Changes in the Local File structure from 2023

There are no legislative changes in the transfer pricing documentation requirements from 2023. The documentation obligation continues to apply if the taxpayer is a business company that qualifies as at least a medium-sized enterprise under the Small and Medium-sized Enterprises Act., or an other organisation specified in the Corporate Tax Act., and the taxpayer has carried out an inter-company transaction that exceeds net HUF 100 million at arm’s length price in the year under review and this transaction is not exempt from the documentation obligation under Decree 32/2017 (X.18.) for reasons other than the transaction value (for example, because of cost recharges, free transfer of funds or a transaction with a private person, who is not a sole-trader).

Pursuant to Decree No. 32/2017 (X. 18.) NGM the documentations of the taxpayer subject to the transfer pricing obligation must consist of the Master File, which presents the group from a general transfer pricing point of view and the Local File. This provision is still in force; however, the parts of the local document have been separated. From tax year 2023 onwards, the Local File must contain a common part at the taxpayer level and a transaction level part or parts.

The common section at the taxpayer level includes, among others, a description of the taxpayer's management, organisation chart, strategy, main competitors, advance pricing agreements or other tax agreements in connection with transactions carried out by the taxpayer, including, for example, the case where a tax audit is carried out at the affiliated company and the audit makes a finding in connection with a transaction carried out with the taxpayer.

The transaction level section includes, among others, a description of the transaction subject to transfer pricing documentation obligation, a list of the related parties involved in the transaction, a functional analysis, the most appropriate arm's length pricing method, the related party (or taxpayer) chosen as the tested party, the presentation of comparable data, and the calculation of the arm's length price, price range, or profitability.

It is essential that for the tax year starting in 2023, the legislator already explicitly requires the application of the practice already laid down by the tax authorities for the records on the determination of the arm's length price, i.e. that the documentation must include how the financial data used in applying the arm's length price method can be linked to the data in the financial statement, general ledger accounts, cost centres, cost bearers, profit centres or work numbers. According to section 77 of Act CL of 2017 - on the Rules of Taxation, the taxpayer must keep its records in such a way that they are suitable for tax assessment, and it is expected from the taxpayer to have separate recording of these transaction data, since the profitability indicators for the transactions and any related corporate tax base adjustment items can be determined on the basis of the transaction records. The importance of segmentation of financial data is highlighted in cases where the taxpayer carries out more than one type of activity, so that the analysis of a transaction and the determination of a transaction-specific profitability indicator cannot be carried out based on the profit and loss account containing full enterprise-level data but requires more detailed data at the level of business lines, activities, divisions or segments.

From tax year 2023, there will be an explicit requirement that purchases cannot be summarised in groups  with sales of goods manufactured from the materials purchased, and that transactions involving expenditures cannot be combined with transactions primarily involving income.

Data reporting requirements in the corporate tax return

For corporate tax returns submitted after 31.12.2022, the obligation to provide information in connection with the determination of the arm's length price is still in force for the tax year 2023, and the information must be provided in the corporate tax return. Transactions with a value of less than HUF 100 million are exempt from both the documentation obligation and the reporting obligations. However, there are transactions that are exempt from the documentation obligation, limited information is required from these. These include contracts with a private individual who is not a sole trader, free transfers of funds and, from tax year 2023 onwards, invoices issued by third parties which are passed on to the taxpayer with no change in value, in other words, cost recharges. The requirements on the content of the information to be provided have not changed, but the following have been added to the data requirements of the corporate tax return:

- it should be indicated whether the transactions have been consolidated,

- whether the so-called tested party is the taxpayer or its related company,

- in the case of limited reporting, the reason for the exemption from the documentation obligation.

As in the previous year, we will continue to support our clients with data compiled in accordance with the structure of the corporate tax return for 2023.

Increasing penalties

Penalty rates for transfer pricing documentation for the tax year starting in 2023 have increased significantly. In the case of the infringement of the documentation obligation or of the storage obligation in connection with the documentation, taxpayers may be fined up to HUF 5 million per record (per consolidated record), and in the case of repeated infringements up to HUF 10 million per record (per consolidated record), instead of the previous HUF 2 million, or HUF 4 million in the case of a repeated infringement. While previously the master file and the local file were considered as one documentation, from 2023 onwards, separate fines may be imposed for each part of the documentation.

Awaited audits

The Hungarian Tax Authority's audit plan for 2024 was published on 25.03.2024 and it states that in 2024, the focus of audits will continue to be on the affiliated companies and intercompany transactions. As in recent years members of the automotive industry and manufacturing companies that are operating at a loss or have achieved unusually low profitability are expected to be chosen for audit. In addition, the authority has also highlighted the audit of pharmaceutical operators.  Audits are expected in the areas of intangible assets, business restructuring and financial transactions. The audit plan also includes joint and coordinated audits of Hungarian subsidiaries belonging to the same group.

The second reporting period in the context of the determination of the arm's length price in the corporate tax return will be performed, so that the tax authority will now also check the compliance with the reporting obligation.

The tax authority has an extensive database of international and domestic transaction data and an adequate and continuously improved toolkit for fast and efficient data analysis, including the use of artificial intelligence and machine learning. These tools are used effectively in both selection and monitoring.

Audits of transfer pricing data and documentation for 2023, which are already subject to higher penalty rates, can be expected in autumn 2024.