In a previous article on transfer pricing documentation we looked at the most important changes affecting transfer pricing records over the years. We also intimated in the article that the documentation will have to contain even more information in the future to make tax authority inspections more efficient. The amendments are already contained in a draft transfer pricing decree, and we look forward to seeing the final wording. During the amendment to a 2013 decree for example, the draft prescribed very detailed database filtering criteria, but in the final decree, the strict conditions on this filtering were ultimately removed. Let’s take a look at the new aspects in the draft.
What period do the changes to the new transfer pricing decree relate to?
Minister of Finance Decree 22/2009 (X.16) that is currently in force will be replaced by a new transfer pricing decree from 2018. The decree’s provisions must be applied for the first time in relation to documentation for liabilities for fiscal years beginning in 2018. Comments could be submitted on the draft until 5 September; we are now waiting for it to be promulgated and then, thirty days later, for it to enter into force. The provisions of the new transfer pricing decree may be applied when preparing documentation for tax liabilities in the 2017 fiscal year as well, but only if the preparation date of the documentation is not earlier than the date the decree enters into force.
What would the new transfer pricing decree change with regard to the documentation content?
The structure of the new documentation would differ from its current form. The ability to prepare independent records would disappear, and be replaced by records comprising two separate documents: the master file and the local file.
The content of the master file would apply to the group as a whole and comprise detailed information; this would include, but is not limited to, the following:
- presentation of supply chain for the group’s 5 largest products and services, and for any product and service whose turnover exceeds 5 percent of the group’s turnover, listed based on sales revenue (this will not be easy to identify, or even list, for an entity with several divisions carrying out activities round the world – the only potential relief is that the information can also be displayed in a table or in a chart),
- list of significant, intra-group services,
- intangible assets and related agreements concluded with related companies,
- description of intra-group financing,
- presentation of the group’s unilateral arm’s length price agreements (APA) in force and other binding ruling resolutions,
- presentation of significant business reorganisations, acquisitions, transactions related to sales of business divisions.
The main and new parts of the local file are as follows:
- when presenting the taxpayer, we need to show the management structure, an organisational diagram and the names of the individuals who report to the management,
- the company’s main competitors have to be listed (under the current transfer pricing decree, relative competitive positions had to be presented),
- copies of unilateral, bilateral and multilateral APAs and other binding ruling agreements not issued by the NAV have to be included (similar conditions can be found in the current transfer pricing decree, however, binding rulings were not included so far, and ongoing procedures had to be presented too).
What is good in the new decree?
On a positive note, the records and the underlying documentation do not have to be prepared in Hungarian. That said, we still recommend that the documentation be compiled in English, German, French or Hungarian (otherwise the tax authority may ask for the documentation to be translated, possibly resulting in undue additional expense). Similar to the previous rule, the local file must be compiled by the submission date of the tax return (but it does not have to be submitted to the tax authority) and the new transfer pricing decree provides an opportunity for the local file to be considered the record for a period of 12 months from the last day of the taxpayer’s fiscal year (also bearing the parent company’s deadlines in mind), until the master file is available.
What is the situation with database filtering?
For companies selected as comparables, it will suffice in the future to carry out database filtering every three years (the financial data of the companies used for the comparisons should be updated every year), provided that there is no significant change in the business activity over this time. The transfer pricing decree currently in force does not contain any such provision, and updating the financial figures of the compared companies can increase costs. This is because many firms did not deem it important to revise the data of the comparable companies, arguing that the market circumstances had not changed.
The primary goal of the regulation bringing more administration is to curb the aggressive tax planning and tax evasion efforts of multinational enterprises. Alongside the rules of country-by-country reporting, Hungary has now integrated the rules of master files and local files too. The documentation prepared so far was substantial anyway, but in future, even thicker transfer pricing records will need to be “produced”. For example, it can happen that there is no written contract between the parties, but this does not mean that the record does not have to include all the relevant details. The master files to be presented to Hungarian tax inspectors will contain a lot of information that is not relevant at all from the perspective of a Hungarian inspection, but just one piece of missing data can pave the way for a default penalty.