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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Conceptual clarifications

By modifying the Hungarian Corporate and Dividend Tax Act, the proposal clarifies the definition of arm’s length price and the arm’s length range in connection with transfer pricing. The newly introduced concepts are in line with the definitions of the OECD Transfer Pricing Guidelines, which were already considered authoritative anyway, so their introduction only represents a technical, not a substantive change.

New transfer pricing data reporting obligation in Hungary

According to the new transfer pricing rules, taxpayers subject to the transfer pricing documentation obligation must also report data in connection with determining arm’s length prices in their corporate tax returns. Taxpayers have already had to prepare their transfer pricing documentation parallel to their corporate tax returns anyway, but this documentation did not have to be submitted together with the tax return. The exact content of the data reporting is defined by the transfer pricing decree but the transfer pricing documentation still does not have to be submitted. The data reporting obligation shall apply to tax returns submitted after 31 December 2022.

Expansion of the interquartile range

According to the proposal, the interquartile range is applicable when transfer pricing methods are used in light of public information or data stored in a database that can be checked by the tax authority, or data available from other sources, publicly accessible data or data that can be checked by the tax authority in respect of comparable products, services or businesses. It means that use of the interquartile range will be compulsory or expected more widely than at present (in certain cases a minimum-maximum range was acceptable).

The definition of the interquartile range will remain unchanged, i.e. the median range which contains half of the elements of the sample has to be used. This means that the lowest 25% and the highest 25% of the sample’s element number are excluded, and the extreme values of the remaining median sample are considered to be the extreme values of the arm’s length range.

Transfer pricing adjustment

The bill details the requirements for calculating the tax base adjustment item connected to the transfer price, based on which, as a general rule, any adjustment may only be made towards the median.

Pursuant to the effective transfer pricing rules if the price applied by the related companies does not fall into the arm’s length range, it is enough to adjust the transfer price to the lowest or highest value of the arm’s length range.

Based on the new provisions, if the price applied falls into the arm’s length range, there is no scope for a transfer price adjustment, the consideration should be deemed the arm’s length price. If the consideration applied is outside the arm’s length range, as a general rule, only the median can be taken into account as the arm’s length price, and the transfer pricing adjustment must be made to this point. The exception to this is if the taxpayer verifies that a value within the range other than the median reflects the transaction under review the best, in which case an adjustment should be made to that value instead of the median.

The median is the mid-point of the arm’s length range, where no more than half of the data is lower and no more than half of the data is higher than this, i.e. in the case of a set of numbers with an odd number of elements, it is the value obtained by sorting the numbers in ascending order then taking the number of elements, adding one and dividing the total by two, while in the case of a set with an even number of elements, the median is the arithmetic mean of two values, firstly, the value obtained by sorting the numbers in ascending order then dividing the total number of elements by two, and secondly, sorting the numbers in ascending order then dividing the total number of elements by two and adding one. The provisions defining the amended interquartile rule and the adjustment point are first to be applied when establishing the tax liability for the fiscal year starting in 2022.

Changes in tax inspections 

To prevent the tax authority from making findings contradicting the future resolution determining the arm’s length price, the Act on Rules of Taxation excludes the ordering of tax inspections against taxpayers during the procedure for determining the arm’s length price. The amendment clarifies that this prohibition only applies to tax inspections resulting in an audited period. The legislator also specifies an exception for checks prior to disbursements, in order to detect unauthorised tax claims and refunds and to make informed decisions on the legality of payments.

Default penalty and raising of APA fees 

Based on the new Hungarian transfer pricing rules, the default penalty is to increase significantly. For missing or incomplete transfer pricing documentation, the maximum fine will increase from HUF 2 million to HUF 5 million, and for repeated infringements from HUF 4 million to HUF 10 million.

As a result of the amendment of the Act on Rules of Taxation, the fee for the procedure to establish the arm’s length price (advance pricing arrangement, APA) will also rise. It will be HUF 5 million in unilateral proceedings and HUF 8 million in bilateral or multilateral proceedings. Payment in instalments or deferred payments are not allowed.

