DAC7 Directive

Member States had time until 31 December 2022 to transpose the provisions of the DAC7 Directive into their national law. Similarly to its predecessor, in Hungary the directive resulted in an obligation to report information to the tax authorities, and in this case the taxpayers are the digital platform operators.

Known as DAC7 (2023/514/EU), the amendment to Directive 2011/16/EU on administrative cooperation in the field of taxation aims to prevent tax fraud, avoidance and evasion by businesses that offer their products or services on digital platforms, mainly in cross-border transactions.

Who is subject to the obligations?

The obligations included in the Hungarian legal system with the amendment of Act XXXVII of 2013 increase the administrative burdens for digital platform operators. (Similar to various other elements of the 2023 tax law amendments, this amendment took effect at the beginning of 2023.) Digital platform operators are organisations that provide sellers (including organisations and individuals) with platforms accessible to users (buyers). Whether we are talking about websites or applications, this can cover any platform that allows for the establishment of a link between the seller and the user for the direct or indirect performance of the so-called “relevant activity” for the users.

However, the reporting obligation does not extend to software that is used only for

• handling payments related to the relevant activity;
• users to display or advertise the relevant activity;
• redirecting or moving users to some platform.

Moreover, it is not only Hungarian companies that are subject to the obligation, but also EU companies that are registered in Hungary and have their permanent establishment and place of business in Hungary. In certain cases, non-EU companies can also be subject to the reporting obligation.

This means, for example, that in addition to a Hungarian company offering an online marketplace, well-known multinational platform operators such as Amazon, eBay, Booking.com or Airbnb must also report data to the authorities.

What needs to be done, and by when?

1. Registration

The platform operator must register with the tax authority within 15 days of becoming a platform operator subject to the reporting obligation. (The first registration deadline for existing digital platform operators was 15 February 2023.)

EU businesses that meet the above conditions must register with the Hungarian tax authority even if they choose to report their data in another Member State.

2. Due diligence

The due diligence tasks include obtaining and verifying the details of the selling individual or organisation (e.g. checking tax number), establishing their domicile, and in the case of a property rental, obtaining information about the property. The due diligence procedures required for reporting the data must be completed by the end of the reporting period, by 31 December.

3. Keeping records

Records of the due diligence and reporting arrangements as well as of the underlying information shall be kept and retained for a period of ten years.

4. Data reporting

The data must be reported once a year, for one calendar year, but on a quarterly basis, by 31 January of the following year. The first reporting deadline for 2023 is 31 January 2024.

What has to be reported?

In specific cases, the data must be provided for the following relevant activities carried out for consideration:

• the rental of immovable property, including both residential and commercial property, as well as any other immovable property and parking spaces;
• personal services;
• the sale of goods;
• the rental of any mode of transport.

However, exemptions are possible, among others, for sellers to whom digital platform operators have facilitated less than 30 sales of goods for less than EUR 2,000, or facilitated more than 2,000 relevant activities by means of the rental of immovable property.

In addition to a range of information on the sellers, the reporting must also include the number of transactions, the amount of consideration, and where applicable, the bank account used.

Penalties

If the digital platform operators fail to fulfil their registration, change notification, data reporting and record-keeping obligations, or fulfil them late, incorrectly, with untrue content or incompletely, the tax authority may impose a default penalty of up to HUF 2 million.

What do the tax authorities use the information from the digital platform operators for?

Reporting is the responsibility of digital platform operators, but sellers should also be aware of the potential tax inspection implications. This is because Member States use the data to exchange tax information in order to support the controls carried out by the authorities of each Member State.

With the proliferation of online sales platforms, cross-border services and product sales have become easy for all businesses to carry out, but at the same time, these transactions have often provided a breeding ground for aggressive tax planning. If the tax authorities have uniform information from platform providers at a European level, it will be easier for them to assess – in the context of local risk assessment procedures – the likelihood that a foreign person or organisation will incur a tax liability in their country for a business activity, be it VAT (see: distance selling) or income tax.

