Transfer Pricing in the focus of the tax authorities

With the development of the domestic and international regulatory environment, increasing emphasis is placed on the transparent and prudent operation of economic entities. According to some analysts, more than 60% of the world trade occurs among related companies due to globalization. In the current highly globalized economy, where multinational enterprises play a prominent role, transfer pricing is a key issue on the agenda of the OECD and the European Union. Consequently, it has become essential for group companies to carefully apply the transfer pricing rules applicable to them.

However, pricing intra-group transactions and identifying which transactions need to be documented annually can often be challenging. The legislative amendment that came into effect in 2023 contains important changes regarding transfer pricing in Hungary. Experience shows that the new data reporting obligation, the tax authority is initiating a dramatically increasing number of more targeted tax audits.

What is Transfer Pricing?

Transfer pricing refers to the prices applied in transactions among related companies within the same group. The price that would be applied between independent parties under similar circumstances is the arm’s length price. The arm’s length principle requires that related companies set their prices as if they were independent of each other.

What is the significance of Transfer Pricing?

Members of international corporate groups are subject to different tax burdens in different countries. Therefore, the pricing of transactions between them can provide opportunities for tax base adjustments and the artificial reallocation of profit.

For tax authorities, it is therefore of paramount importance to continuously monitor the prices applied within groups and the related transfer pricing documentation. Hungarian regulations are in line with the relevant rules of the European Union and the transfer pricing guidelines issued by the Organisation for Economic Co-operation and Development (OECD).

When are two companies considered related?

According to current legislation, two economic entities are considered related if:

• one has a majority influence over the other;
• a third company has a majority influence over both.

In Hungary, unlike in many other countries, the existence of a majority influence is required for a relationship to be established between the two parties when examining ownership stakes. It is important to note that not only direct but also indirect influence can result in a relationship.

A relationship is also established if the same person exercises decisive influence over the business and financial policies of two (or more) companies, meaning their management is the same.

Transfer Pricing Planning

The Importance of Transfer Pricing Planning – Economic Challenges

Following the economic growth and development experienced in recent years, a decline is expected in several industries due to the current energy price trends, which will significantly affect financial results. This may also change the process of transfer pricing planning and transfer pricing.

The search for comparable transactions and their reliability is also changing, and taxpayers must continuously monitor this. Due to the rapidly changing economic environment, it has become crucial to use the most up-to-date financial data in comparative analyses.

Untapped opportunities

In Hungary, approximately 20,000 companies are subject to transfer pricing documentation obligations, i.e., the regulation on the documentation of transactions between related companies. Before preparing transfer pricing records and documentation, it is worth exploring untapped opportunities, such as:

• If relevant, examining the possibility of a corporate tax group, as this can partially exempt from the documentation obligation in the future;
• Exploring the opportunities in applying the arm’s length price range;
• Considering certain asymmetries in the regulatory environment.

Additionally, it is of paramount importance and a crucial aspect of the transfer pricing planning process to use the appropriate pricing method, as this can significantly influence the results obtained. This is also a key focus during tax audits.

Andersen’s Transfer Pricing Planning Services

• We are at our clients’ disposal throughout the entire transfer pricing cycle. Our services related to the transfer pricing planning phase include:
• Mapping related company relationships, identifying related companies;
• Identifying and organizing related transactions and transactions to be documented;
• Identifying potential “invisible” services and activities, developing an appropriate pricing strategy;
• Analyzing ownership activities and shareholder services;
• Reviewing, evaluating, or localizing intra-group contracts and existing transfer pricing records;
• Identifying any risks related to related transactions;
• Transfer pricing consulting, reviewing or designing the transfer pricing principles applied by the company;
• Consulting on one-off transactions (e.g., high-value contribution in kind, intercompany loans, free services);
• Support during business reorganizations, identifying tax consequences, determining market prices;
• Consultation due to changes in the regulatory environment; BEPS action plan, country-by-country reporting (CbCR), anti-tax avoidance directive (ATAD).

Transfer Pricing Documentation

Data Reporting Obligation

Companies required to prepare transfer pricing documentation must also provide transaction-level data as part of their corporate tax return. This includes, among other things, the volume of transactions conducted with related parties, the transfer pricing method applied, the results of database searches, and the prices applied.

For clarification purposes, it is worth noting that the term “transfer pricing policy” is also commonly used in everyday language. However, this essentially means the same as transfer pricing documentation or transfer pricing records.

Transfer Pricing Documentation: Is it Necessary to Record Every Related Transaction?

An important question is whether it is necessary to prepare records for every related transaction. The answer is no, as certain companies and transactions are exempt from the transfer pricing documentation obligation. In terms of company size, it is not necessary to prepare records for:

• Micro-enterprises that employ fewer than 10 people and have an annual net turnover or balance sheet total of up to EUR 2 million equivalent in HUF;
• Small enterprises that employ fewer than 50 people and have an annual net turnover or balance sheet total of up to EUR 10 million equivalent in HUF.

Based on the nature of the transaction, it is not necessary to include the transaction with related parties in the transfer pricing documentation if:

• Its consideration accounted for / to be accounted for in the tax year – calculated at arm’s length price – does not exceed HUF 100 million net;
• It was realized using a fixed official price or a specific price individually determined by law;
• Free transfer of funds occurred.

To fully map the transactions to be documented, it is worth considering “invisible” transactions as well; e.g., transactions with branches, contributions, payment of dividends in kind, capital reductions, guarantees, business unit sales, activity relocations, and free services.

What are the Elements of Transfer Pricing Documentation?

The complete record (transfer pricing documentation) consists of the following documents:

• A so-called master file, which presents the entire corporate group, and
• A so-called local file, which, in addition to analyzing transactions, also contains the results of the economic analysis.

For comparable transactions, it is necessary to determine the arm’s length price and price range within the framework of the economic analysis. For the comparative analysis, based on the nature of the transaction examined (tasks performed by the parties, assets used, risks assumed, and other pricing influencing characteristics), we conduct research using databases accepted and used by the tax authority.

If the ultimate parent company does not prepare the master file on time or is not required to prepare it based on its local regulations, the group member may also be required to prepare the master file.

Risks and Sanctions

Failure to comply with the arm’s length principle entails numerous risks. The improper application of transfer pricing can affect, among others, the following taxes:

• Corporate tax, small business tax, and local business tax, innovation contribution;
• Income tax of energy suppliers (“Robin Hood”); and
• Determination of the VAT base and customs value.

Failure to prepare transfer pricing records can result in a maximum penalty of HUF 5 million in addition to the determination of tax deficiency, which is payable per transaction conducted with related companies. However, having properly prepared documentation is important not only to avoid penalties but also as a crucial tool in the event of an audit or court proceedings (whether domestic or international).

Andersen’s Transfer Pricing Documentation Services

We are at our clients’ disposal throughout the entire transfer pricing cycle. Our services related to the preparation of transfer pricing documentation include:

• Assistance in developing a company-level transfer pricing policy;
• Conducting comparative analysis using databases accepted and used by the tax authority to support the applied transfer pricing;
• Preparing and submitting an advance pricing agreement (APA) application to the Ministry of Finance, representing clients before the Ministry of Finance, and ongoing liaison
• Preparation of comprehensive transfer pricing documentation;
• Reviewing and, if necessary, preparing the master file of the group;
• Assistance and support in preparing and fulfilling country-by-country reporting (CbCR);
• Support in preparing data reports (to be completed as part of the corporate tax return).