New provisions entered into force on 1 July 2022 extending the scope of the so called “chips-tax” to foodstuff and drinks with added sweeteners, as well as to new product categories such as pre-packed sweet and savoury pastries. With a few exceptions, alcoholic beverages escape the tax.
Original scope of the chips-tax
The public health product tax – popularly known as the “chips-tax” – was introduced to the Hungarian tax system in 2011. It increased the price of numerous foodstuff and drinks that are considered harmful to non-beneficial for public health. The aim was to reduce consumption while providing a financial basis for public health programmes.
The groups of products previously subject to the chips-tax were determined, on the one hand, based on the customs tariff code (or heading) as per Council Regulation No. 2658/87, and included soft drinks, energy drinks, pre-packaged products with added sugar, salted snacks, seasonings, flavoured beers, alcoholic refreshments, marmalades, and spirits, and on the other hand, based on the salt and sugar content of those products.
By way of example, when it comes to salty snacks, the chips-tax was applied to products with over 1 gram of salt/100 grams of product. For drinks, such as flavoured beer and alcoholic beverages (having a maximum of 5% alcohol content mixed with soft drinks or additives), the sugar content limit was 5 grams/100 ml.
The rate of the chips-tax is a flat amount determined per litre or kg, depending on the product category, and is payable by the first domestic supplier, i.e. the manufacturer in the case of products manufactured in Hungary, or the importer in the case of imported products.
New provisions expand the scope to “healthy” products
Apart from generally increasing the tax rate, the new provisions aim to expand the scope of the chips-tax to new product categories generally considered “healthy”, and will tax not only sugar content, but also sweetener content. The new product groups are (i) “delicacies”, for example, muesli, cereals and candied fruits, and (ii) “pre-packed sweet and savoury pastry”, which also means stuffed pasta or pastry. In addition, the definition of already existing product groups is now broadened, adding new foods and ingredients to the list.
Another key change is the introduction of a “double rate”. This means that the flat tax rate is set higher – in some cases triple the amount – for products where the added sugar or aggregate sugar and sweetener content exceeds a prescribed threshold.
Important news for drinks manufacturers and importers is that, based on the new exemption list, only soft drinks and syrups (in Hungarian: szörp) containing sugar or sweetener having a fruit or vegetable content of at least 50% (rather than 25%, as formerly) are exempt from the chips-tax, whereas alcoholic beverages (except for flavoured beer and alcoholic refreshments) is now entirely excluded from this tax.
There are some challenges ahead when applying the new provisions
Interpreting the new scope of the chips-tax won’t be easy for stakeholders. Manufacturers are expected to look into their product formulas to determine whether their products fall under the extended scope, while taking all the necessary administrative steps required as a result of their potential tax liability, such as preparing a self-declaration of the tax payable and keeping accurate records on their products subject to the chips-tax.
While sweetened dairy products such as yoghurt or cocoa fall out of the scope of the new tax, defining the new product categories of delicacies and pre-packed sweet and savoury pastry will be challenging. Special dietary product features, such as pre-packed, but gluten-free pastry will not be a ticket to escape. The product feature “pre-packed” is expected to drive changes in the way some products are offered to consumers, since the same product will be taxed differently depending on whether it is offered pre-packed or un-packed.
As the legislator did not provide ample time for manufacturers and importers to get prepared, certain required measures are still uncertain and spark conversation on different approaches and practices. Since the provisions already apply since 1 July, manufacturers and importers should be ready to face specific audits on compliance with the new rules by the Hungarian National Tax Authority.
Domestic manufacturers whose products fall under the scope of the extended chips-tax may simply try to modify their product formulas or packaging approaches to avoid tax liability. However, it is important to note that, in the case of foodstuff supplied to or from other EU Member States, a producer or distributor is expected to ensure that its product is not significantly different in composition from the same product placed on the market of another Member State. This means that, in the long run, larger manufacturers and importers may be inclined to rethink some of their product offerings.