Category: Hungary

The Hungarian Parliament modified the provisions on the implementation of the Country-by-Country Reporting (CbCR) system according to the 2016/1164 EU directive. These changes relate to the obligation of the transfer pricing documentation for multinational enterprises.

The goal of CbCR is to ensure that transfer-pricing documentation provides comprehensive and credible information about the multinational enterprises and the traceability of the intergroup transactions. Multinational enterprises with a more than EUR 750 million of consolidated income are concerned by the reporting obligation. As a first step, all group members will have to notify the tax authority whether they will be obliged to report in the future. Then, the parent company will be obliged to report to the tax authority. The data that have to be provided for each group member separately are, inter alia, the amount of income, the profit before tax and the number of employed persons. In the lack of CbCR regulation in the country where the parent company is seated, the group members will be obliged to report. 

The first report has to be provided from the tax year of 2016, and the deadline for the submission is 31 March 2018. The report does not offer the opportunity of the correction of the corporate income tax base, however, the tax authority can use the data provided to make risk analysis, and may also impose a tax fine based on the available information. If an MNE fails to provide the required data, the fine may amount to HUF 20 million.

Another important development of the amendment is the automatic information exchange, as a result of which the tax authority will be obliged to forward the information received to the other countries’ tax authorities.

By Eszter Kamocsay-Berta, Partner, KCG Partners Law Firm

According to Seth, the pen name of Canadian cartoonist Gregory Gallant, “We can’t suddenly quit a job and then race to find a form of art that will pay off before the next mortgage payment is due. Creating art is a habit, one that we practice daily or hourly until we get good at it.… Art isn’t about the rush of victory that comes from being picked.” 

It seems that in our CEE region bribery and corruption are serious topics again. This is not only a legal issue but a source of political scandals, such as those described by the recent European Anti-Fraud Office Report in Hungary and those related to the January/February 2017 executive order in Romania decriminalizing certain grant offenses and protecting politicians from prosecution. 

A company determined not to violate anti-corruption laws requires more than a strong commitment. Several steps need to be followed. These steps constitute the “compliance program,” which ensures compliance with both local and international laws and should be part of any company’s ordinary, day-to-day activities. Companies with a solid “compliance culture” introduce effective legal risk management processes that cover a wide range of areas. 

An effective compliance program should always be tailored to the particular company implementing it, and it should preferably be managed by an external advisor (at least in the beginning). The need for such programs to be company-specific arises not just because each company has a unique structure and challenges but also because companies are in different development phases, and their supporting tools, such as IT infrastructure, are also different. For international companies, different country cultures also bring additional difficulties for the responsible compliance person. 

A compliance program always starts with a preparation phase, and the result of this phase must be a compliance menu, providing a proper understanding of the company’s business, culture, and mandatory requirements. The program must contain a proper risk assessment as well. 

When the “menu” is ready, the processes begin. At this stage, the key is to review the existing internal policies. This review considers not just the company’s Code of Conduct but also its policies regarding gifts, events (entertainment), vendor/supplier due diligences, and the matrix of roles and responsibilities. Once this stage is complete, results can be harmonized with the compliance menu. Policies that are missing should be drafted. 

The next step is continuous monitoring, which is the key element of a successful compliance program. This step contains regular audits and reviews, including, once again, a business risk analysis focusing on critical areas. It is also advisable to establish a compliance committee led by the senior compliance person. 

No successful compliance program can exist without development and regular training for key staff, as a well-trained staff is the engine of excellence that drives a good compliance program. If you are uncertain whether it is best to have classroom trainings (which are livelier and easier to tailor to actual needs) or online training (which is a more efficient tool and can be properly managed), then do both: classroom trainings for selected employees and online for the whole company. 

The development of a regular training program is also related to awareness and enforcement. In creating such a program, ask the following questions: is a “compliance policy/program” part of the company culture? Has it been appropriately communicated? Has the compliance policy been endorsed by the senior management (reflecting the “tone at the top” within the organization through policies and procedures), and adopted by employees working in the field? Compliance may also include reviews of the policies and practices of the company’s external partners. 

Even with the best compliance programs, occasional non-compliance situations may occur, necessitating a professional investigation. A professional investigation almost always raises some privacy concerns, and very often special advice is needed (e.g., competition law or advice regarding specific industrial standards). An experienced counsel usually possesses the required tools for this job. Above all, the investigation must be independent, quick, and thorough.

A company with a well-established compliance culture can be successful in preventing violations of anti-corruption laws. This will protect the company’s reputation and bring additional value to its business and culture.

By Maria Dardai, Head of Compliance Projects, CMS Hungary

This Article was originally published in Issue 4.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The new bill on the amendment of certain tax laws submitted by the Hungarian Minister of National Economy on 2 May 2017 targets to increase the competitiveness of the economy and the simplification of the taxation and tax administration.

