Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Hungary

Hungary has met all aspects of the terms of reference (ToR) for the calendar year 2017 (year in review) except for applying the “best efforts approach” for past rulings by using all information accessible to the tax administration (ToR I.4.2.2), to identify all potential exchange jurisdictions for future rulings before the new application process took effect (ToR I.4.2.1), to timely exchange information on past and future rulings (ToR II.5.6); and to identify and exchange information on new entrants to the grandfathered IP regime (ToR I.4.1.3) Hungary received four recommendations in the prior year report. Hungary has addressed one recommendation relating to the submission of information to the Competent Authority without undue delay, which is removed. One new recommendation is made. Hungary is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings, to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings, to ensure that all information on future rulings is exchanged as soon as possible, and to identify and exchange information on new entrants to the grandfathered IP regime.

Hungary can legally issue four types of rulings within the scope of the transparency framework.

In practice, Hungary has issued 77 past rulings; for the period 1 April 2016 - 31 December 2016, Hungary issued four future rulings; and for the year in review Hungary issued nine future rulings within the scope of the transparency framework.

Peer input was received from one jurisdiction in respect of the exchanges of information on rulings from Hungary. The input was positive, noting that the information was complete, in the correct format and received in a timely manner.

Introduction

521.  This peer review covers the Hungary’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

522.  In the year of review the Hungary could legally issue the four following types of rulings within the scope of the transparency framework: (i) rulings related to preferential regimes (IP regime for royalties and capital gains); (ii) cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles; (iii) permanent establishment rulings; and (iv) related party conduit rulings. Unilateral APAs are issued by the APA unit in the National Tax and Customs Administration (NTCA) and all other types of rulings are issued by the Ministry for National Economy.

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

523.  For Hungary, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2014 but before 1 April 2016; or (ii) on or after 1 January 2010 but before 1 January 2014, provided they were still in effect as at 1 January 2014.

524.  In the prior year peer review report, it was determined that the Hungarian tax administration’s undertakings to identify past rulings and all potential exchange jurisdictions were sufficient to meet the minimum standard. Hungary states that for APAs it was able to identify most of the potential exchange information as the information was usually included in the ruling itself, even though the taxpayer is not required to provide information on the ultimate parent company. For other rulings, Hungary was only able to identify about half of the potential exchange jurisdictions as those rulings usually did not include information on the immediate and ultimate parent companies. So far the tax administration was primarily consulting the ruling itself and was not using other sources that may contain further information on the taxpayer, including through access to company incorporation databases.

525.  In order to identify further potential Hungary is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

526.  For Hungary, future rulings are any tax rulings within scope that are issued on or after 1 April 2016.

527.  In the prior year peer review report, it was determined that Hungary’s process to identify future rulings was sufficient to meet the minimum standard except for identifying all potential exchange jurisdictions. Hungary was recommended to amend its ruling practice to ensure that information on all potential exchange jurisdictions, particularly on the ultimate parent company, is always obtained. Hungary has amended its rulings practice with effect of 1 January 2018 requiring the taxpayer to provide information on immediate and ultimate parent company when applying for a ruling. As the new procedure was only introduced on 1 January 2018 Hungary should try to gather information on further potential exchange information for future rulings issued before that date using all sources available to the tax administration that may contain further information on the taxpayer, including through access to company incorporation databases.

528.  Hungary is therefore recommended to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings.

Review and supervision mechanism (ToR I.4.3)

529.  In the prior year peer review report, it was determined that Hungary’s review and supervision mechanisms were sufficient to meet the minimum standard. Hungary’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Conclusion on section A

530.  It is determined that Hungary has met all of the ToR except for identifying all potential exchange jurisdictions for past rulings (ToR I.4.2.2) and future rulings (ToR I.4.2.1). Hungary is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings and to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

531.  In the year of review, Hungary identified that it only had the domestic legal basis to exchange information with EU Member States and was therefore not able to exchange information with all members of the Inclusive Framework. Hungary introduced the legal basis to exchange information on rulings issued after 31 December 2017 with all members of the Inclusive Framework on 24 November 2017 and introduced the legal basis to exchange information on rulings issued between 1 January 2010 and 31 December 2017 with all members of the Inclusive Framework on 1 January 2018. Therefore, Hungary did not have the necessary domestic legal basis to exchange information on rulings with all members of the Inclusive Framework during the year of review, but has addressed the issue and is able to exchange information with all other members of the Inclusive Framework as of 1 January 2018.

532.  Hungary is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters; Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”), (ii) the Directive 2011/16/EU with all other European Union Member States and (iii) double tax agreements in force with 80 jurisdictions.1

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

533.  In the prior year peer review report, it was determined that Hungary’s completion of the templates were sufficient to meet the minimum standard except for the timely submission of the information to the Competent Authority (ToR II.5.5) and the timely exchange of information on rulings (ToR II.5.6). In the prior year report, Hungary remarked that it intended to remedy this issue via an internal procedural regulation. Hungary states that it now takes in average three months to forward information on rulings to the Competent Authority from the date the ruling is issued and that it is intended to further reduce the timelines to two weeks.

534.  Due to the lack of the domestic legal basis to exchange information with all members of the Inclusive Framework, Hungary only exchanged information with EU Member States under the EU timelines during the year in review. After introducing the legal basis to exchange with other Inclusive framework members, Hungary was able to exchange information on all past rulings and future rulings issued until 31 December 2017 by July 2018.

