In the period since Hungary joined the European Union, no clearly defined system of rules and regulations has been established for certifying intra-Community supplies of products that are not subject to VAT. The stakes are high as companies run a significant value added tax risk if they are unable to prove, to a satisfactory degree, that goods have left the territory of Hungary. So it is worthwhile taking a look at how an older member of the European Union, Germany, regulates this high tax risk area, and are they really in front of Hungary in this respect.
Before examining the German system we should briefly “remind” ourselves of a European Court of Justice ruling concerning Hungary. In Case C-273/11 (Mecsek-Gabona) the Hungarian tax authority ruled that the Hungarian vendor should have had a document in its possession to prove that it had dispatched the goods and transported them to another Member State. Since the company was unable to present such a document during the tax inspection, and the tax authority had doubts regarding the credibility of the document it did offer, it had to pay VAT on the sale transaction in question, unless it had acted in good faith with the transaction. According to the tax authority the company should not only have gained assurance about the transportation of the goods, but also that they had arrived at their destination.
Hungarian case law
We see the same train of thought in case law of the Supreme Court. In one of its rulings the Supreme Court highlighted that the mere existence of a transportation document only corroborates the fact that the transporter received the goods from the sender. Consequently, the transportation document or other certificate must, taking all the circumstances into account, be suitable for proving, without a doubt, that the products were delivered to and arrived in another Member State. On this basis and in the case at hand, the selling company was not careful enough when it sold several hundred tons of produce without gaining assurance about the circumstances of the supply by checking the entity carrying out the transportation or by checking the authenticity of the CMR document.
It also transpires from the case law of the European Court of Justice that since no provision of Directive 112/2006/EC specifically prescribes which proof taxpayers must provide to receive tax exemption, Member States themselves must define the terms and conditions for the exemption on intra-Community product supplies. This is to ensure that the tax exemptions in question are applied easily and correctly, and to prevent any tax fraud, tax avoidance and abuse.
In the Mecsek-Gabona case mentioned in the introduction, the Hungarian government explained during the hearing at the Court of Justice that Hungarian legislation only specifies the sale must be verified, while the range of evidence required depends on the particular circumstances of the transaction in question. The only reference in this respect on what the tax authority would like to see as an export certificate during an inspection can be found in the rather dated yet detailed tax question 2007/41.
We find similar uncertainties in the German system too. The amendment to the implementing regulation for the German VAT Act which took effect on 1 January 2012 introduced new rules with regard to documenting intra-Community supplies. If a German VAT taxpayer wants to treat its intra-Community supplies as tax-free, they require a special document issued (and signed) by the customer verifying that the goods have been received in the country of destination (Gelangensbestätigung).
This new provision raised various questions and triggered significant outcry among market participants in view of the administrative burdens related to the special documentation. Under pressure from chambers of commerce, the German Finance Ministry has repeatedly set new deadlines, and for intra-Community supplies prior to the expiry of these deadlines the method of documentation applied under the previous rules must be accepted. According to the new plans, the new regulation will take effect from 1 July 2013, and will contain some concessions, based on which the document certifying the arrival of goods will not be the only certificate accepted, and the authorities will have to accept other verifying documentation too. In summarising the German situation it is clear that not even for the authorities of a Member State which has been part of the EU system for many years is it easy to find the golden mean, where the notion of tax evasion is ruled out from the start and yet companies are not hindered by administrative burdens.
What to do
So it is highly recommended that Hungarian companies set up an internal administration system which demonstrates during an inspection, clearly and convincingly, that the company acted with due care and in good faith prior to issuing the tax-free invoice. Experience shows that the more evidence companies integrate into their procedures during sales, the more relaxed they can feel when the tax inspectors come knocking on the door. Such evidence may include a legible CMR document stamped also by the customer, which contains a reference to the registration plate of the transportation vehicle and the invoice accompanying the products. In addition to conducting a thorough check of the customer’s identity, and that of the person representing the customer before the first contract is signed, along with the customer’s EU VAT number, it is worthwhile providing in the contracts for cases where the customer does not return the right copy of the CMR document to the vendor.