SIMPLIFYING TRANSFER PRICING DOCUMENTATION IN HUNGARY
Based on a decree of the Minister for National Economy published in December 2011, the rules for preparing transfer pricing documentation changed with effect from 1 January 2012. The simplifications can be taken into account when preparing documentation for the 2011 tax year if the deadline for preparing the documentation is after 1 January 2012.
Changes regarding the range of taxpayers obliged to prepare transfer pricing documentation
The range of enterprises not subject to the documentation requirement has been expanded. No transfer pricing documentation now needs to be prepared in the following cases:
- Transactions between the foreign permanent establishment of a resident taxpayer and the related parties of the resident taxpayer if no corporate tax base adjustment is otherwise needed because the resident taxpayer applies exemption to the determination of the tax base on the basis of an international contract. This provision does not apply to transactions between a foreign enterprise and its resident permanent establishment or between a taxpayer and its foreign permanent establishment.
- Cases in respect of which the Tax Authority determined the price within the framework of an Advanced Price Agreement (APA). The exemption applies throughout the duration of the decree.
- Cost transfers specified in the decree. These are cost transfers in the same form, not linked to the enterprise’s main activity, and the party actually providing the service or selling the product is not a related party of either of the parties.
- The provision of non-repayable funds.
- Where the aggregate net value of a contract, applying the arm’s length price, is below HUF 50 million for the period between the commencement of the contract and the last day of the tax year. When calculating the value limit, the aggregate value of contracts that can be consolidated must be taken into account.
Low value added intra-group services
As no transfer pricing documentation needs to be prepared in respect of transactions valued at less than HUF 50 million, based on the above section, the term “simplified documentation” – relating to earlier simplification rules for transactions valued at less HUF 50 million – has been abolished.
‘Low value added intra-group services’ has been introduced as a new term. This covers routine services that are provided by a group member outside its main activity to another member or members of the group, in such a way that the services are not directly related to the users’ main business activity and represent no business value for them, and the value of neither the provided nor the used service exceeds the following value limits:
- HUF 150 million in the tax year, based on the aggregate net value of contract-based performance, applying the arm’s length price;
- 5% of the net sales revenue, in the case of a service provider;
- 10% of the net sales revenue, in the case of a service user.
Compliance with the conditions must be examined in respect of the taxpayer that prepared the documentation, taking into account the aggregate value of transactions that can be consolidated.
The types of low value added intra-group services mentioned in the decree include IT services; real estate management; legal, accounting, auditing, tax advising, translation, interpretation, and certain market research activities; certain educational, administrative, and transportation services, as well as other accommodation, canteen services, and guarding and security services. Simplified documentation may be prepared with respect to low value added services, by applying the cost plus method. In the documentation the arm’s length price may be determined on the basis of information available without a comparative analysis if the margin falls between 3% and 7%. If the margin is outside the 3%-7% range, the arm’s length price must be presented using comparative data.
The preparation of simplified documentation is not permitted if in the current tax year or the two preceding tax years low value-added services were provided to or received from not only a related party, but also to/from independent parties, and an arm’s length margin for these independent comparable transactions is outside the 3%-7% range.
The maximum default penalty that can be imposed due to a failure to prepare transfer pricing documentation will be higher. If taxpayers fail to fulfil their documentation obligations (including the safe-keeping of documents) related to the determination of arm’s length prices, the maximum penalty remains at HUF 2 million per record (consolidated record) on the first occasion. If, however, taxpayers are in breach of the requirements after the first tax inspection, the maximum penalty on the second occasion will rise to HUF 4 million per record. Penalties can be even higher if taxpayers are found to be in a repeated breaches of the requirements in connection with records that have already been or would have been inspected. In these cases, a default penalty eight times the one imposed on the first occasion can be levied. Tax inspectors have discretion to reduce penalties to an unlimited extent if taxpayers prepare the required documents after an inspection.
With effect from 1 January 2012, taxpayers must report data not only on those related companies that are still in operation (within 15 days from the commencement of the first contract), but also the end of a relationship (within 15 days from the termination).
Under the amendments, with effect from 2012, in the case of transactions between Hungarian taxpayers and their branches and related parties abroad, pre-tax profits will not be adjusted with the arm’s length price if, based on international treaties, the taxpayer calculates its corporate tax base in a manner that does not include income taxable abroad.
With effect from 2012, during a tax inspection, the Tax Authority will also accept transfer pricing documentation in English, German or French. However, the strict Hungarian statutory regulations will continue to apply to the content of transfer pricing documents. Accordingly, the use of transfer pricing documents prepared by foreign companies in the above languages may carry significant risks for domestic companies.