Transfer Pricing 2018

New transfer pricing regulation (Decree No. 32/2017 (X. 18.) of the Minister for National Economy on the documentation requirement related to the determination of the arm’s-length price (“the Decree”)) was promulgated on 18 October 2017.

Effectiveness
 At the taxpayer’s discretion, the new rules may also be applied to transfer pricing documentation relating to tax liabilities for the 2017 tax year, provided that the due date of the documentation is not earlier than the date on which the Decree enters into force.

Mandatory two-tiered transfer pricing documentation
In previous years, taxpayers were able to choose whether to prepare standalone or combined documentation (master file and country-specific documentation).

In the future, companies subject to the transfer pricing documentation obligation will have to prepare a set of documents consisting of a master file and a local file (it will no longer be possible to opt for the standalone documentation). The content of this documentation will be significantly extended, as it will be essentially the same as what is set out in BEPS Action 13, adopted by the OECD on 5 October 2015.

The master file contains, among other things, a description of the group, its legal and ownership structure, financial and tax position, and specific information related to the group’s intangible assets and financial activities. This is where the group’s unilateral Advance Pricing Agreements (APAs) in force and key supply chains are described.

The local file includes a description of the local subsidiary’s activities, business strategy, related transactions, and financial information. Copies of APAs and advance tax rulings issued by foreign tax authorities that concern the local company’s documented transactions must also be enclosed to the local file.
The above-mentioned documentation consisting of a master file and a local file will be supplemented with a country-by-country report1, in line with the three-tiered approach to transfer pricing documentation described in Action 13.

If a Hungarian group member does not have the master file by the day on which the corporate tax returns are due because local regulations pertaining to the parent company allow for the master file to be prepared later, the local company will be granted an extension until the deadline prescribed in the parent company’s country, but of no longer than 12 months from the last day of the tax year concerned (the local file will still have to be prepared by the deadline). However, the local company will then have to prepare the master file as well.

Database searches
  • The new regulations also include the tax authority’s recent practice, which means that if there is no change in the activities, new database searches must be conducted every three years, while in the interim period financial updates are required annually.
  • The new rules also stipulate that database searches must be documented in a way that makes them reproducible (traceable) or if this is not possible, they must be completely documented.
Low value-adding services
The previous decree provided for the possibility to prepare simplified documentation for the services listed in the annex to the decree, but as several conditions had to be met, few taxpayers were able to make use of this opportunity. For the purposes of this provision, a mark-up between 3% and 10% qualified as an arm’s-length mark-up.
According to the new Decree, a mark-up between 3% and 7% will now qualify as an arm’s-length mark-up used for the supply of services.

Other changes
The Decree also introduces the definition of intangible asset.
In the past, when applying the comparable uncontrolled price method, using the interquartile range was not required. According to the Decree, this exemption will be abolished, so if the related conditions are met, this statistical range will have to be used for all methods.
Another change is that taxpayers will be able to modify the documentation (in the form of an amending document) within the statute of limitations, but by no later than the start of the tax authority’s audit, if the documentation was not prepared in accordance with the relevant laws or it contains errors relating to the tax base, taxes or the arm’s-length price. However, no modification is allowed if the taxpayer has lawfully exercised its option and would change it with the modification.
Considering that the above changes impose significant additional burden on Hungarian companies, and that the scope of simplification will be reduced, we suggest that you start preparing the documentation or contact your parent company well ahead of the deadline.