Anticipated Sharp Drop in Windfall Tax Rates
Hungary Implements New Regulations on Windfall Taxes
The Hungarian government has recently published a decree in the Hungarian Gazette, announcing amendments to regulations on windfall taxes. These changes will have a significant impact on tax rates for petroleum product producers and pharmaceutical companies, among others, starting in 2024. The news, reported by World Economy, highlights the major shift that is expected to occur in the tax landscape.
Currently, the extra profit tax rate for these industries stands at 2.8 percent, which will remain unchanged in 2023. However, starting in 2024, this rate will be substantially reduced to just one percent. This change is particularly welcome news for MOL, Hungary’s main oil and gas company, which has been burdened with high taxes in the past. Last December, it was announced that the tax rate on the margin between the price of Brent oil, Russian oil, and market prices would increase from 40 percent to 95 percent. As a result, the government would claim a significant portion of the extra profit from cheaper Russian oil, resulting in a 95 percent windfall tax for MOL.
The reduction in the windfall tax is not limited to MOL alone. Pharmaceutical companies will also benefit from the tax decrease, but with certain conditions. These companies must engage in investment and research activities to be eligible for the deduction. They can then deduct these costs from their windfall tax if they meet the specified conditions.
Additionally, there have been changes in the tax regulation for airlines, although not as significant as the deductions seen in other industries. The Hungarian government has also designated Israel as a European route. This means that passengers traveling to Israel will be subject to the same tax rate as those traveling within Europe, resulting in a substantially lower tax burden for Israeli flights.
The introduction of windfall taxes in Hungary in 2022 targeted specific groups of companies. Extra profit, defined as the supernormal rate of return, was considered in determining the tax rates for different industries. The energy sector, in particular, experienced a significant increase in profits due to rising energy prices and geopolitical factors such as the Russian-Ukrainian war. To mitigate the impact of this crisis, various sectoral levies were introduced across Europe, including Hungary, to redistribute the corresponding revenues.
The windfall taxes in Hungary affected industries such as banking, insurance, energy, retail, telecoms, airlines, and pharmaceuticals. The amounts varied, with billions of Hungarian Forints allocated to each sector.
These new regulations on windfall taxes aim to provide relief for petroleum product producers, pharmaceutical companies, and other industries starting in 2024. The reduced tax rates will allow these businesses to allocate more resources to growth and innovation, contributing to the overall economy of Hungary.
