New year, new legislation – which means that this year, just like at the beginning of every year, the focus is on changes to the tax rules. One of the most important changes affecting most Hungarian taxpayers in 2023 is the amendment of the transfer pricing documentation rules. As the deadline for preparing transfer pricing documentation and the corporate tax returns in Hungary is the end of May, the changing of the transfer pricing documentation rules will in most cases already impact the 2022 fiscal year. Some of the amendments already came to light last year, while Ministry of Finance Decree 27/2022 (XII.28) on the amendment of the Ministry of National Economy Decree 32/2017 (X.18) on the documentation requirement associated with determining arm’s length prices, published in the Hungarian Gazette on 28 December, answered any outstanding questions.
Scope and threshold of transactions to be documented
It was already known that the prices applied among related parties must comply with market principles, even if the given transaction was not to be included in the transfer pricing documentation. Under the previous transfer pricing documentation rules, no transfer pricing documentation had to be prepared for transactions with an annual transaction value of less than HUF 50 million. This threshold has now been raised to HUF 100 million (the new threshold can be applied no earlier than fiscal years starting in 2022). There is a contrary amendment here (applicable from the 2023 fiscal year) according to which certain transactions cannot be aggregated when preparing the documentation. Accordingly, purchases cannot be aggregated with the sale of goods manufactured from the materials purchased, nor can a transaction involving expenses be combined with a transaction primarily involving revenue. In practice, there is a chance that the higher threshold will reduce the number of transactions to be documented, but not necessarily the administrative burden.
Corporate tax base adjustment and application of interquartile range
What happens if the consideration applied by the parties is outside the arm’s length range? Based on the previous rules, it was enough to make the adjustment up to the lower (minimum) value of the market range. According to the new transfer pricing documentation rules, however, it will no longer be sufficient to make the adjustment to the minimum value, it must be made to the median value of the interquartile range including the “optimal” figures of the range. This means a greater pricing adjustment for a transaction price below the market price range, and also a higher corporate tax base and tax difference for the Hungarian taxpayer. This also indicates that the possibility of taking into account the minimum and maximum values of the arm’s length range is essentially eliminated. Applying the interquartile range is always mandatory.
New data reporting obligation
A completely new element of the transfer pricing documentation rules is the introduction of a data reporting obligation as part of the corporate tax returns. This will apply in Hungary for the first time for tax returns filed after 31 December 2022, so even a taxpayer with a different financial year, who has just closed their 2021/2022 fiscal year, might be subject to the reporting obligation.
In all cases, transactions subject to the documentation requirement are also subject to this new reporting obligation. However, there are some transactions that are not subject to the documentation requirement, but are still subject to the reporting obligation (albeit with a reduced data content). Examples of such transactions include non-refundable cash transfers and transfers of unchanged cost amounts – although the legislator has granted an exemption for the latter for the fiscal year ending in 2022.
Most important facts to be reported from now on:
- transaction type (based on list set out in the decree),
- activity code,
- details of related parties,
- transfer pricing method
and there are additional elements to be reported for certain types of transactions (e.g. benchmark interest rate, accounting standard applied, arm’s length value or range of the profitability indicator, value of the profitability indicator actually achieved, etc.).
So as mentioned above, there is no documentation or reporting obligation for transactions below HUF 100 million per year, or for stock exchange transactions.
Violation of new transfer pricing documentation rules
Finally, and perhaps most importantly, the fines for violating the obligation to provide documentation will increase significantly, from HUF 2 million to HUF 5 million. The maximum fine for repeated infringements has been increased from HUF 4 million to HUF 10 million.
The transfer pricing consultants of WTS Klient Hungary have considerable experience in preparing TP documents and in successfully supporting tax authority inspections, including, among others, industry knowledge on how to manage and support transactions of suppliers in the automobile sector and their tax inspections. As a member of WTS Global’s transfer pricing advisory team, we offer solutions for all kinds of transfer pricing problems at international level. Please do not hesitate to get in touch.