The Hungarian Tax Authority (HTA)  is targeting
public health product tax (NETA)  payers (foreigners too)!

The HTA has been interpreting  legal provisions unchanged for years differently and retroactively.

There is  a brand new trend  concerning the directions of recent tax audits which deserves attention. Previously, when there was a tax audit, VAT was the first thing on everyone's mind. For years, the queen of taxes has been in  absolute pole position in the field of audits, with the right to deduct VAT and the authenticity of the content of the underlying invoices being the central issue. With the introduction of the transfer pricing reporting obligation last year, the audit focus has shifted increasingly from VAT to transfer pricing. While the public health product tax (commonly known as NETA or chips tax) has never been at the top of the popularity list of taxes audited by the HTA, it has recently been increasingly in the focus of the HTA's attention.

A bolt from the blue! Multiplying NETA - audits

In the case of NETA, we are talking about a special tax on a sectorally defined group of economic operators, which has remained fundamentally unchanged for a long and has recently been affected by amendments to emergency legislation. From the outset, the interpretation of the NETA has been surrounded by dilemmas concerning its principles and general legislative purpose. For years, the sector has been monitoring the interpretation of the law by the HTA and the audit practices of the HTA, from which it has been concluded that the NETA obligation can only arise for products suitable for consumption, i.e. wholesale trade in products which are not suitable for consumption by virtue of the form of sale is not subject to NETA. Based on public and non-public interpretations of the law by the HTA, a significant wholesale sector of the concept has been under the belief for years that it does not have to pay NETA, and the related pricing policies have been designed accordingly.

However, based on our tax audit experience, the winds have been blowing differently at the HTA lately. It seems that the tax authorities' attention is specifically focused on NETA and that auditors see more and more fantasy in the retroactive collection of NETA.

An entire sector affected by retroactive changes in interpretation 

The HTA has recently changed its interpretation of the definition of pre-packaging in the Neta Act. The text of the law has not been amended in this respect for years. The change may affect an entire industry (basically wholesale sellers and distributors of pre-packaged products such as mustard, ketchup, marzipan, jam, other bakery and confectionery products), given that the interpretation of the law may change retroactively due to a change in the text of an information booklet available on the HTA’s website. In our experience, the HTA is asking the taxpayers concerned to pay the tax retroactively, which may raise questions of constitutionality and fundamental rights.

The essence of the problem - life before and after the change in legal interpretation

In the case of products sold to industrial users in bags and buckets not suitable for consumption, based on the interpretation of the law available on the Tax Authority's website until 2019, individual official positions and unanimous industry practice, no NETA obligation arose until 2022, so this cost was not taken into account during the determination of the sales price.

In mid-2022, some market players - presumably on the basis of individual regulatory decisions - started to include NETA in their prices, in contrast to previous practice, while others - companies in the same sales position - continued to ignore it in their pricing. Market practice has therefore started to diverge. As a result, market players started to request the HTA to clarify the compliant way of the application of the rules.

In December 2022, the Tax Authority published a non-binding information booklet on its website, which contains a significantly different interpretation of the law, according to which a NETA obligation may also apply if the products are sold to industrial users in bulk for consumption, even if they meet all other conditions of the NETA obligation.

Thus, before the change in interpretation, it appeared that the NETA liability did not arise if the goods otherwise met the preconditions for tax liability in all respects were sold in a non-consumable form, but after the change it appeared that the form of sale was not of such cardinal importance and the liability would still arise.

The above change will affect not only foreign taxpayers in Hungary but also foreign taxpayers who perform cross-border supplies from abroad.

What can those affected expect?

Increased HTA audits . The retroactive change in interpretation has caused confusion in the market, with some operators reacting to the change and others leaving their previous practices unchanged.

Based on our experience, the HTA acts as if the changed interpretation of the law has always been the correct and public interpretation of the law, so it launches legal compliance investigations, during which it carries out spot checks. Accordingly, in the scope of the investigations the HTA request the taxpayers to self-revise and pay NETA retroactively.

It is no wonder that the HTA sees fantasy in this approach, as it involves significant items at the budgetary level. Inspections are sporadic for the time being, but since we are talking about a sectoral phenomenon and the HTA cannot discriminate against certain operators in a disadvantaged position, all operators in the sector can expect to be visited by the inspectors.

The potential retroactive tax liability can put a significant strain on the company budget, so it is worth thinking through the audit strategy and considering the different scenarios in advance.

Special expertise is needed to deal with the HTA, to prepare declarations and appeals. If you have such questions, please contact the tax lawyers at VGD Hungary who are experienced in tax representation.

Are you subject to NETA? We can help you with this:

• NETA registration for foreigners;
• NETA liability assessment;
• NETA compliance;
• Preparing non-binding ruling requests;
• Expert support during the HTA procedures such as compliance investigations and tax audits;
• Liaising with the authorities;
• Tax representation;
• Assisting in litigation and other legal redress procedures.

24 April, 2024.

Should you have any questions as regards about it,
the tax experts of VGD Hungary will be pleased to assist you.

This newsletter provides general information and does not constitute tax advice.