On 21 June 2022, a draft law (Bill No. T/360 on the establishment of Hungary's central budget for 2023) was presented to the Parliament, which will significantly change the rules for the preparation of transfer price documentation and the determination of arm’s length price between related parties.
Overall, it can be stated that both the rules for determining the arm’s length price and the obligations related to the preparation of transfer price documentation have become stricter, and the amount of the default fine has also increased. Changes are summarized below.
Data supply liability in the corporate tax return
Under the effective legislation, the transfer price documentation recording the arm’s length price must be prepared until the day of the corporate tax return. However, currently the documentation does not have to be submitted to the tax authorities, so there was no way to check whether the transfer price documentation was actually completed by May 31, it was sufficient that the documentation was available at the time of a possible tax audit.
Under the law amendment, the company preparing the transfer price documentation must provide data to the tax authority in its corporate tax return. The details of the data supply are defined in a ministerial decree, so the details are currently not known. However, as a result of the change, it is likely that the arm’s length price (range), as well as the prices used during the related transaction, or the profit range must be determined by the date of the corporate tax return.
Mandatory use of interquartile range in database research
In many cases, the arm’s length profit range is determined by company database research, during which the interquartile range formed from the profit indicators included in the comparative market sample is considered the arm’s length profit range. Although the regulation also favors the use of the interquartile range, the legislation left a loophole regarding the minimum and maximum values of the profit indicators included in the market sample delimiting the arm’s length profit range. This is an option if a function analysis is prepared for each of the independent companies included in the comparative sample. Since the content of the function analysis is not defined in detail in the law, the regulation gave the possibility, in principle, if the profit indicator used in the related transaction is not within the interquartile range, it can still be considered arm’s length one.
This possibility is ended by the amendment, saying if the taxpayer takes into account data from a publicly available database, the interquartile range must be considered the arm’s length range. The use of the interquartile range will be mandatory not only for company databases (Amadeus, Crefoport, etc.), but also for public databases for products and services.
Determining the amount of the item increasing the pre-tax profit
If the profit indicator used in related transactions is below the arm’s length range defined by the interquartile range, usually an obligation to increase pre-tax profit arises. Based on current practice, in these cases, the pre-tax profit is usually increased to the extent as if the profit indicator used in related transactions had reached the lower value of the interquartile range.
As a result of changes, in the future the value of the items that increase the pre-tax profit must be determined to the extent that the profit indicator used in related transactions had reached the median, i.e. the middle value of the arm’s length profit range. This means that the obligation to increase the pre-tax profit applicable to related parties will be clearly defined and will be higher than it was in the current practice.
Increase in the maximum amount of default penalty
If the taxpayer does not prepare the transfer price documentation, the tax authority may impose a higher default fine than the currently applied rates. Based on the current legislation, the tax authority can impose a fine of up to HUF 2 million if a transfer price documentation has not been prepared, and in case of repeated failure, a fine of up to HUF 4 million may be imposed. These sanctions increase significantly, the maximum fine that can be imposed is HUF 5 million, and in the case of repeated defaults it can be HUF 10 million.
The above changes must already be applied to transfer price documentation prepared for the year 2022.