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Transfer pricing: gigantic fines and stricter rules in Hungary

A two-and-a-half-fold increase in default fines, a new transfer pricing reporting obligation relating to corporate income tax returns, and changes in the rules pertaining to tax base adjustments. Bill T/360 is expected to have an impact on several aspects of the transfer pricing rules pertaining to related parties, and we are likely to see stricter regulations in this regard.

Fines of up to HUF 10 million for each transfer pricing report

According to the bill, the amount of the default fine for missing transfer pricing reports will increase from HUF 2 million to HUF 5 million, while the fine for repeated violations will increase from HUF 4 million to HUF 10 million.  This is a significant change in itself, particularly if we consider that this isn't just a one-off fine, but instead, it may be imposed by the tax authority on each and every missing report (i.e. undocumented related-party transaction).

Starting from 2023, entities with missing transfer pricing reports, reports that are prepared late, or reports which are not in line with the Hungarian regulations should expect to face massive fines that may be levied repeatedly.

This makes it even more important for companies to ensure that their master files and local files meeting all Hungarian regulations are prepared in a timely manner.


New transfer pricing reporting obligation

Transfer pricing analysis has always been a key part of the corporate income tax returns of related companies, which is why the deadline for preparing transfer pricing reports has been identical to the date of filing of the corporate income tax return. Taxpayers have had to prepare a report to document arm's length prices but have not been required to file it along with the tax return.

Under the proposed amendment, taxpayers required to prepare transfer pricing reports will now need to report data in connection with the calculation of arm's length prices within the corporate income tax return. The specific regulations in this regard will be set out in the transfer pricing decree, but in general, companies will be required to document the arm's length prices relevant to their transactions, the methods used for determining such prices, as well as any supporting facts and circumstances.

This means that transfer pricing reports themselves will still not need to be uploaded by companies; however, having the reports available in a timely manner will be essential for complying with the reporting obligation.

Mandatory use of the interquartile range

Using the interquartile range, i.e. discarding the top and bottom 25% of the elements within the sample and using the extreme values of the remaining sample as the extreme values for the arm's length range, has always been a requirement in the case of price studies or benchmark studies that rely on data derived from databases or other external sources.

Until now, exceptions included cases where the sample size was less than 30, the number of comparable companies was below 10 and the sample range was smaller than 15 percentage points. In such cases, the price range between the minimum and maximum values of the original sample could previously be used as an arm's length range.

The bill abolishes this exception, and the use of the interquartile range will be mandatory in every case from now on.

Transfer pricing adjustment to the median value

Previously, whenever the price applied by related parties was outside of the arm's length range, performing the transfer pricing adjustment for only the lowest or highest value of the arm's length range was sufficient, as all points within the entire arm's length range can be treated as arm's length, meaning that taxpayers were free to set the reference value for the adjustment anywhere within the range.

However, under the proposed amendment, if the price applied by related parties is outside the arm's length range, the general rule is that the median value should be used as the arm's length price, and the transfer pricing adjustment should be performed for that value. An exception to this rule is when the taxpayer demonstrates that an element of the range that is different from the median is the most relevant to the transaction under review, in which case the adjustment should be performed for that value instead of the median.

If the price applied falls within the arm's length range, no transfer pricing adjustment will be necessary.

Increasing fees for APAs

Additionally, the proposed amendment also concerns the fee for advance pricing arrangements (APAs). The fee for an APA request will increase to HUF 5 million for unilateral procedures and HUF 8 million for bilateral and multilateral procedures once the regulation enters into force. 

Understanding transfer pricing rules and operating in compliance with the regulations often pose a challenge for companies, especially with this substantial increase in the risk of fines. RSM Hungary's transfer pricing experts provide assistance in the preparation of transfer pricing reports and benchmark studies that fully comply with the regulations.


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