Changes in deferred tax introduced by the 2010 tax package

In accordance with bill no. T/9817 passed by Parliament, several provisions of the Corporate Tax Act and the pecial Tax Act have been amended with effect from 1 January 2010. The legislative changes may affect the determination of deferred tax.

Changes in tax rates

From 1 January 2010, the corporate tax rate will increase from the current 16% to 19%. At the same time, the special tax payable by businesses will be abolished. Accordingly,

• a 3% increase (19% minus 16%) will have to be accounted in respect of the deferred tax assets and deferred tax liabilities that were calculated at the 16% corporate tax rate in previous financial years;
• a 1% decrease (20% minus 19%) will have to be accounted in respect of the deferred tax assets and deferred tax liabilities that were calculated at the 20% corporate tax and special tax rate in previous financial years (e.g. if there is a deferred tax effect arising from the differences between the IFRS and the Hungarian Accounting Act).

It is important to note that, as a result of these corporate tax rate changes and the abolition of the special tax payable by businesses, different steps may be required under IFRS and US GAAP:

• under IFRS, the profit or, directly, the equity will have to be adjusted according to the event giving rise to the deferred tax liability (e.g. if the deferred tax effect of the temporary difference associated with the revaluation of assets from previous periods has been accounted against the valuation reserve, the adjustment of deferred tax necessitated by changes in the corporate tax rate will also be recognised in equity against the valuation reserve);
• under US GAAP, the effect of these tax rate changes will only be recognised in the profit and loss statement.

Tax loss carry-forward

• Credit institutions will be able to carry losses forward, including 2009 losses, which will mean that deferred tax assets can be recognised.

Bad debts
Under the adopted legislative amendments,

• the definition of bad debts that may be deducted from the pre-tax profit has been expanded: in addition to debts deemed irrecoverable under the Accounting Act, the definition now includes 20% of the cost of debts not settled within 365 days of the payment deadline;
• recorded impairment is defined as impairment recognised in accordance with the accounting rules and accounted as a tax base increasing item, less the amount already deducted from the pre-tax profit; and
• the amount of bad debts that can be used to decrease the pre-tax profit may not exceed the amount of the recorded impairment.

By extending the definition of bad debt and making the definition of recorded impairment more precise, the amended legislation may also affect the magnitude of the temporary differences associated with debts and, therefore, the amount of deferred tax to be recognised in connection with these debts.

Impairment

Under the adopted amendments, the reversal of impairment recognised on ownership interest will decrease the pre-tax profit if the taxpayer has already used that impairment to increase the pre-tax profit and is able to provide proof to that effect. The Corporate Tax Act stipulates that impairment recognised during the tax year on an interest in a controlled foreign company and on a reported shareholding will increase the corporate tax base, while the amount of reversed impairment recognised on these items will decrease the pre-tax profit. Therefore, in accordance with paragraphs 39 and 44 of IAS 12, the resulting differences may have a deferred tax effect.

The provisions concerning deferred tax are effective as of the date of adoption of the amended legislation, which means that they will have to be taken into consideration when calculating the amount of deferred tax for 2009.