It is only a few weeks until Christmas and the end of the year. What does this mean for CbCR (country-by-country reporting) and the related reporting obligation?
Another year has passed, yet 31 December 2017 does not seem that long ago: it was the first deadline for businesses to prepare their country-by-country reports based on Point 13 of the BEPS (base erosion and profit shifting) action plan, and to fulfil their reporting obligations. With 2018 drawing to a close this topic is becoming relevant again, so it is useful to freshen our memories and prepare for the tasks ahead.
CbCR – who has to prepare the reports?
Nothing has changed since last year in that it is essentially the members of multinational groups qualifying as the ultimate parent company that are responsible for CbCR, i.e. country-by-country reporting (data reporting). However, a multinational group is exempted from the country-by-country reporting obligation if its consolidated annual revenues fall short of EUR 750 million in the financial year preceding the financial year for which the data is reported.
In which cases should Hungarian group members submit their country-by-country reports?
As a general rule, Hungarian companies have to submit a CbCR if they qualify as the ultimate parent company of a multinational group. In certain cases, even if the Hungarian-resident group member does not qualify as an ultimate parent company, it may still be the one subject to CbCR. For example, if a company qualifying as the ultimate parent company is not obliged to submit a CbCR in their country of tax residency, or if they are obliged but Hungary does not have an effective agreement on the exchange of information with the given county, and the multinational group does not have a member meeting all the group’s CbCR obligations for the financial year for which data needs to be reported in respect of all group members with European Union tax residency; or more than one group member has tax residency in the European Union, but the multinational group designated the Hungarian member to fulfil the country-by-country reporting obligation.
When should the country-by-country report be submitted by?
An entity required to report data must fulfil its CbCR obligation vis-à-vis the state tax authority within 12 months of the last day of the group’s financial year for which data is reported. This rule applies in the same way to ultimate parent companies and to the Hungarian members designated for CbCR reporting. In this latter case, a transitional rule means that data must be first reported on financial years starting on or after 1 January 2017 for which data is provided. At companies whose financial year is the calendar year, this means that the Hungarian group member – as an entity obliged to report data – must first submit a CbCR by 31 December 2018.
Apart from the ultimate parent company of the multinational group fulfilling its country-by-country reporting obligation, Hungarian-resident group members have data reporting obligations too. This is necessary to ensure that the tax authority is notified of the ultimate parent company, designated parent company or group member status of the Hungarian-resident group member in the multinational group, or the lack thereof, and the identity of the organisation obliged to provide data in respect of the country-by-country report (besides reporting the affected companies’ names, registered offices, tax numbers and financial years).
Hungarian group members affected first had to meet their reporting obligation by 31 December 2017 for the 2016 and 2017 financial years on which the data was reported. If the data reporting obligation is unchanged for the 2018 financial year, the question arises whether it is necessary for the Hungarian group member to submit another report by 31 December 2018 if nothing has changed. The current positions of the Ministry of Finance and the tax authority seem to confirm that the reports must be submitted by the end of the year nonetheless, as this is a new report regarding the 2018 financial year. It is also important to note that changes in the submitted data should be reported to the state tax authority within 30 days of the change.
Exchange of information between Hungary and the USA
On 25 October 2018 Hungary and the USA concluded an agreement on exchanging information, which is a very significant step for all Hungarian members of multinational groups where the ultimate parent company has US tax residency. Without the agreement on information exchange there is a good chance that Hungarian group members would have to submit country-by-country reports to the tax authority by 31 December 2018 for the first time. The conclusion of the agreement in itself is not enough for Hungarian group members to be exempted from the CbCR obligation. It is also important that the agreement must take effect by 31 December 2018 and the competent Hungarian and American authorities need to conclude a separate agreement as well. This will also have to enter into force by 31 December 2018.
If the agreement on the exchange of information and the agreement between the tax authorities become effective by 31 December 2018, Hungarian members of a group with an US ultimate parent company, who previously stated that they would submit the country-by-country report due to there being no agreement on information exchange, will have to change their earlier statement using a designated form by the end of the year, provided their financial year is identical to the calendar year.
It is really important to comply with the above obligations on time and with the right data, since failing to meet the CbCR obligation, provide the data or report any changes, and the delayed or incorrect execution thereof, may result in the tax authority levying a default penalty of up to HUF 20 million (roughly EUR 62,000) on the obliged party.
If you take part in tax planning among international subsidiaries, and have further questions about CbCR or reporting obligations, please feel free to contact our colleagues.