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.
Although the taxation environment in Hungary is
also improving, the peculiarities within the automotive industry create
difficulties to cope with during taxation as well. Large number and different
kind of parts to be used when building a car, their international market
associated with different needs for different markets, high R&D costs of
the innovation extensive production, and the supply on demand also lead to high
inventory costs.
Cost efficiency considerations and improved
quality on parts give a raison d'etre for vendor tooling (outsourcing).
Nevertheless, to avoid being “in the hands of the vendor”, several factors
shall be considered, such as the location of the vendor, delivery capacity in
terms of supply on demand, financial arrangements and the competitors using the
same vendor. The issue also raises complicated indirect tax implications (cost
manufacturing taxation, VAT registration, (self-)invoicing, etc.) and logistics
(e.g. EKAER).
The automotive industrial supply chains
regurarly create chain transactions for VAT, one of the most difficult
situation in the value added taxation. For the proper handling of the supply
chains one should pay attention to taxation determining factors such as legal
title to the tools, existence and location of stock for spare parts, use of
warehouses, responsibilities for the logistics/transport. Misinterpreted chains
lead to serious difficulties and penalties for VAT. The wrongly applied
exemption or unlawfuly deducted VAT create VAT shortages that to be penalized
in Hungary by 50% tax penalty plus interest.
Although many do not like to talk about it; the
risk for creation of a fixed establishment (for VAT) and of a permanent
establishment (for direct taxes) is continuously present in this industry. The
typical situations during production leading to potential creation of FE/PE are
the installation and assembly, the technical support (especially in a start-up
phase), the JIT stocks and partial assembly of parts, and the on site quality
checks. Moreover, distribution and financing also creates situations that may
link to the risk of FE/PE creation, such as the physical presence and legal
obligations (passive FE) of regional importers, and leasing services (a passive
FE). The retroactive correction of these situations can be extremely expensive
both in terms of efforts to clarify and penalties. An existing FE/PE namely not
only result in additional corporate income, local business, employment related
taxes but also changes the place of value added taxation of the services, and
this could be the most burdensome consequence of the mistake.
Missing prices at the time of the supply,
regular price corrections, self-billing, extended warranties, warranty repairs,
financing of distributors, various marketing “set-ups” and the VAT treatment of
company cars are just the some of the further miscellaneous questions that
create difficulties.
Moreover, to turn to the customer financing
side in the automotive industry, we also face with recurrent taxation problems,
as per the leasing, the determination of single or multiply supplies
(insurance, other services), the premature terminations, securing tools, and
fuel cardsjust. All in all, the list of tax related problems highlight the
importance of necessary carefulness and the imvolvement of a quality advisor.
LeitnerLeitner is on the field of Hungarian and
international tax issues one of the most influential advisory firms in CCE. We
offer high quality services to clients on the entire field of VAT, starting
with transactional advisory, VAT-planing, supply chain analysis, FE/PE checks
and corrections, tax representation, ending with full compliance
administration, VAT registration. We also assist in tax allowance optimization,
employment taxation, specific and sectoral taxes, EKAER.
