Tax audits and the system of legal effects in the new excise tax legislation

Rules concerning tax audits and the legal effects in the new excise tax legislation, i.e. Act
LXVIII of 2016 on Excise Tax (hereinafter referred to as ETL) and of the Implementing
Regulation No. 45/2016 (XI.29.) of the Ministry of National Economy on Certain
Provisions of ETL (hereinafter referred to as IR) enter into force on 1 July 2017.

Tax audits

Provisions concerning tax audits and legal effects are laid down in Chapter IX. of ETL,
more specifically sections 96-98 refer to tax audits. Compared to the earlier regulation,
the legislative text has become much simpler. Provisions concerning authorisations has
been eliminated and moved, in the interim, into Act CXXII of 2010 on the National Tax
and Customs Administration (sections 35-36 refer to the rights of finance guards to take
on-site actions as law enforcement officers).

The legislator has applied a coherent approach to excise audits and eliminated the
concept of authority supervision. The audit of taxpayers engaged in activities in
connection with excisable products under tax suspension is now qualified as excise tax
audit. Audits to be carried out before disbursement - which otherwise do not give rise to
qualify as type of re-audit of previously audited tax periods with regard to excise tax –
are eliminated. In the future, these audits may be carried out on the basis of the general
audit rules, in the framework of audits qualifying as re-audits of previously audited tax
periods as stipulated in the Act XCII of 2003 on the Rules of Taxation (hereinafter
referred to as RTL).

Main features of excise tax audits:

- examine the legal conditions of rights exercised and obligations fulfilled as
determined in ETL and IR,
- do not give rise to qualifying as re-audit of previously audited tax period,
- the provisions of RTL are applicable,
- may be carried out by finance guards after presenting their official identification
document (it qualifies as general letter of authorisation in the case of finance
guards) to the taxpayer,
- the applicable rules of RTL for taxpayers are also applicable for entities audited
on the basis of ETL,
- holder of an excisable product must be able to supply satisfactory proof of the
origin and of the lawful possession of the excisable product (strict liability).

From the above it is clear that framework rules of tax audits are stipulated in RTL.

Rules concerning documentation of audits

If an on-site inspection during transportation of an excisable product does not detect

any law infringement, it is only upon request of the inspected entity that an official
report thereof must be made. In the absence of such a report, the state tax and customs
authority records the fact of inspection on the accompanying documents.
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Data mandatorily supplied by the taxpayers to the state tax and customs authority as
well as those recorded in the IT system of the European Union (a computerised system
for monitoring the movement of excisable goods under tax/duty suspension in the EU)
are continuously monitored and analysed by the state tax and customs authority
without any specific need to order an audit. In this regard, about controls of no
infringement detection, the authority does not make any report and the taxpayers are
not informed.

Otherwise, about excise controls of no infringement detection, the state tax and customs
authority makes a simplified report. The purpose of (and an expectation towards)
simplification is to reduce the time spent on administering audits. This is a mutual
interest of both the authority and the audited customer. A simplified report servers the
purpose of recording the relevant facts of a case in the easiest and quickest way possible.

Special types of audit

- carried out with continuous presence and inspection,
- make continuous inspection possible through the installation of technical
equipment,
- require additional data supply,
- create an obligation to register with the state tax and customs authority prior to
the commencement of a certain activity,
- create a joint obligation of preliminary registration by the taxpayer and for the
state tax and customs authority to be present.

Common rules of special types of audits are that they are initiated with an
administrative decision, their duration, as a rule, may not exceed 1 year in the case of an
authorised tax warehouse operator, and 3 months in the case of any other licenced,
registered taxpayer. The audited entity is obliged to cooperate with the authority; the
conditions of the audit must be secured by the entity. With the installation of technical
equipment, the audit may be carried out without any limitation.

It is worth providing further clarification of audits carried out with the use of technical
equipment, as the method thereof is not specified by the legislator so that future
innovative approaches shall not be limited. Technical equipment may be provided by the
audited entity as well. This provision opens up future possibilities of using explosively
developing IT infrastructures and tools, while the objective to safeguard tax revenues is
met by saving human resources of both the authority and the audited entity. In the case
of a factory this may be achieved through the installation of innovative production units,
or by setting up streaming video recorders to check warehouses and their gates where
stocks are released, or by supplying real time data of status indicators of a network of
production units. It is only the technological possibilities and human creativity that can
limit the application of the law. Common thinking and continuous dialogue with our
customers may be of utmost help to make best use of such innovations.

Inspection of goods sold by mail order

Compared to the earlier regulation, there is no major change in this regard. In order to
monitor the fulfilment of tax payment obligations, the state tax and customs authority
may screen any consignments or examine them by any appropriate means in the
package processing facilities of the postal service provider or at the premises of the
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courier or express mail delivery service without opening the packages. If – based on the
inspection – such packages are suspected to contain untaxed excisable goods, the state
tax and customs authority has to power to withhold and open the packages.

