The draft of the 2023 Central Budget Bill of Hungary (No. T/360) (hereinafter referred to as: ‘Draft bill’) was published on the 21st June 2022. The Draft bill refers to numerous sections of the Hungarian transfer pricing (TP) regulations. In the following, the most important proposals will be summarized in 5 points.
Executive summary
It can be concluded that transactions between affiliated companies will require more – and special – attention of the taxpayers and careful process planning in the upcoming years. This is especially true of the new transfer pricing reporting obligation and the strict requirements for transfer pricing adjustments, which will be first applicable for the tax year 2022. At the same time, it is also worth reviewing the transfer pricing documentation prepared for previous years, in the light of the substantially increased default penalty measures.
1. Introduction of a new transfer pricing reporting obligation
Content:
- Taxpayers subject to transfer pricing documentation preparation obligation will also be required to provide transfer prices related data in their annual corporate income tax return.
- The exact content of the report is not specified in the Draft bill, it will be determined separately in the Decree no. 32/2017. (hereinafter ‘Decree’) of the Ministry for National Economy (hereinafter ‘MNE’), which amendment is also expected accordingly.
Scope and applicability:
- The new requirement for the transfer pricing reporting obligation will enter into force on the 30th day following the official publication of the Bill.
- For taxpayers, the new reporting obligation first arises in the corporate income tax return for 2022, in the case of a tax year equivalent to the calendar year.
Our practical insights:
- After the adoption of the Draft Bill, taxpayers would be obliged to assess at least the scope of transactions subject to transfer pricing reporting during the composition of the corporate income tax return, but at the latest before submitting the declaration. The reporting obligation might also cover the selection of a method used to determine the arm’s length price, as well as the arm’s length price / price range, which should therefore be available in due course for the submission of the corporate income tax return.
- If the reporting obligation is not complied with at all or were incomplete, the Tax Authority might assume that the transfer pricing documentation (hereinafter ‘TPD’) has not been prepared in time, which might entail levying a default penalty in the framework of a tax audit, but considering the already increased amount.
2. Increase in potential penalties with regard to transfer pricing
Content:
- According to the proposal of the Draft bill, the maximum amount of the default penalty shall be increased up to HUF 5,000,000 (around EUR 12,500) from the previous HUF 2,000,000 (around EUR 5,000). In the event of any subsequent violations, further default penalty can be imposed up to HUF 10,000,000 (around EUR 25,000) per documentation.
Scope and applicability:
- The changes in relation to the transfer pricing related default penalties will enter into force on the 30th day following the official publication of the Bill.
- According to the Draft bill, the abovementioned new penalties might be applicable in the tax audits starting subsequently covering those tax years not closed with comprehensive tax audit within the statutory limitation period.
Our practical insights:
- Taxpayers may expect significantly higher risk with the unprepared or incomplete transfer pricing documentations for tax years not yet closed by a tax audit.
3. Determination of the arm’s length price and the interquartile range
Content:
- Based on the Draft bill, the use of the interquartile range would always be mandatory for benchmarking analyses based on publicly available databases.
- Where the remuneration applied (profit level achieved) falls within the arm’s length range, there would be no place for transfer pricing adjustments. However, where the remuneration applied (profit level achieved) in related party transactions falls outside the arm’s length range – as a general rule – it shall be adjusted to the median value of the populations and not to the closest point of the interquartile range.
Scope and applicability:
- Changes to the application of the arm’s length range shall enter into force on the 30th day following the official publication of the Bill.
- The new regulations shall be first applicable in the transfer pricing documentations to be prepared for 2022.
Our practical insights:
- The Draft Bill might entail significantly higher tax base modifications than before in the case of low-profitability or loss-making companies.
- It has to be noted, that the abovementioned requirements for the application of the arm’s length range are not clear in all respects and might raise questions from a professional point of view.
4. New definition for the determination of the arm’s length price
Content:
- The Draft Bill also includes a new definition of the arm’s length price and the arm’s length price range. These definitions have not been included in the Corporate Income Tax Act before.
Scope and applicability:
- The regulation on the definition arm’s length price and price range definition shall enter into force on the 30th day following the official publication of the Bill.
Our practical insights:
- The above action represents rather a technical clarification, as the definitions are in line with the ones set out in the OECD Transfer Pricing Guidelines, which were followed in Hungary in the past, as well.
5. Increasing APA request fees
Content:
- The fee for the Advance Pricing Arrangement (APA) request will be increased: in the case of a unilateral procedure from HUF 2,000,000 (around EUR 5,000) to HUF 5,000,000 (around EUR 12,500) and in the case of bilateral or multilateral proceedings, to HUF 8,000,000 (around EUR 20,000).
Scope and applicability:
- The amendment shall enter into force 31 days after the publication of the Bill.
