With the passing of the 2016 amendments to the tax law the tax legislation for the coming year is now finalised. Our column will present the major changes impacting firms registered for VAT, and our first article covers the new regulations governing the performance date of periodically settled transactions.
What are periodically settled transactions?
- Sales of products for which the parties have agreed to settle by set periods. (E.g., a supplier delivers car parts to a manufacturer on a regular basis, and pursuant to their contract the parties settle the consideration on a weekly basis for the products delivered.)
- Services for which the consideration is specified for a set period. (E.g., flat rate services: maintenance, book-keeping, rental fees, etc.)
Pursuant to the rules in effect for 2015, if the parties have agreed on payment in instalments or on settlement by set time periods, then the due date for the payment of the consideration shall be considered as the performance date for VAT purposes.
As of January 1, 2016 however, the performance date for VAT purposes shall be determined in accordance with the following three rules. The performance date could thus vary on a case-by-case basis depending on the agreement between the parties.
- If both the payment due date and the invoice date precede the last date of the period being settled, then the issue date of the invoice shall be considered as the performance date.
Example: An invoice for the October rent is issued on September 20 and the payment is due by October 5. The issue date of the invoice, i.e., September 20 shall be considered as the performance date for VAT purposes.
- If payment is due following the last day of the period being settled, then the performance date shall be the payment due date, but not later than the 60th day following the last day of the period settled.
Example No. 1: An invoice issued for the flat-rate tax consulting fee for the month of September is due for payment on October 10, so the performance date for VAT purposes as indicated on the invoice shall be October 10.
Example No. 2: The parties agree on a long payment term, so that the monthly flat-rate fee for September is due on December 2. In this case the performance date for VAT purposes shall be November 29.
- In all other cases the performance date for VAT purposes shall be the same as the last day of the period concerned by the settlement or by the instalment payment. This last case will be the most seldom used, as essentially it can only occur if the payment due date falls exactly on the last day of the period settled.
Example: An invoice issued for the monthly rent for September is due for payment on September 30, which is the same as the last day of the settled period, and thus in this case the performance date shall be September 30.
The new rules shall be applicable to periodically settled transactions first where the first day of the settled period and the payment due date and the invoice date fall on dates following December 31, 2015.
Example No. 1: The period being settled lasts from December 20 to January 20, with a payment due date of January 30. The old rules are still applicable in this case, because although the payment due date is already after December 31, but the first day of the settled period is before December 31.
Example No. 2: The invoice is issued in December 2015, the period being settled is the month of January 2016 while payment is due on January 5. In this case the old rules shall be applicable for defining the performance date, since the issue date is before December 31.
Example No. 3: The invoice is issued on January 4. The period being settled is the month of January 2016 while payment is due on January 20. In this case the new rules shall be already applicable for defining the performance date, since all three of the relevant dates are after December 31.
- When do I have to pay the VAT if I issue an invoice?
The tax payment obligation is created on the performance date, so knowledge of the above rules and of the agreement between the parties is required in order to decide in which period the VAT for the specific transaction is to be paid and declared.
- When can I make a deduction for the VAT charged if I receive an invoice?
The recipient of the invoice may make a deduction for the VAT paid on the same date as the VAT payment obligation is created, so the performance date will also be determinant for this case.
Although it is the responsibility of the issuer of the invoice to define the performance date and to indicate it on the invoice, the recipient of the invoice also bears responsibility on the deduction side. It is also worthwhile for the recipient of an invoice to examine whether or not the performance date indicated on the invoice was defined in accordance with the rules and as set forth in the contract, because if you make a deduction for the VAT earlier than permitted, then the tax authority may charge you default interest.
- What exchange rate should I use to specify the tax base in HUF?
The discussed change has no impact on the exchange rate rules, i.e., the exchange rate valid on the issue date of the invoice continues to be the rate applicable for the conversion into HUF of the tax expressed in foreign currency. We would also like to stress that the amount of the VAT in HUF must also be indicated on domestic VAT invoices issued for periodically settled transactions.
Regardless of whether you participate in ad-hoc transactions as an issuer or as a recipient of an invoice, it is advisable to contact your tax consultant in advance in order to mitigate your tax-related risk.