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Hungarian VAT return from abroad? – Think of tax risks!

In this respect quite a few tools are available to businesses, including among other things the introduction of centralised purchasing and standardised corporate governance systems, the standardisation and/or the simplification of processes or the centralisation of functions performed in parallel at different locations.

However, in order to ensure that standardisation and centralisation actually go hand in hand with cost reduction, it is necessary to prudently specify the scope of processes and functions affected. In a homogeneous legal and economic environment this does not cause difficulties but internationally, e.g. in case of large multinational companies the different labour law, environmental, accounting and tax requirements of individual countries present great challenges to professionals designing and implementing cost optimisation.

In the course of implementing the international centralisation of accounting and tax related tasks, decision-makers are faced with dilemmas primarily because of national specificities in the fields of accounting and taxation.

  • They integrate the entire accounting and taxation activity of member companies into a shared service centre (SSC) thereby can reduce costs in the long run but also run considerable tax risks.
  • Relying on experts they determine in advance the processes and tasks of member companies that do not require the awareness of nation specific requirements and only these functions are outsourced to a SSC. Affected member companies continue to carry out all other tasks using a smaller expert team or these tasks are outsourced to a local tax advisory or accounting firm. However, the preparation of this solution generates relatively high expenses and results in lower direct cost reduction but tax risks arising from outsourcing can be minimised.
  • The functions continue to remain at the member companies as a result of which the previous levels of both expenses and tax risks can be maintained.

It is important to note that regarding even value added tax (the type of tax that is most harmonised at European level),we can discover a number of differences among rules introduced by the individual member states of the European Community. So it may present VAT risks if an international group makes it mandatory for member companies operating in different countries to use a similarly parameterised accounting and/or invoicing application, or in case they integrate the generation and/or the recording of invoices of member companies operating in different countries into a SSC. Obviously, in addition to minimizing tax risks, the cost reduction impact of centralised solutions can also be utilised, provided the common accounting and/or invoicing application have been adjusted in line with the specific requirements of individual member states, or if only such (routine) accounting tasks are outsourced to the SSC that do not require special local accounting and tax related expertise, so even foreign employees can be trained to use and comply with them.

The common value added tax directive makes it possible for member states to stipulate special VAT rules in a number of areas. Using this opportunity Hungary has also introduced a number of unique VAT related requirements that are not typical in other member states of the European Union, so not even foreign tax experts are necessarily aware of them. Without aiming to give an exhaustive list, below we outline several VAT requirements that are typical of Hungary and the timely awareness of which is indispensable while preparing Hungarian VAT returns:

Special exchange rate rules

Although in terms of bookkeeping, the application of a foreign currency is already allowed in Hungary, it continues to be necessary to submit tax returns with the Hungarian Tax and Customs Authority in Hungarian Forint. For this reason, input and output (payable and deductible) VAT amounts imposed on foreign currency transactions must in all cases be converted into HUF. Regarding the various types of transactions, in the course of translating into HUF a tax base that is denominated in a foreign currency, the Hungarian VAT Act stipulates that the following various exchange rates are used: the exchange rate in effect on the day on which

  • the payable VAT was assessed,
  • the invoice was issued or
  • the transaction was fulfilled, completed.

As exchange rate the foreign exchange selling rate of a credit institution with a currency conversion licence in Hungary can be used. Or, based on a prior notification to the state tax authority, the official foreign exchange rate of the Hungarian National Bank can also be used. As regarding the conversion of VAT into Hungarian Forint, both the seller and the buyer can use different exchange rates, in case of transactions that are denominated in foreign currency and where VAT is charged, the buyer can deduct the tax that was translated into HUF at the exchange rate used by the seller.

