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How to Comply Effectively With the new Transfer Pricing Obligations

Inside View

Judit Jancsa-Pék, Partner, Tax advisor, LeitnerLeitner

Undoubtedly, 2023 will be a great challenge again for multinational companies, not least because of the latest adjustments to transfer pricing rules. The new obligations are known in detail and effective now; thus, affected companies must apply them as soon as possible.

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.

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.

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.”

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.

This article was first published in the Budapest Business Journal print issue of February 24, 2023.

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