535.  For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	46	92	All delayed exchanges on past rulings have been transmitted until 30 June 2018 according with domestic legislation
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the Competent Authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the Competent Authority	Reasons for the delays	Any other comments
	0	141	Hungary is applying the EU timelines to exchange information with EU Member States. Regarding Non EU Member States Hungary encountered legal impediments and therefore could not transmit eight exchanges on future rulings in the year of review.	Since the introduction of the national legislation with effect of 1 January 2018, eight exchanges on future rulings have been transmitted.
Total	46	98

1. In the prior year’s report the number of 20 delayed exchanges on future rulings had to be revised as Hungary notes that not all of the rulings to which the exchanges related were in scope of the transparency framework.

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	N/A

536.  Hungary exchanged information later than three months after the information became available to the Competent Authority. Hungary is recommended to ensure that all information on future rulings is exchanged as soon as possible.

Conclusion on section B

537.  For the year in review, Hungary did not have the necessary legal basis for spontaneous exchange of information with all members of the Inclusive Framework. However, Hungary has introduced the necessary legal basis to exchange information with all members of the Inclusive Framework with effect of 1 January 2018 and has transmitted the exchanges of information on all past and future rulings with other members of the Inclusive Framework until July 2018. Hungary has also taken steps to meet the timelines for forwarding information to the Competent Authority. Hungary is recommended to ensure that all information on future rulings is exchanged as soon as possible (ToR II.5.6).

C. Statistics (ToR IV)

538.  The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Rulings related to preferential regimes	7	Germany, Ireland, Romania, United Kingdom
Cross-border unilateral advance pricing agreements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	31	Austria, Croatia Czech Republic, Cyprus1, Germany, Ireland, Luxembourg, Netherlands, Poland, Romania, Slovak Republic, Slovenia, United Kingdom
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	0	N/A
Permanent establishment rulings	14	Austria, Germany, Ireland, Luxembourg, Netherlands, Malta, Poland, United Kingdom
Related party conduit rulings	0	N/A
De minimis rule	0	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	0	N/A
Total	52

1. Note by Turkey: The information in this document with reference to “Cyprus” relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the “Cyprus issue”.

Note by all the European Union Member States of the OECD and the European Union. The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in this document relates to the area under the effective control of the Government of the Republic of Cyprus.

D. Matters related to intellectual property regimes (ToR I.4.1.3)

539.  Hungary offers an intellectual property regime that is subject to transparency requirements under the Action 5 Report (OECD, 2015).2 According to the information provided for the prior year report, the identification of the benefitting taxpayers will occur as follows:

• New entrants benefitting from the grandfathered regime: Taxpayers that are new entrants to the IP regime can be identified in the tax return. The first tax returns containing information on new entrants have been filed after 6 February 2015. Hungary is currently trying to identify new taxpayers by analysing previous tax returns of taxpayers who have opted into the grandfathered regime. However, new IP assets cannot be identified in the absence of the relevant data in the tax returns and the identification of the new IP assets requires detailed inspection of each taxpayer benefitting from the IP regime. Therefore, Hungary has not exchanged information on new entrants to the grandfathered regime yet. Hungary intends to exchange the information on a retroactive basis as soon as it has identified the new entrants (i.e. both new taxpayers and new IP assets).

• Third category of IP assets: not applicable, as this option has not been incorporated in the Hungarian IP regime.

• Taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption: not applicable, as this option has not been incorporated in the Hungarian IP regime.

540.  Hungary is recommended to continue its efforts to identify and exchange information on all new entrants to the IP regime as soon as possible (ToR I.4.1.3).

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
Hungary was only able to identify potential exchange jurisdictions for around half of the past rulings issued, even though Hungary may have additional ownership information in its possession or this information is accessible to the tax administration, including through access to company incorporation databases.	Hungary is recommended to continue to apply the “best efforts approach” to identify potential exchange jurisdictions for all past rulings.
Hungary was only able to identify potential exchange jurisdictions for around half of the future rulings issued until 31 December 2017, even though Hungary may have additional ownership information in its possession or this information is accessible to the tax administration, including through access to company incorporation databases. It is noted that Hungary has amended its issuing procedure for future rulings as of 1 January 2018 requiring the taxpayers to provide information on relevant exchange jurisdictions. This is a continuing recommendation from the prior year peer review.	Hungary is recommended to ensure that all potential exchange jurisdictions are identified swiftly for all future rulings.
Hungary was not able to exchange future and past rulings in the year of review with non EU Member States as it did not have the legal basis to do so. Hungary introduced a new legal basis as of 1 January 2018 and has exchanged information on rulings with all G20 and non-EU Member States. For the exchange of information with EU Member States Hungary did not meet the timelines of the transparency framework. This is a continuing recommendation from the prior year peer review.	Hungary is recommended to ensure that all information on future rulings is exchanged as soon as possible.
Hungary has not identified and exchanged information on new entrants to the grandfathered IP regime, although information for the 2015 period should be available. This is a continuing recommendation from the prior year peer review.	Hungary is recommended to continue its efforts to identify and exchange information on new entrants to the grandfathered IP regime.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  Parties to the Convention are available here: www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm. Hungary also has bilateral agreements in force with Albania, Armenia, Australia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, China (People’s Republic of), Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, Former Yugoslav Republic of Macedonia, France, Georgia, Germany, Greece, Hong Kong (China), Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Kazakhstan, Korea, Kosovo, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Moldova, Mongolia, Montenegro, Morocco, Netherlands, Norway, Oman, Pakistan, Philippines, Poland, Portugal, Qatar, Romania, Russia, San Marino, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Chinese Taipei, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan and Viet Nam.

← 2.  IP Regime for royalties and capital gains.