If the package shipment opened contains no – or only partially – untaxed excisable

goods, the state tax and customs authority shall repack the shipment or the other non-
excise content thereof, and return it to the consignee or consignor, or their legal
representative along with the report on the opening of the consignment.

Stock records, stock-taking

Provisions concerning stock-taking are stipulated among the general rules for
registered/licenced taxpayers in Section 17 of the Act, although stocks are mainly taken
in the framework of audits. Authorised tax warehouse operators, registered traders and
end users shall keep track of their stock of excisable products by stock-taking. The
closing stock of the accounting period shall be adjusted with the difference between the
result of stock-taking and that of the actual stocks on record.

Times of stock-taking are the following

- annual, on the last date of the actual year or on the balance sheet date of the
business year in the case of business entities subject to the Act on Accounting,
- date of repeal, revocation of a licence,
- date of inspection, audit if stock-taking is initiated by the state tax and customs
authority,
- bi-annual, quarterly or monthly as opted for by the customer (optional stock-
taking).

Stock-taking initiated by the customer (licenced entity) shall be reported to the state tax
and customs authority 3 days before the actual action commences. The authority is
obliged to participate in the stock-taking process of the authorised tax warehouse
operator, except for his/her optional stock-taking. In all other cases, the authority may
decide whether it wishes to participate or not.

Stock-taking is based on a stock declaration of the authorised tax warehouse operator.

The mandatory data content of such a declaration is laid down in Section 14 of IR. The
process of stock-taking has not changed as result of the new regulation.

Audit of filling stations

In order to examine the origin of fuel sold at filling stations it is necessary to assess the
quantity of fuel handled during the period of examination (assessment of fuel turnover).
In such cases, again, the customer has to submit a stock declaration, although this type of
inspection does not qualify as stock-taking.

Legal effects

Provisions concerning legal effects are laid down in sections 99-107 of ETL.

Penalty changes
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ETL has changed the earlier threefold system of penalties. Instead of excise, default and
tax penalty it is now only excise penalty that is applicable in case of violation of the law.
At the same time, ETL prohibits the application of the provisions of ART on tax penalty,
default penalty and tax relief for all excise proceedings. This means that – as opposed to
the earlier practice – excise penalty shall be levied following a tax inspection as well. For
excise penalties, with the exception of itemised penalties, the provisions of ART on
adjustment of tax and default penalty ceilings as per trusted or risk taxpayer categories
and on the imposition thereof shall be applied.

Penalty amounts
The amount of excise penalty may range from the payment of double or five-times the
penalty base, i.e. the financial loss caused to the central budget, but it shall be at least
HUF 30,000. It is clearly visible that – instead of directly applying rigid and fixed penalty
amounts – the legislator has granted wider discretionary power to the state tax and
customs authority so that it can sanction violations of rules according to their
seriousness.

Financial loss caused to the central budget through infringement of obligations laid
down in ETL and IR is tax loss and unjustified claim for tax refund. An excise penalty of
up to HUF 300,000 and HUF 750,000 may be imposed, respectively, upon natural
persons and business associations in the case of infringements causing no financial loss,
and where no itemised penalties have been imposed.

If a registered trader is involved in commercial activities subject to excise licensing and

the products he sells have been taxed with certainty, however the trader has no excise
license, the base for the excise penalty to be imposed shall be calculated by multiplying
the amount of excise security specified by this Act for the excise license required for the
products held by trader by the number of days the trader has conducted his activities
without license until the date when the penalty is imposed. The excise penalty shall be
calculated as multiplying the penalty base by 1/365 of double the current central bank
base rate, or minimum HUF 500,000.

In the case of violation of rules on the storage, importation and/or supply of cured
tobacco or fermented tobacco, an excise penalty of HUF 100,000 per kilogram may be
imposed. The excise penalty shall be HUF 3,000 per liter or kilogram, or minimum HUF
100,000, for the illegal production and/or possession of sugar mash (i.e. outside a tax
warehouse).

Rules of penalty reduction and cancellation

Under special and equitable circumstances, the amount of excise penalty may be
reduced or cancelled ex officio or upon request.

Cancellation of excise penalty is applicable if it is evident from the circumstances that

offender entity has acted with due care in the given circumstances. All circumstances of
a case shall be taken into consideration when reducing an excise penalty, particularly
the product involved in any irregularity, the quantity of forged, counterfeit or illegally
obtained excise seals and official seals, the volume of financial loss caused to the central
budget, the conditions and background of its occurrence, and the gravity and frequency
of the taxpayer’s unlawful conduct (commission or omission). The above rules are all the
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more flexible and allow the assessment of penalties be adjusted to the gravity of
infringement and the circumstances thereof, as under special and equitable
circumstances the penalty may even be cancelled.

