A new element of intra-EU cooperation in taxation will be introduced in Hungary next year, the new mandatory automatic exchange of information on cross-border tax arrangements. The legislation transposing Council Directive (EU) 2018/822 (DAC6) into Hungarian law was approved in June 2019 and will take effect on 1 July 2020.
In respect of transactions and structures that span across more than one jurisdiction, the DAC6 regulation is designed to identify and map profit-shifting practices that are based on the differences between tax regulations as well as aggressive and potentially aggressive tax planning arrangements.
What does the DAC6 regulation cover?
The mandatory disclosure of information according to DAC6 applies for arrangements (series of arrangements) involving more than one Member State, which display at least one of the so-called “hallmarks” as defined by the directive. These hallmarks capture certain typical features or elements of aggressive tax arrangements, which may lead to tax avoidance or abuse. Certain hallmarks infer a reporting obligation per se, while with others, information only has to be exchanged if, in addition to the existence of a hallmark, the main benefit or one of the main benefits of the given arrangement was to obtain a tax advantage. In lack of more extensive legislative guidelines, the practical use of the “main benefit test” requires special care and attention at all times.
Unfortunately, the hallmarks are formulated in such an abstract way that they do not provide precise enough guidelines on the complete scope of transactions affected by the data reporting obligation. It is no secret that the legislators’ aim was to bring an extremely broad spectrum of cross-border-arrangements under DAC6. So with regard to DAC6, you shouldn’t just think about the traditional (tax-efficient) involvement of often exotic states (tax heavens) in tax arrangements, but also everyday transactions of companies operating as part of multinational groups, such as intra-group financing, the operation of holdings, or in extreme cases (depending on local laws of EU member states), even simple dividend payments too.
Who needs to report data?
Primarily tax planning intermediaries are obliged to report to the competent tax authorities. An “intermediary” firstly refers to anyone obliged to report information who designs or markets cross-border arrangements, or manages their implementation (so-called “promoter”, direct/active intermediary). It also means any person who knows or could be reasonably expected to know that they have undertaken to provide aid, assistance or advice with regard to reportable tax planning arrangements (so-called “service provider”, indirect/passive intermediary).
Direct intermediaries are basically consultants and tax advisors designing arrangements, while indirect intermediaries are the persons implementing such arrangements. For so-called indirect intermediaries (e.g. banks, accountants) the phrase “known/should have known” provides some sort of exculpation from the reporting obligation, but it remains to be seen where the line for such exemption will be drawn in practice.
In the case of “in-house tax arrangements” where no intermediaries are involved, the given taxpayer is responsible for the reporting.
No reporting obligation is enforceable if a certain activity is bound by a legal professional privilege. In such cases, other intermediaries and ultimately the given taxpayer itself is obliged to report data. Among others, the activities of lawyers are subject to such a confidentiality obligation. A person exempt from the reporting obligation must notify another intermediary, or in certain cases the given taxpayer, about the reporting obligation that falls on them. Further interpretation of the law is required to determine what scope of business or bank secrets (if any) can grant exemption from the reporting obligation.
What data must be reported?
The law defines a broad spectrum of reportable information with regard to certain arrangements. The most important factor is that data reporting is not anonymous: certain identification data (e.g. name) of the person affected by the arrangement must be reported.
What is the reporting deadline?
Arrangements must be reported to the competent tax authority within 30 days from the date defined by law (or from the following day). This date is generally the same as when the arrangements become available or ready for implementation, or the day of the first step of implementation.
It is important to note though that the reporting obligation not only pertains to arrangements realised/to be realised after 1 July 2020, but also to cross-border arrangements subject to data reporting where the first implementation step takes place between 25 June 2018 and 1 July 2020. The fact that the retrospective reporting obligation is to be performed based on available data provides some sort of relief.
What does the tax authority do with the data received?
The data reported by individual intermediaries or the given taxpayers does not have an explicit use set out by law. To our current knowledge, the data may be used during taxpayer risk analyses. As a result of the data reporting, the Hungarian tax authority will have much more information available than just now to make selections for tax audit purposes. It is important to emphasise that if a given arrangement is subject to mandatory data exchange according to DAC6, this does not automatically mean that the given arrangement would be unlawful.
As a general rule, a default penalty of up to HUF 500,000 (roughly EUR 1,520) can be imposed by the Hungarian tax authority for failure to comply with the reporting and notification obligation, or in the case of delayed, incorrect, false or incomplete execution thereof.
No default penalty shall be levied if the obliged party justifies its action by claiming to have acted as can be generally expected under the circumstances. The limits of what can be reasonably expected shall be developed over time in practice.
Since the DAC6 regulation is a complex obligation for data exchange in countries across the EU, it is probable that Member States will approve different detailed rules during the transposition process. (See for example our English article about the implementation in Poland.) So it will not be enough for a multinational group to develop their internal DAC6 procedures based on the regulations of the state of the (ultimate) parent company alone.
Establishing and maintaining procedures in line with the DAC6 has to be one of the main goals going forward for all companies that are part of a multinational group. In all cases, the relevant arrangements and transactions need to be comprehensively examined from both legal and taxation perspectives to identify transactions with a potential reporting obligation. Should you wish to entrust such a review to an expert, please do not hesitate to contact the tax consultancy team at WTS Klient Hungary. We will be happy to assist you.