Pressure to generate higher budget revenues led to the Hungarian government increasing its VAT rate to 27% – the highest in the EU – this year, and to multinationals being more frequently audited and challenged on tax positions which had received little attention in the past.
Tamas Vekasi, of Ernst & Young, said tax fraud investigations take significantly more time to trace tax cheating, while multinationals are much more cost-efficient to audit.
In response to the VAT fraud, the government has introduced new measures, such as the special tax registration procedure, to help monitor the registration process of new companies and help the tax authorities to better target potential VAT cheats in the audit selection process.
However, Vekasi said to assist with pre-selection, there will be an additional obligation for taxpayers to file regular listings for domestic transactions from 2013.
“Above a certain threshold all transactions will need to be reported with the aim of cross-checking VAT payments and VAT deductions and it is hoped that this way missing trader-fraud situations can be pre-filtered and audited with higher efficiency,” said Vekasi.
“I think the domestic transaction listings will create an extra administrative burden for legitimate companies and even if they themselves do not take part in any fraudulent activities, if any other company down the supply chain starts fraudulent transactions with products stemming from them, they may be involved in connected VAT audits,” he added.
In addition to paying greater attention to VAT fraud, the Hungarian tax authorities have also expressed their intent to make auditing of VAT refunds a priority.
Andrea Linczer, of HLB Klient, said he expects the amount of administrative penalties related to VAT refunds to increase.
“One of the areas all big companies have to pay attention to for VAT refunds is where the tax authority gives extra scrutiny to refunds within the preferential, 45-day deadline,” said Linczer.
“If a company cannot prove for every inch of reclaimed VAT that it comes exclusively from already settled bills, the administrative penalties could be huge even for a 1HUF omission,” he added.
Extension of the general refund deadline from 45 to 75 days will also impact companies’ cash-flow. The 45-day deadline now only applies if all the reported purchases of a taxpayer are fully settled by the filing deadline of the VAT return.
And Hungary’s high 27% VAT rate is exacerbating the problem.
Linczer said the high rate has an unfavourable cash-flow effect for all operating companies, which may adversely affect their competitiveness.
“Given the special regulations of the financial sector, which cannot reclaim any VAT, the high VAT is an even more painful cost when opposed to other competitors operating in the lower VAT countries of the EU,” said Linczer.
In response to the VAT environment in Hungary, companies looking to reclaim VAT or make refund requests must ensure they have prepared thorough documentation.
Linczer said companies exporting or performing intra-Community supplies should obtain all the original shipping documents proving that the products concerned were shipped from Hungary, as such documents are difficult to collect during the course of an inspection, and taxpayers will be given short deadlines to obtain them.
“If a company considers that its files are not ready for the scrutiny of a tax inspector yet, it better uses the input VAT in a later period and, if possible, waits with the refund and rather offsets it against future payable VAT,” said Linczer.
While Vekasi said taxpayers may need to prepare a defence file in response to the shifting approach of the tax authorities.
“Due to the overwhelmingly formalistic, even form over substance, approach of the authorities, we suggest reviewing certain tax positions taxpayers have been applying, as a fresh look may reveal gaps in documentation or areas of potential challenges,” said Vekasi.