Data reporting obligations under the Corporate Tax Act

According to the amendment to Act LXXXI of 1996 on Corporate Tax and Dividend Tax, effective from 26 August 2022, companies and other organisations defined by law that are not considered small enterprises are obliged to provide data to the tax authority in connection with the determination of the arm's length price until the submission of the corporate tax return, in addition to the preparation of transfer pricing documentation, as set forth in the relevant decree.
The reporting requirement applies for the first time to returns filed after 31 December 2022.

Transactions involved

According to the amendment to the Decree 32/2017 (X.18.) of the Ministry of National Economy on the documentation obligation in connection with the determination of the arm's length price (hereinafter: Decree), which entered into force on 31 December 2022, the following are still exempt from the obligation to prepare transfer pricing documentation, but there is a limited obligation to provide information in the corporate tax return with regard to the name of the transaction, the activity code specific to the transaction, the details of the related parties involved in the transaction, the amounts settled and any corporate tax base adjustment:

• contract with a private individual not as a self-employed person
• free transfer of liquid assets.

Recharged costs (invoices from unrelated parties recharged with no mark-up) are also exempt from the preparation of transfer pricing documentation and, for the tax year ending in 2022, from reporting in the corporate tax return as well. Later they will be considered as transactions subject to the limited reporting requirements mentioned above.

Transactions with a value of less than HUF 100 million at arm's length prices excluding VAT in the tax year are also exempt from the obligation to prepare documentation, with the proviso that transactions under contracts that can be aggregated must be taken into account together. The threshold has been increased from HUF 50 million to HUF 100 million, and the higher threshold is applicable for the tax year starting in 2022 and also applies to the reporting obligation.

Neither preparing documentation nor reporting obligations apply to the following transactions:

• a stock exchange transaction under the Capital Markets Act,
•  a transaction carried out at a fixed official price or at a specific price determined by law.

A transaction in respect of which the arm's length price has been established by a decision under the Act on the Rules of Taxation is exempt from the transfer pricing documentation obligation, provided that the facts as established in the decision remain unchanged, but the obligation to provide information is fully applicable.

If the taxpayer entered into a contract with an associated enterprise before the association relationship was established, the taxpayer is only required to prepare transfer pricing documentation and provide information if any terms of the contract are modified or if there is a change that would be applied by independent parties in determining the price.

What information is required?

The scope of the data to be provided in the corporate tax return covers the information already included in transfer pricing documentation, including primarily short, quantifiable data, which facilitates IT manageability.

Name of transaction

The first step in providing the information is to provide the name of the transaction, possibly indicating the functions performed and risks assumed by the taxpayer in the controlled transaction and on which side of the transaction the taxpayer is involved. The list of eligible types of transactions is set out in the Decree and includes, among others: toll manufacturing, use of toll manufacturing, contract manufacturing; use of contract manufacturing; contract/limited risk manufacturing with invoicing to an independent party; commission agency; use of commission agency; limited risk distribution; use of limited risk distribution; provision of services and use of services where the service provider bears limited risk in relation to the service and can therefore be characterised as a routine entity in relation to the service; the provision of a service and the use of a service where the service provider can be characterised as a contractor or co-venturer entity; the granting of a licence; the taking of a licence; the granting of a loan; borrowing a loan; providing and use of a guarantee or collateral; the transfer of a business or an equity interest, other ad hoc transactions related to a business restructuring; the ad hoc sale of assets not related to a business restructuring; other transactions.

Code of activity

For manufacturing, distribution and service activities and, where possible, for other transactions, the most appropriate activity code for the transaction should also be provided.

Net amount

The information must also include the actual net value of the transaction, detailed by associated parties, and the amount of the adjustment to the corporate tax base relating to the current year.

Method, data depending on method

The corporate income tax return must indicate the arm's length pricing method primarily used and, if the resale price method, the cost plus method or the transactional net margin method is applied, the profit level indicator. Such profit level indicators are operating profit divided by total operating income, return on total costs, operating margin, gross margin, Berry ratio, return on assets and optional other indicators.

If a service activity or a licensing, franchising activity is involved and the comparable uncontrolled price method is used, the basis for the service fee or the royalty, which may be net or gross sales, operating profit or loss, or other basis, should be provided.

In the case of financial transactions, where the comparable uncontrolled price method is used, the reference rate should be provided or the fixed rate should be indicated.

Accounting standard

It also includes information on the accounting standard applied to the party from whose point of view the transaction is being examined (the "tested party") or whose financial data are taken into account in determining the basis for the royalty or service fee.

Arm’s length price and actual transfer price

The corporate tax return must also state the arm's length price or range determined by using the profit level indicator, or regarding the royalty fee, service fee, interest rate, or in the case of a unit price, the unit value or range and the name of the unit. In addition, it is also necessary to provide the actual transfer prices, together with the tax base adjustment applied.

Segmentation of the financial data

For tax year beginning in 2023, the transfer pricing documentation must include how the financial data used in applying the arm's length price method can be linked to the reported data, general ledger accounts, cost centres, cost objects, profit centres or job numbers. It has always been necessary, and will continue to be necessary for the financial year ending in 2022, to show the relationship between the annual report and the data used, as the definition of indicators for the transaction has always been the accepted practice and expected by the tax authority. As mentioned above, reporting about the profit level indicator of the transaction is already required in corporate tax returns filed after 31 December 2022, if a method is applied that includes the assessment of a profit level indicator.

Pursuant to Article 77 of the Hungarian Rules on Taxation, the taxpayer must keep its records in such a way that they are suitable for the assessment of tax. Due to that, the separate recording of data on transactions can also be expected, since the profit level indicators and any related corporate tax base adjustment items can be determined on the basis of the records on transactions.

The segmentation of financial data is important in cases where the taxpayer carries out several activities, so the analysis of the transaction, the determination of the profit level indicator specific to the transaction cannot be carried out based on the profit-and-loss statement containing data at the level of the entire enterprise. Data that are more detailed are required at the level of the business line, activity, division or segment.

Given that the more precise legislation will only apply to the tax year starting in 2023, it is recommended to review as soon as possible whether the records allow for the determination of transaction-level data, as there may be an opportunity to make changes at the beginning of the year that strengthen compliance with the legislation.