The notion of recoverable VAT by a foreign traveler is not unknown amongst the tax business professionals. In this newsletter we present the conditions and procedures relating to these transactions.
In accordance with the VAT Directive the Act on VAT is including the tax free export sales of sales of goods which were completed by the seller to a foreign traveler and where the goods leave the European Community as a part of the foreign traveler’s personal or registered luggage. The condition of tax exemption of export sales is that the product has to leave the Community within 90 days which is proven by the customs authority.
Who qualifies as a foreign traveler?
Before we start presenting the relevant rules, it should be firstly clarified who considers as a foreign traveler. Foreign traveler can be only natural person who:
- Is not a citizen of any member state of the Community and who has no right of permanent residence in any member state of the Community or
- Is a citizen of any member state of the Community, however his, permanent address is outside the territory of the Community.
The conditions of tax exemption
In order that the exemption can be enforceable, the following conditions must be met together
- The value of the product sold – including VAT – should exceed EUR 175. The threshold should be investigated per invoice, not per product. The limit defined by the law must be converted for the whole year by using the valid exchange rate of the Hungarian National Bank for the preceding year’s first business day of October. Thus, in 2016 the applicable amount is the current exchange rate on 01 October 2015. The amount received shall be rounded to HUF 1,000, therefore the limit defined by the law is HUF 55,000 in 2016.
- The foreign traveler has to certify its legal status, i.e. he is qualified as a foreign traveler, which can be made by a travel document or other valid public document recognized by Hungary for personal identification.
- He should ask an invoice from the seller regarding the purchase and fill in a VAT refund application form, which has to be drawn up in three copies. The data included in the foreign traveler’s personal documents has to be indicated on it. The first two copies of the application form are to be taken by the passenger, one remains at the seller. Separate VAT refund application form has to be filled for all invoices, thus a VAT refund application form can contain the data of only one invoice. The form can be filled in Hungarian, English, German or French. Only the form approved by the tax authority can be used. For using different forms, prior approval of the tax authority is required. The VAT refund application form must be available at the seller.
- The product shall leave the territory of the Community in the foreign traveler’s baggage within 90 days from the date of sale. The fact of the export should be confirmed by the customs authority of the Member State where the traveler leaves the territory of the Community. The presentation of the original sale invoice and the VAT refund application form stamped by the customs authority is necessary for the validity of the confirmation. The second copy of endorsed and stamped VAT refund application form will remain with the acting customs authority.
- Finally, the first copy of the endorsed and stamped VAT refund application form together with the invoice has to be returned by the foreign traveler to the seller.
The validation of tax exemption
There are two ways for the seller to enforce the tax exemption.
1. According to the main rule, it is enforceable indirectly, which means subsequent reimbursement of the VAT to the foreign traveler. This is possible when the foreign traveler returns back his own copy of the invoice and the first copy of the VAT refund application form endorsed and stamped by the customs office to the seller.
In principle, the seller has to reimburse the tax in cash and in currency HUF to the foreign traveler, however, they can agree on a different currency and payment mode.
The invoice, which tax part has been refunded to foreign traveler, must be provided with the “VAT refunded” mark, preventing the repeated tax refund. Before the seller returns the invoice to the foreign traveler, he is obliged to make a photocopy which has to be kept along with the other documents relating to the sale (second copy of the invoice, the first copy of the VAT refund application form endorsed and stamped by the customs authority and the third copy of the VAT refund application form filled by himself).
The VAT of the invoice issued regarding the sale shall be included as payable tax in the VAT return covering the concerning VAT period the sales relates to. After reimbursement of the VAT to the foreign traveler (in possession of the relevant supporting documents), he can decrease the amount of the payable tax in the VAT return for the relevant tax assessment period which shall be entered in the return line 30.
2. Another method is the issuing of VAT exempt invoice by the seller, which can be done on his own risk. Also in this case the foreign traveler should send back the endorsed and stamped VAT refund application form to take effect the exemption. But, if this fails and the seller is subsequently unable to prove that the product has left the Community within 90 days, then it is necessary to modify the VAT return, including the sale within the framework of self-revision and subsequently has to pay the unpaid tax.
Instead of the foreign traveler his representative through proxy can also act in his name and on his behalf. In this case, the person acting must have a written authorization, which shall be provided to the seller.
We hope that you find our summary useful. If you have further questions on the subject, our tax advisors are available at any time.