International Tax Planning and Transfer Pricing Planning: Hungary from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Hungary in the OECD context
    • 2.3 Transfer pricing rules of Hungary
      • 2.3.1 Laws and rules
      • 2.3.2 Arm's length principle
      • 2.3.3 Transfer pricing methods
      • 2.3.4 Definition of related companies
      • 2.3.5 Reporting requirements
      • 2.3.6 Cost sharing
      • 2.3.7 Documentation requirements
      • 2.3.8 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Hungary and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Hungary-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Hungary in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Hungary to the US
      • 2.4.8 Case study 2: Interests from Hungary to the US
      • 2.4.9 Case study 3: Royalties from Hungary to the US
      • 2.4.10 Case study 4: Management and technical service fees from Hungary to the US
      • 2.4.11 Case study 5: Capital gains with Hungary as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Hungary
      • 2.4.13 Case study 7: Interests from the US to Hungary
      • 2.4.14 Case study 10: Capital gains with the US as asset country and Hungary as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Hungary confirms in 2016 with a gross domestic product (GDP) of US$ 117,065 million the eight-highest GDP of the European Union. In Hungary, the general corporate income tax is 19.00%. A reduced rate of 10.00% is applicable on the part of the pre-tax profits of the company, which does not exceed HUF 500 million. Hungary has a partial integration system of taxation for corporate profits. Distributed dividends are not deductible in computing taxable income: however, dividends received are deductible from the taxable base, unless received from controlled foreign companies. Hungry is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Hungry has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Hungary, macroeconomic imbalances are being corrected with the public debt-to-GDP ratio falling and the current account moving to a surplus. Financial vulnerabilities have been reduced, but non-performing loans still hamper bank lending. Growth has been strong since 2012. However, income levels are still well below those in more advanced economies and as economic slack disappears, sustaining growth will require structural reforms to strengthen the business sector and upgrade skills. This chapter provides a survey on the actual tax law frame conditions in Hungary and provides practical support in international tax planning and transfer pricing planning between Hungary and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Hungary applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method, and the profit split method. No method is preferred over another. The tax law uses the expression 'affiliated companies'. The following companies are regarded as affiliated: a company that, directly or indirectly, has the majority of votes in the other company, or vice versa, two companies mutually controlled by a third company, and a foreign company and its domestic permanent establishment and vice versa. There are reporting and documentation requirements. Cost sharing is allowed. There is interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Hungary, an OECD high-income mixed economy with very high human development index and skilled labor force with the 16th lowest income inequality in the world, furthermore the 15th most complex economy according to the Economic Complexity Index and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] Hungary confirms in 2016 with a gross domestic product (GDP) of US$ 117,065 million the eight-highest GDP of the European Union. In Hungary, the general corporate income tax is 19.00%. A reduced rate of 10.00% is applicable on the part of the pre-tax profits of the company, which does not exceed HUF 500 million. Hungary has a partial integration system of taxation for corporate profits. Distributed dividends are not deductible in computing taxable income: however, dividends received are deductible from the taxable base, unless received from controlled foreign companies. Hungry is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Hungry has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] in Hungary, macroeconomic imbalances are being corrected with the public debt-to-GDP ratio falling and the current account moving to a surplus. Financial vulnerabilities have been reduced, but non-performing loans still hamper bank lending. Growth has been strong since 2012. However, income levels are still well below those in more advanced economies and as economic slack disappears, sustaining growth will require structural reforms to strengthen the business sector and upgrade skills. A key driver behind faster growth is more rapid business capital accumulation. Inward FDI and EU structural funds are strong investment drivers. On the other hand,

domestic business investment, particularly by SMEs, is held back by a frequently changing regulatory environment and entry barriers in network industries. Reforms on these fronts could increase the integration of domestic firms, which are overwhelmingly SMEs, into global value chains. Skill requirements in the labor market are changing rapidly as the economy becomes increasingly knowledge based. The education system has reacted slowly, leaving many graduates without needed skills and unprepared to apply knowledge in novel and unfamiliar settings. Training in public work

schemes has not been effective enough in generating relevant labor market skills. Women’s skills are underutilized, as many do not participate in the labor market.

According to Orbitax, [3] (Daily Tax News Digest of 16 December 2016),

on 12 December 2016, the Hungarian parliament reportedly approved legislation to introduce a single corporate tax rate of 9%. The 9% rate replaces both the current 10% rate on taxable income up to HUF 500 million and the 19% rate on taxable income exceeding that amount. Other measures approved include:

  • A reduction in the effective tax rate condition for controlled foreign company (CFC) purposes from 10% to 9%;
  • A reduction of the small business flat tax (KIVA) rate from 16% to 14% in 2017 and to 13% in 2018 (covers corporate tax, value added tax, social security, etc.); and
  • A reduction in the social tax rate from 27% to 22% in 2017 and to 20% in 2018.

The measures generally apply from 1 January 2017.

According to Orbitax, [4] (Daily Tax News Digest of 21 November 2016), on 17 November 2016, Hungary's Prime Minister Viktor Orbán announced[5] that the government is planning to cut the corporate tax rate to 9.00% for all companies in 2017. Currently, a 10.00% rate applies for taxable income up to HUF 500 million with a 19.00% rate applying on the excess. The government is also planning to reduce the value added tax (VAT) rate on internet services from 27.00% to 18.00% in 2017 and subsequently down to 5.00% in 2018.

According to Orbitax, [6] (Daily Tax News Digest of 15 June 2016), on 7 June 2016, the Hungarian parliament adopted legislation including the 2017 Budget Measures. One of the main measures is the amendment of the country's IP regime to bring it in line with the modified nexus approach as developed under Action 5 of the OECD BEPS Project (previous coverage). The changes apply from 1 July 2016, with royalty income from IP owned prior to that date generally grandfathered to 30 June 2021. Other changes include:

  • The general anti avoidance rules are amended so that the related expenses, costs and benefits of a transaction may not be utilized if the main purpose of the transactions was to obtain a tax advantage (under current rules a tax advantage should be the only purpose);
  • The value added tax (VAT) threshold for monthly VAT return filing and certain other reporting obligations is reduced from HUF 1 million to HUF 100,000;
  • The VAT rates for certain goods and services are reduced: Rate for restaurant/catering services reduced to 18% from 1 January 2017 and 5% from 1 January 2018; Rate for certain food stuffs, including eggs, milk, and poultry reduced to 5%; Rate for internet access services reduced to 18%; Minimum initial capital and shareholder requirements for real estate investment trust (REIT) status are relaxed (REITs are eligible for corporate and local businesses tax exemptions and other benefits); Taxpayer's are allowed to use excess R&D expenses to offset social security contributions subject to certain requirements; and The bank tax rate is set at 0.21% for 2017 and 0.15% for 2018.

The legislation must be signed into law by the president and published in the official gazette before entering into force. The changes will generally apply from 1 January 2017, aside from the above-mentioned IP regime changes.

The...

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