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Global transfer pricing guide

Transfer pricing - Hungary

30 Aug 2023

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Introduction to Hungarian transfer pricing
Transfer pricing rules
  • The Hungarian transfer pricing (TP) legislation is in Act LXXXI of 1996 on Corporate Tax and Dividend Tax, Section 18 (hereinafter referred CIT), in different Decrees, as well as in the Double Tax Treaties.
  • The Decree 32/2017. (X. 18.) of the Ministry of National Economy (hereinafter referred to as “Decree 32/2017” or “Decree”) provides for the methods of transfer pricing documentation and formal requirements associated with the determination of arm’s length price. The rules are fairly formulaic and provides principles as well.  
  • Double Tax Treaties define the place of taxation of the concerned entities.
  • The TP rules apply to HU taxpayers and there is a self-assessment regime, i.e. the onus is on the taxpayer to confirm its transfer pricing meets the standard or to adjust its tax return accordingly.
  • According to the Decree on transfer pricing documentation requirements, a company is obliged to prepare transfer pricing documentation if it had transactions with related parties within the given tax year. TP documentation has to be in place on the date a corporate income-tax return is filed.
  • The OECD’s Master File and Local File concept is regarded as best practice. In addition, for larger groups (with consolidated revenue of €750 million or more) HU has implemented CbCR (Country by Country Reporting).
  • The details of APA request can be found in Decree No. 465/2017 (XII.28. issued by the Government.
  • According to the CIT transfer pricing rules, the founder (not including formation by transformation, merger, division), the taxpayer who receives capital or pays out any part of the capital, and members (shareholders) shall apply the provisions of CIT in connection with the paying-up or increase of the subscribed capital, capital reserves by non-monetary contributions or if decreased through disinvestment, or when business shares acquired by the taxpayer for consideration are transferred to members uncompensated, or when retired, with any payment of share by means other than money in the event of dissolution without succession, and also where dividends are provided by means other than money, if the non-monetary contribution is paid or the share is received by an affiliated company or a member (shareholder) who makes a non-monetary contribution to become an affiliated company.
OECD guidance
  • Hungarian transfer pricing rules have been prepared in harmony with on OECD Guidelines, acknowledging that the arm’s length principle is the international transfer pricing standard to be used. Legislation contains an explicit reference to OECD.
Transfer pricing methods
  • The most appropriate pricing method should be selected. Hungarian methods rely on OECD Guidelines: the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods and other methods are accepted when the chosen method is in line with the functional and risk profile of the entity.
  • There is a non written hierarchy between the methods: other methods shall be used after the comparable uncontrolled price method have been eliminated.
Self-assessment
  • As most of the Hungarian taxes transfer pricing related payments are levied by self-assessment. Companies must file the return and make any payment by the due date, without waiting for a formal assessment. Hungarian authority requires taxpayers to make computational adjustments in cases where transactions, as recorded in the statutory accounts, are not on an arm’s length basis.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Hungary adopted the OECD’s transfer pricing documentation model based on the Master File and Local File (BEPS Action 13) approach and it is considered best practice in Hungary. The content of Master and Local File is exactly defined in the Decree.  
  • The deadline for the preparation of the Local File is the filing date of the corporate tax return (generally May 31st).
  • If certain conditions are met, administrative burden could be reduced: (1) taxpayer may prepare simplified documentation for low value adding intragroup transactions (exact list of services and other limitations are defined in the Decree) (2) Company may examine the possibility of consolidating transactions.
  • TP documentation and supporting documentation may be compiled in languages other than Hungarian. In addition to Hungarian, the use of English, German, and French languages is generally accepted for the preparation of documentation.
  • Amendment of TP documentation is limited. Based on the Decree, modification is possible when (1) documentation does not comply with the legislation (2) Identified error relates to the amount of tax, to the tax base, to the arm’s length price/range. But those parst where the taxpayer has previously used the choices provided by regulations shall not be amended (i.e. selection of method).
  • The usual standard market (arm’s length) price and the method used to determine it, as well as the facts and circumstances supporting it, until the declaration is submitted, are supplemented by the obligation to provide data to the state tax and customs authorities. Taxpayers subject to the transfer price registration obligation will also be required to provide data in their corporate tax return in connection with the determination of the standard market price. The exact content of the data provision is regulated by the Minister responsible for tax policy in the transfer pricing regulation. 
