How to Comply Effectively With the new Transfer Pricing Obligations

Therefore, businesses that have not yet paid enough attention to transfer pricing must identify each related party transaction from 2022 and should know their details, their arm’s length price, and the exact result of the reconciliation. Determining all these is certainly not easy. There is also an increasing expectation that transfer pricing transactions should be supported by segmented accounting data specific to each transaction.

In addition, the range of transactions affected by the data reporting is more expansive than those subject to transfer pricing documentation, as certain exempted transactions will also have to be reported, such as those covered by an AdvancedPricing Agreements (APA) decision, contracts with a private individual who is not a sole proprietor, intra-group cost recharges, and free transfers of funds.

Continued from page 11 ››› unnecessary financial risks. This is an expected trend by foreign investors. LB: The tax inspectors receive more information regarding taxpayers due to the digital developments, which can highly support their focus on issues to be examined (and thus levy penalties). Therefore, companies should attach great importance to their taxation and accounting processes. Furthermore, numerous legal conditions may be applied solely until the end of the state of emergency (currently June 27, 2023), after which, if the legislators want to keep them, these should also be changed. ASz: There seems to be an increased focus by the tax office on leveraging information technology, collecting online data, building databases, and using digitalization and big data to gather information about taxpayers. Hopefully, this will help reduce the administrative burden on taxpayers.

Although transfer pricing has long been a focal point of all comprehensive tax audits in Hungary, significant legislative changes were introduced last year. With the new transfer pricing data reporting in corporate income tax declarations, the authority will not only be able to select “risky” taxpayers but will also be able to carry out audits much more efficiently than before. This provision may mean an invisible audit extension for the tax authority since they may already have gathered much important information in the risk assessment phase about the affiliated companies, even before an officially announced audit begins.

Although transfer pricing documents do not have to be submitted automatically to the tax authorities, theoretically, they had to be prepared by the submission date of the corporate income tax return. Furthermore, from now on, affiliated companies must provide data about their related party transactions and transfer pricing practices as part of the corporate income tax return by FY2022.

Affiliated companies must provide data within the CIT reporting period, which is five months from the end of the financial year, in other words, by the end of May 2023, for a financial year that matches the calendar year.

As part of such transfer pricing, reporting is required about every related transaction: information on the associated entities participating, the magnitude and type of the transaction, the yearly transaction value per related party, the method of determining the arm’s length price, the indicators used, the arm’s length price or price range, the actual applied price, and any adjustments compared to the above.

The increasing penalties will also put more pressure on businesses to prepare transfer pricing reports within the deadline, by the corporate income tax return date. The fine for omission or failure to compile a transfer pricing document has more than doubled to HUF 5 million (approximately EUR 12,500) per transaction, and in the case of repeated infringements, to HUF 10 million (roughly EUR 25,000).

In addition to the rule tightening presented above, the obligation of the “interquartile range” will be compulsorily applied during the analysis based on the database in the tax year that started in 2022. If the consideration in the examined related transaction is outside the arm’s length range, the transfer pricing adjustment must be made to the “median.” the financial regulations of most European countries. A new element in the corporate tax returns for 2022 is the data reporting and return obligation regarding transfer pricing. This is a significant change for a broader range of companies operating in affiliated structures that must devote the necessary attention in due time, well before the tax return filing date in May.

These new requirements are opening up even more accurate and rigorous transfer pricing controls. As a result, many more businesses could face increased default penalties and corporate tax base adjustments in the coming years. So, it is recommended that companies seek the help of a transfer pricing specialist as early as it is possible and consider claiming an APA-agreement with the tax authority, providing greater security, for the most critical or complex transactions that saves the need to prepare the transfer pricing documentations for years.

LeitnerLeitner is one of the most influential tax consulting companies in Central Europe, with worldwide coverage through the Taxand network. You may rely on our specialized full-scope transfer pricing service package: documentation, benchmark studies, database searches, representation in legal disputes, MAP and APA processes.

ZL: Changes to transfer pricing rules will affect many companies. For those with a business year matching the calendar year, time is running out to prepare proper transfer pricing documentation by the end of May and report information connected to transfer prices in their corporate income tax returns. The new legislation will increase administration, although the threshold of HUF 50 million, under which no TP documentation is needed, has been increased to HUF 100 mln.

BBJ: Are there specific areas where you would like legislation changed in Hungary? Do you see any hope this might happen?

IN: Some provisions still make certain tax procedures lengthy or inflexible and should be simplified in the future. It would be helpful if Hungarian accounting could be brought closer to IFRS rules, thus freeing international companies from difficulties.

PH: Reducing the administrative burden has been a focus for years, although we still see lots of space for further action here. The initiative to negotiate with professional experts is a good direction, but these contributions should be built into the legislation faster. Automation and digitalization are key areas and highly supported by the government but, in parallel, we need to reduce the administrative burdens as well.

GyF: The uniform taxation of large international corporations is becoming an increasingly important question in Europe and worldwide. The OECD has been working on developing global minimum corporate tax regulations since 2019, which most European countries, including Hungary, signed up to last year. The question of transfer pricing is also being given an ever more significant emphasis in

LB: The potential remaining hidden employment could be whitened more if social taxes were further reduced. Also, as the local business tax is a significant and particular tax type in Hungary, the simplification of the system would be improved if it were canceled permanently and, for example, the current 9% corporate tax rate was increased a bit (but we do not think it will change soon). Generally, it would be favorable if the government would consult more with practical experts and consider their views. Furthermore, in numerous cases, the new regulations are quite complex to interpret and must be applied quickly.

ASz: It is difficult to select any particular area. Generally, longer preparation time before implementing changes and more communication would be welcome. We would also be happy to see a more up-todate accounting law that follows business and technology changes more frequently.

GF: There are several topics on our wish list. Following the end of the commenting phase of an audit carried out by the Hungarian National Tax and Customs Administration (NAV), taxpayers no longer have the opportunity to submit any new supporting evidence or facts. Consequently, the current regulation is incompatible with the right to a fair trial.

NAV classifies taxpayers into three categories: “risky,” “general,” and “reliable.” Penalties are assessed by the authority based on this. We believe this should be amended; sanctions should not be established based on criteria established by NAV but rather on the actual circumstances of each specific case that led to the imposition of a penalty. With the current practice, even a minor administrative error could lead to “risky taxpayer” status and thus might result in an unfair fine.

Fiscal representations are crucial in ensuring that the taxes levied on foreign companies not established in Hungary are incorporated into the Hungarian budget. We think the rules are partly outdated and incomplete, thus open to abuse. That could lower the inflow of revenues to the budget and also significantly complicates the operation of financial representatives acting as intermediaries between the related foreign businesses and the Hungarian public finances.

Department of Taxation and Customs Administration. We hope the legislators will consider and adopt our constructive and forwardlooking suggestions.

ZL: The number of tax types in Hungary is still very high compared to other countries. There is still room the reduce or aggregate specific tax types. A major improvement would be a complete change of the local business tax system by adding more tax basedecreasing items (labor or investment costs) or building this burden into CIT.