Hungary is often mentioned as a country of manufacturers, but there is a significant difference from a tax point of view between manufacturing independently or on demand, when a foreign customer engages a Hungarian firm to make products using the customer’s raw materials. And it can be expensive to make a mistake in evaluating the nature of the transaction!
Producing goods from the raw materials of the
principal is regarded as a service, but it changes the situation if the
manufacturer adds its own goods to the finished product. Investigating the
volume of the goods from the manufacturer and the exact scope of the engagement
is crucial to see whether you can stay within the terms of toll manufacturing
and providing a service.
As long as the added goods do not have a significant volume, it is clear that the nature of the transaction is unchanged, and the manufacturer never performs a sales transaction but instead remains within the framework of service supply. But there are no black-or-white answers; transactions should be reviewed on a case-by-case basis, considering the above factors and the intention of the parties.
Namely, it must not be ignored while defining the
transaction if the principal is interested in the activity and service of the
manufacturer (as in producing goods from its materials or installing and
manufacturing the goods of the customer) or rather in the purchase of finished
goods which are the products of the manufacturer. A wrong interpretation and
treatment might bear significant VAT risks for both parties.
Toll manufacturing as a service is regarded as a
general B2B service in terms of VAT, meaning that the place of supply is where
the recipient has established its business. Assuming that the customer is a
foreign taxable person without a seat or fixed establishment in Hungary for VAT
purposes, the place of supply is outside of Hungary, so the manufacturer issues
an invoice without VAT with a reverse-charge reference.
Does the manufacturer have any additional obligations in this relation? It is easy to say no, while it is responsible purely for processing and is not involved in delivering either the raw materials or the finished goods. Nevertheless, even if the manufacturer is not engaged in the transportation of the goods (since it has been concluded that the manufacturer is providing a service), in some cases, it might be faced with a connecting liability.
If goods are delivered by the principal from its premises to the manufacturer for processing, and later these are returned to the principal, that creates no VAT liability in Hungary that would require a tax ID number. The delivery of goods does not require registration either, as those shipments are out of the scope of VAT. Nevertheless, if the products are subject to EKAER reporting in Hungary, in the absence of registration and the tax ID number of the principal, the manufacturer is required to register the deliveries in the EKAER system. Even if the scope of products subject to EKAER reporting has been significantly limited, it is worth checking both the Hungarian VAT status of the principal and the connecting liabilities of the manufacturer; further, within the contractual provisions, those questions should be outlined with task allocations.
