New EU VAT rules

26 June 2018

Beside the online data-reporting obligation of invoicing softwares from 1st July, further changes are expected in the VAT system from 1 January 2019. These changes will have to be applied not only in Hungary: in December the European Council accepted the new rules affecting all member states of the European Union.

Simultaneously with the increase of online sales – the associated evasion has also been increasing, which caused significant distortions of competition. These reasons could motivate present changes. Currently, as a main rule of distance sale, (teleshopping) until a certain limit sellers may apply the tax rate of their home country if they provide services to non-taxpayers within the European Union. (This limit may differ country by country, but typically 35 thousand euro.)

In the case of sales above the given limit sellers have to register as a taxpayer in the country where the sales actually happen and have to pay that country’s VAT. This procedure causes significant administrative burdens, as well.

According to the new rules these limits are going to be abolished, which means that those countries’ tax rates must be applied for the whole sale, where the purchase happens. By this modification the tax evasions and distorted competition caused by different tax rates are expected to decrease.

As a result of the changes more administrative burdens might also occur, however the European Council is going to introduce new rules handling this problem as well (the rules will be applied only in the long run, from 2021). It is the expansion of the MOSS (Mini one-stop-shop) system. This system is already operating in the European Union, but only in connection with services that can be supplied at a distance (i.e. electronically supplied services, telecommunications, radio and audiovisual media services). This system is intended to be extended to distance-selling as well, by which solution taxpayers become exempt from registration and other obligations.

It is important to note that only some beneficiaries remain who will be entitled to use the current system in the future as well (it means that until a certain limit they can use their home country’s tax rate, which limit is going to be 10 thousand euro): small and medium-sized enterprises, and start-up businesses.

Another major change will be the introduction of tax liability of mediators: the new EU rules oblige online platforms to collect VAT on sales flowing through them. Similar methods can be found more frequently nowadays (for example in South-America in connection with some taxes collected by credit card issuers, or regarding Airbnb and tax on tourism).

It may be interesting monitor the spread of this method because the tax collection efficiency may really increase if it is prescribed at earlier stage of the process, especially by obliging an independent party.

We should also mention the tax-free limit of import VAT: currently the so-called ‘small amount’ products are exempt from import VAT – this means a 22-euro limit – which is also going to be abolished. The reason for this is also to decrease the number of tax evasions because this exemption could encourage taxpayers to indicate the price of product lower than the limit.

Member states have to implement a part of rules by 31st December 2018, but the whole rule comes into force only from 2021.

Finally regarding VAT-changes we mention that the discussions between the Hungarian Government and the European Union are still in progress – based on the information available - about increasing the VAT-exempt limit from 8 million to 12 million forints, but this change might affect directly only the smallest taxpayers.

Szenkovits Lili |