Corporate income tax,
Small business tax („KIVA”) and
transfer pricing rules

I.   Corporate income tax

A new tax base adjustment to the corporate income tax base

A new, optional tax base adjustment becomes available from the tax year 2022 which is the impairment loss recognised on the shareholdings for the tax year.

II.   Transfer pricing rules

In the transfer pricing area, the following significant changes enter into force, so that both corporate income and small business (“KIVA”) taxpayers are subject to this transfer pricing regime for their related party transactions as early as the tax year 2022:

Reporting obligation on the determination of the arm's length prices in a corporate income tax return

Companies not qualifying as small enterprises, as well as foreign companies operating in Hungary through a domestic establishment or branch, and other categories of taxpayers subject to transfer pricing record-keeping requirements should provide information on the determination of the arm's length price in their corporate income tax returns. The specific data to be reported will be set out in a ministerial decree on the detailed rules of the transfer pricing records.

This also means that taxpayers need to be aware of the scope of their related party transactions, the arm's length pricing methods used and other relevant facts and circumstances before filing their corporate income tax return. 

Using the interquartile range

The requirement to use an interquartile range is tightened. Under the current rules, in some cases, it is not mandatory to narrow the sample to the interquartile range (i.e. the range of values bounded by the lower and upper quartile) to determine the arm's length range, but the whole range between the minimum and the maximum can be considered as the arm's length range. Such exceptions apply, for example, if internal comparables are used, or, in a database search, where comparables analysis includes less than three financial years of data from 10 companies, or less than 30 observations, or if the comparables sample size is less than 15 percentage points. From 2022 onwards, the interquartile range should be used in all cases. 

Transfer price adjustment to the median value

From tax year 2022, if the price applied by the taxpayer is outside the arm's length price range and therefore a transfer pricing adjustment is applicable, the adjustment should, as a general rule, be made to the median of the arm's length price range. This will not only increase the corporate tax or KIVA base, but also the local business tax and innovation tax base, as well as the income tax base of energy suppliers (“Robin Hood tax”). If the price applied by the taxpayer is within the arm's length price range, it is not necessary to adjust the price to the median value. 

III.  Tax procedure rules related to transfer pricing regulations

Default fine increases

The default penalty for determining the arm's length price and for breaching the transfer pricing record-keeping obligations would be increased to HUF 5 million per record and, in case of repeated breaches, to HUF 10 million per record (from the current HUF 2 million and HUF 4 million respectively). Such an omission may include, for example, transfer pricing records with missing or incomplete data or transfer pricing records prepared after the deadline.

Advanced pricing agreements („APA”)

The fee for the arm's length price ("APA") procedure will change.  In a unilateral procedure, the fee is HUF 5 million and in a multilateral procedure (i.e. involving the tax authorities of several countries) the fee is HUF 8 million. Under the current rule, the fee is HUF 2 million for each party of the procedure initiated. At the same time, the provision prohibiting payment in instalments or deferral of payment is abolished.

As a novelty in legislation, the APA procedure becomes available to all taxpayers. Under the APA procedure, taxpayers can agree in advance with the tax authorities on the prices to be applied in any of their related party transactions, typically in the more complex category. Thereafter, within a certain time limit, the tax authority cannot challenge the price applied, provided that the circumstances of the transaction have not changed materially.

Under the current rule, the APA procedure can only be initiated by taxpayers subject to transfer pricing record-keeping requirements (an exception is made for the taxpayers under majority state control).

20 July, 2022

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This newsletter provides general information and does not constitute tax advice