In our previous newsletters, we explained which companies are affected by the documentation and data reporting obligations related to the determination of the arm’s length price, why it is worth preparing for this during the business year, how preparation can make the financial closing process easier, and what data is available to the taxpayer during the year. Data is not always available at the taxpayer, and the involvement of associated enterprises in the arm’s length price determination process is also essential and helps to avoid double taxation.

Purchases and Sales

As of 31 December 2022, the regulation governing the documentation obligation related to the determination of the arm’s length price has been expanded with several new elements, including the emphasis that the purchase cannot be consolidated with the sale of products manufactured from the purchased materials, and the transaction affecting expenses cannot be consolidated with the transaction primarily affecting revenues.

As mentioned in our previous newsletter, the taxpayer’s documentation on the determination of the arm’s length price consists of the group’s Master File and the Local File’s common part at the taxpayer level and its transaction-level part or parts. Separate transaction-level parts contain the determination of the arm’s length price for purchases and sales.

Detailed data is required for the separate examination of transactions, which is often only available from related parties in the case of purchases. It is typical that certain raw materials or components are only purchased from related parties, so there is no comparable data available for the price of the affected raw material or component, as no independent purchase took place. Information on how the related party determined the price and the profit margin applied during the sale to the taxpayer is only available from the related party.

Penalties per documentation

While previously the master file and the local file were considered a single set of documentation, and in the event of non-compliance with the documentation obligation, a penalty could be imposed on the entire set of documentation, from 2023, the master file, the common part of the local file at the taxpayer level, and its transaction-level part or parts are considered separate parts of the documentation, so that each part can be penalized separately. At the same time, the penalties that can be imposed in connection with transfer pricing documentation have significantly increased. In the event of non-compliance with the documentation obligation or the document retention obligation related to the documentation, the taxpayer can be fined up to five million forints per documentation (documentation for a group of transactions) and up to ten million forints per documentation (documentation for a group of transactions) in case of repeated non-compliance, instead of the previous two million and four million forints. Therefore, it becomes particularly important that in cases where related parties have the necessary information to determine whether the arm’s length principle is being applied, this information can be obtained, and thus each transaction part can be properly prepared.

Without proper documentation, proper data reporting cannot be fulfilled either, as the data to be provided in the corporate tax return in connection with the determination of the arm’s length price is based on the documentation. From 1 August 2024, temporarily (for the duration of the emergency situation), the penalty amounts have also changed in this regard, and in the event of non-compliance with certain tax obligations (e.g., data reporting, filing, change notification, etc.), companies can be fined up to 1,000,000 forints instead of the previous 500,000 forints. It is also important to mention the obligation to report related companies to the tax authority, which must be done within 15 days after the first contract (including verbal agreements and invoicing), as well as the termination of the basis of the relationship and the reporting of cash payments exceeding one million forints between related companies.

What expectations do related parties and parent companies face?

Hungarian regulations are in line with OECD guidelines, but the threshold defined in domestic regulations for the documentation obligation related to the determination of the arm’s length price differs from the thresholds in other countries. As mentioned in our previous newsletters, in Hungary, the documentation and data reporting obligation applies to transactions exceeding 100 million forints calculated at arm’s length price without value added tax carried out with related companies. The documentation to be prepared by the taxpayer extend beyond the local file’s taxpayer-level part and transaction-level parts to the group’s master file, for which there is no separate threshold. Both the difference in thresholds and the different deadlines for fulfilling the documentation obligation can cause difficulties in obtaining data available at related parties, so it is advisable to start consultations in time. According to Hungarian regulations, the deadline for preparing the documentation is the date of the corporate tax return for the local file, and for the master file, - if prepared by the group - the deadline for the group’s ultimate parent company, but the master file must be available no later than 12 months from the last day of the taxpayer’s tax year.

Transactions often involve German, Austrian, or Swiss parent companies or related companies. The different regulation of thresholds and deadlines can pose difficulties in obtaining the necessary data for the proper preparation of transfer pricing documentation from related companies, so it is advisable to start consultations as soon as possible.

In Germany, the threshold for intra-group transactions is 6 million euros for products and goods and 600,000 euros for intra-group services. Both thresholds are higher than the 100-million-forint amount that triggers the documentation and data reporting obligation in Hungary, so it is easy to imagine that our German partner may not even consider the need for transfer pricing documentation. The threshold for preparing the master file is even higher, with the documentation obligation tied to a turnover of 100 million euros, so it may happen that a local file is prepared, but no master file is necessary. If the documentation needs to be prepared, the German taxpayer has 60 days to fulfil this obligation and submit the documentation to the tax authority following the tax authority’s request. In the case of certain extraordinary transactions, for which the documentation must be prepared within 6 months following the business year, the German taxpayer can submit the documentation within 30 days following the tax authority’s request.

In Austria, generally, the member of a multinational enterprise group that has carried out transactions with related or unrelated parties exceeding 50 million euros in the previous two years is required to prepare a Master File and Local File. However, if a lower threshold applies to the preparation of the main document for a member of the multinational enterprise group operating in another country, the Austrian tax authority may request the presentation of the document. The documentation must be presented within 30 days upon request by the tax authority.

In Switzerland, there are no specific rules for the preparation of the Master File and Local File. Taxpayers must provide all written and oral information requested by the tax authority to substantiate that their tax base is appropriate.

The third level of transfer pricing documentation, the country-by-country report, which does not affect the data provision required in the corporate tax return for individual transactions, but is part of international data provision, is uniformly regulated and applies to multinational enterprises with consolidated revenues of 750 million euros or more.

Timely and Accurate Data

To ensure that transfer pricing documentation and the related data provision are accurate and reliable, it is essential to have appropriate, timely, and comprehensive data available from the taxpayer and, if necessary, from related parties. The lack or inaccuracy of data can distort the results of the analysis, leading to incorrect conclusions.

Timely consultations with related parties contribute to achieving the most accurate and reliable results in the preparation of transfer pricing documentation and avoiding double taxation.