Mária Lakatos

Taxation in General: Hungarian Tax System

Construction of the OECD Model Convention

As it is apparent, the EU legislation is still not comprehensive, although, the practical results are promising. This also means, that the tool for the avoidance of double- or undertaxation are predominantly bilateral treaties as these are that regulate the taxation relations between the countries.

Generally, the fundamental goal of concluding these treaties is to avoid the double taxation of the natural persons and enterprises. In the basic case this means, that that and the same income should be taxed in the one state only and the other state should refrain from taxing it too.

As regards their forms, structures and contents, these bilateral international treaties are all similar, as the states concerned follow the Model Convention elaborated by the Organization for Economic Co-operation and Development (OECD) with a view to offer solutions for the problems that may arise in the area of double taxation.

It is worth to know, however, that it was not only OECD, but the UN also that has elaborated a model agreement for facilitating international commercial relations. This, though, in a few provisions is significantly different from the version recommended by the OECD. In their recommendation published in 1979, the drafters recognize the claim of the developing countries for taxation at source, but simultaneously, they also take into account the wishes of the developed countries. Accordingly, the UN Model Convention lays a bigger stress on the taxation of income at the place of its emergence (i.e., at source), but where the opposed interests of the developed and developing countries cannot be resolved (e.g., income of employees on mission), it lets the parties agree as they please.

In addition to the above model agreements that wish to solve the problems on the large scale, there are also recommendations that are of local importance, such as the model conventions of the states of the Andes, elaborated in 1971, which also favours the developing countries and their rights.

For the European countries and, among them, Hungary, obviously the first two, i.e., the tax harmonization laws of the EU and the bilateral agreements concluded on the basis of the OECD Model Convention are that have importance.

The OECD Model Convention – hereinafter called: Model Convention – is not obligatory to apply. Its goal is that the principles set down in the bilateral agreements for the avoidance of double taxation should be uniform in all and more countries. The Model Convention is, thus, only a recommendation that makes it possible for two countries to regulate by common consent the taxation of income that is generated during the commercial and other relations in between them, both for natural persons and enterprises. The application of the terms and definitions clarified in the Model Convention, on the other hand, renders it possible to bridge the apparently big gap between the tax regulations of the different countries. From a certain standpoint, the structure of the Model Convention is different from the Hungarian tax legislation, since its goal is not to guarantee the tax revenues of a country, but to regulate according to generally accepted principles the distribution of the tax falling on revenues already generated and earned.

Article 1 recommends regulating the personal scope of the conventions relatively simply. According to it, the convention covers those persons, who are residents in one of the contracting paarties or in both. This means that the bilateral treaties cover all those persons (natural persons and businesses), who are the subjects of the tax systems of the one or the other of the two contracting states.

The scope of the subject of the convention (Article 2) determines those taxes for which the convention is applicable. As a rule, these are income- and wealth taxes. Those deduction forms fall within the group of income- and wealth taxes that are imposed on the entire income or wealth or any part thereof, including the proceeds of the sales of movable and immovable property but also the tax imposed on the growth of the value of capital. As a rule, turnover tax type taxes are not covered by conventions on the avoidance of double taxation.

The conventions list one by one the taxes for which their provisions are applicable but in order to avoid continuous modifications, they set down that the conventions are applicable to all identical or essentially identical taxes which shall be introduced following the signing or which replace others.

As a rule, the conventions also provide for the obligation of the competent authorities of the contracting states to notify each other should any material change be implemented in their relevant tax regulations. The last part regulates the coming into force and the termination.

The seven parts of the Model Convention contain various Articles the titles of which are as follow:

13. Table. System of the Model Convention

	Title of Article		Title of Article
1.	Persons covered	17.	Entertainers and sportspersons
2.	Taxes covered	18.	Pensions
3.	General definitions	19.	Government service
4.	Resident	20.	Students
5.	Permanent establishment	21.	Other income
6.	Income from immovable property	22.	Capital
7.	Business profits	23.	Avoidance of double taxation
8.	International shipping and air transportation	24.	Non-discrimination
9.	Associated enterprises	25.	Mutual agreement procedure
10.	Dividends	26.	Exchange of information
11.	Interest	27.	Assistance in the collection of taxes
12.	Royalties	28.	Members of diplomatic missions and consular posts
13.	Capital gains	29.	Territorial extension
14.	Income from self-employment	30.	Entry into force
15.	Income from employment	31	Termination
16.	Directors’ fees

Source: OECD. Modell Convention

Taxation in General: Hungarian Tax System

Tartalomjegyzék

Kiadó: Akadémiai Kiadó

Online megjelenés éve: 2022

ISBN: 978 963 664 137 5

Taxation is a scheme for the state to provide revenue. The so collected money could then cover the public spending of the government. These are the so-called allocative and redistributive functions of the state budget. Although, taxation theory discusses the various tax types and analyses the various taxation tools very extensively, there is no absolute answer to the question, when and what type of taxation system would be optimal. Thus this introductory book on taxation deals with the three basic types of taxes - the income tax, the VAT and the corporation tax - in a very pragmatic way. There are legal texts and cases from both the international and also from the relevant Hungarian practice.

This book is recommended not only for students of economics but also for law students and practitioners beside anyone who is interested in the basic regulations of taxation.

Hivatkozás: https://mersz.hu/lakatos-taxation-in-general-hungarian-tax-system//

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