Transfer price

Important information, experiences, and new regulations about transfer pricing

 

The base of the transfer price documentations is the examination of the related companies. At first, we would like to highlight the registration obligation of the related companies, which is regulated by the Act on the rules of taxation. For several companies there are still defaults about this registration. According to the 23.§ (4) paragraph of the law the related companies have to be reported to the tax authority within 15 days after the first contract by the ‘T201T form. A default penalty occurs in case of the registration action not being processed. If the registration is not completed, we strongly advise you to register as soon as possible. Registration obligation also exists in case of the related party relationship ends, within 15 days after the end of the relationship, and moreover according to the 17.§ (9) paragraph of the Act on the rules of taxation in if cash payment took place for more than HUF 1 million between related companies.

The documentation requirement is regulated by the Decree on 22/2009 of the Hungarian Ministry of Finance. According to the Decree taxpayers, listed in 18.§ (5) paragraph of the Act LXXXI of 1996 on Corporate Tax and Dividend Tax, have documentation requirement, if there were transaction amongst any of their related companies (Act on Corporate Tax 4.§ 23.) according to an effective contact.  The taxpayers specified in the Act are the companies, which are not qualified as small-company on the last day of the tax year, the union, the European joint-stock company, the cooperative society, the European cooperative society and the foreign entrepreneur (excluding the non-profit company, and the taxpayer in which the state has direct or indirect majority influence). To decide that whether the company is qualified as small-company, the Act XXXIV of 2004 on Small and Medium-Sized Enterprises and The Support of Their Development provides a guideline.  The limit values have to be considered at group level (including the foreign members of the group) and the data of the related and partner companies also have to be taken into account.

During the preparation of the transfer pricing documentation, those transactions have to be presented, which are carried out with a related company defined by the Act on Corporate Tax, including the free transactions, such as registered office services and warranty service.  

According to the 18.§ of the Act on Corporate Tax, when the related companies apply higher or lower value in the intra-group contacts, agreements, than the value used between independent companies under similar circumstances (“arm’s length price”), the taxpayer than can change their tax base with the amount equals with the difference. In case of applied value being higher, under certain condition, the taxpayer can reduce its earnings before taxation, however the taxpayer has to raise it, when it is lower than it would be if they had used the arm’s length price. This regulation also applies to small companies, therefore the tax authority checks the appropriacy of the transfer pricing for small businesses as well. Although there is no documentation requirement for small businesses, it is advisable and practical to keep the documents and information, which prove the appropriateness of the intra-group prices in case of tax authority check.

For companies, which are not qualified as small-companies, a separate documentation is currently being prepared, which, according to the regulations, includes the introduction of the related parties, the names of the transactions, the examination of aggregation of transactions, the introduction of the relating contracts, the industry analysis, the functional analysis (which is increasingly important according to latest international and domestic aspirations), the presentation of the transfer pricing methods used in business transactions, the examination and the analysis of  appropriacy of the transfer prices to the arm’s length principles.

With the help of the analysis the comparable data are presented, which can be based on the financial data of comparable companies selected throughout the database queries. The Molnár és Bányai Kft. uses the AMADEUS database, which is preferred by the Hungarian tax authorities, and provides information of more than 3 million companies of 36 countries, and makes it possible to create a query which can be controlled and reproduced by the tax authorities.

With the help of the database, comparable independent companies can be identified, that have no related parties, such companies’ prices are not affected by the conditions agreed with related companies, and as a result the financial data of these companies will reflect the arm’s length price.  The database allows the query to be carried out in several aspects, with this it meets the requirements of the principles settled in the OECD, which is the main guideline related to the transfer pricing. It is important to select the comparable companies carefully, the appropriate selection can be supported by a detailed description of the activity of the company, which is the subject of the documentation. The tax authority review and may, if necessary, change the list of the selected companies. 

On 18.10.2017 the Ministry of National Economy published the Decree No. 32/2017 (X.18.), which can also be applied to the liabilities resulting from the financial year 2017, however according to  the documentation of the year 2018, it is obligatory that the transfer pricing documentation has to contain master and local file.  The previous regulation also allowed this kind of two-stage documentation, however the new regulation gives more detailed instructions regarding the requirements.  The two-stage documentation liability applies to both international and domestic corporate groups. The master file should include the legal and ownership structure of the group, the illustration of the geographic location of the group members, the key factors influencing the results, the supply chain of the most important products, the introduction of the intra-group agreements, the most important geographical markets, and a brief functional analysis. The regulation also specifies what data must be presented in the master file related to the intangibles and financing of the group.   In addition to the above, the financial and tax position of the group must also be presented.  

In the local file the structure of the management have to be presented in details; those people have to be identified who have the obligation to report to the management, the corporate strategy has to be introduced in details. The law sets that the local file has to contain the copy of the contracts regarding to certain transactions. In case of the verbal agreements, a detailed description is necessary. The presentation of the sum of the transactions, the selected transfer pricing method, the comparable transactions and the explanation of transactions’ aggregation remain to be important components of the documentation. The law sets the previously common practice regarding the use of database query, according to this a new database query should be created at least every three years, the financial data needs to be updated annually. According to the current practice of the Molnár és Bányai Kft. the database query is renewed every other year, the financial data are updated in the following year.

Since the tax authorities examine the field of transfer pricing internationally in ever closer cooperation, we would like to draw attention to the importance of the compliance with the related companies.