Economy 25 November 2024, 10:20am

Further details emerge on the tax amendments due for 2025

Portfolio

The end of the year has seen a flurry of activity regarding the extra profit tax. After a government decree on Thursday revealed which sectoral extra levies would remain in place in 2025, the headline figures of the various chapters of the 2025 budget became available at the same time. And its illustrative public finance table shows that the government would indeed forgo windfall profit tax revenues in 2026. The question is how seriously the sectors concerned will take this promise, as the government has made this commitment several times over the past two years. The scepticism is especially warranted in light of the fact that 2026 will be an election year, when fiscal austerity is not exactly the government's preferred option. But in its current plan, the cabinet is making a firm promise to deliver and to lower the budget deficit from 3.7% to 2.9% by 2026, while reducing public spending. If they see this through in an election year, we could be looking at not just an extraordinary but a unique 2026.

Tax squeeze in 2025

As expected, the second half of the 2025 tax provisions has been published, not in the form of a law, but as a measure citing the state of danger [because of the Russia-Ukraine war, the migration crisis, etc - ed.], the government has amended the original 2022 extra profit tax regulation by decree.

The essence of the taxes that remain in place:

The extra profit tax on banks will remain and may even increase to HUF 320 billion per year (up from HUF 280 billion expected this year, half of which banks may not have to pay), half of which banks can write off if they buy enough government securities.
The increased retail sales tax remains. It is no coincidence that the government expects retail companies to pay HUF 40-50 billion more in 2025, or nearly HUF 300 billion in total.
The extra profit tax on insurance companies remains, which the government expects to generate an extra HUF 100-120 billion, but this amount can also be halved in the case of government bond purchases, so the actual gain could be HUF 50-60 billion. Overall, it expects the sector to contribute HUF 213 billion, lower than this year's HUF 234 billion target and the expected receipt of over HUF 290 billion.
The special tax on the Brent-Ural spread, paid by Mol, remains. This represents an extra burden of HUF 40 billion, according to previous estimates.

Taxes we say goodbye to:

The revenue-based special tax, also paid by Mol (HUF 40-50 billion), will be abolished.
The special tax on renewable energy companies and on balancing capacity service providers will be abolished.
The extra profit tax for manufacturing companies (bioethanol producers, starch and starch products producers and sunflower oil producers) will also be abolished.
It is no coincidence that next year, the government expects the energy sector to pay HUF 296.7 billion in revenue, a significant drop from the HUF 513.6 billion it had forecast for this year.
The government phases out the extra mining fee. Therefore, the revenue from the mining tax line will be reduced from HUF 192 billion to HUF 129 billion.
The extra profit tax for the telecoms sector will be abolished. Therefore, the expected tax revenue of HUF 95 billion this year will be reduced to HUF 51.1 billion.
The extra profit tax on pharmaceutical producers and the distributors' extra tax will disappear.
The special tax on airlines will be abolished.
The utility tax, which could generate HUF 40 billion in revenue this year, will be abolished.

Thus, despite the many phase-outs, substantial special tax revenues will remain in 2025, increasing the tax burden on the industry and on the consumers concerned due to pass-through compared to the base line (fully phased-out extra profit taxes). In their latest Public Finance Report, National Bank of Hungary (MNB) analysts estimated that

maintaining the four special taxes would imply a tax burden increase of HUF 413 billion

compared to the situation without these extra profit taxes in 2025. The term tax squeeze increase is also justified for 2025 because, in addition to the continuation of the already detailed extra-profit taxes, economic agents will also have to face future tax increases:

Increase in the financial transaction tax and the additional levy on currency conversion transactions. This will bring HUF 230 billion in extra revenue to state coffers next year (the financial transaction tax is budgeted at HUF 589.3 billion.)
Inflation-indexed increases for several taxes. Excise duty: the specific excise duty on alcoholic beverages, tobacco products and fuels (petrol, diesel, LPG) will increase annually by the rate of inflation in July of the previous year (excise duty could increase by HUF 112 billion next year compared to this year's forecast). Vehicle tax: the amount of tax on motor vehicles will also be adjusted to inflation (this type of revenue could increase from HUF 101 billion this year to HUF 102 billion). Registration tax: the tax payable on the first registration of vehicles will increase annually in line with inflation (from HUF 17 billion this year to HUF 25 billion next year). Vehicle transfer tax: the tax payable on the transfer of ownership of vehicles will increase in line with inflation. Company car tax: from 2026, the tax on company cars will also be subject to inflation (from HUF 80 billion in revenue this year to HUF 94 billion next year). Duty on onerous transfer of property in the case of motor vehicles too.
Raising road tolls by the rate of inflation will generate an extra HUF 22 billion in revenue for the budget in 2025.
The increase in fines will generate an additional HUF 40 billion in revenue for the state.
Another new item for next year will be the aviation environmental impact tax, with HUF 20 billion in revenue.
The government expects to receive HUF 75 billion from the carbon tax (CO2 quota) next year alone.

