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Tamás Fehér Jalsovszky, Hungary
Tamás Fehér is a Senior Tax Lawyer at Jalsovszky, Hungary
Somewhat predictably, the EU Commission has initiated an infringement procedure against Hungary because of its Electronic Public Road Trade Control System (“EKAER”). This is an electronic surveillance system concerning road transport which was designed to clamp down on carousel-type VAT fraud. Is there a way to retain EKAER’s positives whilst also satisfying the expectations of the EU Commission?
The EKAER system was introduced in 2015 in order to clamp down on the most common form of VAT-related fraud known as carousel fraud. It is an electronic system introduced by the Hungarian government to track road shipments. It imposes a reporting obligation on Hungarian taxpayers extending to the time and place of dispatch and receipt of road shipments; the designation, value and weight of goods being shipped; as well as the registration plate number of the transport vehicle. It also involves the obligation to provide security for “high-risk” goods. Intra-community sales and purchases, as well as the first domestic supply of goods are within the scope of this system.
The system seeks to reduce the possibilities of fraud involving fake shipments. The EKAER system works in conjunction with the Hungarian road toll system, primarily, but not exclusively, targeting vehicles above 3.5 tons. It thus provides the tax authority with the possibility to track road shipments in real-time. Non-compliance may be subject to a fine of up to 40 percent of the value of the goods transported and may also lead to the seizure of the goods.
On October 4, 2017 the EU Commission formally initiated an infringement procedure against Hungary because of this system. In its communications the Commission highlighted the administrative burden connected to the crossing of the EU borders as a reason for its inquiry. Obviously a more thorough legal explanation may be expected later if and when a reasoned opinion is issued by the Commission.
Already at the time of its introduction it was quite clear that this system does not fully comply with the EU's harmonized VAT system and some of its fundamental freedoms.
Firstly, the system relies on quite extensive administrative formalities to be completed by those making or receiving shipments in Hungary. Notably, imports and exports as well as transits (i.e. shipments not originating and neither ending in Hungary) are not in the scope of these rules. Therefore, on the one hand, most of these administrative requirements directly concern the crossing of EU borders. Administrative formalities like this have been deemed non-compliant by the CJEU in the past.
Secondly, purchasers are virtually only required to submit data to this system if they make purchases from other Member States. Conversely, even where domestic sales are within the scope of the regulation, the administrative requirements usually need to be met by the seller. This is clearly capable of dissuading Hungarian purchasers from making intra-community acquisitions making them favor domestic suppliers instead.
Then there is the problem concerning the need to provide financial security. For instance, if “high-risk” goods (most typically food, clothes and bulk goods) are being acquired from the EU or sold domestically, then security amounting to 15 percent of the value of the high-risk goods transported over the past 45 days must be provided. This could be provided in cash or in the form of a bank guarantee. However, in either case, this places a considerable financial burden on those wishing to trade with such goods. This means that a purchaser is incentivized to buy from a domestic, rather than an EU-based supplier, as in the former case, it would not be required to provide security.
Nonetheless, the undeniable accomplishments of this system is what the Hungarian government cites as its main argument against the Commission's inquiry. It claims that this system (together with the introduction of “online” cash machines) contributed to a 420 billion forint increase in VAT revenues since its introduction. Indeed, VAT collection statistics have been impressive in recent years. The latest VAT Gap report of the EU Commission shows a decline in VAT Gap from 22 percent to just 14 percent from 2012 through 2015. This is super-low compared to other countries in the region, such as Romania, Slovakia or Poland.
To understand where the Hungarian government is coming from, it may be useful to give a few examples of how the EKAER system is used to boost tax revenues. Obviously, the Hungarian tax authority now has access to enormous amounts of data concerning road shipments that cross Hungary. On the one hand, they have real time access to the road toll and road weighing systems telling them the registration plate, weight and direction of travel of road transport vehicles through Hungary. At the same time, they have real time access to the data submitted by the various sellers and purchasers identifying each registration plate by a unique EKAER number. In addition, from the submissions, the tax authority has information on exactly what and how much of it is being carried. All of these data are available 24/7.
This obviously allows the tax authority to draw some interesting conclusions concerning individual taxpayers and to do so on an ongoing basis. Whilst retroactive analysis is a useful tool to assess past periods of taxpayers, the tax authority now focuses its efforts on real time measures. Some interesting discoveries from the past two years include the taxpayer which did not report any economic activities but nonetheless received and shipped large amounts of building materials; the taxpayer who very precisely submitted data to the EKAER system but did not declare any VAT with regard to the supplies made; the taxpayer subject to tax enforcement receiving a high value shipment from the EU—seized immediately ensuring the prompt collection of the unpaid tax; the taxpayer receiving large amounts of building materials at an unreported building site prompting an on-site visit by the tax authority and discovering undeclared workers; or taxpayers who, unbeknownst to them were ordering goods from the EU which should have been subject to an excise permit. There are many more examples. What is evident is that the system is far from only used to combat VAT fraud; but also to collect other taxes.
Thus the EKAER system really seems to be a success story of tax collection. However, from a taxpayer point of view this is not necessarily so. Granted, honest taxpayers welcome the fact that they now do not need to compete as much with dishonest ones. However, this comes at a tremendous cost in terms of administration and the placement of security. Moreover, if a mistake is made (which so often occurs) then the resulting sanctions may mean that the taxpayer is unable to send or receive shipments for some time, effectively forcing some to close down their business.
So, will the EU Commission now request Hungary to abolish this promising system? The Hungarian government certainly wishes it to appear so. However, it is clear that the EU Commission does not request Hungary to abolish the EKAER system; it rather asks that the system comply with the EU VAT rules.
My own view of the EKAER system is that it is a brilliant idea and one which very well fulfils its purpose. In fact, nothing short of a silver bullet when it comes to the fight against VAT fraud. However, much more thought should have gone into its introduction and its current operation. It should place much less burden on taxpayers at the cost of increased administration and sophistication by the tax authority. This would not only ensure compliance with the EU VAT system but would at the same time relieve taxpayers from most of the unnecessary administrative obligations. Clearly, it is difficult to conceive that the same amount of data could be collected with less administrative efforts. Nonetheless, the Hungarian legislator should certainly ask the question whether, for the purpose of combating VAT fraud, they really are in need of such extensive data and such inordinate amount of security? And, whether fines amounting to 40 percent of the value of the goods carried is proportionate with the goals they are trying to achieve?
Let us watch out for a fierce legal battle by the Hungarian government accompanied by even fiercer rhetoric against the new ways in which “Brussels” wishes to “undermine” the Hungarian government. However at the end of the day I am quite certain that a compromise solution will emerge that should also reduce red tape for taxpayers. In any case, the outcome will be watched closely by both the Polish and the Slovakian authorities—as they, too, are in the process of introducing systems very similar to the Hungarian EKAER.
Tamás Fehér is a Senior Tax Lawyer at Jalsovszky, Hungary.
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