Changes in the requirements for transfer transfer pricing documentation
The concept of arm’s length price and range
Companies are subject to a tax base adjustment if they apply a higher or lower price in their contracts with their associated companies than the price that would be applied between independent parties in comparable circumstances.
With effect from 26 August, the concept of the arm's length price, which was previously formulated in Section 18 (1) and described above, will be included in the interpretative provisions of the Corporate Tax Act, and the arm's length range will be introduced as a new definition.
The arm’s length range is defined as the set of values resulting from the application of the methods prescribed by the Corporation Tax Act, consisting of financial data of comparable transactions between independent parties or financial data of independent enterprises.
Reporting the arm's length price in the corporate tax return
The obligation for companies that are not small enterprises to prepare transfer pricing documentation of their transactions with related parties during the tax year will continue to apply, and the scope of transactions exempted from the documentation obligation will remain unchanged, e.g. transactions not exceeding HUF 50 million at arm's length, cost pass-through.
The deadline for preparing the documentation remains the same as the deadline for filing the corporate tax return. According to the new provisions, it is not enough to have the documentation available, the taxpayers concerned must also provide data in their corporate tax return, as specified in the NGM Decree on transfer pricing documentation for establishing the arm’s length price. The exact content and scope of the data provision is not yet known, as the NGM Decree has not yet been amended.
The obligation to provide information will mean that even greater emphasis will have to be placed on ensuring that the documentation is available by the deadline of filing corporate tax returns.
According to the enacting provision, data must be provided for the first time in tax returns filed after 31 December 2022.
Mandatory use of interquartile range
In determining the arm’s length range, the interquartile range has so far not been mandatory in cases where the comparative analysis has taken into account data from at least three financial years of fewer than 10 companies or fewer than 30 observations and the size of the sample of comparable data was less than 15 percentage points. In such cases, the minimum-maximum price range (profitability) of the original sample was accepted as the arm’s length range.
As a result of the change in legislation, this exception will be removed and the use of the interquartile range will be mandatory in all cases.
This rule will be applied for the first time in determining the tax liability for the tax year starting in 2022.
Adjustment to median
Where the price, margin or profit between related enterprises did not fall within the arm's length range, the legislation did not previously specify to which element of the arm's length range an adjustment was necessary. According to the tax authorities' expectations, the adjustment could be made to the nearest acceptable value of the range, the lower or upper quartile in the case of the mandatory use of the interquartile range.
As a consequence of the amendment, if the price applied by the company falls outside the arm's length range, the mid-point of the arm's length range at which the data is no more than half less and no more than half greater (median) should be taken into account as the arm's length price when adjusting the profit before tax. A company can adjust its pre-tax profit to a value other than the median, but it must then demonstrate why a value other than the median within the arm’s length range best reflects the transaction under review.
If the price applied by the company is within the arm's length range, the reduction or increase in pre-tax profit is not permitted under the regulations coming into force. This is particularly important for members of groups of companies where it was part of the practice, in line with the expectations set out in the transfer pricing policy, to make an adjustment even if the company's profit was within the arm’s length range. The adjustment to the median will be applied for the first time in determining the tax liability for the tax year starting in 2022.
Default penalty for the absence or incompleteness of transfer pricing documentation
The amount of the default fine for the absence or incompleteness of transfer pricing documentation will increase from HUF 2 million to HUF 5 million, and from HUF 4 million to HUF 10 million in the case of repeated failure to comply.
The increased penalty rates will apply for the first time in tax year 2023.
Advance pricing arrangements
The fee for the advance pricing arrangement has so far been HUF 2 million for each of the number of the parties to the initiated proceedings.
From 27 August 2022, the fee for unilateral proceedings will be HUF 5 million, and HUF 8 million for bilateral or multilateral proceedings. Instalment payment or deferred payment for the fee may not be permitted.