Will foreign suppliers be at a competitive disadvantage due to the introduction of EPR-system in Hungary?

The deadline for the EPR declaration is approaching!

Our experience shows that a significant number of companies are not yet fully prepared to cope with the obligations of the Extended Producer Responsibility (EPR) fee, with many companies having a wake-up call only at the last minute. The deadline for the first EPR reporting obligation (20 October) is now close and it should also be borne in mind that the introduction of the EPR obligation will change the current practice of environmental product charge reporting. The new system, introduced on 1 July, presents considerable challenges for stakeholders, both from a financial and administrative point of view: many are struggling with registration or getting the registration system right, while many companies are not even aware of their involvement. Those who wake up late still have less than two weeks to be prepared, while those who fail to comply with their reporting obligations on time will have to face possible fines!

Why is the EPR problematic for foreign companies selling domestically and Hungarian businesses sourcing from abroad?

The EPR applies to all companies operating in Hungary on equal terms, but the definition of the scope of the obligation may indirectly disadvantage those selling from abroad. The obligated parties include companies which are the first domestic distributors of products subject to the charge. This means that, where a foreign supplier is used, domestic purchasers are liable to pay the EPR fee, provided that they are the first domestic distributor of the product and are not subject to exemption rules.

In addition to the increased financial impact, this represents a significant additional administrative burden for companies that purchase chargeable products from abroad.  As the EPR fee is built into the price, it is largely irrelevant to the buyer whether he pays it to the supplier or to the MOHU, but the significant administrative burden involved, as well as the potential fines and "tax" risks, make it quite important whether the goods subject to the fee are purchased from a Hungarian or a foreign supplier. In the former case, the supplier is responsible for the payment of the fee and the related administrative burden, and thus the risk, whereas in cross-border purchases the first domestic purchaser/seller is responsible for those.

The EPR obligation is strongly influenced by the position in the supply chain, namely whether a domestic firm has a domestic or foreign supplier. In addition, a conflict of interest may arise between the buyer and the seller as a result of the introduction of the EPR system: domestic buyers obviously want to reduce their risk and administrative burden, while foreign suppliers want to maintain, and possibly further strengthen their existing market positions. The introduction of the EPR in the domestic market will therefore lead both sellers and buyers involved in cross-border sales to consider how to minimise costs and risks by restructuring their supply chain and logistics processes, while foreign sellers will need to consider strategies to maintain/improve their existing position in the supply chain and market position.

Aspects to consider, possible solutions

The restructuring of supply chains will obviously lead to changes in contractual relations and logistics processes, but for foreign suppliers this process may also involve organisational changes (e.g. tax registration in Hungary or establishment of a business establishment - e.g. branch or company formation, etc.). As all of the above changes will generate more or less additional costs, it is essential to weigh up the investment against the benefits to be gained on a cost-benefit basis.

Obviously, the right answer to these questions can only be given on a specific case-by-case basis, taking into account all the circumstances of the case, but it can be generally stated that VAT registration in Hungary, possibly a branch or the establishment of a company, could be a solution for many foreign companies in this situation.

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If you have any further questions regarding the information in this newsletter, please do not hesitate to contact our tax experts.

12th of October 2023