“The introduction of the EKAER has been a success story, and our neighbouring countries would like to “import” the system.” – According to the authorities, the system is good and has achieved its goal. Those who use the system and taxpayers making mistakes in the system might have a different opinion though. It must be said, the EKAER has its downsides. The greater administrative burden and therefore the increasing wage costs are only part of the negative effects. As tax consultants we meet more and more taxpayers on a daily basis who suffer from these consequences.
What are the implications of the EKAER system?
According to the Commission staff working document “Country Report Hungary 2017”, the introduction of the EKAER (Electric Road Cargo Monitoring System) has created administrative burdens as regards “intra-EU trade”. As stated in the Country Report “This highlights the trade-off between tax collection efficiency and compliance costs”. And what about penalties in addition to compliance costs?
The default penalty related to the system can amount to 40% of the value of the goods transported without an EKAER number (in the case of such transport, the origin of the goods is considered unverified by the Hungarian Tax Authority (NAV), even if the waybill explicitly shows the sender and the origin of the goods). Taxpayers providing reports that are incomplete or include mistakes or false data can expect this type of fine. NAV can also impose a fine if you forget to request an EKAER number, or if there is more than a 10% difference between the reported weight of the product and the actual weight. You can expect a fine if your logistics colleague is tired and makes a mistake, and writes the letter Y instead of a V in the licence plate number.
Do not think you can relax at weekends either. A default penalty can rear its head if the closing of the EKAER number falls on a weekend, and your colleagues are unable to do so. There was one case when inspectors performing a tax inspection wanted to impose a fine because the name of a foreign city was incorrect. Only after our comments submitted to the report did they accept our explanation that the words Cologne and Köln, which is the Hungarian name of the city, mean the same place, and a city name given in another language should not constitute a valid legal reason to impose a default penalty. In addition to a penalty, the goods can also be seized, which in the case of a production process with tight deadlines may cause further problems, including production losses.
Penalties that are excessive or violate legal certainty
Although the sanctions are called default penalties by the legislator, we think that the sanctions imposed on the value of the goods are more than that. The aim of the very high penalty is to ward off tax fraudsters. However, tax fraudsters are difficult to catch and the most difficult task is collecting any amount from them at all. The maximum penalty imposed in the event of concealed revenues – at the moment totalling 200% – is planned to be amended soon in the new Act on Rules of Taxation and be reduced to 100%. Why? According to the law, the penalty amount should be reduced because it is very difficult to collect even the amount of the tax, not to mention the penalty. We would be happy to hear about a similar modification for the EKAER as well, although there would surely be taxpayers saying that when transporting goods amounting to hundreds of thousands euros, it makes no difference whether the maximum penalty rate is 40% or 20% of the value of the goods, because the company would probably close down anyway, no matter which amount is imposed.
We believe the penalty of up to 40% of the value of goods of unverified origin, or of unreported goods, is excessive, and it is higher than the amount necessary to achieve the goal of the regulation (i.e. being able to track the path of the goods). The discretion available to the tax authority in setting the penalty from 0% to 40% is also too wide, which impairs legal certainty. We should note here that it is important to clarify in the legislative text whether the net or the gross value of the unverified goods is the basis of the fine. For example, let us assume a net value of unverified goods of HUF 1,000,000 (approx. EUR 3,300). If the fine is imposed based on the net value, the amount of the fine can total up to HUF 400,000 (approx. EUR 1,300), while if 27% VAT is included in the amount used to calculate the fine, the basis rises to HUF 1,270,000 (approx. EUR 4,200) and the fine itself can exceed HUF 500,000 (approx. EUR 1,600).
What happens in practice?
We find it quite strange that the maximum amount of the penalty is more than the VAT in the goods’ value (in case of carousel frauds, the high VAT rate (27%) is what motivates tax evasion). If the inspectors assume there has been no deliberate tax fraud based on the behaviour of the taxpayer and the documents examined, the maximum default penalty is unlikely to be imposed. In our experience, the 40% penalty has never been set, and in most cases the amount of the penalty is around HUF 100,000 (approx. EUR 330) per case/inspection.
This is enabled by the Act on Rules of Taxation because the tax authority can weigh up all the circumstances in each case, and when setting the default penalty it considers the severity and frequency of the unlawful conduct (activity or omission) of the taxpayer and whether the taxpayer or its representative acted with due care appropriate to the particular situation. Although we have not seen any significant EKAER fines so far, it can be really annoying if the tax authority imposes a fine equal to the salary of the logistics colleague over several months, or for a small company, a penalty that swallows the funds for salary increases planned for the following year.
The second part of the article can be found here.