In case of companies trading with products, it is a common practice to purchase and sell the products without having a physical ownership as the products purchased and sold will be delivered directly from the original supplier to the final customer. Therefore the delivery of the products will not follow the invoicing process, since the products will be delivered from the first supplier to the final customer excluding the intermediary parties. Such transactions are known as chain transactions among the tax experts.
It is well known, that in case of intra-community supply or export of goods, the Tax Authority puts high emphasis on examining if the products have left the territory of Hungary. This fact should be proved by the tax payer; in most cases the Tax Authority requires the availability and the presentation of the delivery notes (CMR).
However, companies can easily draw incorrect conclusions in connection with the transaction, if they do not recognise that they are acting as a party in a chain transaction. Therefore, it is possible that a certain tax payer assumes to carry out a VAT exempt intra-community supply of goods, while the place of supply should have been determined differently because of the presence of a chain transaction. Or if their transaction would not be the one which is connected with the delivery of the products and thus VAT exemption cannot be applied, despite the fact that the company can show the delivery notes which have been filled out without any mistake. In our current newsletter of October we will summarize the main rules of chain transactions.
The Act Nr. CXXVII. of 2007 on value added tax (hereinafter referred to as ‘VAT Act’) does not include the definition of chain transactions, neither does it use the expression ‘chain transaction’. However, according to Section 27 of the VAT Act, a chain transaction will occur, if the same product will be sold consecutively, more times in a way that it will be delivered directly from the first supplier to the final customer. The simplest version of the chain transactions is, if there are three parties in the transaction chain, the first party will sell the products to the second, and the second party will resell the products to the third, but the products will be delivered from the first party to the third.
The first question, which should be considered from VAT point of view, is regarding the place of supply of the first and the second sale. Based on Section 26 of the VAT Act, where goods are dispatched as a consignment or transported by the supplier, or by the customer, or by a third person on behalf of either the supplier or the customer, the place of supply shall be deemed to be the place where the goods are located at the time when the dispatch or transport of the consignment of goods addressed to the name of the customer begins. As a consequence thereof, if the products are transported or dispatched as a consignment, the place of supply will be the place, where the place of the dispatch is, or where the transport begins.
In case of a chain transaction, where, irrespective of the number of the sales transaction only one transport will be carried out from the first supplier to the final customer, the above mentioned provision of Section 26 of the VAT Act can be applied only to one sales transaction, to the one which is connected with the transport of the goods (known as ‘moved supply’). Thus, as the first step, we have to find in every chain transaction the sales transaction, which can be considered as the moved supply and examine which party is transporting the products or organising the transport. Generally, the question will arise, who will organise the transport or who is in relationship with the carrier. If there is a party who will transport the goods itself, with its own vehicles, the answer to this question is very simple.
If the first supplier is delivering the products or organising the transport, than we can be sure that the first sales transaction will be the moved supply, while if the final customer will transport the products or organise the transport, than the last sales transaction will be considered as the moved supply. But how should we qualify the transaction if the intermediary party will deliver the products or organise the transport? According to Subsection 2 of Section 27 of the VAT Act, if goods are dispatched as a consignment or transported by a customer who also functions as a supplier, i.e it is an intermediary party, it shall be assumed - except proven in an other way - as the goods in question are dispatched as a consignment or transported by such customer, acting as such, or by a third party on his behalf. Therefore the moved supply will be the transaction, in which this intermediary party is acting as a customer.
According to Subsection 3 of Section 27 of the VAT Act, the place of supply of those sales transactions which precede the moved supply will be also the place where the transport of the goods begins, and the place of supply of the transaction following the moved supply will be the place of destination.
If, by the application of the rules mentioned above, the place of supply of a transaction will be in a country other than Hungary, the rules of the Hungarian VAT Act shall not be applicable to that transaction; therefore such transaction will be out of the scope of the VAT Act.
By the application of the above mentioned rules, the place of supply of each of the transactions of a chain transaction can be determined easily and by knowing the place of supply it can be decided if the transaction falls under the rules of the Hungarian VAT Act, since the place of supply is in Hungary, or if the transaction falls out of the scope of the VAT Act, the rules of the Hungarian VAT Act cannot be applied. The determination of the place of supply of the transaction is highly important also from invoicing point of view, i.e if the invoice should be issued regarding a domestic supply of goods with Hungarian VAT or as a VAT exempt intra-community supply of goods without charging Hungarian VAT.
Summarizing the above mentioned, it might not be easy to take a decision regarding the VAT treatment of chain transactions. Therefore, we will continue this topic in our next newsletter through some practical examples. Furthermore, taking into account the complexity of this topic and the specific focus of the Tax Authority in this respect, we advise to get these transactions reviewed by a tax advisor in order to avoid significant tax penalties in the future