Wednesday, 18 September 2019

Introduction to the world of development tax allowances

Entrepreneurs often face that they do not have enough resources to implement their ideas, too many taxes shall be paid, and what is even more annoying is often they get informed only after the closure of an investment about the benefits they missed. However, there are far more opportunities for entrepreneurs than they might think in the field of taxation.

Would you like to install a recharging point? Claim corporate income tax base allowance!

As of 1 July 2017, according to the Act on Corporate Income Tax, companies could apply for a tax base allowance in case they are supporting the installment of a basic recharging point infrastructure required to use electric vehicles.

Wednesday, 4 September 2019

Chain supplies or not, tax-exempt or not

During product sales the question arises frequently, how it can be recognized, if there are chain supplies for VAT, what are the circumstances based on which it can be defined, that the specific transaction is multi-characteristic, so more than one supplies are performed. The decision of the question is often very complicated and complex for the participating taxpayers.

We talk about chain supplies in the system of the value added tax (VAT), if a product is sold more than once and it will be dispatched or transported directly from the first supplier with the destination to the name of the last purchaser last in the row. In chain supplies there are three participants at least; however, the transportation of the goods happens only once. If the transport interrupts, it is not a chain anymore, at least not in the relation of the first supplier and the last purchaser.

Based on the regulations of the Hungarian VAT Act related to the place of supply of chain transactions, there is only one supply to be fulfilled where the product can be found at the beginning of the transportation. This only sale to which the transportation is allocated might be exempted from VAT as intra-Community supply of goods (under other conditions as well) if the sold product will be transported proven outside Hungary, but to the territory of the Community. The place of supply of goods preceding the mentioned tax exempted supply shall be the place where the transportation starts, while in supplies following the tax exempted supply the place of supply is where the transportation finishes.

The taxable persons should recognize, if they participate in chain transaction, because it affects the invoicing and the VAT-administration and obligations as well. However, not all of the participating parties is known by the first supplier, who is in contact with only one participating partner. There are minimum three parties in a chain transaction, but in certain cases at the same time long chains may incur making the identification of the whole chain even almost impossible.

In the chain supply with three participants presented in our first example, the Hungarian taxable person seller supplies the goods to its German parent company in a manner that the products will be transported directly to the French customers of the German taxable person. The question is how the Hungarian taxable person can make sure that it proceeds correctly, when it issues its invoice either with or without VAT to the parent company.

The incorrect tax treatment can cost much for the taxable person as the amount of the non-paid VAT is considered as tax shortage, for which tax penalty and late payment interest is due.

In order to decide, which supply might be considered as related to the transportation and therefore to be handled as tax exempt, the following documents and information might be decisive
  • contract between the parties,
  • declaration of the business partners,
  • delivery note,
  • the tax-number used by parties, specially the middleman,
  • which party orders the transportation,
  • destination of the products

In the lack of an exhaustive list, further documents might also be considerable, of course, which can help in the decision of the question.

The simplest case, if the transportation is ordered by the first supplier, he signs the contract; he orders the transportation (pursuant to the civil law he shall be considered as master of the case). In this case, his supply shall be considered as tax exempt, because the freight is related to that. If he orders the freight, he is also aware of the final destination of the goods. The first supplier can reasonably think to participate in a chain transaction, if he e.g. notices that the destination does not correspond with the headquarters or site of its direct purchaser.

If the middleman arranges for the transportation, the presumption of the Hungarian VAT Act shall also be considered. According to the main rule of the Hungarian VAT Act, the middleman arranging for the transport in his character of customer, so the supply towards him shall be deemed as tax exempt. However, he has the possibility to prove that the transport – and the tax exempt supply – is linked to his own supply towards the third in the chain. The refusal of the legal presumption is possible only for the taxable person since 2012. For the support of the taxation position of the Hungarian company it is reasonable to let the middleman declare its role in the chain and to request the delivery note upon handover of the goods. It is the most ideal case, when the middleman declares, that he purchases the goods for his further supply and he arranges for the transport in a manner that the goods will be delivered from the first supplier directly to the final customer and informs his partner about this fact. As we have already noted, the middleman proceeds in two roles, because he is simultaneously recipient and supplier of the same product, without physically receiving the goods. Depending on his choice either the first or the second supply can be qualified as supply related to the transportation, so as a tax exempt supply of goods.