APA procedures

Prior to the amendment, a request for determining the arm’s length price could be submitted by a taxpayer who had to prepare transfer pricing documentation. (Taxpayers under majority state control are an exception.) Essentially, “the nature of APA proceedings may de facto limit their accessibility to large taxpayers. The restriction of APAs to large taxpayers may raise questions of equality and uniformity, since taxpayers in identical situations should not be treated differently” (OECD Transfer Pricing Guidelines [2022], paragraph 4.174). Despite the fact that taxpayers are not obliged to prepare transfer pricing documentation, they must modify their tax base to comply with the arm’s length principle. Any taxpayer may have complex related party transactions for which it may be justified to request the determination of an arm’s length price, and it is up to the taxpayer to decide whether this is necessary, there is no justification for limitation in the legislation.

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.

A Tightening transfer pricing rules, increasing fines in Hungary bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Company car tax

As we recently mentioned, the bill will indeed raise the rates of the company car tax – which were promulgated by decree and are effective from 1 July 2022 – to the level of a law from 1 January 2023. The tax burden is nearly doubling (for the precise amounts, please see our earlier article).

Corporate tax 

Based on the proposal, the tax base is reduced by the amount of the impairment recognised as an increase in pre-tax profit in previous fiscal years when an ownership share was derecognised – as evidenced by tax returns and supporting statements – matching the extent to which the tax base has not yet been reduced by a reversal, and the tax base is increased by the amount of impairment recognised in the fiscal year on the ownership share as a charge to pre-tax profit for the fiscal year, at the taxpayer’s discretion.

The new provisions on impairment shall first be applicable to the impairment charged in the fiscal year of 2022 when determining the tax liability for the 2022 fiscal year.

VAT

The latest Hungarian tax amendments do not leave VAT untouched either. According to the proposal and in light of judgment C-717/19 (Boehringer case concerning the price subsidy for pharmaceuticals), in the case of a claim for a subsequent tax base reduction stemming from a payment made under a subsidy volume contract, the taxpayer will not have to perform a self-revision but will be able to account for the given amount in the tax assessment period including the date of the reimbursement, at the earliest.

Innovation contribution

The proposal amends the Act on Scientific Research, Development and Innovation, stipulating that the Hungarian permanent establishment, including the branch, of a foreign-registered business must pay the innovation contribution. The contribution payment obligation of permanent establishments shall enter into force on the 31^st day after the promulgation of the law.

A permanent establishment falling under the scope of the innovation contribution must determine, declare and pay its innovation contribution advance for the 2022 fiscal year by 20 October 2022. The contribution advance is the estimated amount payable for the 2022 fiscal year and calculated pro rata to the number of days when the contribution payment obligation prevailed. A contribution advance also has to be paid for the first two quarters of the 2023 fiscal year, the quarterly amount is a quarter of the contribution payable for 2022.

Social contribution tax

The amendment to the Act on Social Contribution Tax changes the social security rules for postings. Accordingly, working days should be taken as the basis instead of calendar days when establishing the portion of the income taxable in Hungary, and the pro-rating should be implemented accordingly.

The proposal deletes from the Act on Social Contribution Tax the concept of basic salary applicable in the event of a posting abroad; from now on, the rules of the Act on Social Insurance Contributions will apply, according to which the income underlying the contribution base is the actual basic salary.

Personal income tax

The latest Hungarian tax amendments also affect the Personal Income Tax Act. The proposal supplements the range of methods that the self-employed can use to calculate the amount chargeable under fuel consumption in connection with the business use of their own (rented or leased) vehicles, with regard to plug-in hybrid and pure electric vehicles.

Hungarian tax amendments in transfer pricing

In our opinion, the most serious tax amendments are expected in the area of transfer pricing. The proposal affects the rules on related companies in several points. We will explain the details on these amendments shortly in a separate article. The most important changes affect the following areas:

• Data reporting obligation: In Hungary, data will have to be reported first in the corporate tax return submitted after 31 December 2022. The exact content of the data reporting will be defined by the transfer pricing decree.

• Application, definition and use of the interquartile range: If the consideration applied is outside the arm’s length range, then as a general rule only the median can be taken into account as the arm’s length price, and the transfer pricing adjustment must be made to this point. The exception to this is if the taxpayer verifies that a value within the range other than the median reflects the transaction under review the best, in which case an adjustment should be made to that value instead of the median.

