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.

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.