Our previous newsletter on the European Union’s e-commerce package explained in detail the rules on intra-Community distance sales to non-taxable persons. However, changes effective from 1 July 2021 will have a significant impact on the VAT treatment of certain supplies of services, so highlighting the options available in this regard is essential.
In the light of the changes, we would like to provide an overview of the new rules and the options available to Hungarian businesses that provide services to non-VAT registered consumers, that is, typically individuals, in other member states of the European Community.
MOSS scheme extension - Who could be affected?
The new One Stop Shop (OSS) scheme is the successor to the MOSS (Mini One Stop Shop), which has been in operation since 2015, in which both the taxpayer and transactional areas have been expanded. The former MOSS scheme offered an efficient one-stop shop for services that could be provided remotely or electronically (i.e. telecommunications, radio and television broadcasting or electronic services such as software, music or films online or via downloads) to non-taxable persons (e.g. individuals).
With the introduction of the OSS, the possibility of simplified administration has been extended beyond the range of the services mentioned above to certain types of services provided to non-taxable persons in other EU Member States. Such services supplied to non-taxable persons may include services relating to immovable property situated in another Member State (specific property planning, property valuation, property brokerage), offline education and training performed in another Member State, the organization of events (e.g. weddings, exhibitions, shows) in another Member State, the transport of passengers or goods in another Member State. It is essential to note that the use of the OSS scheme is not compulsory, it is merely an option.
The purpose of this newsletter is to show what choosing the OSS means for Hungarian taxpayers in relation to the provision of services.
The services in question supplied intra-Community to a non-taxable person can be taxed in three ways. The tax options are essentially differentiated by the place where the transaction is carried out, which can either be in Hungary or in another EU Member State. However, depending on the annual amount of the consideration for the specified transactions and the choice of the supplier of the service, there are in fact three different tax treatments:
- Performance in Hungary
It is important to point out that the first taxation method may be subject to a threshold, but this only applies to services that can be supplied at a distance and electronically to other Member States and does not cover other types of services provided to EU customers. A taxable person (combined with intra-Community distance supplies) below the annual threshold of EUR 10,000 (HUF 3,139,600) may choose to apply the general rules of the Hungarian VAT Act (provided that they have a VAT establishment only in Hungary and their customers are non-taxable persons in other Member States). In other words, the Provider assesses the VAT under Hungarian rules, issues the invoice under Hungarian rules and reports the transaction in its Hungarian VAT return. This is more advantageous from an administrative point of view, but given the high Hungarian VAT rate, it may be disadvantageous in terms of price competition.
- Performance in another EU Member State
For the next two taxation method, the place of performance of the transactions will not be Hungary, but in both cases will be shifted to another EU member state, according to the country of destination principle, for which the OSS scheme is an available option. The transactions concerned in these cases can be divided into two groups. On the one hand, these include services which can be supplied at a distance and services supplied by electronic means, for which the country of destination principle is mandatory (combined with intra-Community distance supplies) above the annual threshold of EUR 10,000 (HUF 3,139,600) and optional if this threshold is not reached. On the other hand, this also includes other types of special services (e.g. services related to immovable property, offline training in another Member State, etc.) provided to non-taxable customers in the EU, as mentioned above, where the country of destination principle is mandatory. It is important to note that the taxpayer is bound by their choice (taxation by country of destination or OSS scheme) until the end of the second year following the year of the decision .
2.1 The supplier of the service must establish and maintain a VAT registration in the country of destination and issue invoices and receipts according to the invoicing rules of that country. This can entail a heavy administrative burden and cost. The advantage is that no payment of Hungarian VAT is necessary and, given that the standard VAT rate in Hungary is the highest in the EU, the gross value of the product may be lower. Overall, this taxation method is recommended when the company has other transactions that justify maintaining foreign VAT registration.
2.2 The taxpayer can also opt for taxation by country of destination through the OSS scheme. In this case, the tax is still payable according to the rules of the Member State of the customer (the VAT rate of the Member State of destination applies), but in the case of OSS registration, the VAT on the supply of services to all Member States must be declared and paid in the Member State where the taxable person is registered in the OSS system (in this case Hungary). However, please note that VAT obligations can only be fulfilled through the one-stop shop scheme in a Member State where the taxable person supplying the service is not established for VAT purposes. The return must be submitted electronically via the OSS portal and the Hungarian tax authority will transfer the tax declared and paid to it via the OSS interface to the tax authorities of the destination countries.
Advantages of OSS registration
- Reduced administrative burden:
- There is no need for VAT registration and administration in every country of destination where services are supplied.
- A single VAT return can be used to fulfil the VAT return obligation for all destination countries where the taxable person is not established for VAT purposes. No need to complete and submit VAT returns in several Member States, using several different methods and several different forms.
- Not every invoice or receipt has to be issued according to the rules of a different country. Invoicing must be done according to the rules of the country of OSS registration.
- Reduced costs:
- It is not necessary to appoint a tax expert for each Member State concerned. It is sufficient to seek professional assistance in the Member State of OSS registration.
- VAT can be paid by a single bank transfer to the authority of the Member State of OSS registration, no more separate bank transfers to the authorities of each destination country and no more potential fees for them.
- Increased competitiveness:
- The VAT rate of the country of destination always applies, so the high Hungarian VAT rate should not put the distance seller at a competitive disadvantage compared to local businesses.
Which taxation method should you choose?
Above, we have provided a general overview of the different types of taxation that arise and their specificities. However, the best choice for a particular company should always be decided on the basis of the specific characteristics of the transaction. Our tax team will be pleased to assist you in determining the most advantageous tax treatment for your company and in its implementation.