The VAT rules for distance selling will be radically transformed from 1 July 2021: which option to choose?

The European Union’s e-commerce package, also implemented by the Hungarian VAT Act, sets new rules for intra-Community distance selling to non-taxable persons from 1 July 2021, introduces the taxation of low-value import consignments, in some cases imposes a tax obligations on electronic platforms, and also extends the applicability of the one-stop shop system. Due to their nature, the new rules will have a significant impact on the day-to-day operations of webshops.

In view of the fact that the online selling of goods has gained a great deal of significance recently, in this newsletter, we will examine the VAT treatment of intra-Community distance selling transactions (hereinafter referred to as distance selling), without the claim to be exhaustive. Our aim is to present the rules entering into force on 1 July 2021 and the possibilities inherent in them.

What is intra-Community distance selling?

Intra-Community distance selling means that the goods are sold to a non-taxable person or to a customer not required to pay VAT (typically a private individual), where the seller supplies the goods from one EU Member State to another. In addition, the goods sold are neither new means of transport, nor goods supplied that require assembly or installation. Such sales are most often carried out via webshops.

Three options for taxation

Basically, distance selling as described above can be taxed in three different ways, depending on the value of the transaction and the choice of the seller.

1. Distance selling may be subject to tax in the country of destination, i.e. according to the rules of the EU Member State to which the product is supplied. Unless the supplier of the goods decides otherwise, this provision applies. The disadvantage is that in this case the supplier must establish and maintain VAT registration in the country of destination, and must issue invoices and supporting documents in accordance with the invoicing rules of this country. This could entail considerable administrative burdens and/or costs. The advantage of this option is that it is not the Hungarian VAT that has to be paid after the transaction, and given that the general VAT rate is the highest among EU Member States in Hungary, the gross price of the product may thus be lower. Overall, this method of taxation is recommended when, in addition to distance selling, the company also has other transactions that justify the maintenance of the foreign VAT registration.

2. If the taxable person has an establishment for VAT purposes only in Hungary and engages in distance selling from there to other EU Member States, and further, the total combined value of the distance selling to non-taxable persons in other EU Member States in the given and in the previous year is less than EUR 10,000 (EUR 3,139,600), then the taxable person may decide to remain subject to the Hungarian VAT Act. In other words, such sellers determine the VAT according to the Hungarian rules, issue their invoices in accordance with the Hungarian rules, and include these transactions in their Hungarian tax returns. This is preferable from an administrative point of view, but given the high rate of the general VAT in Hungary, it may be disadvantageous from a price competition point of view.

3. Taxation according to the country of destination via a one-stop shop (“OSS”) system. In this case, the principle of country of destination applies, which means that the tax is to be paid according to the rules of the Member State in which the transport ends (the VAT rate of the country of destination applies). However, in the case of OSS registration, the taxable person must include the VAT on distance selling in its tax returns and pay the VAT in the Member State in which it is registered in the OSS system (in this case, in Hungary). The tax returns must be filed electronically on the OSS portal, and the Hungarian tax authority will transfer the tax indicated in the tax returns and paid to it to the tax authority of the country of destination via the OSS interface. This means that establishing and maintaining VAT registration abroad is not necessary.

However, it is important to emphasise that the VAT returns filing and payment obligation can only be performed via the OSS in case of distance selling to such EU countries where the supplier does not have an establishment for VAT purposes.

The advantages of OSS registration

• Reduced administrative burdens:
  • There is no need for VAT registration and the related administration in all countries of destination of the distance selling.
  • The taxpayer can fulfil its VAT returns obligation by way of filing a single VAT return for all countries of destination where it has no establishment for VAT purposes. This means that there is no need to complete and file VAT returns in several different Member States, each in a different way and on a different form.
  • Also, there is no need to issue the invoices and other documents according to the specific rules of each country of destination. It is sufficient to invoice in compliance with the rules of the country of OSS registration.
• Reduced costs:

• It is no longer necessary to employ and pay for experts proficient in the tax rules of all countries of destinations. It is sufficient to make use of professional assistance in the country of the OSS registration.
• The VAT can also be paid by way of a single bank transfer to the tax authority of the country of OSS registration, and it is not necessary to use separate bank transfers to the tax authorities of each country of destination separately, nor to pay the costs of such transfers.

• Increasing competitiveness:
  • The VAT rate of the country of destination is always applicable, which means that the VAT charged would not result in a competitive disadvantage for distance sellers in comparison with local businesses.

Which method is worth choosing?

In the foregoing, we have provided a general presentation of the different tax methods and their specificities. However, the best choice for a supplier, such as the operator of a webshop, should always be based on the specific characteristics of the transaction. Our tax group is pleased to be at your disposal in determining and introducing the most advantageous arrangement for you.