• Fines and default penalties applicable during tax inspections: For missing or incomplete transfer pricing documentation, the maximum fine will increase from HUF 2 million (roughly EUR 4,918) to HUF 5 million (roughly EUR 12,290), and for repeated infringements from HUF 4 million (roughly EUR 9,835) to HUF 10 million (roughly EUR 24,590).

Tax amendments for casual employment

The modification of the Act on Simplified Employment was incorporated into the government decree containing the extra-profit tax, and these changes entered into force on 1 July. According to this, for seasonal workers in agriculture and tourism working under the simplified employment scheme, the public levy payable by the employer will rise from the current HUF 500 (roughly EUR 1.2) to 0.5% of the minimum wage, i.e. to HUF 1,000 (roughly EUR 2.5). For general casual employment, the employer has to pay 1% of the minimum wage i.e. HUF 2,000 (roughly EUR 5) instead of the daily HUF 1,000 (roughly EUR 2.5). For film extras, employers are obliged to pay 3% of the minimum wage, which corresponds to an increase in the tax burden from HUF 4,000 (roughly EUR 10) to HUF 6,000 (roughly EUR 14.7).

In this article we only highlighted the most important aspects of the tax amendments submitted on 21 June. If you have any questions about these or any other rule changes not mentioned here, feel free to contact the tax consulting team at WTS Klient Hungary.

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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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Top-up obligation for local business tax

According to the 2020 summer tax amendments, the paragraph of Act C of 1990 on Local Taxes that states “any company subject to corporate tax and keeping double-entry accounting records (including the Hungarian branches of foreign-registered companies, and other foreign-based entities applying bookkeeping methods equivalent to the principles of double-entry bookkeeping), whose annual net sales revenue in the tax year prior to the given tax year exceeded HUF 100 million (roughly EUR 283,000), must top-up the amount of local business tax advances paid for the tax year to the amount of expected tax payable for the tax year”, is to be revoked. This essentially means that the obligation to top up local business tax advances is no longer in force in Hungary for 2020 either. The abolition of the obligation also applies to companies that follow different financial years.

Other local taxes

To simplify the tax system the building tax payment obligation for advertisement holding objects is to be abolished.

Changes to social security, social contribution tax

Amendments are also being made to Act CXXII of 2019 on the Eligibility for and Funding of Social Security Benefits. According to the amendment, the social security contribution payable on the difference between the lower threshold set by law for contribution payments (30% of the minimum wage) and the actual income paid forming the contribution base must be paid by employers for all employment relationships.

From July this year, the in-kind health insurance contribution (4%), the cash health insurance contribution (3%), the labour market contribution (1.5%) and the pension contribution (10%) have been merged into a single-rate contribution in Hungary. The new contribution is called the social security contribution, with a rate equal to the amount of the contributions listed above, i.e. 18.5%. The amendment means that almost every insured person has to pay the social security contribution of 18.5% on the income included in the contribution base.

However, companies will obtain some relief by the fact that from 1 July 2020 the rate of the social contribution tax is to fall by another two percentage points, from 17.5% to 15.5%. 

KATA: 40% special tax 

For those in the KATA system the government introduced some transitional measures in the emergency situation announced because of the coronavirus, but the 2020 summer tax amendments have put in place some long-term changes for these taxpayers.

Act CXLVII of 2012 on the Fixed-Rate Tax of Low Tax-Bracket Enterprises (KATA) and on the Small Business Tax (KIVA) has been supplemented in that from 2021 private individuals can only be registered in the low tax bracket for one business relationship. As of 1 January 2021, with the exception of the first registered relationship, the NAV will delete the private individual from the list of those in the small tax bracket for all other business relationships.

The 2020 summer tax amendments introduce an extra 40% tax for those who invoice more than HUF 3 million (roughly EUR 8,500) to any given business partner during a year. The Hungarian Ministry of Finance is quite open about the fact that this is intended to limit hidden employment. From 2021 this special tax must be paid

• by a payer as per the Act on Rules of Taxation, if they pay income to an entity in the low tax bracket that is a related company;

• by an entity in the low tax bracket if they earn income from a foreign-registered legal entity or other organisation that is a related company;

• by a payer as per the Act on Rules of Taxation, if in the given year it pays income of more than HUF 3 million (roughly EUR 8,500) to an entity in the low tax bracket as counted from the start of the year; the extra tax applies to the amount in excess of the HUF 3 million (roughly EUR 8,500).

