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New tool for reducing tax evasion – the CbC report requirement takes effect

15th of May marked the proclamation of the legislation that requires businesses to prepare Country-by-Country Report (CbC) reports. Hereby we summarize the most important issues and deadlines impacting Hungarian firms, including when the Hungarian companies need to submit their CbC reports and the obligations of firms whose parent companies are in the United States, which for the moment is a special case, regarding data reporting.

Hungarian parliamant aprroved the law on country-by-country (CbC) reporting. The legislation is in accordance with the Directive 2016/881/EU of 25 May 2016, which required all EU Member States to implement a CbC reporting obligation in their national legislation. The law has been proclaimed, all Hungarian tax resident entities that are part of a multinational group that recognises over total consolidated group revenue of EUR 750 million need to comply with the CbC reporting requirements.

According to the main rule on behalf of the multinational group the ultimate parent entity obliged to submit the CbC report to the respective tax authority that should be circulated via the automatic exchange of information process to other tax authorities concerned in the MNEs’ activity. However, in special cases (e. g. the ultimate parent is not obliged to file a CbC report in its country of residence) the group entity may be obliged to report.

The multinational group will be required to report information for each country where entities of the MNE group operate, including gross income, profit/loss before tax, income tax paid and accrued, capital, accumulated earnings, tangible assets and the number of employees. In addition, the main business activities of all entities in each country should be disclosed. Entities resident in Hungary that are being part of multinational group should notice the tax authority whether they qualify or not as a reporting entity in the group, and if not they should also inform the tax authority about the name and the country of residence of the reporting entity.

When the member of a Hungarian group need to submit a CbC report

The reporting requirement always needs to be approached for a given fiscal year (the year for which the report is prepared). The cardinal rule is that the Hungarian corporation needs to submit the report if it qualifies as the overall parent company. The first fiscal year that must be reported on begins with January 1, 2016 or the fiscal year starting after that point and businesses have 12 months following the final day of the fiscal year to submit them. If the fiscal year conforms to the calendar year, the Hungarian overall parent company will have until December 31, 2017 to submit the CbC to the Hungarian Tax Authority (NAV).

The Hungarian corporation may be required to submit a report – even if it does not qualify as the overall parent company, if:

  • the overall parent company is in a country where there is no CbC reporting requirement,
  • or if a systems failure prevents the overall parent company from submitting the report (in other words, if the parent company has been suspended in its own country or if it has failed to share information) in which case the Hungarian tax authority will notify the Hungarian group member of its reporting requirement,
  • or if the country of the parent company does not have a valid information-exchange accord with Hungary which expressly includes CbC reports, which is currently the situation regarding the USA and Hungary!

What is the exact situation regarding overall parent companies located in the USA?

When the overall parent company is in a country not under EU tax law jurisdiction (i.e. is in a third country) it typically occurs that although the corporation is obliged to prepare CbC reports, it does not have a valid information exchange agreement that includes exchanging CbC reports. This is when the Hungarian corporation becomes required to submit a CbC report. There is a bill pending that would adopt multilateral accords on the exchange of CbC reports into domestic law, which would currently cover 32 non-EU countries. They include Brazil, Mexico, Canada, the People’s Republic of China, and the Russian Federation, but not the United States. This is proving to be a problem for corporate group members whose overall parent company is in the United States, not only for us but for other EU countries as well.

It will not help us if an overall parent company in the USA submits a CbC report in the United States but the Hungarian tax authority does not receive it in lieu of an information exchange agreement. One way of resolving the problem would be for the overall parent company in the United States to name one member of the corporate group within the EU to submit a report, which could exempt the Hungarian corporation from submitting its own report. In lieu of this – and until the United States signs onto the multilateral accord on the exchange of CbC reports among the responsible authorities, or until it concludes a bilateral agreement that allows an exchange of CbC information with Hungary – the Hungarian corporation will have to submit a report.

Deadlines for submitting data and sanctions for failure to do so

The corporation qualifying as the overall parent or the Hungarian corporation labeled as the parent company (the overall parent company may name the Hungarian group member as the one required to submit the CbC report covering all EU members) is required to submit the CbC report by the deadline valid for the overall parent company.

The deadline for data submission for Hungarian corporations required to submit their own reports differs from the above in that the first submission requirement is a year later. A member of a Hungarian group that does not qualify as an overall parent company or where no parent company has been named will not have to submit the CbC report until the end of the fiscal year beginning on January 1, 2017 or after that time.

The Hungarian Corporation

Where the data for the report come from

Deadline for submitting CbC report (if fiscal and calendar year is the same)

Overall parent company

The Hungarian parent company collects its own data

December 31, 2017

Corporation named the parent one

The corporation named the Hungarian parent one is to request the data from the foreign parent company

December 31, 2017

Required to submit CbC on its own

The Hungarian member-corporation requests the data from the foreign parent company

December 31, 2018

If the Hungarian entity fails to make the announcement or the report is not filed, filed late, incomplete or contains misleading information the Hungarian tax administration may impose a penalty up to 20 million HUF (app. 65 kEUR).

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