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 2020 at the Explanatory Notes for DDP clause: “… DDP requires the seller to clear the goods … ,where applicable, as well as for import and to pay any import duty or to carry out any customs formalities. … There may be tax implications and this tax may not be recoverable from the buyer ...”
The question is how the seller can fulfil its above obligation in respect of the Hungarian Value Added Tax. The main problem is the reclaim of the VAT by the debtor being in charge of paying the customs duty and taxes (considering that otherwise the VAT – 27% in Hungary in most of the cases – would become part of the expenses).
- The easiest solution is when the importer makes the import clearance in its own name, pays the import duty and the taxes. The importer charges the amount of the import duty to the exporter who pays it to the importer. The importer has the right to reclaim VAT in Hungary (deducts it from the payable VAT amount in its monthly VAT report).
- 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. Consequently, an intercompany sale of the goods, between the exporter and its HU legal entity would be required – so other taxation issues should be considered, too.
- The exporter may appoint a commission merchant, a company registered in Hungary as per the Article 6:281. of the Hungarian Act No. 5 from 2013. The commission merchant is a kind of trader which 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 VAT (VAT Act Article 120 ca) or cb)), practically deducting the import VAT from the payable one in its monthly report.
It is worth mentioning 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 to its indirect representative. The import VAT issue can be solved in the following ways:
- 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)).
- 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.
- As each Hungarian company which meets 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. The latter 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 import VAT. The conditions of such an authorisation are very strict, that is why not all customs representatives work with this solution.
In respect of your questions related to DDP and in general to the INCOTERMS clauses, please feel free to turning to us.
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