In the first two cases, the tax must be assessed, declared and paid by the 12^th of the month following the payment/income, while in the latter case initially by the 12^th of the month after the month in which the payer crossed the afore-mentioned threshold, then following that by the 12^th of any month in the given year in which it provides income to the entity in the low tax bracket. In the tax return the payer has to indicate the tax number, name and address of the entity in the low tax bracket. This is an extra special tax that provides no exemption from payment of the specific tax.

New data reporting obligation for entities in the low tax bracket

From 2021, entities in the low tax bracket must inform payers entering into a contractual relationship with them that they are in the low tax bracket, and when this status is terminated or restarted.

By 31 January of the year after the given year, the payer must inform the low tax-bracket entity about the amount taken into account for the 40% tax base (based on the information above).

EKAER

The legal regulations regarding the EKAER in Hungary are changing from 2021. We will let you know about the most important details in a separate newsletter.

Deadline extension for DAC6 data reporting obligation

For cross-border arrangements falling under the data reporting obligation that started between 25 June 2018 and 30 June 2020, the deadline has been shifted to 28 February 2021.

For transactions after 1 July 2020 the 30-day reporting deadline will be applied for the first time from 1 January 2021, which essentially means the first deadline is 31 January 2021.

If you would like more detailed information on how the 2020 summer tax amendments will affect your company, please get in touch with the tax experts at WTS Klient Hungary.

A 2020 summer tax amendments in Hungary bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

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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What is the purpose of Action 13 of the BEPS Action Plan?

In the case of multinational companies, the action plan is designed to mitigate aggressive tax planning and tax evasion. To this end, in addition to the preparation of transfer pricing records (master file, local file), it also requires country-by-country (CbC) reporting.

What data is reported, and to whom?

It is essentially the group member qualifying as the ultimate parent company that is responsible for the country-by-country reporting (data provision). However, a multinational group is exempted from the country-by-country reporting obligation if its consolidated revenues did not reach EUR 750 million in the financial year preceding the financial year when the data was provided.

A country-by-country report should contain, among others, the amount and currency of revenues, pre-tax profit, income tax paid, income tax payable, registered capital, retained earnings, headcount, and many other pieces of information in respect of every state or region where the group performs economic activities; based on this information, the competent tax authorities can survey the risks related to assessing market prices, reducing the tax base and profit shifting.

In which cases and by when should Hungarian group members submit their country-by-country reports? 

As a general rule, Hungarian companies have to submit a country-by-country report if they qualify as an ultimate parent company. The ultimate parent company of the multinational group (Hungarian resident) and the organisation designated as the resident parent company in Hungary first have to comply with their reporting obligation within 12 months of the last day of the financial year starting on or after 1 January 2016 for which data is provided.

In certain cases, although the Hungarian resident group member does not qualify as an ultimate parent company, it will still be the one subject to country-by-country reporting. These are:

• the ultimate parent company is not subject to country-by-country reporting in the state where it is resident, or
• the state of the ultimate parent company is a party to a valid international agreement to which Hungary is also a party, but there is no valid agreement recognised by the competent authorities for country-by-country reporting, or
• there is a systemic error in the state of the ultimate parent company and the national tax authority notified the Hungarian company of this.

What other obligations does a group member not qualifying as an ultimate parent company have, and by when should these be fulfilled?

Apart from the parent company meeting its country-by-country reporting obligation, the Hungarian resident group members have a data reporting obligation towards the relevant tax authority, ensuring that the latter becomes aware 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).

The data must first be reported to the tax authority within 12 months of the last day of the financial year starting on or after 1 January 2016 for which data is provided. This essentially means that the Hungarian group member of the parent company subject to country-by-country reporting has to comply with its data reporting obligation towards the NAV by 31 December 2017 at the earliest.

Sanctions 

Please note that failure to comply with either the country-by-country reporting or the obligation to provide data, and in the case of delayed or defective execution, the tax authority may levy a default penalty of up to HUF 20 million (approx. EUR 64,000) on the party with the reporting or data provision obligation, so it is really important to comply with the above obligations on time and with the right data.

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