VAT Talks with Zsolt Szatmari
In our blogpost series “VAT Talks” we speak with VAT experts from all over the world to learn more about VAT, VAT fraud and everything related to VAT. For this episode we had the honour to speak with Zsolt Szatmari, who is a managing senior of the VAT Knowledge Group at the IBFD. In this episode we discuss the innovative VAT system in Hungary, Zsolt will give advice on how to prevent being held liable for VAT fraud and we learn that VAT has a beauty that not yet has been recognized.
How long have you been working in VAT and how did you end up in this field of work?
“It is very close to a decade now. I ended up in taxation and VAT through university, where I was a student assistant at the department of fiscal law. The accounting firm Ernst & Young organised an event there and I was intrigued by what they were doing. So, I decided to apply to their starters programme and got admitted. While working with Ernst & Young, colleagues suggested to work in VAT, as that work might come closest to what regular lawyers do.”
In our previous ‘VAT Talks’ with Redmar Wolf, hestated that VAT eventually stole his heart, do you feel the same way?
[Laughing] “I think VAT has many levels on how you can deal with it, from the very basic compliance all the way to the most complex litigations. That’s why I think it’s very interesting.”
Your career in VAT started in Hungary. At this moment, Hungary has a relatively advanced and innovative VAT system. Could you tell a little bit more about this VAT system and especially the real-time invoice reporting system?
“The implementation process of that system was actually a pretty long process and a good example of how a government can build up the implementation of such a system.”
“It was implemented in two streams, the first stream was the real-time reporting system for receipts (B2C). This was gradually implemented to tackle the grey and black market industry in restaurant services, taxis etc. The implementation resulted in some very interesting stories as everyone was expecting that suppliers in these industries would mainly see the reporting as an extra burden and that they would absolutely hate it, but there were actually also success stories. For example, a bar-owner was even grateful that the tax auditors came and fined him. The tax authority had noticed, when looking at the data coming from the cash registries, that each day there were 2 hours that no VAT was reported. It turned out that during those two hours, the owner was on his lunch break and that during this lunch break the employees were pocketing the transactions themselves. So overall, there was interesting feedback coming in.”
“The B2B leg required a bit longer build up. First, companies were required to register their invoicing system with the tax authority. So when a company was using invoicing software, they only had to register some basic data about that software. In addition to that there was this thing called ‘domestic sales and purchase listings’ for invoices that exceeded a certain threshold. This system was still not an automated system, it was still something that you had to file together with your VAT return. However, it already was something on a transactional basis, because of course VAT returns only contain summarised information and not invoice related information. From this system, they gradually moved towards more or less real-time reporting. I think they started implementing that in 2017. In that system they basically followed the same thresholds as the ‘domestic sales and purchase listings’, which made some of the information containing the domestic sales and purchase listings no longer necessary. So that information was later on left out. This was the same that Spain was doing with the SII (Sistema de Información Inmediata), they were also leaving out a lot of extra reports there.”
“The Hungarian invoice reporting system only applies, even today, to domestic transactions and transactions that are subject to the standard invoicing mechanism. So, no reverse charge as it would only make sense for a supplier to report an invoice when VAT is applied. The first threshold amount was 1 million Hungarian Forints (~ EUR 2900), then they reduced it to 100.000 Forints (~ EUR 290). So the reporting threshold was gradually brought down. Some are already speculating, and this is not officially communicated yet, that Hungary might actually move to a system where VAT data will be pre-populated with the real-time data that is provided. This would not be unprecedented in Hungary as the personal income tax is already prepared this way. Maybe other transactions will also be implemented in the system, like cross-border ones, then it will be very similar to the Spanish SII.”
“A big advantage that the Hungarian Tax Authority has over the Spanish SII system, is that the SII is a semi-automatic system. There is still a time gap between the transaction and the reporting. In the Hungarian system, if you are issuing an invoice through an invoicing software it is actually real-time reported. However, you still have the possibility to issue invoices with pre-printed invoice forms, these have to be reported through this system within a couple of business days, which is also very quick.”
