Which tax types are affected by transfer pricing adjustments in Hungary? 

Compliance with transfer pricing rules requires related companies to set the pricing of their intra-group transactions according to the arm’s length principle. Since this is not always possible for individual orders during the year, prices applied over the year are often adjusted by the parties to arm’s length prices at the end of the year. An intra-group review of transfer pricing adjustments is essentially necessary for the purposes of income taxes. However, in Hungary, in addition to corporate income tax, transfer pricing adjustments can also have an impact on the local business tax base (which type of tax carries turnover tax elements), or on the innovation contribution and even on VAT returns in certain cases. 

How do you handle such adjustments? 

Adjustments can be performed in several ways. The first question that usually arises is whether the adjustment should only appear as a corporate income tax base adjustment item, or as an accounting adjustment.

According to the rules of the Hungarian Act on Accounting and in line with underlying contractual provisions, related companies have a chance to include in their accounting records a subsequent adjustment of the consideration for assets and services sold and acquired in the ordinary course of business during a specified period as an adjustment of the original transaction amount, i.e. to adjust the consideration of their transactions to market price, thereby avoiding the tax base adjustment under the Corporate and Dividend Tax Act.

The Hungarian Act on Accounting stipulates that these adjustments must be reported (based on the accounting document issued for the subsequent adjustment) as part of the asset’s acquisition value; as a change to a cost or expense in the case of services purchased; and as net sales revenue in the case of sales.

Double taxation problems and the special status of local business tax

Of course, the accounting does not just affect corporate income tax, it is highly important for the purposes of local business tax as well. Local business tax is a tax type based on net sales revenue, so transfer pricing adjustments accounted for as other income would not essentially have an effect on the local business tax base, while the adjustment reported as part of the net sales revenue is subject to local business tax as well as corporate income tax.

Prior to the change in legislation valid from the 2021, the Act on Local Taxes did not include any specific rules for transfer pricing adjustments. However, it follows from the general rules of the Act on Rules of Taxation that upon calculating individual local business tax base components, related companies must consider if a tax base component is derived from a transaction in which the contractual price differs from arm’s length conditions.

For local business tax, adjustments due to the arm’s length price apply to related companies who are subject to this obligation under the Corporate and Dividend Tax Act. An entity obliged to apply arm’s length prices based on the Corporate and Dividend Tax Act may determine net sales revenues or the cost and expense decreasing net sales revenues on the basis of the arm’s length price defined under the Corporate and Dividend Tax Act. An adjustment aimed at reducing the tax base is only possible if the entity has a statement from its business partner that the latter performs an opposite tax base adjustment in the same amount. If the business partner is not subject to local business tax (a foreign entity, or a domestic entity that only has a registered office or permanent establishment in a municipality where local business tax is not applicable), the statement must specify that the entity will apply the adjustment in the tax type corresponding to local business tax or, in the absence of such a tax, in corporate income tax or in the foreign tax similar to corporate tax.

For multinational groups, taking local business tax into account has always been difficult, and it can make up a significant portion of total Hungarian tax liability. In the system of direct taxes, it would be ideal if transfer pricing adjustments worked for all companies affected, i.e. for example, a tax base increase due to transfer pricing adjustments in Germany would be matched with a tax base adjustment (deduction) at the Hungarian subsidiary. We can perform this under the framework of double tax treaties and their principles since such treaties include separate rules for the prices applied between related parties. However, not all tax treaties specify local business tax as a tax type that can be considered and this can lead to double taxation in the case of local business tax adjustments. 

What happens to VAT? 

To judge when transfer pricing adjustments modify the invoiced amount of previous product sales or service provision (this requires the correction of the invoices and VAT returns) and when we are only talking about other financial and profitability adjustments (where no correction invoice is issued and no direct link exists with a previous individual transaction), the underlying contractual agreement between the parties should be used as a basis.

In summary, year-end transfer pricing adjustments require a very thorough review to enable appropriate adjustments to be made for all tax types. Our transfer pricing experts will be happy to help you manage your transfer pricing adjustments and prepare the supporting documentation using the Amadeus TP Catalyst program.

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Management fee

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:

1. Exactly what costs are included in the management fee?
2. Does the management fee contain a surcharge, in the case of recharged wage costs for example?
3. 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?
4. 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.

Narrow range of comparative data

 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.

For our previous articles on transfer pricing please click here and here.

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At the outset

As it was fourteen years ago, the Hungarian regulation required documentation for almost every transaction with a related company. Under the decree, in addition to the full documentation it was also possible to prepare simplified transfer pricing documentation for low-value transactions. Taxpayers affected in Hungary had to prepare the transfer pricing documentation by the submission date for their corporate tax returns at the latest, but it did not have to be submitted to the tax authority, it only had to be made available for the tax inspectors in the event of an inspection. The HUF 50 million threshold fulfilled an important role from the beginning in defining the documentation obligation.