Special fulfilment date rules

In the case of transactions that are being settled for/during a definite period (e.g. monthly flat fees, continuously provided services),subject to the date of invoice preparation or payment deadline, Hungary stipulates that different fulfilment dates are used. From time to time, even experienced experts may find it difficult to use these rules properly:

  • the last day of the period (principal rule),
  • the date of the issue of the invoice – provided both the invoice issue date and the payment deadline date precede the last day of the settlement period,
  • payment deadline – in case the payment deadline falls due after the settlement period, but not later than the 60th day following the last day of the settlement period,
  • the 60th day following the last day of the settlement period – provided the payment deadline is later than the 60th day following the last day of the settlement period

The reverse charge mechanism in the case of certain domestic transactions

Using the opportunity provided by Article 199 of the VAT Directive, Hungary requires the use of the reverse charge mechanism regarding a number of special transactions among taxpayers registered on national territory. These include:

  • transfer of immovable property to the buyer that must be recorded in the land/property register, provided the immovable property is a result of construction/installation/assembly works,
  • the sale of built-up/developed immovable properties that have been occupied for more than 2 years, provided that the seller opted that the sale of such properties must be subject to taxation,
  • construction/installation/assembly and other assembly works designed to set up, expand, restructure or otherwise alter the immovable property, provided that such works require a licence from the construction authority, or the construction authority must acknowledge their construction,
  • providing temporary staff, seconding or making staff available for the sale of products and the provision of services,
  • the sale of certain scrap metals and metal raw materials,
  • the sale of certain crops (e.g. maize, wheat) or e.g.
  • in case of selling the emission units of greenhouse gases.

Special tax return rules applicable to invoices and corrected invoices

Prior to 1 January 2016, in Hungary it was possible to deduct the amount of input VAT in any later tax return periods provided such periods were within the limitation period within which it was possible to assess tax. However, from 2016 onwards, the right of tax deduction can only be deferred until the end of the calendar year following the year in which the tax obligation was incurred. Subsequently, the right of VAT deduction can only be exercised by submitting an self-revision tax declaration for the VAT return period during which the right of VAT deduction arose.

It is also important to be aware that in the case of corrected invoices, the parties issuing and accepting the affected invoice are not necessarily obliged to enforce the VAT difference in the same period. Whereas in case of reducing the amount of payable VAT, the principal rule is that both parties settle the VAT difference in the return period during which the amending document is available to the party accepting the invoice, regarding an increase in the amount of VAT payable, the party issuing the invoice must submit a self-revision tax declaration for the VAT return period during which the transaction was completed but the party accepting the invoice will settle the difference in its tax return for the period during which the amending document is/was available.

Special rules applicable to the preparation and retention of invoices

It is important to be aware that Hungary introduced special rules regarding the preparation of invoices. Invoices under a Hungarian tax number or documents amending invoices can only be prepared/issued using

  • paper based forms,
  • invoicing programmes and/or
  • cash registers.

That is in Hungary no invoices can be issued/prepared using a word processing or spreadsheet software.

As an additional special requirement, effective as of 1 January 2016 invoicing programmes must have a so-called "tax authority audit report" function. Using a pre-set structure, this function must make it possible to list the data of invoices for any period between two dates, or the data of invoices within a range of invoices for which the starting and ending invoice number was specified.

It is well known that until the end of the limitation period during which the tax can be assessed, it is necessary to retain, preserve both the invoices and related agreements, contracts, orders and certificates of completion. It is, however, less well known, that in Hungary electronic invoices can only be retained electronically, to which very strict requirements apply. Although invoices sent in pdf format via e-mail may also be considered electronic invoices, prior to archiving such invoices, Hungarian taxpayers must add an electronic signature and a time stamp to such invoices.

Special rules applicable to the data content of invoices

Although, regarding the mandatory substantive elements of invoices, the Hungarian VAT Act follows provisions in the VAT Directive, regarding other types of taxes it may also be mandatory to display certain "extra" data and information in invoices to be issued. However, in case these data or pieces of information are missing, they may have detrimental legal implications not in terms of VAT, but in terms of the type of tax affected (e.g. excise tax, environmental product charge or public health product tax).

This is only a foretaste of the many Hungarian tax specialities we have. When it comes to preparing Hungarian invoices or submitting a Hungarian VAT return, it definitely makes sense to involve the experts of local requirements as in case of irregularities, the Hungarian tax authority may impose a number of penalties and fines. In case of a failure to issue an invoice, the default penalty per transaction may amount to HUF 1 million (approx. EUR 3 200) or (if an invoice is prepared incorrectly) to HUF 500 thousand (approx. EUR 1 600). In case a tax audit discloses a tax shortage, tax penalty imposed can amount to 50 percent of the shortage and a late payment interest is also imposed (in case the tax shortage emerges because of the concealing of revenue, or the falsifying or destruction of accounting records, books and documents, the penalty amounts to 200 percent of the shortage).

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