INCOTERMS CLAUSE „DDP” AND THE HUNGARIAN VAT SYSTEM

The International Chamber of Commerce (ICC) has issued the International Commercial Terms (Incoterms), which says in its edition dated 2000: “Delivered duty paid” (DDP) means that the seller delivers the goods to the buyer, cleared for import … The seller has to bear … any “duty” (which terms includes the responsibility for and the risk of the carrying out of customs formalities and the payment of formalities, customs duties, taxes and other charges) for import in the country of destination.

The question is how the seller can fulfil its above obligation in respect of the Hungarian Value Added Tax. The main problem in this respect is the reclaim of the VAT by the debtor being in charge of paying the customs duty and taxes (considering that otherwise the VAT – 20% in Hungary in most of the cases – would become part of the expenses).

  1. The easiest solution is when the importer makes the import clearance in its own name, pays the import duty and the taxes. The importer invoices the amount of the import duty to the exporter who pays it to the importer. If the importer is subject to VAT reclaim in Hungary, it reclaims the import duty (deducts it from the payable duty amount in its – regularly – monthly VAT report).
  2. Another easy solution is when the exporter has a legal entity, registered at the Hungarian tax authority. This case the exporter’s above legal entity acts as the importer, pays the import duty and the taxes, and after it reclaims the import VAT. Obviously, this legal entity, registered in Hungary, should sell the imported goods to the buyer.
  3. The exporter may appoint a commission merchant in Hungary, a company registered in Hungary. The commission merchant is a kind of trader who acts in its own name but for the sake of its principal (this case the exporter). The commission merchant makes the import declaration, acts as the declarant and the debtor of the import clearance, and pays the customs duty and the taxes – Hungarian Act No 127 from 2007 – further on VAT Act - Article 145 (1). Then it collects the customs duty from its principal, the exporter. The commission merchant sells the cleared (released for free circulation) goods to the buyer in Hungary (this sale is subject to regular VAT), and this way it can reclaim the paid import duty (VAT Act Article 120 c)), practically deducting the import VAT from the payable one in its – regularly – monthly report.
  4. In case the exporter not only sells a machinery, but it is its obligation to mount and/or assemble it (VAT ACT – Article 32) in Hungary, and the exporter has no other sales activity in Hungary – VAT Act Article 244 (1) b) – than the exporter is allowed to reclaim the import VAT (VAT Act Articles 245 – 246). It is possible for exporters
  5. Registered in any member state of the European Community, or
  6. Registered in a 3rd country (not a member of the EU), which has a reciprocal solution for Hungarian companies. The minimum amount of the reclaim is EUR 25. Above EUR 200, the application for the reclaim can be delivered to the Hungarian tax authority quarterly (VAT Act Article 249). The exporter must appoint a Hungarian fiscal representative (VAT Act Article 148 (2)). Fiscal representative can be any Hungarian legal entity (Hungarian Act No 92 from 2003, Article 9 (2)), which
  7. Has a registered capital of 50 million HUF or a bank guarantee for the same amount
  8. Has no debts at the Hungarian tax authority.

I have to add, that according to Article 139 of the VAT Act, the national VAT on the sale of the mounted/assembled machinery should be paid by the buyer.

Let me mention a special solution, which can be part of any of the above points. Any declarant may appoint an indirect representative, representing it during the customs procedure. The indirect representative is a debtor, too, practically it is the indirect representative, who gets the customs decision and pays the customs duty and the taxes. The customs duty is then usually paid by the principal of the indirect representative. The import VAT issue can be solved in the following ways:

  1. The indirect representative gives a declaration to the principal, stating that it has paid the import VAT. Based on this declaration and on the customs decision, the import VAT can be reclaimed (deducted) by the principal (VAT Act Article 127 ca)).
  2. If the principal has the right to reclaim (deduct) the import VAT and gives a declaration about it to the indirect representative, then it is the indirect representative who can reclaim (deduct) the import VAT (VAT Act Article 129). In this case the indirect representative paid and reclaimed the import VAT, the only question is the financing of this amount.
  3. As each Hungarian company fulfilling certain conditions, as well as the indirect representative can get a special customs authorisation of self taxation of the import VAT, as per Articles 156 – 157 of the VAT Act. Self taxation means in this respect that customs do not impose import VAT to the debtor, which has the obligation to put the import VAT into its monthly VAT report as payable amount, but at the same time it has the right to deduct it immediately. The result is practically no payment of the customs duty. The conditions of such an authorisation are very strict, that is why only very few customs representatives can be found, having the self taxation authorisation.

Budapest, 6th July 2008

/:Tamas Nietsch:/

Expert of foreign trading