The May roll-out of data reporting on related party transactions to NAV may cause serious problems for Hungarian companies. Short preparation times, IT problems and unclarified regulatory issues could hinder the timely submission of transfer pricing documentation.
The transfer pricing documentation obligation, in other words the regulation on recording related party transactions, affects around 20,000 companies in Hungary. Major changes have been made in this area as of this year, as transaction-level data on transfer pricing must now be reported in the corporate tax return by 31 May.
What are the most important changes?
Under the previous rules, the transfer pricing documentation also had to be prepared by the deadline for tax returns, but it did not need to be submitted and its existence did not have to be verified by 31 May. According to the changes that entered into force on 26 August 2022, the submission of the documentation will still not be mandatory, but the companies affected will have to provide the details of their transactions with related parties (e.g. their parent company or subsidiaries within a group), together with their corporate tax return. Such reporting must include the type of transaction, the activity code and the consideration, as well as the related parties’ data and the method of establishing the transfer price. For easier processing, the data has to be submitted to the tax authority in a pre-defined structure.
Preparation time is too short
The goal of the new regulation is justifiable from the perspective of the authorities and financial control, but there are several problems with it. One is the lack of gradual implementation, since companies will find it difficult from an IT point of view to collect the data required for reporting on time from their own systems.
The decree on the detailed rules of the concept was published on 28 December 2022, giving those involved at best only 4-5 months to prepare, which is extremely short. There is no testing period or grace period, and failing to provide the data can lead to immediate sanctions from the tax authority. Moreover, as a result of the mid-year amendment, the default penalty has also been significantly increased compared to its previous level, and it can now be levied individually per record (essentially per transaction).
Different deadlines apply abroad
It can also be a serious problem that, for international groups, the transfer price and the adjustment of the tax base are not determined on the basis of the decision of just the Hungarian party. Usually, it is a consensual agreement, which also requires the agreement of the foreign related party of the company concerned. However, the deadline abroad for preparing accounts and records is typically not 31 May, so transfer pricing decisions are made later. This means that, according to the new Hungarian rules, the Hungarian party must make a decision on the market price to apply without any assurance that the foreign members of the group (parent company, sister company) will agree. Consequently, the transfer pricing data submitted on 31 May will most likely be inaccurate and the companies will have to correct them later.
Adding to these difficulties, those involved also have to expect that the external advisory capacity for compiling the transfer pricing documentation is likely to be insufficient.
NAV’s new wonder weapon is going live
The tax authority will have a very accurate means of control through the structured collection of transfer pricing data, which will provide them with up-to-date information on the pricing, profitability and profits of the players in the given industry. This will enable cross-checking, detecting anomalies and improving risk analysis, making a significant overall contribution to more effective control activity.