For transportation by the final purchaser the exemption from VAT may only be valid for the second supply, because he can transport only in his character of recipient.

We note that the taxable persons do not have to perform the transport under any circumstances with their own means of transportation, they can avail of forwarding companies as well. Upon the definition of the tax exempt supply it is of importance, to which party the transportation might be allocated (order, direct, instruct and contact the forwarding company etc.).

Practical experiences: Upon the identification of the tax exempt supply it is often not enough to prove which party orders the transportation. In case of tax authority inspections we have experienced that the tax exempt supply of the Hungarian seller first in the row was refused by the tax authority with the reasoning that even the transport was ordered by him, the transport costs were directly further recharged to any other party. In this particular case according to the tax authority the supplier (as ordering and arranging person of the transport) cannot be considered as carrying out the tax exempt supply, because according to them he has ordered the transport on behalf of others in his character of mediator, so in reality the transport and the exemption are not related to his supply. Against this tax authority argumentation counter-proving is allowed, of course, and all circumstances of the case shall be considered, who shall be rated as the recipient of the transportation service both legally and economically.

The tax number usage of the middleman has a dominant importance. Based on the Hungarian VAT Act, only the taxable person shall be entitled for the contraprove of the presumption, so the role as middleman character. If he arranges for the transportation by indicating the tax number (which is his decision) he can confirm or contraprove the presumption related to the tax exempt supply, which has a significant influence on the VAT-treatment of the transaction. If he indicates a tax number in country of dispatch for the seller, while the goods will be transported to a destination outside that to another Member State, the first supplier shall be able to recognize, that it is not possible to invoice a tax exempt intra-Community supply and therefore the subsequent supply of the middleman shall be deemed as the tax exempt intra-Community supply in case the products are really transported from the the country.

The first supplier can neither perform a tax exempt supply if the middleman sells the products further for other taxable persons with a destination in the same country. Considering that in this case the place of supply of both sales shall be domestic based on the VAT Act, local VAT shall be charged for both supplies meaning of course that the middleman shall get registered for VAT in that country.

The middleman may also indicate a tax number in the country of destination. If the transportation is performed by the first seller or the middleman in his character of recipient, the first party performs a tax exempt intra-Community supply while in the destination country and the middleman declares an intra-Community acquisition (assuming, that the simplifying rules related to triangle-transactions are not applicable in in the country of destination). The subsequent there shall be taxable, so the taxable person issues the invoice for his customer charging domestic VAT in destination country.

We believe that even this relatively simple example can show the complexity of a chain supply. This complexity may be increased by the number of participants. Irrespective of such, however, the proper classification of the chain and their own role in such transactions is essential for businesses.

As for improper handling, incredible penalty consequences may incur by way of rejection the intra-community exemption of the sale, or even the respective deductibility of input VAT.

On the top of this, in Hungary 50% tax penalties plus late payment interest is also due for such mistake.

You may find more information about the Hungarian VAT legislation on our Hungarian blog

LeitnerLeitner provides the following services in VAT fields:
  • Comprehensive VAT-compliance for VAT registered foreign entities and local businesses
  • Lump-sum “hotline” services
  • VAT “healthcheck” financial review and corrections
  • Consulting and legal opinion regarding VAT issues
  • Representation during tax audits, defence regarding the findings of the tax authority
  • Cooperation with tax authorities and state departments, requiring of legal opinion from the authorities
  • Compliance regarding the refund of foreign VAT (“cross-border VAT reclaim”)
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Wednesday, 28 August 2019

Change in the significance of the observation in tax audits

As you could already read on numerous forums, by the recoding of the tax procedural legislation in Hungary has changed the function of the observation in tax audits. Since January 1, 2018, the observation is of primary importance in judging matters.

In the following, we briefly summarize what "role" has the observation in tax audits under the Tax Administration Act. In the current post, we focus on tax audits, and follow up on the law enforcement check later.

"One observation – above all"

The secondary role of the observation has been determined by the fact so far that in prac-tice it was possible to expect a meaningful change in the assessment of the taxpayer's case from the second-instance authority proceedings. However, in processes started in 2018, the observation has of primary importance. According to the new legislation, the appeal - apart from the grounds of nullity can no longer be relied on as a 'new' fact already known to the taxpayer prior to the adoption of the first instance decision, which was specifically referred to him by the tax authority but was not made by the taxpayer.

