On 4 May 2017 the Hungarian Parliament accepted the act amendment which implements the mandatory Country by Country Reporting („CBCR”) to the Hungarian tax legislation. The detailed rules of the introduced CBCR system are basically in line with the respective EU Directive. Below we summarise the main features of the implemented Hungarian CBCR system.
Hungarian CBCR system
As per the main rule, multinational enterprise groups („MNEs”) whose consolidated revenues exceed the EUR 750 million threshold, shall prepare and submit CBCR to the tax authority.
The CBCR should be compiled annually and normally submitted by the ultimate parent company of the MNE to the tax authority of its jurisdiction (i.e. where the ultimate parent is tax resident). Subsequently, the tax authority receiving the CBCR is going to circulate the report to all concerned tax authorities through the automatic exchange of information procedure.
According to the accepted amendment, the CBCR must include information on the main data of the MNE per each tax jurisdiction involved with its operation (i.e. revenue, pre-tax profit / loss, paid corporate income tax, capital, number of employees, etc.). The Hungarian tax authority could only use the CBCR and the data contained therein for the purposes of risk, economic and statistical analysis – i.e. tax and tax base findings associated with transfer pricing could not be based on the report.
Pertaining to the CBCR, the Hungarian tax resident companies (which are not ultimate parent companies) should notify the Hungarian tax authority on their ultimate parent company, or on any other designated reporting group member (name, tax residence). In addition, Hungarian companies should also report the fact when the Hungarian group member is actually required to prepare and submit CBCR.
According to the accepted rules, in case of delayed, erroneous, incorrect or incomplete fulfilment of the above reporting or notification obligations, the Hungarian tax authority may impose a fine up to HUF 20 million (approximately EUR 67,000) on the company required to reporting or notification.
How does the CBCR affect Hungarian companies?
It is important to note that irrespective of the final CBCR reporting obligation, each affected Hungarian tax resident company shall notify the Hungarian tax authority on the data of the final parent company or of the designated reporting group member. The notification should be submitted to the tax authority within 12 months calculated from the last day of the financial year started on or after 1 January 2016. Any changes in the reported data should be reported to the Hungarian tax authority within 30 days by the Hungarian group member.
With a few exceptions, the ultimate parent company of a MNE obliged to prepare and submit CBCR is not Hungarian tax resident. Consequently, the CBCR obligation will only indirectly affect the Hungarian companies. This means that Hungarian companies may have primarily intercompany duties and tasks in order to provide the necessary financial information to the respective reporting company.
Higher level of responsibility may be attributed to the Hungarian group member of a MNE (except of course when the ultimate parent company is a Hungarian tax resident), if, for example, the ultimate parent company does not have CBCR obligation in its tax jurisdiction, or the tax authority of the jurisdiction affected has not shared the received CBCR with the Hungarian tax authority (e.g. because the automatic exchange of information has been suspended between the affected countries). In these cases, the Hungarian affiliate shall basically be liable to prepare and submit the CBCR to the Hungarian tax authority.
As mentioned above, the CBCR reporting obligation is going to directly affect the Hungarian tax resident ultimate parent companies (however, this will only likely involve a few major Hungarian-based MNEs). These Hungarian ultimate parent companies will have to prepare CBCR, for the first time, after closing their financial year started on or after 1 January 2016 and submit them to the tax authority within 12 months calculated from the last day of the underlying financial year.