Who is subject to the reporting obligation?

The data reporting obligation, as well as the transfer pricing documentation obligation, applies if the taxpayer, as a corporate tax entity, qualifies as at least a medium-sized enterprise according to the Act on on Small and Medium-sized Enterprises and the Support Provided to Such Enterprises (“SME Act.”)  - considering the group data - or is another entity defined in the corporate tax law and has carried out transactions with related parties exceeding HUF 100 million in the examined business year. The determination of the transaction value requires careful consideration under Hungarian regulations. The values that can be treated collectively must be considered together.

Certain transactions are exempt from the documentation obligation for reasons other than transaction value; the reporting obligation for these transactions varies as follows:

What data does the tax authority receive?

Comprehensive data reporting covers the information in the transfer pricing documentation, including concise, quantifiable data that can be easily managed by IT systems. This includes the description of transactions, which, if possible, should indicate the taxpayer's functions and risks in the transaction, and which side they are on, e.g., performing contract or toll manufacturing, use of limited risk distribution. Additionally, for the 2023 business year, reporting includes whether the taxpayer or its related party is the one for whom the arm's length principle's application is demonstrated in the transfer pricing documentation (the tested party), if relevant for the analysis method.

For manufacturing, distribution, service activities, and other transactions where possible, the most typical activity code of the transaction must also be provided.

The net consideration recognised in the transaction must be reported, broken down by related parties, along with the corporate tax base adjustment amount related to the year's performance (with the correct sign).

The primary arm's length price determination method used in the corporate tax return must be indicated. If this method is the resale price, cost-plus, or transactional net margin method, the profitability indicator (e.g., operating result relative to operating revenue or operating result relative to operating expenses) must also be selected and specified. For service activities, licensing, franchise, and if the comparable uncontrolled price method can be applied, the base of the service fee, or royalty rate, which could be the net or gross sales revenue, operating income, or other bases, must be given. For financial transactions where the comparable uncontrolled price method can be applied, the reference interest rate or fixed interest rate must be specified.

The reporting also covers which accounting standard is applied by the party whose transaction is being examined (the tested party) or whose financial data is considered in determining the royalty or service fee base.

The corporate tax return must also provide the arm's length value or range of the profitability indicator, percentage royalty, (percentage) service fee, interest margin, or total interest rate; in the case of unit price, its unit value or range, and the unit's designation. Additionally, the actual applied values must also be indicated along with the applied tax base adjustments.

Limited data reporting covers the transaction name, most typical activity code, data of related parties involved in the transaction, settled amounts, and any tax base adjustments.

What are the sources for the data used to determine the arm's length price? What should be considered?

Depending on the method used to examine the arm's length principle in the transfer pricing documentation, internal comparable data available to the taxpayer or its related party (i.e., within the group) may be used, or if no such comparable data is available, external comparable data can be used. External comparable data should be publicly accessible, verifiable by the tax authority, and are typically stored in databases. If the taxpayer uses database searches to examine the arm's length principle and considers the data of comparable companies, the screening must be updated at least every three years, and the financial data of the selected comparable companies must be updated at least annually.

We would like to draw attention to the fact that the tax authority also expects the updating of financial data even if the database search is prepared or purchased centrally by the corporate group!

It is also important to note that if external comparable data is used, which originates from publicly available, verifiable sources by the tax authority, the middle part, i.e., the interquartile range is considered the acceptable part of the arm's length range.

How does the tax authority utilize the data?

The tax authority has access to data on taxpayers and their transactions from various sources, including international and domestic data provision. Its continuously developed toolkit allows for quick and efficient data analysis, supported by the use of artificial intelligence and machine learning processes. These tools are effectively used in both selection and audit, mapping the range of risky taxpayers and transactions, and focusing on specific topics during audits, such as the automotive industry, pharmaceuticals, loss-making or low-profit taxpayers, intangible assets, business restructurings, and financial transactions. The various databases available to the tax authority also make it easy to identify Hungarian subsidiaries within the same corporate group, which is also part of the 2024 inspection plan for joint and coordinated inspections.

For more information on why the arm's length principle should be examined during the year, see our next newsletter.