Recent Hungarian developments in transfer pricing with a focus on impacts of COVID-19

Introduction

As an answer to the COVID-19 crisis, Hungarian taxpayers received four months’ extension for the filing deadline of the annual corporate income tax and return and thus for the preparation of the Transfer Pricing (“TP”) documentation. It means that the new filing deadline for calendar-year taxpayers is 30 September instead of 31 May. Nevertheless, it is important to emphasise that if a company decides to file the corporate income tax return before 30 September, the TP documentation becomes due too.

Allocation of losses

With a few exceptions, global corporations suffered great economic losses due to the COVID-19 crisis, which could be challenging from a TP perspective as well. Most of the companies in Hungary that are part of a group have a low risk profile, which justifies a low but stable profit allocation. If TP analyses for the past years have been describing the previously mentioned low risk scenario, it will be hard to justify significant losses in these local entities.

However, there may be some viable approach to justify less favourable financials. The best way to support the loss split model by lower-risk entities is to use existing examples of third-party behaviour in similar situations. Even without existing comparable data (which is still limited), it seems to be reasonable to say that under such extraordinary circumstances, unrelated parties would renegotiate their existing agreements. The profit-loss model can be re-evaluated based on the new analysis called DEMPE (development, enhancement, maintenance, protection and exploitation) introduced by OECD for intangibles and risks.

Financial losses can occur for various reasons. Underpinning the allocation of losses as a result of commercial, financial or operational changes increases the chance that the tax authorities would accept intercompany pricing. In this context, the following may be considered:

• Commercial reason can be the reduced customer demand or the disruption in the supply chain;
• An example for financial changes may be the increased G&A-to-sales ratio that can support the allocation of losses. Low risk entities often undertake support functions and these fixed costs usually remain constant over a short term.
• As an answer to the unforeseeable event there may be changes in the company’s operating structure like in management functions.

Furthermore, it is advisable to consider information about the country’s previous response to the allocation of losses in similar situations, for instance after the economic recession of 2008. 

Other challenges in the transfer pricing documentation liability

Based on past experience, Hungarian subsidiaries of a group may face difficulties in the preparation of the master file (“MF”), where the headquarters are in a different country and the filing of the MF is not a requirement in that specific country. This is especially true, where the Hungarian subsidiary has a marginal role and therefore the headquarters are not especially interested in sharing the necessary information. Even if the headquarters prepares and sends the master file to the subsidiary, additional queries may emerge if there is a difference in filing deadlines or in terms of obligatory content; or if a translation is needed if the MF is not prepared in one of the accepted languages, namely in Hungarian, English, German or French.