Transfer Pricing Documentation: Immediate Action Proposed

Analysis

Sándor Hegedüs, Director of Andersen Adótanácsadó Zrt.

The May roll-out of data reporting on related party transactions to the Hungarian National Tax and Customs Administration (NAV) may cause severe problems for Hungarian companies. Short preparation times, IT problems, and unclarified regulatory issues could hinder the timely submission of transfer pricing documentation.

The regulation on recording related party transactions affects around 20,000 companies in Hungary. Significant changes have been made in this area as of this year, as transaction-level data on transfer pricing must now be reported in the corporate tax return by May 31.

Most Important Changes

Under the previous rules, the transfer pricing documentation also had to be prepared by the deadline for tax returns, but it did not need to be submitted, and its existence did not have to be verified by May 31. According to the changes that entered into force on August 26, 2022, the submission of the documentation will still not be mandatory. However, affected companies will still have to provide the details of their transactions with related parties (for example, their parent company or subsidiaries within a group), together with their corporate tax return. Such reporting must include the type of transaction, the activity code, the consideration, the related parties’ data, and the method of establishing the transfer price. The data must be submitted to the tax authority in a pre-defined structure for easier processing.

Preparation Time too Short

The goal of the new regulation is justifiable from the perspective of the authorities and financial control, but there are several problems with it. One is the lack of gradual implementation, since companies will find it difficult from an IT point of view to collect the data required for reporting on time from their own systems.

The decree on the detailed rules of the concept was published on December 28, giving those involved only four or five months to prepare at best, which is extremely short. There is no testing or grace period, and failing to provide the data can lead to immediate sanctions from NAV. Moreover, resulting from the mid-year amendment, the default penalty has also been significantly increased compared to its previous level and can now be levied individually per record (essentially per transaction).

Different Deadlines Abroad

It could also be a serious problem for international groups that the transfer price and the adjustment of the tax base are not just the decision of the Hungarian party. Usually, it is a consensual arrangement, which also requires the agreement of the related foreign party of the company concerned. However, the deadline abroad for preparing accounts and records is typically not May 31, so transfer pricing decisions are made later. This means that, according to the new Hungarian rules, the Hungarian party must decide on the market price to apply without any assurance that the foreign members of the group (whether the parent or sister company) will agree. Consequently, the transfer pricing data submitted on May 31 will, most likely, be inaccurate, and the companies will have to correct them later.

Adding to these difficulties, those involved also have to expect that the external advisory capacity for compiling the transfer pricing documentation will likely be insufficient.

NAV’s ‘Wonder Weapon’ Going Live

The tax authority will have a very accurate means of control through the structured collection of transfer pricing data, providing them with up-to-date information on the pricing, profitability and profits of the players in the given industry. This will enable cross-checking, detecting anomalies, and improving risk analysis, making a significant overall contribution to more effective control activity.

This article was first published in the Budapest Business Journal print issue of April 21, 2023.

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