Social charge reduction could be higher next year than expected! - Mazars Tax Newsletter 2017/22

As it is well-known, the trend of lowering the social security charges has begun from January 1, 2017 by reducing the rate of social contribution payable by employers from 27% to 22%. A further reduction from 22% to 20% has also been ratified last December, which would enter into force on January 1, 2018 as the second step of the process. However, it seems now that the rate of social contribution tax would be lowered even further, to 19.5%. Thus, wage costs incurred by companies may further decrease.

The background of the proposal may be the commitment made by the government to the labor unions last November, namely that the social contribution tax liability may be lowered by another 0.5 % starting from 2018, provided average gross wages increase in the business sector by at least 11 % in 2017.

If the bill is passed by the Parliament, businesses could benefit from the reduction in many ways. Firstly, the level of wage costs is a significant factor of the overall competitiveness of businesses. Secondly, the reduction of the rate of the social contribution tax would go together with the reduction of the rates of the health contribution (“EHO”) and the so-called “simplified public contribution” (“EKHO”).

MAZARS has already pointed out that employers' full wage costs are close to 160% of net wages in average in the Central and Eastern European region, due to the high payroll related taxes and contributions. The so-called tax-wedge, which reflects all the taxes and contributions to be born in relation to wages, is especially high in Hungary. Therefore, the proposed additional reduction of employers' tax and contribution burdens seems to be well justified.