The VAT content also depends on the entity on behalf of which the cost is incurred
As regards the reallocation of costs, one of the most important topics to clarify is the entity that ordered the service or product sale to be passed on to a business partner, or the one on behalf of which the cost was incurred.
Let us look at an example. One of our domestic customers incurred customs, warehousing, and shipping costs which the company wanted to pass on to the foreign parent company. We checked on whose behalf these costs were incurred, i.e. the entity that would have been responsible for the import, then storage and delivery of the product based on the relationship between the parties under the civil law.
It turned out that the imported, stored and then shipped product was owned by the foreign parent, instead of the Hungarian company. This means that, if the correct scenario was followed, customs clearance should have been requested on behalf of the foreign company (in terms of the VAT, they would import the product, and the customs ruling would also be issued for their name, assuming direct customs representation). If they would later store the product and then sold it domestically, and arrange for the necessary shipping too, these all would be arranged on behalf of the owner of the product, i.e. the foreign company. This also means that the foreign company would contract with the customs agent, the warehouse keeper, and the carrier, they would be the customer of these services, i.e. the invoice for these services would be issued in the name of the foreign company. Moreover, the foreign company would most probably be required to apply for a Hungarian tax number too, if the imported product were to be sold domestically.
After all these, how could the customs clearance, warehousing, and shipping costs have been incurred by the Hungarian company? There can be multiple reasons, depending on the given situation, whereby it is important to know what happened in that situation. Let us look at some cases.
The company acts for and on behalf of another company when making the order, and receives a fee for such service. What about the VAT?
One possibility is that the foreign company asks the Hungarian affiliate to pay the customs, warehousing, and shipping costs for them, setting out that they reimburse the same later.
In this case, although contracts and invoices clearly arise between the Hungarian service provider and the foreign company, the cash flow fails to follow this path. The Hungarian company pays the invoices for and on behalf (and instead) of the foreign company and then collects the money from the foreign affiliate. In this case, it is not necessary to issue an invoice under the VAT Act to the foreign company for the reallocation of costs, but accounting documents suffice. Neither the amount paid nor the amount reallocated needs to be included in the return, given that neither the cost nor the revenue occurs for the name of the Hungarian company. The service provider must issue an invoice for customs clearance, warehousing, and shipping to the foreign customer exclusive of VAT, even if the invoice was paid by the Hungarian company.
In this scenario, it is another question why the Hungarian company has chosen to pay these costs for the foreign company, and if they have received any commission or interest for this. If contact had to be maintained with the Hungarian customs agent, the customs authorities, the warehouse keeper, or the carrier, was any special fee received from the foreign parent company for such liaisons? If so, was this a fair market fee?
Did the company act in its own name but on behalf of another entity when placing the orders?
In the other scenario, the Hungarian company enters into contracts with the customs agent, the warehouse keeper, and the carrier, and orders these services in their own name, but for the benefit of their foreign parent. In this case, the Hungarian customs agent, warehouse keeper, and carrier have to issue the invoice to the Hungarian company, including the Hungarian VAT. The Hungarian company can include this cost in their own tax return and deduct the VAT content. Then this cost, if invoiced independently, must be reallocated to the foreign parent company via invoicing, although the invoice must be issued for a transaction outside the scope of VAT, which must also be included in the return.
It is important that this option only works if the contracts have been entered between the customs agent/warehouse keeper/carrier and the Hungarian company. On the other hand, if the contracts were entered in the name of the foreign company, then the customs agent/warehouse keeper/carrier may not issue invoices to the Hungarian company; these must be issued to the foreign parent company. As regards the invoice recipients, if the Hungarian company receives an invoice with VAT content from the Hungarian customs agent/warehouse keeper/carrier without a contract with them, the deduction of the VAT involves risks. In this case, the Hungarian Tax Authority would have a reason to claim that the VAT could not be deducted because the Hungarian company did not use the service for its own business activities.
Instead of a one-off claim, the Hungarian company could also reclaim this cost as part of a regularly recurring settlement arrangement, which would cause the customs agency, warehousing, and shipping services to lose their independent status and merge into a bigger service. – What is certain is that the Hungarian company has to pass on costs to the foreign parent company via invoices issued in line with the VAT Act, whether it is about one-off invoicing or merging into a bigger service.
From VAT aspects, there are still many scenarios
The Hungarian company may requests customs clearance too in their own name. In this case, the customs authority issues the customs ruling for the name of the Hungarian company, and the import tax must also be paid in their own name. However, this case is problematic, since the owner of the imported product is a foreign company, while the customs ruling is issued for the name of the Hungarian company. There may be a risk here that the Hungarian company cannot deduct the VAT included in the import ruling, as the imported product is not owned by them, but by the foreign company. Thus, the tax authority has good reason to claim that the import tax has not been incurred as part of their own business activity, so they cannot deduct it either.
If the costs arise for the name of the Hungarian company, they cannot pass them on but in their own name. In this case, further questions arise: will the Hungarian company pass on these costs with or without a markup? If the markup is applied, is it a fair market one?
What if it turns out that the foreign parent company had transferred the product to the Hungarian company prior to the import? In this case, the Hungarian company must have a proforma invoice allowing them to prove that the product now forms their property. In this case, the import customs ruling and the invoice for the customs agency/warehousing/shipping fee may be issued for the name of the Hungarian company, while the invoice for the sale must be issued by the Hungarian company to their customer, and the foreign company can escape the Hungarian VAT registration. If this is the case, it is important to make sure that the contracts between the parties actually reflect the said facts, the invoices are aligned to the contracts, they have been issued correctly, etc. Let us keep in mind the future of the shipping cost too: if the imported product is actually sold by the foreign company, which also transports it to the buyer, they will also pass on the shipping cost as part of this sale.
As you may see, it is not the least negligible, as regards cost reallocations, who such costs are incurred by, i.e. for whose name they should incur, in the light of the contractual relationships. This is what determines, at least partly, the entity for whose name an incoming invoice should be issued, and who may deduct the VAT content, provided that it can be deducted at all. It is very important to keep contractual relationships and invoicing synchronized. It is important to consider who the contract has been entered and actually performed between; although these are not always easy to determine, they must be checked in all cases, as these will partly also determine how the relevant costs can be reallocated.
It is worth reviewing intra-company connections, as bad practices involve VAT risks, which can be corrected via a self-audit before they give rise to a tax penalty.
