Due to the stricter regulations on subsequent transfer pricing adjustments in Hungary, businesses must pay special attention to the arm’s length principle. Proper documentation, regular reviews, and the conscious application of various adjustment options can help minimize tax risks.
Why is transfer pricing adjustment important?
According to the CIT Act, if related companies do not apply arm’s length prices in their contracts or agreements, they must adjust their pre-tax profit accordingly for corporate income tax purposes.
Related parties can agree on any price, but if that price deviates from the fair market value (which independent parties would apply or would have applied under similar conditions),a tax base adjustment may be required.
Companies can handle this adjustment as part of their year-end tasks, either at the corporate profit level through tax base or accounting adjustments, or at the transaction level through invoice corrections.
However, since 2022, a stricter regulation has been introduced that not only regulates the method of adjustments but also, in certain cases, prohibits the possibility of subsequent transfer pricing adjustments.
As a general rule, if the price applied by the taxpayer falls outside the arm’s length range, the transfer pricing adjustment must be made to the median value of the arm’s length range, and any deviation from this requires proper justification.
However, if the price applied by the company already falls within the arm’s length range, the company cannot make a transfer pricing adjustment.
How can subsequent transfer pricing adjustments be made?
A company can carry out transfer pricing adjustments in several ways, and the above-mentioned restrictions do not always apply.
1. Tax base adjustment
Related parties may apply pricing that deviates from the fair market value. However, under the CIT Act, they must determine their tax base as if they had applied pricing consistent with the arm’s length principle. If the applied price deviates from the arm’s length price (and falls outside the arm’s length range),a tax base adjustment may be required.
In this case, no actual cash movement occurs between the parties, as the correction is made at the tax base level without affecting the financial result reported in the financial statements. As a general rule, the adjustment should be made to the median of the arm’s length range. Additionally, a tax base adjustment cannot be made if the applied price is already considered arm’s length.
2. Adjustment on the level of accounting source documents
A transfer pricing adjustment can also be made before closing the books to ensure that the taxpayer’s tax return and financial statements reflect arm’s length conditions. This type of adjustment is applied to achieve the appropriate profitability. In this case, there is no need to correct individual invoices, as the transfer pricing adjustment does not affect the VAT base in transactions between related parties.
This type of correction is permitted under the Accounting Act, which, however, refers to the provisions of the CIT Act. While the Accounting Act does not explicitly require the application of the median as a general rule, adjustments should primarily be made to this median value.
3. Invoice related adjustment
The third type of transfer pricing adjustment occurs when related parties wish to modify or correct invoices related to specific transactions at the end of the year (including the prices applied in those invoices). In such cases, the parties adjust the transaction value retroactively, modifying a specific performance, which also affects the VAT amount stated on the invoice.
In this case, the CIT Act’s provisions regarding the median are not necessarily applicable. This means that with a retrospective correction, the parties may select any value within the arm’s length range, rather than being strictly bound to the median.
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When is transfer pricing adjustment mandatory?
It is important to note that taxpayers may choose a value different from the median in subsequent transfer pricing adjustments, provided they can justify that the price they have chosen qualifies as the fair market value for the given transaction.
Additionally, while transactions below the statutory threshold defined in Hungarian law are exempt from transfer pricing documentation and reporting obligations, the obligation to adjust the tax base for arm’s length pricing applies to all transactions—regardless of whether transfer pricing documentation has been prepared for them or not.
Thus, transfer pricing adjustments also apply to transactions below HUF 100 million.
How can tax risks be reduced?
The regular review of transfer prices is crucial to ensure compliance with legal requirements. It is advisable to check multiple times during the year whether the applied prices are in line with the arm’s length principle, as this can help avoid significant year-end tax base adjustments.
If there is any uncertainty regarding the compliance of transfer pricing adjustments with legal regulations, it is recommended that you consult an expert to avoid potential tax authority sanctions.
