Taxation of the Automotive Industry: Problems Along the Chain

Banking

The automotive industry plays a significant role in the Hungarian economy; it already contributes more than 10% of GDP and employment, while it is the fastest growing sector.

Márta Siklós, Tax Advisor | Partner, LeitnerLeitner  

The automotive industry plays a significant role in the Hungarian economy; it already contributes more than 10% of GDP and employment, while it is the fastest growing sector. Hungary’s strategic geographical location, highly developed logistics and infrastructure, cost effective and high-level production capability determines the country as a regional distribution center and a service hub for the CEE region. Although the taxation environment in Hungary is also improving, peculiarities within the automotive industry create difficulties. The large number and different types of parts to be used in building a car, the international market, associated with different needs for different areas, the high R&D costs of innovation-intensive production, and supply-on-demand also lead to high inventory costs.

Cost efficiency considerations and improved quality on parts give a raison d’être for vendor tooling (outsourcing). Nevertheless, to avoid being “in the hands of the vendor”, several factors must be considered, such as the location of the vendor, delivery capacity in terms of supply-on-demand, financial arrangements and competitors using the same vendor. The issue of complicated indirect tax implications (cost manufacturing taxation, VAT registration, (self-)invoicing, etc.) and logistics (e.g. EKAER) is also raised. Automotive industrial supply lines regularly create chain transactions for VAT, one of the most difficult situations in this area of taxation. For the proper handling of supply chains, one should pay attention to taxation-determining factors such as legal title to the tools, existence and location of stock for spare parts, use of warehouses, and responsibilities for logistics/transport.

Misinterpreted chains lead to serious difficulties and potential VAT penalties. A wrongly applied exemption or unlawfully deducted VAT can create VAT shortages that are penalized in Hungary by a 50% tax penalty plus interest.Although many do not like to talk about it, the risk of creation of a fixed establishment (for VAT) and of a permanent establishment (for direct taxes) is continuously present in this industry. The typical situations during production leading to potential creation of FE/PE are installation and assembly, technical support (especially in the start-up phase), JIT stocks and partial assembly of parts, and on-site quality checks. Moreover, distribution and financing also creates situations that may link to the risk of FE/PE creation, such as the physical presence and legal obligations of regional importers, and leasing services (passive FE).

The retroactive correction of these situations can be extremely expensive, both in terms of the efforts to clarify the situation, and the penalties to be paid. An existing FE/PE does not only result in additional corporate income, local business- and employment-related taxes, but also changes the place of VAT of the services, and this could be the most burdensome consequence of the mistake.Missing prices at the time of supply, regular price corrections, self-billing, extended warranties, warranty repairs, financing of distributors, various marketing “set-ups” and the VAT treatment of company cars are just the some of the further miscellaneous questions that can create difficulties. Moreover, to turn to the customer financing side in the automotive industry, we are also faced with recurrent taxation problems, as per leasing, the determination of single or multiply supplies (insurance, other services), premature terminations, securing tools, and fuel cards. All-in-all, the list of tax-related problems highlight the importance of necessary care and the involvement of a quality advisor.LeitnerLeitner is one of the most influential advisory firms in CCE in the field of Hungarian and international tax issues.

We offer high quality services to clients across the entire field of VAT, starting with transactional advisory, VAT-planning, supply chain analysis, FE/PE checks and corrections, tax representation, ending with full compliance administration and VAT registration. We also assist in tax allowance optimization, employment taxation, specific and sectoral taxes,
and EKAER.

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