Are the results of the system already visible in relation to VAT fraud?
“Overall, there was a lot of excitement when the system was introduced, not only from the tax authority but also from the consulting firms as the system would definitely need some fine tuning. In Hungary, VAT is the number one revenue for the state. Whereas personal income tax is 15% and corporate tax is 9%, VAT is 27% which is the highest rate in the EU. Therefore, the vast majority of the audits that are initiated are in one way or another related to VAT, and this system is definitely from the tax authority side a major benefit in performing these audits. They can already receive a lot of red flags, even without going out and starting checking the documentation.”
You mentioned that with the B2C implementation reactions were not that negative as expected, how was the reaction of businesses when invoice reporting became mandatory for B2B transactions as well?
“Well, businesses are always reluctant in making any kind of change. When the whole process started with the ‘domestic sales and purchase listings’ companies were widely dissatisfied. This was something that required manual input from their tax accountants and also meant hiring new people, reshuffling their resources and so on. As it moved more and more towards automation, the main difficulty became that companies had to provide invoices in a specific data structure. This was very similar to the SAFT-T data structure, so it was not completely new, but it still had some differences. A more general problem was that businesses knew that the system was coming, but they only received the very detailed technical rules and methods relatively late. This was mostly a concern about timing. Worth mentioning however is that there was a grace period of a couple of months where tax authorities were not penalising anyone. This made the process a little bit smoother.”
“Furthemore, businesses do adopt. They did receive a lot of support from the authorities and from the consulting firms; for example it is very common that consulting firms are organising events together with the tax authorities.”
Also on a European level measures have been taken to tackle VAT fraud, what are the most important recent measures according to you?
“The quick fixes were in my opinion very useful. Of course, the quick fixes will not solve all issues and maybe even create new ones as well, but they definitely point towards harmonisation. I do think that the rules relating to the chain transactions were very important in this regard. In my opinion more legal clarity also means a bit less room for fraud.”
“Furthermore, there are also a couple of things that are happening in the background, things that businesses do not really see. This was more on the level of tax authorities, a lot of progress was made there, for example regarding joint audits, and an easier flow of information between them. Setting up Eurofisc also really helped tax authorities to cooperate, share best practices and have a forum where they can flag each other about activities that might be fraudulent.”
During crises, VAT has been used often as a fiscal tool. Currently there are countries that are lowering their VAT rates for example. What do you think of this measure and what should be the role of VAT in combating the current economic crisis?
“VAT is a tax on consumption and it’s basically applied on anything we consume on a daily basis. It is very tempting to introduce reduced rates, but there is always the concern that the economic effects for consumers will be quite short as, at the end of the day, the market will be the one determining the gross price and companies can actually just swallow up the additional revenue. Besides, people will always consume and although the consumption levels are uncertain as it has been reduced due to the fact that restaurant, catering companies etc. are suffering, other industries are completely unaffected or even profiting. Think of streaming services for example. On the other hand, less companies will be able to pay corporate taxation and income tax as a lot of companies are declaring bankruptcy and people are losing their jobs. So, I think that VAT has the capacity to be a solid basis for economies to actually be able to provide them fiscal assistance to their own businesses.”
To come back to the crisis, often during crises there is a rise in fraud. Do you foresee a rise in VAT fraud?
“Interesting, I think VAT fraud will be there even with the crisis. I do not really expect that the crisis will actually bring in new types of VAT fraud. I don’t really see that this is the area where VAT will be affected.”
In developing policies to fight VAT fraud, such as the system in Hungary, do you think the aspect of confidentiality has been taken into account?
“Companies are always concerned regarding handing over data, even to the authorities. First of all, they are always bound by the requirements of holding tax secrets, which is something that is actually protected by criminal law. Interestingly, some time ago, the European court of Justice ruled in a Hungarian case related to Glencore. The ruling regarded obtaining data during a tax audit of the Hungarian Tax Authority. So basically the question is, when the tax authority is doing a tax audit on your business, should the data of your business partners also be handed over? This is relevant data, think about pricing information for example.”