The mandatory content of the full transfer pricing documentation did not really change over the years; the most important parts are the description of related parties, related transactions and the related market along with a functional analysis and the depiction of comparable transactions.

The simplified transfer pricing documentation is a short administrative record, it does not substantively review the relationship between the price applied among the related companies and the arm’s length price.

Major changes over the years

MoF Decree No. 18/2003 developing the initial regulation was in force until 2009, with only a few modifications made. The new MoF Decree No. 22/2009 was issued in Hungary in 2009, and it redefined the rules for preparing transfer pricing documentation in a few areas.

One of the most important changes was including in the decree the possibility of preparing a joint document. The joint document allows for the preparation of a document consisting of two parts, similar to the international master file.

Another important change or easing in the new decree was that it allowed the preparation of documents in languages other than Hungarian (English, French and German). Regardless of this, during an inspection the Hungarian tax authority could still request a Hungarian extract or the translation of documentation prepared in a foreign language.

The situation today 

The decree currently valid in Hungary has changed in many respects over the years. The simplified documentation has disappeared completely from the regulation (it was actually renamed, see low value added services below), below the HUF 50 million (EUR 160,000) threshold it is not necessary to prepare transfer pricing documentation at all. The notion of low value added services was added to the decree in 2012 as an important new element (it was already applicable as an amendment for the 2011 fiscal year). Accordingly, in the case of certain services (such as IT) reinvoiced with a low surcharge (5 and 10%), the taxpayer can prepare simplified documentation with the data previously required in the simplified record. One significant relief is that if the taxpayer uses services or acquires products of an independent party, and resells them to its related company without a mark-up, it does not have to prepare documentation. The latest changes provide guidance for the use of databases. 

The future

The committees of the EU and the OECD continually search for tools and methods to make the development of transfer prices more transparent. Hungary also participated in the OECD’s working committee when they worked out the data supply concept for country-by-country reporting (CbC), but only joined those committed to implementing the data supply as a signatory later on. Starting from the early summer of 2017 the EU prescribes a reporting obligation for its Member States in a directive that is strikingly reminiscent of the OECD data supply. Several European countries (such as Germany) have already included country-by-country reporting in the documentation as a mandatory element. In light of the above, the new direction is clear: transfer pricing documentation will summarise even more information in the future and it will provide more detailed information and more efficient controlling criteria for national tax authorities.

ARTICLES RELATED TO THE TOPIC:

Mandatory country-by-country reporting – Hungary joins the ranks

Challenges of Hungarian transfer pricing rules

The basics of Hungarian transfer pricing rules

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Even at the beginning of the year we can almost take for granted that transfer pricing rules will be a key topic in the lives of Hungarian companies in 2017. Issues affecting transfer prices are continually changing, even globally: multinational companies are constantly searching for pricing solutions that are welcomed by the experts of the local tax authorities of the given member states.

Without a detailed review of the legislative environment it is difficult to understand and interpret what these rules apply to exactly, and what should be considered. By answering some basic questions, this article provides some assistance regarding transfer pricing rules.

When can transfer pricing rules come into play?

In many cases it is not clear whether we are dealing with a transaction where the issue of transfer pricing arises at all. When two or more companies qualify as related parties and they conclude transactions, we need to review the development of transfer prices between them.

Important! Local transfer pricing rules exempt taxpayers from preparing transfer pricing documentation in many cases (e.g. based on the size of the enterprise or due to the low value of the transaction). However, this only means that the taxpayer does not have to prepare such documentation. Nevertheless, related party transactions have to be concluded at arm’s length price in order to avoid any tax base corrections at the end of the year at the latest.

What does a “related party” mean? 

If we review a transaction for the purposes of corporate tax, the relevant definition will be found in the Act on Corporate Tax. Based on this, the following qualify as related parties:

• enterprises which have a (direct or indirect) majority interest in each other, or a third party that has such an interest in them; or
• a foreign company and its domestic permanent establishment(s) or the domestic establishment(s) and the persons where the issue of majority interests arises; or
• a domestic company and its foreign permanent establishment(s) or the foreign establishment(s) and the persons where the issue of majority interests arises; or
• the taxpayer and other persons if there is controlling influence over business and financial policy between the companies based on overlaps in the respective management teams.

Tip! Draw a simple chart of a company group in order to specify the companies that qualify related parties.

What does a “majority interest” mean? 

The term “majority interest” is defined in the Civil Code. In a nutshell, this is when an individual or a legal entity has more than half of the voting rights or a controlling interest in a legal entity. Consequently, they have decision-making authority or can appoint or remove the persons who make the decisions.

Important! The direct or indirect ownership shares or voting rights of close relatives have to be counted together.

Based on the above it is easy to identify related party transactions, and the ones where pricing has to be reviewed can be designated.

For our latest articles on transfer pricing please click here and here.

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