From the perspective of digital platform operators, the new reporting obligations require caution given the detailed rules and the numerous deadlines. A foreign seller also needs to assess exactly what tax obligations their cross-border activity entails. Whichever side you are on, if you need assistance with the related compliance work, our tax department will be happy to assist you.

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1. Series of tax obligations

Taxpayers have multiple tax obligations to fulfil in relation to controlled transactions. These include, for example, the obligation to report related company status or the termination of such, the obligation to report cash payments or to prepare transfer pricing records, or the tax base adjustment obligation owing to transfer pricing. This list has now been extended with a new obligation: transfer pricing reporting.

In relation to a given controlled transaction, compliance with these tax obligations must be examined separately, i.e. to establish which of them must be complied with, and whether any of them need fulfilled. For example, whether the related company is registered, whether the transaction was carried out on market terms (it can happen that the taxpayer is not obliged to file documentation, but is obliged to adjust the tax base), or whether and to what extent data must be reported. 

2. Transactions to be reported as part of transfer pricing reporting

A transaction subject to documentation shall always be subject to full transfer pricing reporting, but some transactions not subject to the documentation requirement may also still have to be reported, albeit with a reduced level of data. Examples of such partially exempt transactions include transactions carried out under a contract with a private individual who is not self-employed, the free transfer of cash, or the re-charging of costs. For the latter, a transitional rule temporarily grants full exemption for 2022, provided that the transaction is also exempt from the documentation obligation.

However, a transaction that is the subject of an APA decision (advance pricing agreement) must be reported in full, even though such a transaction is exempt from the transfer pricing documentation obligation.

However, there is no transfer pricing documentation or transfer pricing reporting obligation for transactions below HUF 100 million per year or for stock exchange transactions.

3. Aggregating transactions (or not)

The relevant legislation in Hungary previously allowed for (or in some cases essentially required) aggregation in fulfilling documentation obligations for controlled transactions. Aggregation is contingent upon not jeopardising comparability, the subject-matter of the contracts being identical, and all the material terms of their performance are fixed in advance and the same, or any differences between the terms are not significant or are closely connected.

Having said that, a new paragraph was added during the latest amendment to the transfer pricing regulation that purchases cannot be aggregated with the sale of goods manufactured from the materials purchased, nor can a transaction involving expenses be combined with a transaction primarily involving revenue. The Hungarian Ministry of Finance also reflects on this in its recently published information: this addition was necessary because, in their experience, the sale of manufactured products and the purchase of raw materials are sometimes combined for example, despite this practice infringing upon comparability.

It is important that the transfer pricing reporting should show cash pool deposits and the borrowing part separately. This is also confirmed by the Hungarian Ministry of Finance as regards aggregation in the context of cash-pooling.

4. Name of transaction

It is definitely recommended to coordinate the data reporting by related companies in cases where the parties concerned are obliged to report data on the given transaction in their corporate tax return. However, it is not recommended to copy the data reporting sheet as is. For example, the name of the transaction can often differ for the parties on both sides of the transaction, because the name of the transaction also essentially indicates the role of the reporting taxpayer in the transaction (for example, one party performs the service while the other party uses it). 

5. Designating activity code

If the reportable transaction is for manufacturing, distribution or services for example, the most typical TEÁOR code must also be included in the return. This activity code does not necessarily coincide with the main activity or one of the registered activities of the reporting entity, or even of the enterprise on the other side of the transaction. So it is important to indicate the activity code that defines the related transaction in the reporting, and if more than one code is possible, then it is recommended to select the most typical one.

+1 The indispensable full transfer pricing analysis 

Selecting the pricing method, designating the profitability indicator and determining the arm’s length range are undoubtedly the most essential parts of full transfer pricing reporting. It follows that transactions subject to documentation can only be reported after a full transfer pricing analysis, based on the data contained in the transfer pricing documentation.

The new information from the Hungarian Ministry of Finance primarily details what input the authorities expect for the individual points of the new transfer pricing reporting arrangement, and may provide basic support in completing the related forms of the corporate tax return. However, it is worth browsing through it in advance, when fulfilling the transfer pricing documentation obligation, and if you still have questions then our transfer pricing advisers are happy to help!

