The VAT rules on when a foreign entity must register for VAT in Hungary have changed little since the Hungarian EU Accession in 2004. A foreign business may need to register for VAT (whether or not it needs to charge VAT) even if it doesn’t have a permanent business presence in Hungary. A foreign entity must register for VAT if it has economic activity not subject to international reverse charge mechanism, typically if it supplies goods from Hungary, imports goods into Hungary from outside the EU or from other EU member states. Typical instances where a foreign business may need Hungarian VAT registration are:
- The foreign business is buying and selling goods in Hungary
- The business is importing goods into Hungary from outside EU or bringing its own goods or purchasing goods into Hungary from another EU country
- Holding goods in warehouses or on consignment stock in other EU countries for sales to customers, except special cases
- Selling goods to non VAT registered consumers over the internet or through catalogues (distance selling)
In other words, the transportation of goods to/from/in Hungary by a foreign entity in many cases results in a need to register for VAT. Foreign businesses ignoring this obligation to register for VAT or incorrectly charging VAT may be required to repay all liabilities plus interest and fines. This sanction in itself proved to be not deterrent enough - in the past many foreign traders ignored their obligation to register for VAT and pay VAT in Hungary. In many cases the unreported VAT went undetected by the Hungarian Tax Authority, the chances of getting caught for avoiding VAT registration were limited and remote.
This situation changed radically with the introduction of EKAER. From 1 January 2015 Hungary has introduced a new obligation for businesses to report all transport of goods that involves EU supplies/acquisitions and domestic supplies in an itemized report, if transactions involve road transportation with vehicles subject to a road toll (having a total weight of over 3.5 tons). Each individual transport of goods of the affected transactions must be filed separately. The filing must include – inter alia – the license plate of the vehicle, date and time of the departure of transport of goods.
In essence this means that if you transport goods to or from Hungary by qualified vehicles over certain threshold, you need to report the transport upfront in the EKAER system. If you don’t report the transport upfront, your vehicle may be detected by the road police/tax inspectors, you may be required to pay a penalty of up to 40 percent of the transported goods. The tax authority/police has the power to cease goods if the transport is unreported.
If the VAT penalty was not deterrent enough, then EKAER sanction certainly is. EKAER is not a new tax, it is a new reporting obligation. A potential penalty of 40 percent of the value of transported goods and a prospective of the goods being ceased on the way is much more deterrent than the penalty for avoiding VAT registration. In business terms, it is worth to comply with the new EKAER obligation rather than to avoid it. In addition to this, the chances of getting caught are relatively high – it does not take much for the Hungarian Tax Authority to detect a vehicle traveling without a pre-filed EKAER number.
But what EKAER has to do with the VAT registration? The brief answer is that VAT registration is a pre-requisite of the EKAER registration and EKAER reporting. In other words, if you need to report EKAER, you first need to have VAT registration in Hungary. The scope of transactions reportable in EKAER almost mirrors the transactions reportable in the VAT return – almost all transactions reportable in EKAER are also reportable in the VAT return, but not all transactions reportable in the VAT return are reportable in EKAER.
Some foreign traders may be unaware of this nuance. Many would prefer to go straight to EKAER registration without dealing with VAT registration. Some businesses try to avoid Hungarian VAT and EKAER registration by asking their local business partners (in many cases local subsidiaries) to file EKAER on their behalf pretending they have transported goods themselves. This may work in some cases in short term, but in long term the risk of incorrect reporting is shifted to local business partners. If one reports transactions in EKAER that should not be reported by him or her, then its VAT reporting will not match EKAER reporting and the authorities can easily detect the mismatch. Hungarian entities are becoming increasingly aware of the potential consequences of reporting EKAER instead of their foreign business partners. The long term solution is to understand local VAT/EKAER registration requirements and act accordingly. If a foreign trader needs a local VAT registration, it can get one in two weeks. Once it is registered for VAT and has it is own EKAER registration it can appoint its local business partner or third party logistics provider to report EKAER on its behalf using its EKAER registration. A skilled tax advisor can prepare the VAT registration package and submit VAT returns.
Two weeks seems a long time, especially if your vehicle is already heading towards Hungary packed with goods you don’t want to get seized due to non reporting of EKAER. For those businesses that map their potential local tax and regulatory footprint upfront, two weeks is a brief period in the process of careful planning and structuring. While EKAER reporting may be a uniquely Hungarian thing with distinct flavor of Central European bureaucracy, the need to understand the local tax and regulatory environment is an old principle of the global trade. So plan your tax matters globally and consult locally!