New transfer pricing reporting obligation in Hungary
As has been known since the summer, transfer pricing penalties will increase significantly from 2023. In addition, taxpayers will also face new data reporting obligations in relation to their transfer pricing documentation, as information on controlled transactions will have to be included in the corporate income tax return as a new element.
Under currently effective regulations, companies were required to prepare their transfer pricing documentation by a deadline. However, they did not have to upload the records or the information anywhere, they were merely required to keep them so that they could present them to the inspectors during a tax audit.
According to a bill* published on the website of the Ministry of Finance, the full TP report will still not need to be filed with the corporate income tax return, but information on almost all relevant content of the transfer pricing documentation will need to be reported as part of the tax filing. This will cause difficulties for companies that have no documentation prepared by the deadline to support arm’s length prices.
These transfer pricing data must be reported in the CIT return
The amending provisions require taxpayers to include the following information in their corporate income tax returns:
- name of the related party transaction by selecting the activities specified in the Act;
- the sectoral classification (according to TEÁOR'08) most representative of the transaction;
- name of the related party, its tax number (or other identification data),and the country of residence of the foreign affiliate;
- net transaction value per related party;
- tax base adjustment per related party;
- transfer pricing method used;
- indicators related to the transaction (profitability, interest, royalty rate, % indicators);
- type of reporting used by the tested party (statutory Hungarian, IFRS, other);
- arm's length price or price range defined by a study or by other means;
- price used in the transaction under review (if an adjustment was made, the final price).
The tax authority's current practice is to analyse the information provided by taxpayers and, based on the available data, they are expected to initiate more targeted transfer pricing reviews. They may pay particular attention to areas where they identify deficiencies or inconsistencies in TP data reporting.
The majority of taxpayers where tax year corresponds to the calendar year close their books in January, which requires preliminary corporate income tax calculations (along with benchmark studies to calculate possible TP adjustments). It is very important to start collecting information and tasks related to transfer pricing documentation in time, as the preparation of transfer pricing records is a lengthy process.
Due to the increasing TP data reporting obligations, taxpayers should start preparing the information required for transfer pricing records at the end of the financial year, otherwise they could easily miss the deadline. This could lead to severe penalties due to the significant increase in penalty limits.
Increase in transfer pricing documentation threshold
In addition to the new TP administrative task, the proposed amendment to the transfer pricing decree also includes some relief. The transaction value threshold to be documented is expected to increase from HUF 50 million to HUF 100 million.
This means that for the first time, from the tax year 2022, taxpayers will only have to include transactions with an arm’s length value of HUF 100 million or more, instead of the long-unchanged HUF 50 million in their transfer pricing documentation.
Transactions below the new value limit need not be included in the transfer pricing documentation. It is important to note, however, that if related parties have not settled transactions below HUF 100 million at arm's length, they will still have to adjust the tax base in their corporate income tax return. When assessing the threshold, contracts that can be aggregated should still be considered together.
In light of the above, it is important to highlight that the 2022 local file must be prepared at the same time as the corporate income tax return (CIT) for the current year, but no later than the date of filing the CIT return. This deadline is 31 May 2023 for taxpayers with the same fiscal year as the calendar year.
Please note, 31 May is the final deadline! If the company files its CIT return earlier, the transfer pricing report should also be completed earlier.
In our experience, comprehensive tax authority audits typically cover transfer pricing documentation, so it is advisable for group members to keep these up to date and in line with the submission of their accounts. It is also recommended that a transfer pricing expert is involved in the above and, if necessary, a benchmark analysis is requested.
