Recent developments in Hungarian transfer pricing

Introduction

Hungarian transfer pricing broadly follows the OECD principles with respect to both the methods available to determine arm’s-length prices and the documentation obligation.

As a general rule, transfer pricing documentation must be available by the filing deadline of a Hungarian taxpayer’s annual corporate income tax return (which is 31 May for companies where the business year corresponds to the calendar year); however, this does not have to be filed with the Tax Authority. General exemption from the obligation to prepare transfer pricing documentation exists (amongst others) for transactions completed in a particular tax year with an aggregate value below HUF 50 million (approx. EUR 156,000). Simplified documentation can be prepared for qualifying low-value-adding intra-group services.

The OECD three-tiered approach

Hungary adopted the 2017 OECD guidelines, as a result of which transfer pricing documentation is split into two main parts, the Master File and the Local File. Compared to previous legislation, new rules require, in general, a more detailed description of related financial data, whereas as a third tier, a Country-by-Country Reporting (CbCR) obligation also exists in certain cases. The new rules will be first applied for the 2018 tax year.

Group taxation scheme

Effective as of 1 January 2019, Hungary introduced a group taxation model for corporate income tax purposes (a group taxation scheme for value added tax purposes existed already prior to 2019). The scheme provides for an exemption from transfer pricing provisions in transactions concluded between members of a corporate income tax group during the existence of the tax group (including the documentation obligation and potential corporate income tax base adjustments).

Transfer pricing rules must, however, still be considered for transactions carried out prior to establishing a tax group, and also with respect to transactions of tax group members with associated enterprises having foreign tax residency (these cannot be part of a domestic tax group), where the transfer pricing documentation is to be prepared at the level of the tax group.

CbCR treaty with the USA

Hungary and the United States of America concluded an agreement on the automatic exchange of CbC reports, effective from 21 December 2018, which can be considered an important step for Hungarian companies with ultimate parents resident in the US. The agreement enables exemption for Hungarian group members from submitting Country-by-Country reports to the Hungarian Tax Authority, an obligation that would generally exist if there is no bilateral treaty (applicable if the Hungarian group member was not initially designated by the group for CbC Reporting in Hungary).

Transfer pricing audits

Based on the Tax Authority’s own statistics, more than 250 transfer pricing-focused tax audits were completed in 2018, resulting in a difference of more than HUF 1.7 billion (approx. EUR 5.5 million) corporate income tax owed by taxpayers. Transfer pricing audits mainly targeted financial transactions (cash pool arrangements, loan transactions), qualification issues pertaining to automotive industry suppliers (fully pledged or contract manufacturers), lack of transfer pricing documentation (e.g. misinterpretation of exemptions), and erroneous application of qualitative adjustments in benchmark studies.