“So, I believe companies prefer a system, whether this is electronic or in general procedural rules, of which they are sure that only the tax authority and only those people in the tax authority that are handling their cases will have access to their data and no one else. Especially as we are speaking about invoice data. If that would be exposed, you could see for example that a supplier might be charging different prices for the same goods to different business partners. That it is very sensitive data.”
Would you say the Hungarian invoice reporting system tackles this problem of confidentiality sufficiently?
“I do think it is a very good solution to tackle VAT fraud and to guarantee that tax revenues are being collected. In terms of confidentiality, it seems that until now there has been no data leakage, but of course you never know when that will be coming. At the moment, the Hungarian system is set up in a way that it has a two step verification, so basically businesses need to have two steps of credentials to actually send invoices. And of course, everyone is hoping that this is sufficient security for their data, but you know this is a very core IT security question and I think there are no systems that are completely unbreakable, though we really have to wait and see.”
In our previous episode we spoke about the possibility of being held liable when ending up in a fraudulent value chain, do you also have experience with this in your work?
“This is something I came across before. In Hungary, there are a couple of industries where this issue is even more relevant. Agriculture is one of those for example. Think of major multinational wholesalers that acquire their goods, whether this is grains or any other type of agricultural product, from very small suppliers. To what extent can you verify whether that supplier was even allowed to sell these goods, or to check its background? This is very hard, from a legal perspective. ‘to know, or should have known’ sounds very good, but how can you prove this?”
“Also, what tax authorities normally require from you as a business is that you acquire as much information from your supplier as possible. If you are a big multinational and you are a major player in the industry, then you might have the market power to push your supplier to provide data that they would normally not be willing to provide. If you are a smaller business you might not have this potential. So, it is a difficult situation and it is very difficult to defend these cases in a litigation. At the end of the day the court will make a final decision, but in the meantime you will be dealing with potentially multiple hundreds of pages of court documents that could even read like a proper crime novel.”
What would be your advice for businesses to prevent ending up in this crime novel?
“In Hungary there was a document released by the supreme court where they basically listed all those factors that courts will be taking into account when dealing with such cases. That was a major step for businesses because they finally had an official communication on what kind of things they should be normally taking into account. Indeed, what you can do as a business to mitigate the risk is set up an internal process based on such documents and make a checklist. You could maybe eventually develop an electronic system for this in order to automate this process to the greatest extent possible.”
If you could give one piece of advice to the European Commission, to fight VAT fraud what would be your advice? What should they focus on?
“I would definitely say technology. The European Commision has been focussing on substantive rules and those are very important as well, but I think the Commission realised that they should put even more focus on technological solutions with all the potential difficulties of trying to harmonise the approaches of 27 Member States.”
To conclude, do you have any last words for the reader to enthuse them about VAT?
“I would say just look at the statistics of the OECD and you will see that VAT is definitely on the rise. It is one of those taxes that has an impact on a global level. Therefore, I think VAT has a beauty that has not yet been recognized by most of the tax professionals.”
The International Bureau of Fiscal Documentation (IBFD) offers information and education on international tax. Find out more about the IBFD here: https://www.ibfd.org/.
See for a discussion of reverse charge the previous episode of VAT Talk with Redmar Wolf: https://blog.summitto.com/posts/vat_talks_redmar_wolf/
For a detailed explanation of the quick fixes as provided by the European Commission see: https://ec.europa.eu/taxation_customs/sites/taxation/files/explanatory_notes_2020_quick_fixes_en.pdf
If you’re interested in the ruling see: https://www.vatupdate.com/2019/10/17/ecj-c-189-18-glencore-agriculture-vs-hu-may-tax-authorities-use-findings-of-an-administrative-procedures-to-which-the-taxable-person-was-not-a-party/
The following study gives an insight into the developments of the usage of VAT: https://www.oecd-ilibrary.org/taxation/consumption-tax-trends-2018/countries-with-vat_ctt-2018-7-en