DÁNIEL H. NAGY
TAX DIRECTOR, HUNGARY
“If the German taxable entity exceeds the threshold of 35,000 in 2018, they must establish their tax registration in Hungary and sell their goods with the Hungarian VAT”
What are VAT-specific rules for e-commerce platforms in Hungary? Do additional VAT-specific rules exist for Hungary (in addition to EU rules)?
The definition of e-commerce cannot be found at all in the Hungarian VAT Act, and thus, in theory, there are no specific rules that could apply to it, and transactions conducted in the framework of e-commerce should be considered in accordance with the general rules. At the same time, however, many rules raise quite interesting questions from the point of view of e-commerce. Perhaps the most important among these are the set of rules governing distance selling. The essence of these is that in case the amount of annual sales to another EU country reach the thresholds established by the given member state, the place of supply must be in that country of destination, which means that VAT registration, the filing of VAT returns, etc. becomes compulsory. The threshold is EUR 100,000 on the basis of the relevant EU directive, but individual member states may also set a lower threshold of EUR 35,000 if they fear that competition would otherwise be seriously distorted. Hungary chose to apply this threshold of EUR 35,000, to be calculated with the use of the exchange rate in effect on the date of the promulgation of the accession treaty, which means HUF 8,800,000.
Thus, when the relevant conditions are satisfied, a product supplied from Germany to Hungary may be subject to VAT in Germany. For a German seller to avoid the requirement to register in Hungary and pay the tax here, they should be below the threshold of EUR 35,000 not only in the given year, but also in the previous year. If the German taxable entity exceeds the threshold of 35,000 in 2018, they must establish their tax registration in Hungary and sell their goods with the Hungarian VAT. However, they must also remain subject to Hungarian VAT in 2019, regardless of the total amount of their sales in the given year. If they do not reach EUR 35,000 in 2019 nor in 2020, then from 2020 they no longer need to charge the Hungarian VAT. The fact that a German taxable entity has a Hungarian tax number does not exclude the possibility to sell its goods in the framework of distance selling with the German VAT charged.
The taxpayer, however, may also choose to pay VAT according to the country of destination even if their sales are below the given threshold. If a webshop abroad chooses to perform its obligation to pay the value added tax in Hungary, they must notify their choice to this effect by the last day of the preceding tax year, and this decision is for a period of at least two years. However, since the normal Hungarian VAT rate is exceptionally high (27%), such a choice is not really common.
It is important to emphasise also that, under the EU’s VAT Directive, the rules of distance selling are compulsory to all member states; in other words, the member state cannot choose not to apply the rules. The member states’ right of decision pertains to the threshold only.
Are there penalties for companies who do not comply with tax requirements in Hungary? If so, what are they, and how much do they impact foreign companies?
Under Hungarian tax law is, the most “feared” penalty is the tax fine, which is to be paid after tax arrears. Simply put, tax arrears are taxes not included in the tax returns and not paid either. The amount of the tax fine is 50% of the tax arrears or unlawfully claimed tax refunds. If the tax arrears are related to the concealing of income, or the forging or destruction of documents, the extent of the tax fine is 200 percent of the tax arrears.
A default penalty may be imposed for failure to perform, or for the late or incorrect performance of various tax-related obligations. Generally, the amount of the default penalty imposed varies widely, depending on the tax entity’s conduct, and in case of repeated offences, it may be imposed again. The typical maximum of default penalties is HUF 500,000 (EUR 1,600) in case of companies; however, in case of failures to perform obligations related to transfer pricing documentation, it may be much higher.
Starting from 2018, the amount of the late payment surcharge, automatically charged by the tax authority in case of late payment of the tax, will increase significantly. The rate of the late payment surcharge will increase from the current value of twice the base rate of interest (that is, 2 x 0.9% = 1.8%) to the base rate of interest plus five percent points (resulting in 5.9%).
A surcharge is also to be paid in case of self-revisions by the taxable entity itself, but the rate of that surcharge is low: the amount of the self-revision surcharge is to be calculated by applying the base rate of interest to the difference between the amount in the tax return and the corrected amount of the tax.
Would you say the Hungarian tax system/regulations are easy or difficult for foreign companies to adapt to and incorporate?
I would say that the situation is continuously improving in this respect. The Hungarian tax regime is usually considered to be complicated, but there are promising signs. The government is committed to radically reducing the amount of time spent by businesses on compliance, and aims to change the regulatory environment accordingly.
One example for this is the strengthening of e-services and the introduction of smart taxation. Starting from 2018, electronic communication has been made mandatory in B2G (Business-to-Government) relationships.
On the other hand, however, we must also admit that language barriers can make the Hungarian presence of a foreign enterprise difficult. Therefore, it is useful if a tax-compliance team of international background supports the expansion in the country.
What are some of the more recent/interesting tax developments in the EU, and in Hungary specifically, that are having an impact on companies looking to sell in Hungary from abroad?
The biggest challenge this year was the introduction of the real-time data reporting obligation. The essence of this is that from 1 July 2018, all invoicing software must be prepared for automatically providing data, in a pre-defined structure, for the Hungarian tax authority on invoices having a VAT content of HUF 100,000 or higher, issued for domestic tax subject customers.
Our experiences showed that this meant a particularly big challenge to most stakeholders. The development needs put pressures on companies operating with their IT background abroad, but also on the tax advisers supporting them. This is because the new obligation necessitated the joint interpretation of the invoicing-related rules of the VAT Act and the technical specifications issued by the tax authority, and the developments had to be coordinated on the basis of these. Fortunately, the Hungarian tax authority was very cooperative: for example, they also made the specifications available in English, and used a fairly patient approach in the initial period.