Master and local file
  • The Master File and Local File are considered separate files. If the Local File is prepared by the deadline of the corporate income-tax return, but the Master File for the tax year concerned is not available due to regulations pertaining to the parent company of the group, then the documentation will exclusively consist of the Local File until the deadline prescribed in the parent company’s country, but no longer than 12 months from the last day of the taxpayer’s tax year.
  • There is an explicit list of expected content for Master and HU Local File defined in Decree: basically, follows the documentation structure defined by OECD, but the Decree specifies some additional requirements which shall be met.
  • A mandatory content element of the Local File is how the financial data used in determining the transfer price are related to the data contained in the taxpayer's accounting report, this should be presented with a deeper level of analysis; Clarification of the concept of Functional Analysis; Aspects to be taken into account during the examination of the grouping of the transactions were defined, excluding closely related but opposite transactions.
  • The deadline for the preparation of Local File is the filing date of the corporate tax return (generally May 31st). Deadline for the preparation of Master File is adjusted to the ultimate parent company, but 12 months at the latest after the last day of the tax year.
Some risk factors for challenge
  • Due to the transfer pricing declaration obligation in our view, it may be worthwhile to examine where the currently applied pricing or profit is compared to the normal market range even before the annual accounting close. In practice, this means that the necessary database research should not be conducted afterwards, in the weeks before the submission of the corporate tax return, but much earlier than before, so that the pricing or profit can still be changed in light of the results obtained. In fact, the related parties involved can settle the necessary adjustment instead of paying a large amount of tax.
  • The increasing number of TP related tax audits demonstrate the risk of TP provisions. Tax authority is more prepared and uses international databases for audits. Documentation does not have to be submitted to the tax authority, it should be provided upon request, and the tax authority must have to prove if it is not adequate.
  • Tax authority annually publish the tax audit guidance including the industries that are the focus of TP audits that year.
  • The taxpayers that generate losses on a notorious basis (and optionally do not pay tax after minimum profit) and/or have intercompany service charges with proportionally high value can expect tax audit with higher probability.
  • There is a limitation of rules/guidance of domestic legislation (1) do not provide TP rules or special measures regarding hard to value intangibles (HTVI) (2) do not guide how to price intangibles (3) no regulation on cost contribution agreements.
Penalties
  • In case tax authority finds any deficiency tax penalty and late payment interest might be due in accordance with general rules of Hungarian taxation.
  • Penalties for non-compliance (1) According to the amendment to the legislation, instead of two million forints, the default fine could be up to HUF 5 million, and for repeated violations up to HUF 10 million per (consolidated) documentation. In order to increase the dissuasive nature of the default fine, the legislator prescribed a higher rate, which is in line with the tax liability. (2) In the case of delayed, incorrect or incomplete fulfilment of CbC reports the fine is up to HUF 20 million. (3) Consequences of failure to register related party (if it is a new business partner) with the tax authority up to HUF 500.000.
  • Penalties regarding tax underpayment (1) A 50 percent tax penalty can be charged on the additional tax payable (2) Late payment interest can also be charged.
Economic analysis and how to demonstrate an arm’s length result
  • Comparability analysis is barely regulated, OECD Guidelines must be followed. Comparative analysis must be conducted and executed in a way that could be reproduced by the tax authority. Domestic practice prefers local comparable data. Secondly, if the reliability of Hungarian comparable data is not sufficient enough, sources from different geographical region could be accepted as well. 
  • The arm’s length price range for low added value intra-group services is 3-7%.  
  • If considered justified (having regard in particular to functionality analysis, sample composition or extreme values), the taxpayer shall apply additional filters relying on the interquartile range. 
    All taxpayers will be required to determine the interquartile range, regardless of whether they are involved in the preparation of transfer pricing documentation. The interquartile range must be used if the transfer price methods are applied taking into account the data stored in a public database or that can be verified by the tax authority for the comparable product, service or enterprise. The interquartile range, i.e. the middle range in which half of the sample elements fall must be used.  The taxpayer must perform a new database search at least every three tax years and the financial data of selected comparable transactions or companies must be updated at least annually, provided that there are no significant changes in business activity which would be considered as influential by independent parties in the determination of the prices to be applied.