According to the bill, the taxation related to practice rights will become more favorable, and the healthcare contribution concerning the lease activity will be annulled. There are developments in the corporate income tax as well, as the threshold of 10% relating to the reported participation exemption will be annulled, accordingly, any participation percentage could be reported to the tax authority in order to benefit from the Hungarian participation exemption regime. Another change is that the start-ups will not have to employ research and development personnel. The VAT rate of internet access is planned to be decreased from 18% to 5%, and the VAT of fish would be reduced from 27% to 5%.

The planned tax package also contains provisions in connection with the bank accounts. If sole entrepreneurs choose personal tax exemption, they will be obliged to open a bank account. In addition, resident companies having a foreign bank account have to notify the tax authority about such account. Good news to real estate investors that the bill plans to modify the Act CII of 2011 on the regulated real estate investment companies, aiming to facilitate the establishment of those companies. 

By Eszter Kamocsay-Berta, Partner, KCG Partners Law Firm

The Court of Justice of the European Union (Court) has pronounced several relevant statements in its decision rendered at the end of April 2017 relating to a case in which a private person purchased a mobile hangar from an insolvent limited liability company in an auction.

In the case, the applicant paid the purchase price and the VAT according to the invoice issued by the insolvent company, and then deducted the VAT. The Hungarian tax authority stated that the rules on reverse charge should have been applied for the transaction, thus, it did not approve the deduction of the VAT and levied a penalty in the amount of 50% of the VAT.

The Court established in the given case that the provisions of the Hungarian VAT Act on the reverse charge regime and the imposition of the tax penalty is incompatible with the directive on the common system of value added tax, since the relevant provisions of such directive are applicable only for real properties. In addition, the Court declared that under the principles of fiscal neutrality, effectiveness and proportionality, the purchaser shall be able to request the reimbursement of the value-added tax unduly invoiced by the seller directly from the tax authority in case the reimbursement becomes impossible or excessively difficult for the purchaser, in particular due to the insolvency of the seller. Furthermore, according to the Court’s decision, the tax penalty of 50% of the amount of value added tax is contrary to the principle of proportionality, with respect to the fact that in the given case the authorities suffered no loss of tax revenue and there is no evidence of tax evasion.

By Gabriella Galik, Partner, KCG Partners Law Firm

The new act on excise duty has been amended by the Hungarian Parliament on 21 March 2017. According to the amendment initiated by the Economic Committee, the new act will enter into force on 1 July 2017, i.e. 3 months later than originally planned. 

The Parliament had also accepted the Economic Committee’s other proposals. Accordingly, in case of electronic cigarettes, an amount of HUF 70 of excise duty will have to be paid on each ml of fill, which contains nicotine. The excise duty for 1000 piece of cigarettes will be increased by HUF 400 to HUF 29,200.

According to the previous version of the act, the undertakings concerned were obliged to make a declaration until 28 February 2017 whether they would continue their activities affected by the excise duty. Based on the amended act, the deadline for such declaration was postponed to 15 May 2017. If a company fails to fulfill this obligation, it will lose its excise authorization. 

Those companies which perform data provision via direct electronic connection are also obliged to register for testing at the Hungarian tax authority. The extended period ensures a smooth transition to the electronic excise system for the approx. 17,000 undertakings concerned. 

By Eszter Kamocsay-Berta, Partner, KCG Partners Law Firm

The Hungarian Parliament has started the general debate concerning the new bill on the mandatory filing of country-by-country report by multinational enterprise groups (MNE Groups) located or operating in the EU. The aim is to hinder the aggressive tax-planning practices of the MNE Groups with a total consolidated revenue equal or higher than €750 million by strengthening the mandatory exchange of information. Increased transparency could have the effect of giving MNE Groups an incentive to abandon the above practices.

The new bill submitted by the Hungarian Government is the implementation of the 2016/881 EU Directive (DAC4) amending Directive 2011/16/EU on the mandatory automatic exchange of information in the field of taxation. Furthermore, it serves the purpose of the execution of the Action Plan on Base Erosion and Profit Shifting of the Organisation for Economic Co-operation and Development (OECD BEPS). 

By the adoption of the bill, the Hungarian tax authority would have access to data of more than 60 states that concerns MNE Groups. That information would enable the Hungarian tax authority to react properly to aggressive tax practices by undertaking adequate risk assessments and tax audits. Such audits are proven to be successful in Hungary, as in the last two years more than 1650 investigations have been closed with the result of a discovered net tax difference in the amount exceeding HUF 81 billion as 85% of the investigations determined tax shortcoming or inadequacies.

By Eszter Kamocsay-Berta, Partner, KCG Partners Law Firm