It is therefore clear from the above that, overall, at the level of current plans, the government's priority is to further reduce the deficit target in 2025 and is taking a number of revenue-increasing steps to do so. There is a risk that consumers will pay the price for these, both directly (through pass-through) and indirectly (high inflation). Part of this could be offset by the first phase of the doubling of the family tax relief for some households (with children), which could leave an extra HUF 85 billion for families next year.

Portfolio previously wrote about the 2025 budget here:

Tax squeeze may ease from 2026

In addition to the extra profit tax regulation, other new information on the budget was released on Thursday. The government has submitted the headings for the 2025 budget bill, which include the budget outlook for the period 2026-2028, i.e. the evolution of all the main revenue and expenditure lines.

And the revenue lines in this document show that the lines where the government will account for the remaining extra profit tax revenues next year are expected to show revenue reductions from 2026 onwards. This clearly suggests that

the government plans to phase out all windfall profit taxes completely from 2026.

It is true that the same plan was made in 2023 (i.e. that extra profit taxes will only remain in place in 2022 and 2023) and again in 2024 (i.e. that the tax will remain only for one extra year). Some revenue lines are highlighted here to show how their amount will be reduced from 2025 to 2026:

Payments by financial institutions (this is where the budget accounts for the standard bank levy and the extra profit tax) could amount to HUF 111.8 billion in 2026, down from the HUF 253.1 billion expected in 2025.
Payments by the energy sector could fall from HUF 296.7 billion to HUF 212.7 billion by 2026.
Retail tax revenues could fall from HUF 295.3 billion to HUF 197.2 billion next year.
The insurance tax revenue could shrink from HUF 213.1 billion in 2025 to HUF 156.8 billion.

As regards the public finance table in the outlook chapter, the submitting Ministry of Finance stresses that "the fiscal outlook for the years 2026-2028 is based on the macroeconomic path underpinning the bill". "The calculations assume the so-called "no (fiscal) policy change" scenario where there is no parliamentary or government decision to deviate from the current rules," the chapter volume says. However, this can also be read as meaning that

the finance ministry does not expect, for example, the extra profit taxes detailed above to be maintained after 2025 because there is no legislation to do so. but we must add in a hurry that there is no legislation - yet!

It was the amendment to the extra profit tax regulation published in last Thursday's Official Gazette that proved that the government can extend these special taxes to later years in a heartbeat, using the instrument of ruling by decree. Presumably, the unpleasant experiences of the last two years have led the operators in the sectors concerned to draw the same conclusion, i.e. to be prepared for anything.

This is all in spite of the fact that the government specifically describes the fact of phasing out from 2026 for each extra profit tax in the chapter volumes in the budgetary developments, for example:

in the case of the extra-profit tax on banks, the text says that the measure will be phased out from 2026.
the extra-profit tax on the difference between the price of Brent and Urals oil and the increase in the rate of the income tax on energy suppliers are not included for 2026 in the draft.
In this respect, it is interesting that the future fate of the extra profit tax on insurance and retail sales is not specifically addressed under this point.

Now that's a mighty big promise

Due to the above, i.e. the government's plan to fully phase out extra-profit taxes from 2026, the interesting situation in the budget arises that central budget revenues will decrease by HUF 133 billion from 2025 to 2026. It is also interesting to note that, partly as a result of this, the total revenue side of public finances is projected to increase only slightly in 2026, from HUF 38,739 billion to HUF 39,211 billion.

This is on top of the government's commitment to further reduce the budget deficit as a share of GDP from 3.7% to 2.9% in 2026.

This also requires a nominally declining expenditure side in 2026.

The expenditure side of the general government budget could reach HUF 42,255 billion in 2026, a decrease from the HUF 42,862 billion projected for 2025. Within this, central budget expenditure could also fall, from HUF 30,799 billion to HUF 29,544 billion.

The icing on the cake is that there will be a parliamentary election in 2026, when fiscal austerity will not be the focus of government management. For this reason alone, the government's pledge to forego hundreds of billions of forints in extra profit tax revenue in its entirety is interesting, in a year when political challenges will put pressure on governing parties to encourage public spending.

Cover photo: MTI Photo/Tamás Purger