In this article we draw attention to two different but important issues (and we deliberately don’t call them problems), which occupy prime positions among the challenges of Hungarian transfer pricing rules and crop up from time to time. There is a good chance that professionals making decisions on transfer pricing rules will encounter them.
Many accountants working at Hungarian subsidiaries are certainly familiar with the feeling of receiving an annual management fee invoice at the end of the year. The question is not whether it has to be paid or not, or whether it has to be booked or not, but rather what will happen to the amount of the invoice when calculating corporate tax: does it have to be checked for the purposes of transfer pricing and should the tax base be adjusted? These are the challenges facing professionals.
For a management fee, the problem in many cases is that it is difficult to find out what costs are included in the fee. If we don’t know the individual elements in a bundle of costs, and how these elements were defined, it is also difficult to establish how they relate to arm’s length prices. Accountants working at Hungarian subsidiaries often do not know why the invoice includes the given amount, and what services were provided for it. When we examine a management fee from the perspective of Hungarian transfer pricing rules, one of the first questions is always about the content of the bundle of costs. In our experience, the fee often includes the salary of a person posted to the subsidiary as an expert. Other times, the fee for centralised IT solutions (e.g. SAP access) is allocated between the members of the group under this title. The management fee may also include a portion of central marketing and PR costs. Finally, the invoice can contain the salary arising in connection with the company’s executive/administrative management.
In short, the following questions should be raised when analysing management fees:
- Exactly what costs are included in the management fee?
- Does the management fee contain a surcharge, in the case of recharged wage costs for example?
- If the management fee contains allocated central costs, what principles were used to allocate the cost ratios to the individual subsidiaries? What allocation rates were applied?
- Can the recharged costs be considered recognised costs based on the rules of corporate taxation?
After clarifying the above issues we can start examining the relationship between the arm’s length price and the transfer price.
A good professional not only likes challenges, but also seeks them. It is always interesting getting to know a new customer and we can be sure that the challenges of Hungarian transfer pricing rules will come up during the meetings if the customer operates in a non-conventional line of business. It is obviously easier to find comparative data for the transactions of a company engaged in contract work which operates as a supplier for the automotive industry, than in the case of a group that is partly involved in secret military projects and configures military equipment. Equally unconventional is a related transaction where a Hungarian company constructs an entire power station and the services and products of affiliated companies are also incorporated into the project.
What guidelines or principles should we use here? The basis for all transfer pricing work is understanding how the company operates, and what tasks and risks they assume during the related transaction. How the parties should invoice their work to each other and what pricing they should choose. In the case of individual or rare transactions, the role of internal comparable prices gains in importance, i.e. we should always ask whether the company delivers the product in the related transaction to independent parties as well, or provides a similar service for independent parties. However, we should be careful with using comparative data and it should be understood that supporting the given transaction with proposals may prove to be insufficient during a NAV inspection.
These two examples illustrate that during any work related to transfer pricing even the first phase is very time-consuming (collecting information, analysing and collecting comparative data), but this is vital to be able to offer the necessary support.