In this newsletter, we would like to draw your attention to a change that has recently entered into force, which requires businesses to prepare for a new transfer pricing reporting obligation. In addition to the introduction of the reporting obligation, the professional requirements for transfer pricing documentation obligation will be tightened and the default penalties for non-compliance will increase significantly, resulting in the most significant changes in transfer pricing in recent years.
The reporting obligation on transactions between related parties was already introduced in the provisions of the Corporate Income Tax Act in the summer of 2022, but its detailed rules were only promulgated in the PM Decree 27/2022 (XII. 28.) of 28 December 2022 amending the NGM Decree 32/2017 (X.18.) on the obligation to keep records in connection with the determination of the arm's length price ('TP Decree').
Below, we have briefly summarized the rules of the transfer pricing reporting obligation and the related changes and deadlines.
Transfer pricing reporting obligation in the corporate income tax return
Under the new reporting obligation, taxpayers will have to provide information on the determination of the arm's length price as part of their corporate income tax return by the deadline for filing the corporate income tax return. The introduction of the reporting obligation does not affect the transfer pricing documentation obligation of taxpayers, as transfer pricing documentation should continue to be prepared by companies in the same way as before, taking also into account the new provisions of the amended TP Decree.
According to the rules introduced in the summer of 2022, the reporting obligation will first apply to corporate income tax returns to be filed after 31 December 2022, which means that taxpayers applying the calendar year as a tax year will have to comply with the new reporting obligation in their returns for the tax year of 2022, i.e. by 31 May 2023 at the latest.
The new version of the corporate income tax return form, which includes the reporting obligation, has not yet been published on the website of the National Tax and Customs Authority, but according to the amended rules of the TP Decree, taxpayers will have to include the following information on a transaction basis in their corporate income tax return for each transaction carried out with related parties:
- details of the related parties involved in the transaction (tax number, registration number, State
of residence);
- indication of the nature of the transaction from the 53-item listed in the amended TP Decree;
- the most specific TEÁOR code for the transaction (if applicable);
- the net consideration - expressed in HUF - actually applied in the transaction between the
parties during the year under consideration, broken down by related party;
- the provisional amount of the corporation income tax base adjustment in case of applying a price other than the arm's length price, broken down by related party;
- and the transfer pricing method chosen to determine the arm's length price.
- In addition to the above, depending on the method chosen, the reporting should include, for each transaction, the name of the profitability indicator chosen, its arm's length value or range, and the value of the profitability indicator actually achieved by the tested party in the transaction during the tax year.
Given the fact that the provision of the information required under the reporting obligation requires the performance of a functional analysis and characterisation of the transaction, as well as the preparation of a benchmarking study, in the future it will be of particular importance to determine the arm's length price for the related party transactions until the filing deadline of the corporate income tax return the latest.
The reporting obligation mainly applies to transactions with related companies which are also subject to transfer pricing documentation obligation. A positive change is, that under the amended TP Decree the ransaction threshold below which no transfer pricing documentation is required to be prepared, was increased from HUF 50 million to HUF 100 million, so that transactions with an annual value of less than HUF 100 million are, as a general rule, not subject to the reporting obligation. The amended provision is also applicable for the tax year starting in 2022.
However, it should be noted that transactions exempt from transfer pricing documentation obligation for certain reasons other than the transaction value threshold (e.g., the transfer of the cost of services purchased from an unrelated party at the same price) might also be subject to reporting obligation, but in the case of these transactions the reporting obligation applies only to a reduced data content.
Changes affecting the transfer pricing documentation obligation
The amended TP Decree has also affected the transfer pricing documentation obligation in several aspects.
For example, in addition to the above-mentioned change to the transaction threshold, the rules on the consolidation of transactions for transfer pricing documentation purposes have also been amended, whereby transactions in opposite directions could no longer be consolidated from the tax year beginning in 2023.
Another important change is that the transfer pricing documentation prepared for the tax year starting from 2023 will now have to include in detail how the financial data used in applying the method for the determination of the arm's length price can be linked to the taxpayer's accounting information system, in particular to the data contained in the financial statements, general ledger accounts, cost centres, cost-bearers, profit centres or work numbers, and, where applicable, the method of allocating costs between several parties and the allocation keys should be shown too.
What changes will the new rules bring in practice?
The introduction of the new reporting requirements will make it essential for groups of companies to deal with transfer pricing not only at the end of the tax year, but on an ongoing basis. If a company fails to do so, it would expose itself to a higher risk of a default penalty for non-compliance and of being selected by the tax authorities.
We would like to highlight also that as a result of the summer amendments to the taxation rules, the maximum default penalty for transfer pricing documentation violations has more than doubled from HUF 2 million to HUF 5 million per transaction, and from HUF 4 million to HUF 10 million for repeated violations.
The new data reporting obligation is intended to introduce significant changes and tightening in the area of transfer pricing audits, thus giving the National Tax and Customs Authority more scope for risk analysis in transfer pricing. Companies in similar industries would be more easily accessible, giving more scope for more accurate and rigorous transfer pricing audits.
The tax experts of Moore Hungary Tax Advisory Ltd. would be pleased to assist you in preparing for the new obligations, please do not hesitate to contact us.