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.
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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