Practically speaking, the information known by the taxpayer and requested by the tax authority shall be included in the procedure at the latest when the observation is made, after that it is no longer possible.

"Speak now or listen forever ..."

The special call of the tax authority must contain only the circumstances and findings in rela-tion to which the tax authority invites the taxpayer to provide evidence in the event of legal consequences. Practically, this may mean that the tax authority issues a general call for evidence, and this is a sufficient basis for "obliging" the taxpayer to provide all the relevant evidence he knows. So, evidences he did not present at this time can no longer be involved in the procedure. Thus, from the receipt of a special call from the tax authority to the decision of the first instance, the taxpayer should be more careful in assessing the information he knows: that is, he must decide whether, or not to use it in the proceedings.

Of course, there may be facts or circumstances that will come to the attention of the taxpayer later than the decision at first instance. The question is how the taxpayer will be able to prove when he got to know the fact he would use as evidence.

Who falls behind: misses out

Another significant change is that the deadline for submitting an observation in the case of a tax audit has been extended from 15 days to 30 day but has become limited. Namely, someone who misses the deadline can no longer submit the observation. In the light of the above, however, it is likely that the taxpayer will have the opportunity to supplement his observations made in due time. What else could he do if he knew, before the decision was made, but after the 30-day observation period, information that the tax authority had called on him to publish and which he wanted to use.

Final Solution – activity

Overall, it can be stated that the change has the advantage of taxpayers actively participating in the audit at an earlier stage than before, and to ask tax inspectors for information on the status of their case. And, if you are discussing them with tax experts, you can help with the evaluation of the available information and evidence. That is why, in the early stages of the audit, it is worth involving an experienced tax advisor so that the findings - after tax authority decisions - do not have to realize that penalties could have been avoided.

New transfer pricing regulation – the transfer pricing documentary obligation seems to be more difficult than ever

As of January 2018 the application of the new transfer pricing documentation regulation is mandatory. The amendment is necessitated by the OECD rules adopted in the framework of the BEPS package, according to which the Hungarian transfer pricing documentations shall be prepared in a more complex, more detailed way and should include more information as well.

Attention! From 2019 the penalty rates are changing!

From 1 January 2019 a significant increase in penalties in tax audit procedures can be expected. You can find the main changes below.

Monday, 12 August 2019

Conditional tax penalty: Advantage or Disadvantage?

This year, the regulation of the institution of the tax penalty has changed, so a new allowance on conditional tax penalty has been introduced. However, is it really beneficial for taxpayers?

Tuesday, 30 July 2019

Taxation of e-commerce

People spend time daily on the internet for work, study, and entertainment, which calls for life e-commerce, offering a great possibility for businesses, since e-commerce is less costly than traditional methods.

Friday, 31 May 2019

Motivation of employees by stocks

At the time of total re-legislation of the cafeteria taxation, employers are actively seeking new instruments for the remuneration of their employees. Stock option plans now get even a higher emphasize than earlier, especially considering the potential high values that are not limited, and the long-term loyalty effect that is becoming ever more important in this fluctuating and demand-driven employment market.

Tuesday, 16 April 2019

Taxation that follows postings

Employment posting questions emerge in both short- and long-term relations. In practice, long term-postings are usually handled by the HR department; however, short-term business trips and trainings that may get a lower emphasize also require due care from a taxation and administration perspective. In addition, the logistics sector also has some special treatments.

Friday, 11 January 2019

Serving the investment…

LeitnerLeitner primarily focuses on national and international tax advisory, accounting and payroll, statutory and merger audit, and financial advisory services such as M&A and DD assistance to Hungarian subsidiaries and branches of international companies. Thus we are the first to meet the intension of a business foundation or the launch of foreign companies in Hungary. Our recent experiences truly reflect a notable growth in starting or expanding business in the country. Many contact us with an interest in new investments, mergers and acquisitions; they ask us to support them in the due diligence of their targets, their accounting and tax integration and also to help maximize the tax incentives available for their business.

Thursday, 15 November 2018

Collective corporate taxation opens new perspectives for companies

Next year the so-called collective corporate taxation which is a popular tax planning technique in Germany and Austria will also become available in Hungary. Thanks to the new opportunity for companies the Hungarian tax system might become more attractive, i.e. it can catch foreign investors' attention and improve the competitiveness of Hungarian corporate groups. Let's see how it works!