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Scope and threshold of transactions to be documented

It was already known that the prices applied among related parties must comply with market principles, even if the given transaction was not to be included in the transfer pricing documentation. Under the previous transfer pricing documentation rules, no transfer pricing documentation had to be prepared for transactions with an annual transaction value of less than HUF 50 million. This threshold has now been raised to HUF 100 million (the new threshold can be applied no earlier than fiscal years starting in 2022). There is a contrary amendment here (applicable from the 2023 fiscal year) according to which certain transactions cannot be aggregated when preparing the documentation. Accordingly, purchases cannot be aggregated with the sale of goods manufactured from the materials purchased, nor can a transaction involving expenses be combined with a transaction primarily involving revenue. In practice, there is a chance that the higher threshold will reduce the number of transactions to be documented, but not necessarily the administrative burden.

Corporate tax base adjustment and application of interquartile range

What happens if the consideration applied by the parties is outside the arm’s length range? Based on the previous rules, it was enough to make the adjustment up to the lower (minimum) value of the market range. According to the new transfer pricing documentation rules, however, it will no longer be sufficient to make the adjustment to the minimum value, it must be made to the median value of the interquartile range including the “optimal” figures of the range. This means a greater pricing adjustment for a transaction price below the market price range, and also a higher corporate tax base and tax difference for the Hungarian taxpayer. This also indicates that the possibility of taking into account the minimum and maximum values of the arm’s length range is essentially eliminated. Applying the interquartile range is always mandatory.

New data reporting obligation 

A completely new element of the transfer pricing documentation rules is the introduction of a data reporting obligation as part of the corporate tax returns. This will apply in Hungary for the first time for tax returns filed after 31 December 2022, so even a taxpayer with a different financial year, who has just closed their 2021/2022 fiscal year, might be subject to the reporting obligation.

In all cases, transactions subject to the documentation requirement are also subject to this new reporting obligation. However, there are some transactions that are not subject to the documentation requirement, but are still subject to the reporting obligation (albeit with a reduced data content). Examples of such transactions include non-refundable cash transfers and transfers of unchanged cost amounts – although the legislator has granted an exemption for the latter for the fiscal year ending in 2022.

Most important facts to be reported from now on:

• transaction type (based on list set out in the decree),
• activity code,
• consideration,
• details of related parties,
• transfer pricing method

and there are additional elements to be reported for certain types of transactions (e.g. benchmark interest rate, accounting standard applied, arm’s length value or range of the profitability indicator, value of the profitability indicator actually achieved, etc.).

So as mentioned above, there is no documentation or reporting obligation for transactions below HUF 100 million per year, or for stock exchange transactions.

Violation of new transfer pricing documentation rules

Finally, and perhaps most importantly, the fines for violating the obligation to provide documentation will increase significantly, from HUF 2 million to HUF 5 million. The maximum fine for repeated infringements has been increased from HUF 4 million to HUF 10 million.

The transfer pricing consultants of WTS Klient Hungary have considerable experience in preparing TP documents and in successfully supporting tax authority inspections, including, among others, industry knowledge on how to manage and support transactions of suppliers in the automobile sector and their tax inspections. As a member of WTS Global’s transfer pricing advisory team, we offer solutions for all kinds of transfer pricing problems at international level. Please do not hesitate to get in touch.

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2021 Q1: grace period for penalties

To give Hungarian businesses enough time to prepare their IT systems, in the second week of September the NAV published templates for developers along with a comprehensive description of the technical changes with regard to the online invoice 3.0 system on the GitHub and onlineszamla.nav.gov websites. The first version of the XSD 3.0 specification is already available, and in theory, the testing system and the live system will both accept data reporting in this format from the end of September, but application of the system will only be mandatory from 1 January 2021.

To facilitate a seamless transition the NAV will not levy penalties in the first three months, i.e. until 31 March 2021, which means it will still accept the 2.0 format as well. Following the grace period, only the higher version, 3.0, will be available from 1 April.

XSD 3.0 specification

According to legislators, the online invoice 3.0 system and the related data reporting format will enable draft VAT returns, paper-free invoicing and data security all at the same time.

