The VAT gap according to an EU report exceeds EUR 160 billion, of which cross-border fraud accounts for approximately EUR 50 billion in lost revenue every year. This latter figure totals EUR 1.5-2 billion in Hungary. What is the EU doing, what measures can be expected in Hungary, and how will this all affect the day-to-day administration of law-abiding taxpayers? These are the questions we seek answers to in our article.
Generalised reverse charge mechanism – EU action
If we look into the future, we see that under the agreement between the European Parliament and the Council the definitive VAT system will be based on the principle of taxation in the country of destination (the so-called “destination principle”), whereas the current system is based on exemption of supplies of goods in the Member State of departure. However, since preparing, adopting and implementing such a major change is likely to take some time, the Commission recognised the need to work in parallel on other initiatives to tackle tax evasion. This is what led to the proposal on 21 December 2016 to amend Directive 2006/112/EC.
The essence of the legislation is that at the request of individual Member States, and provided set conditions are met, it would be possible for Member States requesting the special rule to implement a temporary generalised reverse charge mechanism (GRCM) until 30 June 2022 for supplies of goods and services above a threshold of EUR 10,000 per invoice (regardless of the industry or type of service).
Any Member State wishing to introduce the generalised reverse charge mechanism must comply with the following conditions:
a.) it has a VAT gap, expressed as a percentage of the VAT Total Tax Liability, of at least 5 percentage points above the Community median VAT gap;
b.) it has a carousel fraud level within its total VAT gap of more than 25%;
c.) it establishes that other control measures are not sufficient to combat carousel fraud on its territory.
When implementing the mechanism it must also be examined what impact this will have on neighbouring countries, since it could easily happen in this case that those engaged in tax fraud simply shift their activities to nearby states.
Combating tax fraud in Hungary
Hungary’s 27% VAT rate is extremely enticing for tax fraudsters, and implementing the reverse charge mechanism seems obvious in “toxic” sectors. In 2014, according to an EU study, several Member States broadened the scope of goods and services that fall under reverse charging. Thanks to this move, Hungary managed to achieve a 4% reduction in its VAT gap. Besides the reverse charging, Hungarian legislators also took measures that clearly increase the administration burden but which make it more difficult to commit VAT fraud, for example:
- the itemised domestic summary report, in which invoices must be listed individually taking defined thresholds into account, or
- the requirement to register invoicing software with the tax authority, or
- the requirement for invoicing software to have a data export function, and
- the introduction of the EKAER system, one of the most significant changes, which is a real-time control system running simultaneously with road transportation.
The introduction of the generalised reverse charge mechanism will increase administration for the companies affected, as all transactions above EUR 10,000 have to be reported to the tax authority. If we look at the data supply requirements for Hungary, Poland or even the Czech Republic, these countries probably face a similar amount of administration now. Nevertheless, with regard to the online data supply and invoicing to be introduced in Hungary from 1 July 2017 there are still many unknowns, as we do not yet have the government decree to hand. What does seem certain is the risk of a default penalty, which could be as much as HUF 500,000 (approx. EUR 1,600) per invoice if the data supplied is incorrect.
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