Thursday, 25 October 2018

Breaking news - The latest tax package draft has been released

On 19 October 2018, a new tax package was presented to the Parliament. Please find the most important amendments of the package here: the threshold of VAT exemption for SMEs will be raised to HUF 12 million, collective corporate taxation is coming, the international tax information exchange increases, the personal income tax liability of insurances taken out by employers is re-regulated, and, last but not least, the rules on the abolition of employer housing subsidies will be clarified.

Monday, 8 October 2018

Future of 5% VAT on residential properties in Hungary

The reduced 5% VAT rate on residential properties undeniably played an important role in strengthening the real estate industry. Although from the outset the reduction was incorporated for a fixed period of four years, between 2016-2019, many expected the long-term continuation of the rule. The Minister of Finance’s summer announcement cut an end for these hopes. The return of 27% VAT on such real estate will significantly affect the overall market; the consequence may be the further increase of property prices, but also the reduction of investors’ profits. Certain prepayment constructions may help to extend the validity of the reduced VAT period, but these require due care and attention from developers, buyers and financing banks.

Friday, 28 September 2018

Actions against tax fraud bring a better world for the good-faith taxpayers too

Considering the low direct tax rates similarly on corporations (9%) such as on private persons (15%), the reducing social security charges (19.5%) and the ceasing sectoral taxes; Hungary has a more and more attractive tax environment, even in a wide international comparison. At the same time, Hungary is continue to play increasing attention to compliance and introducing new and new actions – mainly administrative measures – against tax evasion. This, especially during implementation, undeniably triggers significant costs and administrative burden for the stakeholders. The new era of digitalization; however, gives the role for control solutions that will finally reduce manual administration and “competitive advantage” of tax fraud too.

Wednesday, 9 May 2018

LeitnerLeitner established a new transfer pricing business line led by a new colleague

As of April 2018 Ágnes Fotiadi joined LeitnerLeitner as the leader of the newly established transfer pricing business line. She has so far headed the Transfer Pricing Unit of the Hungarian Tax and Customs Administration from its establishment. Due to her work, the field has become an internationally recognized area within the Hungarian Tax Authority.

Tuesday, 20 March 2018

Transfer Pricing: Too Expensive to Ignore

Up to now – Hungary was the first in CEE that introduced statutory transfer pricing documentation requirements in 2003 – very complex transfer pricing requirements pertained to affiliated companies. Therefore, group-pricing should be measured in line with the arm’s length principle and be strictly documented. Moreover, unlike in international practice, the Hungarian transfer pricing documentation obligations cover domestic intragroup transactions too. As tax authorities examine transfer prices very closely, it has become vital for groups to have a consistent, reliable TP-system. This is especially so, considering the record high Hungarian penalties for non-compliance that amount to HUF 2 million (appr. EUR 6,500) per transaction per year.

Thursday, 5 October 2017

The tax Aspects of Hungarian Real Estate

No wonder that real estate plays a major role in the overall M&A market, since these properties represent financial and emotional security too. Both buyer and seller try to maximize their cost-benefit ratio and are dependent on reliable data. Next to identifying, for example, future rental income and maintenance costs, the owner/lessor has to be absolutely sure about the funding of fiscal circumstances, including taxes. In this article, we would like to give an insight into the specialties of real estate taxation in Hungary.

Wednesday, 6 September 2017

Taxation of the automotive industry – problems along the chain

The automotive industry plays a significant role in the Hungarian economy; it already makes over 10% of the GDP and employment, while it is the fastest growing sector. Hungary’s strategic geographical location, highly developed logistics and infrastructure, cost effective and high-level production capability determines the country as a regional distribution centre and a service hub for the CEE region.

Tuesday, 29 August 2017

How to manage the tax affairs of foreign managers

It occurs often that a multinational company employs a foreign manager based on an employment contract or secondment. In the first case the Hungarian company is considered as the legal and the economic employer as well, therefore the salaries are payed directly by them. In the second case, the employee maintains the employment contract in the „mother country”; therefore, the salaries are still paid by the parent company (naturally the Hungarian company pays a „service fee” for the secondment to the parent company). The mentioned cases differ from many points of view; therefore, an improper classification may trigger many issues.