With the online invoice 3.0 data reporting system covering invoices issued to private individuals and foreigners (from the EU and third countries), the NAV will see an average of more than half a million more (retail) invoices on a daily basis compared to before. Consequently, from next year onwards, auditors will have practically all the control data they need when examining the authenticity of VAT returns, and the Hungarian government will be able to fill in VAT returns instead of the companies. According to information from the State Secretariat for Taxation Issues, draft VAT returns will be introduced as a new service, which could reduce the administration burden for more than 480,000 businesses. At the same time, one should note that taxpayers must consider several aspects and internal audit procedures when deducting the VAT content of invoices, which is not expected to be replaced by this relief procedure. (For instance, deductions are governed by strict legal requirements, and taxpayers can decide when to exercise their right to deduct VAT once it becomes an option.)

One further benefit of the XSD 3.0 specification – especially during the coronavirus pandemic – is that it may replace paper invoices which imply a high risk of infection. E-invoices uploaded by the vendor in XML format can be downloaded and treated by the customer as original invoices, thus the electronic invoice can serve as the data reporting itself. Identifiers often used in business, such as contract numbers, can be filled in on an optional basis in the XSD 3.0 data structure, making the invoices easy to process automatically by the customer.

Finally, transitioning to the online invoice 3.0 system is important from a data protection point of view too, since the XSD 3.0 specification ensures the anonymity of retail data. In the case of invoices issued for private individuals, the invoices may not contain names or addresses, so the personal details of the private customer will not be seen by the NAV.

Further advantages of the online invoice 3.0 system

By implementing the online invoice 3.0 system next year, the invoice data reporting system launched on 1 July 2018, and expanded this year, will essentially be complete in Hungary. This may result in increased whitening of the Hungarian economy and help the spread of digitalisation.

Changing the IT systems and invoicing software programmes of companies to facilitate the online invoice 3.0 data reporting system and the new format may pose challenges for the IT technicians and finance experts of Hungarian companies, just like during the previous transitions. WTS Klient Business Automation will gladly help you with the transition and with developing the digital systems necessary to fulfil the new data reporting obligation.

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DAC6 data reporting deadlines at EU level

As we already reported earlier, the DAC6 regulation is designed to identify and map profit-shifting practices as well as aggressive and potentially aggressive tax planning arrangements associated with transactions and structures that span across more than one jurisdiction and are based on the differences between tax regulations in the affected states. Under this regulation, cross-border arrangements which display certain potentially aggressive tax planning “hallmarks” must be reported.

In accordance with the EU proposal accepted on 3 June, the DAC6 data reporting deadlines would be modified as follows:

• The reporting deadline for “historical” transactions realised between 25 June 2018 and 30 June 2020 would be shifted from 31 August 2020 to 28 February 2021; while

• for arrangements made available as of 1 July 2020 and for transactions where the first execution steps are taken after 1 July 2020, the (first) data reporting deadline would change from 31 July 2020 to 31 January 2021.

For the new DAC6 data reporting deadlines above to take effect, the European Council must approve the modification of the DAC6 directive, which the European Parliament must express an opinion on. All this is expected by the end of June; EU Member States may only transpose the appropriate modifications into their legislation thereafter.

Hungary has already submitted the bill

In Hungary the legislation transposing the DAC6 Directive into Hungarian law was approved in June 2019, with an effective date of 1 July 2020. Now, somewhat ahead of EU legislative procedures, Hungary has already submitted a proposal on the six-month extension of the DAC6 data reporting deadlines as part of the bill laying down the grounds for the 2021 Hungarian central budget on 2 June 2020, the approval of which is still expected in June.

Despite the fact that businesses are expected to receive a six-month extension on the reporting of their DAC6 transactions due to the economic situation as a result of the coronavirus pandemic, it is crucial that transactions potentially subject to the reporting obligation are assessed as soon as possible and the necessary internal procedures are developed. This is especially true for companies operating as part of a multinational group where, among other things, intra-group financing transactions and services among group members may be affected from DAC6.

Establishing and maintaining procedures in line with 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.

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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.

Affected transactions

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.

Confidentiality

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.

Penalties

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.

International overview

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 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.

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