As already addressed in our previous newsletter, transfer pricing (”TP”) regulations are getting stricter from 2022. The regulation is covered in the Ministry of Finance’s TP Decree, which will be amended accordingly. The proposed amendments were recently made available for public consultation. We summarise the anticipated changes below.
Based on the amendments to the Act on Corporate Income Tax effective from 2023, taxpayers subject to the TP documentation obligation will have to finalise their TP documentation by the submission deadline of the corporate income tax return. In addition to this, they will also be obliged to provide transaction-level details on their intercompany dealings in their returns. The reporting obligation will first come into effect for tax returns submitted after 31 December 2022. For most corporations, this means that the first reporting will be done on the financial year of 2022, for which returns must be filed by 31 May 2023.
The TP Decree will incorporate the amended rules. According to its proposed modifications, the reporting obligation will affect some transactions that otherwise are not subject to TP documentation, such as:
- Contracts concluded with natural persons who are not self-employed,
- Transactions covered by APA decisions,
- Cost recharges from independent parties without mark-up,
- Transfers of cash without consideration.
The only relief in the amended regulation is the change in threshold for the TP documentation obligation. The current threshold of HUF 50 million per transaction will be increased to HUF 100 million per transaction, under which there will be no obligation to prepare TP documentation.
At the beginning of summer 2022, the default penalty for violating the TP documentation requirements was already increased from HUF 2 million to HUF 5 million per intercompany transaction. In the case of repeated infringements, the maximum default penalty was increased from HUF 4 million to HUF 10 million. To avoid the growing penalty risk, taxpayers will have to pay attention to the above amendments to the TP Decree.
According to the current legislation, the TP documentation consists of one master file and one local file, which may cover more than one transaction. Based on the proposed modification to the TP Decree, the master file would still be regarded as a single document, while the local files would be regarded as individual files for each intercompany transaction. This means that the imposable amount of the default penalty – presuming multiple intercompany transactions – could be multiplied in case of non-compliance.
Furthermore, per theproposed amendments, the TP Decree will clarify the cases in which taxpayers can choose to document their transactions in a consolidated manner. The comparability of certain transactions will be influenced by the functions undertaken by the parties, the assets involved in the transaction, the associated risks, the economic circumstances of the transaction and the business strategies of the parties. The TP Decree will also determine the cases where taxpayers cannot opt for the consolidation of their dealings. The proposal clarifies that the procurement of goods and the sales of products manufactured with said goods cannot be consolidated. Also, those transactions that are expenditure-based cannot be consolidated with income-related transactions. These provisions would be applicable from the tax year beginning in 2023.
Based on the proposal, taxpayers will have to disclose the following information and data in their corporate income tax return:
- The name of the reportable transaction, based on a predetermined nomenclature;
- The most applicable NACE Rev. 2 code, if it can be interpreted in the context of the transaction;
- The name and tax number of the other company involved in the transaction; in case the other party is foreign, the foreign tax number or (if none) any other identification number as well as the country of its tax residency;
- The payable net value of the transaction per year, categorised by affiliated partners;
- The required corporate income tax base adjustment determined in HUF, categorised by affiliated partners;
- The applied method for determining the transfer price;
- Certain indicators depending on the applicable method and nature of the transaction (profitability index, royalty percentage, commission service fee, reference interest rate);
- The accounting standard applied by the tested party or when determining the fee (based on nomenclature: Hungarian GAAP, IFRS, US GAAP, other);
- The arm’s length price or range determined by the benchmark analysis (profitability index, royalty percentage, commission service fee, surcharge, total interest rate);
- Depending on the method and nature of the transaction, the actual applied price/indicator determined with the required corporate income tax base adjustments.
Furthermore, the proposed amendments to the TP Decree would clarify what relevant information should be disclosed in the local file for supporting the financial data presented for the purpose of the arm’s length range, i.e. how the financial data is connected to the accounting system of the taxpayer.
Important to note
Expectedly, the tax authority has already started to prepare its risk assessment software to process the information to be collected. The authority will most likely initiate more targeted audits that – based on their expectations – will be substantially more effective than before. To avoid unpleasant surprises, we are of the view that it will be vital to prepare for the upcoming changes well in advance. Beyond gathering the reportable information, it is suggested that the benchmark analyses are also prepared in a timely manner to be able to execute any necessary corrections before year-end closings.