungarian excise duties are lower, in general, than those of the EU Member States?What do you think the consequences will be of a rise in excise duties? How do you think this will affect your company?

In Hungary the excise duty on beer is 64% higher than the EU minimum. The duty is HUF 285/hl, that is HUF 1/bottle (0,5 l). How do you think the additional HUF 1 influence the price, the de-mand and the turnover?What do you think is the reason behind the higher duty?How does this affect your company?Do you think it is possible that the excise duty on beer will be lowered in the near future (3 years)? How great a reduction would you expect?How do you think it influence your company?

In the EU, wine is included among the alcoholic beverages and the regulations apply to its produc-tion. On the other hand, in Hungary wine is not subject of excise duty rather a duty-like, but so-called consumption tax. By this solution the Government avoided requiring small farmers to com-ply with the precise and complicated regulation of excise products. The consumption tax on wine is 11% opposed to the 0% excise duty in the EU.What do you think the consequence of this difference is?What do you think the effect would be of including wine in the legislation of excise duties? What do you think the consequence of levying 0% on wine would be?How would it affect the price and the consumption of wine vs. beer?

Manufactured tobacco:

The excise duty on cigarettes is made up by two components. There is an ad valorem duty of 17% and a special element of HUF 1950/1.000 pieces. The ad valorem duty is 17% of the retail price, and there is HUF 39 on an ordinary packet of cigarettes (20 pieces). Above all, from 1998 even VAT is calculated backwards from the retail price, it is 20% of it. The total tax amount on a packet of cigarettes is thereby 48-50% (EU: min. 57%) of the retail price depending on the price of a packet. The retail price of cigarettes is decided on by the producer (importer) who prints this price on the packet. The tax (the single stage VAT and the excise duty) is paid and collected through tax stamps. This means that the producer or importer buys the stamps from the state, sticks the stamp on the packet and thereby pays the full tax levied on the cigarettes.How great do you think the producers’ freedom or flexibility is, in reality, in deciding on the price? What do you think the effect will be on the prices of cigarettes?How do you think the producer and the retailer agree on a price between them?How do you think they divide the profit among them?Does this system damage the interests of smaller actors in the market?Do you think the producer will abuse its size and market power to attain an unfair market price, or will he not?

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Mineral oils:

Number of company cars (trucks and cars)?Average number of km annually?How do you transport your products? Own trucks or with the help of a transporting company? Av-erage number of km annually?

The regulation in Hungary has been harmonized with the EU requirements but the excise duties on mineral oils are higher than in the EU. Fuel is thus more expensive in Hungary than in Europe. What do you think the reason is behind this?How do the higher fuel prices affect your company?Do you think it is possible that the fuel prices will decrease in Hungary?How would you estimate the decrease?

What would be the effect on your company supposing a 10% reduction in fuel prices?What would be the advantage of it?

D. Corporate tax

Today, transactions such as the formation of a capital company, the conversion into a capital com-pany, an increase of capital by contribution of assets, a the transfer from a third country to a Mem-ber State of the effective center of management or of the registered office, are subject to capital duty only in the country where the effective center of management of the company is located. This capital duty is not allowed to exceed 1% of the nominal amount in the EU. This capital duty is 2% in Hungary, though with an upper limit of HUF 300.000.Have you had any formation of capital, conversion into a capital company or an increase of capital in the previous years? What was the nominal amount?Do you think that the capital duty influences these types of decisions in a company? To what de-gree? What do you think the effects of a reduction to 1% would be?What would be the effects of abolishing the capital duty?How would it concern your company?

According to the Merger Directive in the case of cross-frontier mergers, division, transfer of assets, and exchange of shares, taxes may be rolled over. The tax liability usually arises from the capital gains, from hidden reserves and from the recapture of excess depreciation. The tax liability can not be avoided all together, but the granted rollover is supposed to encourage the development and for-mation of European companies.When do you think this measure could become appropriate in Hungary?When do you think European companies will arise with Hungarian origin?How does it concern your company?

According to the legislation applicable in the EU, payments of dividends from subsidiary to mother company are not subject to withholding tax in the country of the subsidiary. Besides, relief from double taxation must be given in the country of the parent, either by exempting dividends received from tax or by granting a foreign tax credit. However, in Hungary dividends that cross the frontier are subject to withholding tax that is 20% if nothing else is stated in the international treaties on double taxation (Hungary has agreement with almost every Member State, except for Portugal).

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These lower rates range from 5 -15%. What do you think the consequences would be if companies did not need to pay withholding tax on dividends paid to foreign mother companies?In your opinion, how would it affect your company?Parallel with this, it is proposed that even interest payments and royalties should be exempt. There is one difference though. While dividends are exempt in one direction only, interest payments and royalties would be exempt in both ways (in two directions). What do you think the consequences would be of such a system? How would it influence your company’s operation?A serious deterrent to foreign direct investment is the fact that a parent company can not claim re-lief against tax on its own profits for losses incurred by its foreign subsidiaries. This problem is ad-dressed by the proposed Directive on intra-group losses. Member States shall allow their enter-prises to take account of the losses incurred by different subsidiaries and set of part of the profit, thus tax on a group bases.How great do you think such a relief would be for international companies?How great proportion of the companies would opt for such an alternative?How would it affect your company?

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Stockholm University_ _ Masters Thesis (Draft) · Web viewAccording to Article 4, a taxable person means any person who independently carries out in any place any economic activity,