Another deadline is coming: Master File in transfer pricing
In Hungary, the transfer pricing documentation – since 2018 – consists of two elements: a Master File and a Local File. If your company was required to prepare a Local File for the 2019 tax year, a Master File must also be available (for a calendar year taxpayer) by 31 December 2020.
The Master File presents the entire company group, furthermore certain of its internal transactions, while the Local File examines the arm’s length nature of the taxpayer’s transactions with its affiliated companies. The current Hungarian transfer price regulation is regulated by Decree 32/2017 of the Ministry for National Economy (henceforth: “Decree”). The Decree clearly states that Hungarian companies involved in transfer pricing must have a Master File presenting the company group in the case of at least one transaction subject to documentation, in addition to the Local File describing the subsidiary and its transactions with the affiliated companies.
Although the Decree does not stipulate that the Master File can be prepared only by the parent company, in our experience it is in practice not possible to prepare the Master File in most cases without at least partial involvement of the parent company. This is because it is necessary to present fairly detailed information about intra-group transactions and financial processes about which a subsidiary does not have sufficient information. The Master File requires the presentation of the entire company group, all affiliated companies must appear in it, regardless of whether the Hungarian company had any transactions with the given firm.
In the case of international company groups, the parent company may not be obliged to prepare a Master File according to the transfer pricing rules of the country of its registered office, or may be obliged to do so but only with a later date than in Hungary.
We would like to emphasize that the Hungarian legislator does not provide relief: the Hungarian company is still obliged to have a Master File for the entire company group with the content elements required by Hungarian law and by the deadline in order to comply with Hungarian transfer pricing rules. Nonetheless, given the international nature, it is easier for the Master File to be written in English, German, French or Hungarian. Other languages may be used, but in these cases the Hungarian Tax Authority may request a professional translation of the documents.
Like the Local File, the Master File does not have to be submitted to the tax authority, the legislator requires that it shall ready by the specified deadline. As the preparation of the Master File – also for the reasons mentioned above – involves a significant administrative surplus compared to the preparation of the Local File, the available deadline is longer: according to the Hungarian rules, the concerned taxpayer is obliged to prepare the Master File by the end of the 12th month following its tax year. For calendar year taxpayers, this deadline is 31 December 2020 for the 2019 tax year.
If a tax authority inspection reveals that the taxpayer, who is otherwise obliged to do so, does not have a Master File or does not have the required content of it, the tax authority may impose a default fine of up to HUF 2 million (approx. EUR 5 700), depending on the nature of the default. It is important that this fine does not replace the obligation to prepare the Master File, as it is still required by the tax authority and in many cases also checks whether the Master File has actually been replaced or corrected (supplemented). In the case of a second inspection, the default fine may up to HUF 4 million (approx. EUR 11 400), however, the taxpayer is still not released from the obligation to prepare the Master File. During the subsequent inspection, four times the fine imposed for the first time may be imposed.
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As can be seen from the above, the preparation of the Master File requires close co-operation and a number of consultations between the parent company and its subsidiary (or subsidiaries), which, especially in the case of multinational company groups, can significantly extend the time for preparation. So it is not worth leaving the preparations to the last minute, as we have also seen that the tax authority impose heavy fines on those who delay.
VGD Hungary’s transfer pricing experts are happy to provide you with tax advisory services related to the preparation of Master Files in Hungarian, English and German languages, or to the verification of their compliance with the Hungarian legislation.