  • CIT defines the cases when profit before taxation shall be modified by TP adjustment: it is required if the price used between related parties based on their agreement is lower or higher than the consideration used by independent parties within comparative conditions (there are additional rules if related party considered to be a CFC).
  • The transfer price adjustment must be made to the median value instead of the lower quartile, therefore if the applied consideration is within the normal market range, there is no room for transfer price adjustment, the consideration is considered to be the normal market price. If the applied consideration is outside the normal market range, then as a general rule, the median must and can only be taken into account as the normal market price, the transfer price adjustment must be made to this point. An exception to this is if the taxpayer proves that a value other than the median within the range best corresponds to the examined transaction, in which case it must be adjusted to this value instead of the median. 
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • Advanced Pricing Agreement (APA) is a written transfer pricing guidance from National Tax and Customs Administration how to handle a particular intercompany transaction. The result of APA process is valid for a period of minimum 3 maximum 5 years (with a possible extension for further three years). As long as the taxpayer complies with the APA, the taxpayer’s transfer pricing will be considered arm’s length.
  • The process could start (1) with a professional consultation with tax authority (2) with filling a formal request. The tax authority can manage unilateral, bilateral or multilateral agreements. The decision on whether the application is successful is expected to take up to 120 days. The time limit may be extended on two occasions, by 90 days.  In bilateral or multilateral proceedings, the consultation with the competent authority of the foreign state shall be concluded within 2 years from the date of filing the application. The time limit may be extended by 1 year for good cause.
  • There is charge for APA. The fee for the procedure to determine the normal market price is HUF 8 million in a unilateral procedure, and HUF 12 million in a bilateral or multilateral procedure. Payment in installments or deferred payment is not permitted.
  • The rules are included in Act CL of 2017 on Taxation.
Exemptions
  • There are some cases when the taxpayer has no liability for preparing TP documentation (1) the transaction was made based on agreement with an individual, (2) the enterprise is considered small-sized, (3) medium-sized companies for certain transactions, (4) APA covers the transaction, (5) free cash transfer, (6) cost recharges, if the seller or party bearing the cost is not related enterprise, (7) transactions performed on stock exchange and fixed price specified by law, (8) taxpayer is public-benefit nonprofit business association, (9) the taxpayers in which the State has majority control – whether directly or indirectly.
  • There are also exemptions based on the arm’s length value of the transaction: the value does not reach HUF 100 million (net) within the tax year. The contracts which may be consolidated are to be considered together. The Decree defines the conversion process for currencies other than HUF.
  • For intra-group transactions between members of a corporate taxpayer group after the establishment of such a group (the possibility of establishing a corporate taxpayer group for corporate income tax purposes is available to Hungarian resident taxpayers from 1 January 2019).
Related developments
Digital services tax
  • Act XXII of 2014 on Advertisement Tax of Hungary (hereinafter referred digital service tax or DST) only tax on revenues from online advertising. It is relevant to businesses that generate revenues of at least HUF 100 million.  
  • The tax rate is 7.5 percent.
HMRC and taxpayer behaviour
  • Documentation does not have to be submitted to the tax authority, it should be provided upon request.
  • A tax authority audit can be started at any time and may apply to any tax year in accordance with the statutory of period of limitations. The tax auditors generally make field visits. TP documentation is also part of the initial information package transmitted electronically to the authority. Examination could last several weeks.
  • The tax authority will issue minutes on its findings. The taxpayer has opportunity to defend its own position.
COVID-19
  • The pandemic will have effects on TP documentation. The company which claiming losses needs special and more detailed analysis to ensure arm’s lengths prices. It will be hard to find comparable uncontrolled transactions with similar circumstances especially in relation to several years. The expectations of the Hungarian tax authority are largely in line with the Guidance on the Transfer Pricing Implications of COVID-19 published by the OECD.

For further information on transfer pricing in Hungary please contact:

Gábor Szarka.png

Gábor Szarka
T +36 (30) 415 1570
E gabor.szarka@hu.gt.com

  
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