Tamás Fehér

The rules on VAT-exempt intra-Community supplies of goods have long been a source of worry for businesses. It is not uncommon for the tax authority to deny tax exemption on such transactions on the grounds that the goods never left the country. Although a recently accepted proposal by the EU clarifies the rules, complying with them entails a great deal of bureaucracy for companies that deliver to EU markets.

VAT-free supply of goods within the EU

It is not only the proposed 25% VAT ceiling in the EU that is keeping tax experts on their toes these days, the EU’s Economic and Financial Affairs Council (ECOFIN) approved a VAT package on 2 October. The most important element of the package is related to VAT-free intra-Community supply.

Sales of goods to other businesses within the Community enjoy VAT exemption, provided that the goods do leave the member state in which the seller is based. Proving this, however, gives rise to a great deal of problems in practice. And if a Hungarian seller is unable to prove that the product has genuinely left the country, then ultimately it can be denied the VAT exemption. In other words, the seller has to pay 27% VAT instead of zero.

Consequently, this kind of goods supply is a particularly feared aspect of tax inspections: even with the Electronic Public Road Trade Control System (EKÁER), which works relatively well, the tax authority can still deny VAT exemption from bona fide sellers, because it does not consider the fact that the product left the country, or that the buyer was a VATable person, to have been satisfactorily proven.

Presumption of proof

The recently accepted proposal introduces a legal presumption. Accordingly, if the seller can provide the documents listed in the proposal proving that the goods have left the country, then this must be accepted unless the tax authority can prove otherwise. The proofs necessary for this presumption to take effect are, however, fairly rigorously defined. The proposal requires at least two different but concurring documents issued by at least two parties involved in the transaction who are independent from each other (e.g. haulier, warehouse, etc.), as proof of transport; and in addition to this, a declaration by the seller or the buyer (depending on who arranges the transportation) is also a requirement.

The proposal also makes the VAT exemption subject to two additional basic requirements. Firstly, the seller must have an EU VAT identification number, and secondly the seller must complete the recapitulative statement on the supply of goods without any omissions.

So are the rules being loosened or tightened?

At first glance the package could present good news, as the expected forms of proof have finally been specified. What is more, the strict documentation is only needed to establish the assumption of proof and does not prevent the seller from proving that the delivery has occurred in some other, appropriate manner.

Nevertheless, the proposal can be construed as a tightening of the rules. For a start, naming the VAT identification number and summary report as basic requirements means that there is no leeway in this respect: if the data is incorrect, there is no exemption. And this gives the tax authority carte blanche to deny the exemption, citing even the most trivial formal error.

Also, based on the practice that has half-crystallised in Hungary thus far, as long as the seller can provide any appropriate proof that the goods have left the country, then the onus is on the tax authority to prove the opposite. The future standard of proof, however, will be higher and more bureaucratic than this. There is also a possibility that in all cases not fully in line with the ‘obligation proofs’ (e.g. when the seller only proves the delivery of the product with a simple CMR), it will be sufficient for the tax authority to express doubts regarding the credibility and completeness of the available proof.

Is this just a proposal, or already reality?

Although the package formally has to be approved by the European Council, in reality this is only a formality following the ECOFIN decision. And although the rules do not officially take effect until 2020, there is every possibility that the tax authority will revise its existing auditing practices in line with the new rules.