Accelerated procedure
In connection with any unlawful act where according to the findings of an excise control
procedure, the value of the products under tax evasion is not more than HUF 20,000 – in
case of tobacco products – HUF 28,000, the authority conducting the inspection may
employ the accelerated procedure and impose and collect a penalty on location. In such
a case, the products under tax evasion shall be seized and confiscated if the holder or
supplier of the products admits to the infringement, acknowledges receipt of the
information concerning legal consequences and waives his right to remedy. In the
course of an accelerated procedure the amount of excise penalty is HUF 20,000 and – for
tobacco products – HUF 28,000. If the accelerated procedure cannot be employed, the
authority conducting the inspection shall proceed according to the general rules.
The increased threshold amount of HUF 28,000 in the case of tobacco products is
justified by the fact that – as per ETL – that penalty base also includes the VAT amount of
these products.

Closing down the premises

If a person involved in commercial activities with excisable goods – commercial
activities performed in free circulation as per ETL – violates the regulations, he/she shall
be subject to the sanction laid down in RTL, i.e. the commercial establishment or
premises affected shall be closed down by the customs authority. The commercial
establishment or premises may be closed down for twelve business days after the first
offense, for thirty business days after the second offense and for sixty business days
after all subsequent offenses for any infringement of the relevant provisions. As opposed
to the earlier regulations, it is not the specific duration of the close down that is laid
down by the legislator, but the maximum applicable duration thereof. Just for the sake of
clarity, the commercial establishment or premises may also be closed down for four
business days after the first offense, for ten business days after the second offense and
for twenty business days after the third offense.

The provisions pertaining to repeat offenses shall not apply where the same type of
infringement is committed or identified two years apart. This measure (close down of
commercial establishment or premises) may not be applied if the quantity of beer, pearl
wine and other type of fermented pearl drinks, intermediate alcoholic products or
alcoholic products in respect of which the offense was committed remains less than 10
liters. By this provision the legislator wishes to ensure that such a rigorous sanction
shall not be applicable for unlawful activities of minor nature.

Seizure and confiscation

As compared to the earlier regulation, provisions concerning seizure and confiscation
have not changed significantly. The most important ones are the following.

In the course of its excise proceedings, the state tax and customs authority may order
seizure of anything – except for live animals – for the conclusion of facts and in order to
enforce confiscation. The customs authority shall order seizure by way of a ruling. The
client shall have the right to lodge a complaint against such ruling alleging infringement
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of the law. The lodgement shall be presented within eight days of the date when the
ruling was delivered to the relevant customs authority. The compliant will be heard by
the body of the customs authority of the second instance within fifteen days of the date
of submission. The seizure shall be carried out irrespective of the compliant.

The costs incurred in connection with the transportation, storage and safeguarding of
seized products shall be borne by the client if condemned to pay an excise penalty by
final decision. If no excise penalty is imposed, the said costs shall be borne by the state.
The state tax and customs authority shall transport and safeguard the seized
products/things, or – if this incurred disproportionately high costs –, it may leave the
seized products/things with the customer, at the same time forbidding the right of use
or sale of the seized products/things.

Seized products shall be confiscated if

a) an excise penalty is imposed by final decision in the respective excise case, or
if the state tax and customs authority elected not to impose an excise penalty
pursuant to special and equitable circumstances, particularly if payment
thereof would make it impossible for the affected private individual, legal
person or organization to conduct business operations,
b) they have been altered with the intent to commit any unlawful act pertaining
to excise regulations.

The consideration received from the sale of confiscated goods and means in a
preliminary action shall supersede the confiscated goods and means. Where, by decision
of the state tax and customs authority or the court, any confiscated or seized goods or
means that have been destroyed, transferred or consumed are to be restored to its
original holder and the value of the goods or means at the time of seizure shall be
reimbursed with interest based on the prevailing central bank base rate.

Other penalty in case of infringing private distillation rules

The municipal tax authority calls natural persons who largely comply with the relevant
rules, but produce distillates without reporting the private distiller’s distillation
equipment to the authority or without obtaining official seals or by providing unrealistic
data to the authority that aims to determine whether the distillation equipment is
rightfully possessed to fulfil their tax liability within 15 days of receipt of the call. If the
natural person does not fulfil his/her obligation upon call until the given deadline, a
penalty of maximum HUF 200,000 shall be imposed by the municipal tax authority.

Excise penalty to be paid by the contract distillation customer

The tax on distillates produced in a tax warehouse for the contract distillation customer
is assessed and collected by the authorised tax warehouse operator from the contract
distillation customer until the moment of delivering the distillates to the contract
distillation customer. The contract distillation customer shall make the payment of the
tax on the delivered distillates to the tax warehouse in cash or by bank transfer until the
very moment of delivery by the authorised tax warehouse operator. Should the contract
distillation customer fail to fulfil this tax obligation of him/her, the produced distillate
may not be released to him/her. The uncollectable tax from the contract distillation
customer shall be paid by the authorised tax warehouse operator. If, however, the
amount of tax has been erroneously assessed by the authorised tax warehouse operator
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due to false information provided by the contract distillation customer, the tax
difference is payable by the contract distillation customer along with the tax penalty in
the same amount.

National Tax and Customs Administration