The term “self-revision” appeared in the text of the transfer pricing documentation decree in effect from 2018. Enabling the subsequent correction of errors is one of the most important new features in the legal regulation published on 18 October 2017 in issue no. 169 of the Hungarian Gazette. Compared to the draft detailed in our previous article, the final approved text does not include any new measures or points, but there are a few specific rules that are worth discussing.
New transfer pricing documentation decree makes joint documentation mandatory
Based on the new transfer pricing documentation decree, from 2018 it is no longer possible to prepare independent documentation. This system has been replaced by one comprising two separate documents: the master file and the local file. Large corporate groups tend to prepare transfer pricing policies (or guidelines) at group level, describing related-party transactions from the perspective of the group as a whole. Preparing joint documentation was permitted based on the previous decree, but now, the master file and the local file have become mandatory elements of transfer pricing documentation. In our previous article we discussed these mandatory elements in detail; now we would like to draw attention to a few practical issues.
What should you look out for?
A local transfer price documentation used to be prepared from the international master files. A lot of important information could be extracted from these documents, but they had to be supplemented with the mandatory formal content elements of the transfer pricing decree, for example, presenting court cases that were in progress. Based on the new transfer pricing documentation decree the master file can have mandatory elements that the headquarters of the group have not considered, and so it is up to us to remedy this. For example, some companies might not consider it necessary to present the driving forces behind business results, but in Hungary, not having this information could easily result in a default penalty.
Self-revisions now included
As mentioned before, the other important change compared to the previous transfer pricing decrees is the ability to prepare self-revisions. Modifying records was allowed before, but taxpayers typically used this at most to rectify formal deficiencies. The new rule clearly states that making changes is allowed even if we detect an error affecting taxes or arm’s length prices in a completed document.
What should you look out for?
If you have a related party transaction in 2017 that you have not yet prepared transfer price documentation for, then as a taxpayer applying a normal financial year you still have time to rectify the problem without any legal consequences in Hungary until the deadline for the 2017 corporate tax return. The size of the penalty imposed for incomplete documentation will not change in 2018, it is still very high. It can amount to HUF 2 million (approx. EUR 6,500) per incomplete document, and as much as HUF 4 million (approx. EUR 13,000) in the case of a repeated failure to comply with the laws.
What has not changed?
Given that compiling a transfer pricing document takes a lot of time and energy, and thus ultimately means a financial burden for companies active in Hungary, it is worth seeking the points in the decree that result in either exemption or the possibility to compile a simpler document.
You do not have to prepare documentation on product and service sales recharged without a mark-up, provided that you transacted with an independent party. Under certain conditions you can still prepare simplified documentation for intragroup services of low added value.
What should you look out for?
When recharging without a mark-up, often only a portion of the costs is invoiced to several subsidiaries of the group. In this case, the distribution of costs has to be verified by presenting the right distribution rate, since the total cost from the independent party can be verifiably qualified as being a market cost, but the ratios have to be supported (the right indicator for this might be the number of employees for example).
If you are interested in the transfer pricing regulations of other countries in the Central and Eastern European region (Latvian and Russian analysis) please contact our regional transfer pricing expert!
