CbC reporting regulation is part of the Action 13 of the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) Action Plan. Due to the OECD BEPS, the requirements of transfer pricing documentation will be significantly changed. The new OECD transfer pricing guidelines affect the Hungarian tax legislation, which impacts the Hungarian legal entities of multinational corporate groups.
In the following we are trying to summarise what you should know about the changing regulation, and also would like to suggest tax risk management measures to the Hungarian legal entities and to corporate groups to handle the risk connected to transfer prices and related parties.
Given the fact that Hungary is a member of OECD, the country is obliged to take international legal harmonization steps to respect to the changing OECD regulation. Therefore the Hungarian law harmonized the new guidelines step by step in 2017.
The harmonization affects the companies operating in Hungary in the following subjects: (1) CbC reporting obligation, (2) changing transfer pricing documentation rules.
I. CbC reporting obligation
CbC obligation in a nutshell
The Hungarian Parliament introduced the CbC (Country-by-Country) reporting obligation by the modification of Act of XXXVII of 2013 (act on certain rules of international administrative co-operation on tax and other public charges) in 2017.
Under the general rule, a Hungarian resident ultimate parent entity has to file the CbC report to the Hungarian tax authority, if (1) the group is labelled as multinational group that means group members (companies, subsidiaries, permanent establishments) operate under two or more countries’ jurisdictions, moreover (2) the consolidated group revenue exceeds 750 million EUR in the fiscal year preceding the reporting fiscal year.
Please note that there are special cases: (1) the ultimate parent company of the multinational group can assign the CbC reporting obligation to another group member (designated group member), (2) in some cases the Hungarian tax group member is not an ultimate parent company or designated group member, but will still be required to submit a CbC report, e.g. if the ultimate parent company will not be obliged to submit a CbC report in the State or territory of its tax jurisdiction, or there is not any other group member in the European Union.
We would like to underline that only a few Hungarian legal entities (as ultimate parent company or as designated group member) are obliged to submit CbC report connected to FY 2016 and 2017 because the number of those multinational groups, which are operated from Hungary and the consolidated group revenue is over 750 million EUR, is limited.
It is good to know that the compliance of the CbC report requires significant tax administration. The CbC report must include the following information: the name of the group, the reporting fiscal year, revenues from related and non-related parties, profit before taxation, paid corporate tax, registered capital, stated capital, accumulated earnings, number of employees, and tangible assets, functions performed during operation.
The Hungarian tax authority will exchange automatically the collected information with the tax authorities of other countries. The local tax authorities can use the received information only for purpose of risk analysis. The tax authority cannot refer to the information, received during automatic exchange procedure, in its final report of tax audit, the received information can be used only to select the taxpayers to tax audits.
Obligation connected to notification and reporting
If there is CbC reporting obligation to FY 2016 or/and 2017 in connection with the Hungarian tax resident company (taxpayer), the following forms has to be returned in electronic way to the local tax authority (NAV) until 31th December 2017 (if the fiscal year is equivalent with calendar year): 17T201T form (A sheet, 18th section, 1st subsection, determination of why taxpayer is obliged to return the form), and 16CBC form.
We would like to highlight that if the Hungarian tax resident entity is a member of a multinational group, in which group one entity (normally the parent company) has CbC reporting obligation (the group is multinational, group members operate in two or more countries, and the consolidated group revenue is more than 750 million EUR) to FY 2016 or/and 2017, the Hungarian group member has notification obligation to the Hungarian national tax authority (NAV) about which group member completes the CbC reporting obligation. In this case the Hungarian entity has to fill the 17T201T form (A sheet, 18th section, 2nd subsection, name of the legal entity which completes the CbC reporting obligation). The deadline for the submission of the 17T201T form is 31th December 2017 if the business year of the taxpayer is equivalent with the calendar year.
The maximum default penalty can be 20 million HUF if there is missing, delayed, erroneous, incorrect or incomplete fulfilment connecting to the obligation of CBC reporting.
The taxpayer is exempted from the default penalty connected to omission, delay, erroneous, incorrect or incomplete fulfilment, change submissions, delivery of data, or failure to provide the data, if the taxpayer has explanation as it behaved as usual in the given situation.
II. The new transfer pricing documentation rules
The Action 13 of the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) also affects the transfer pricing documentation regulation. The Ministry of National Economy (NGM) issued its decree on the documentation obligations for the determination of arm’s length price (Decree of NGM of 32/2017 (X.18.)).
The usage of the new transfer pricing documentation rules is an option for FY 2017 and taxpayers have to use compulsory to document their transfer prices in FY 2018.
The new NGM Decree changes radically the documentation rules, the full-scoped standalone transfer pricing documentation will disappear, taxpayers cannot use this type of documentation to document the FY 2018, the usage of master file and local file will be mandatory. The master file shall contain general, standardized information on all members of the group, while the local file presents the local taxpayer and the agreements between the taxpayer and its related parties.
The master file based on the NGM Decree shall contain:
information about the group’s organizational structure;
a general introduction on the group;
a depiction of the value chain of the group’s most significant products and an outline of its main geographic markets;
a list of important service agreements concluded between related parties;
a functional analysis showing the contribution of each member entity towards value creation;
information regarding the group’s intangible goods;
information regarding the group’s research and development activity
presentation of the group’s inter-company financial activity (including significant financing agreements concluded with unrelated parties);
the group’s financial and tax positions;
a list and brief presentation of the group’s effective unilateral advance pricing agreements and other tax-related agreements on the distribution of income between countries.
Typically the information mentioned above is available at the parent company, therefore the preparation of the master file should be controlled by the parent company. Based on the new regulation, the deadline of preparation of the master file depends on the regulation of state of the ultimate parent company, but the deadline is no later than 12 months after the last day of the Hungarian taxpayer’s fiscal year.
The local file presents the local taxpayer and the agreements between the taxpayer and its related parties. The new regulation slightly stricter than the former Decree. The local file based on the NGM Decree shall contain:
the organizational structure of the local entity;
a description of the entity’s activity and its business strategy;
presentation of main competitors;
information on controlled transactions;
a copy of effective advance pricing agreements and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions;
a functional analysis showing the contribution of each member entity towards value creation;
describe the regular transfer pricing methods;
determining the arm’s length price range;
the connection between the arm’s length price and the price that the company used;
if there is any litigation, jurisdictional issue connected to transfer prices.
The Decree gives the possibility to taxpayers to prepare aggregated record, documentation on transactions meeting the following requirements:
the subject matter of the agreements and the relevant conditions of the fulfilment of the subject is the same and pre-recorded, or the differences of the conditions are not significant, or
the agreements are closely related,
Transfer pricing documentation can be written in any languages, not only in Hungarian. The local file must be prepared by the filing date of the corporate tax return.
Preparation for changing transfer pricing rules
First of all, it is very important to clarify which member of the group is obligated to return the CbC report if there is CbC reporting obligation of the group, we recommend to consult with the parent company in this matter.
Taxpayers can use the same documentation process as used in the past, however we recommend to consult about the details with your tax professional, because the new documentation decree requires to show additional information about the company and related transaction comparing to the previous requirements.
Our conclusion is that the new documentation rules will increase the tax administration connected to transfer prices.
This article is published by Gyöngyi Ferencz, Andrea Kuntner and Erik Thurn from VGD Hungary