The Hungarian Ministry of Finance’s guidance on transfer pricing data reporting
In our previous newsletter, we have already written about the content of the transfer pricing data report to be included in corporate income tax returns from 2023. A recently published guidance by the Ministry of Finance provides a detailed overview of the elements of the reporting and practical examples of each type of transaction, thus helping taxpayers to comply with the law. In today's newsletter, we take a look at some of the details, which we would like to draw the attention of our clients to.
- General information
The guidance takes a complex approach to the issue of data reporting, covering the scope of the reporting obligations, the year of reporting (when data for tax year 2022 should and should not be reported), the transactions subject to the obligation, and the full and partial exemptions.
In this context, for taxpayers with a tax year other than the calendar year, it is important to note that no information is required to be provided in the corporate income tax return due on or before 31 December 2022, either at the time of filing or in any self-revisions submitted after 31 December 2022. If the due date of the return is after 31 December 2022, but the return was filed before 31 December 2022, no information was required at the time of filing, but any self-revision return should include the information.
Among others, transactions subject to reporting include transactions involving a reduction in the share capital, non-cash asset disposals or dividend payments - if they are between related parties or between parties that become related as a result of such transactions.
Among the partially exempt transactions, we highlight cost recharge transactions. Under the general rule, cost recharge transactions are only partially exempted from reporting and fully exempted from record-keeping provided the taxpayer can demonstrate that the allocation method used is in line with the arm's length principle. Under the transitional rule, for the tax year ending in 2022 only, these transactions should not be subject to the reporting obligation, provided that they are also exempt from the record-keeping obligation. As from the tax year ending in 2023, the general rule should apply, i.e. there should be a partial exemption for the reporting of data on cost recharges if they comply with the arm's length principle.
It is important to note that the exemption from the record-keeping and reporting obligations does not exempt the taxpayer from the tax base adjustment obligation, which should be examined for each related party transaction.
- Description and precise definition of the transaction
Eligible transactions include atypical transactions in which the goods manufactured or services rendered are invoiced to a party other than the entrepreneur (the risk-taker). Such transactions, despite their theoretical characterisation as atypical ones, occur frequently in business. The guidance helps to characterise them by describing the most common business models involved.
The actors in the business models have different roles in the transaction, so they will use different codes to indicate the same transactions in their reports (e.g. the distributor, which can be characterised as an entrepreneur entity, should choose the code "17. purchase of material or goods without the use of manufacturing or providing distribution services", while the manufacturer, which also can be characterised as an entrepreneur entity, should choose the code "53. other transaction" for their transaction with each other).
Some categories known from the previous NTCA (National Tax and Customs Administration) information (e.g. “licensed manufacturer”, “full risk manufacturer”, “full risk distributor”) are not included in the list of selectable codes, given that they produce and sell completely independently, as entrepreneur entities, at their own risk. Cost recharge transactions (if not covered by the exemption and still need to be reported) are not included in the list either, because they can be classified in another category in that part which constitutes costs.
- Consolidation of transactions
The amended transfer pricing regulation stipulates that transactions involving the purchase of materials cannot be consolidated with sales of goods manufactured from the purchased materials, and that transactions involving costs&expenses cannot be consolidated with transactions involving primarily revenues, as this would undermine comparability. There may be a situation where a taxpayer buys material at a much higher price than the arm’s length price and yet realises an arm's length profitability for the entire activity. As a result, its corporate income tax base will be lower than if it had purchased the materials from an independent contractor.
To prevent this, the conformity of the price of the materials purchased with the arm’s length price should be examined in a separate transfer pricing document, while in another transfer pricing document, it should be demonstrated that the profitability achieved on the sale is arm’s length. Consequently, this results in two separate reportable transactions for reporting purposes.
Based on our experience, many taxpayers are likely to have difficulties with the above method of documentation, as they often do not have a price calculation of the materials purchased (the cost price of the related party seller and the markup applied).
There are also transactions (e.g. cash-pool) which, although considered as a single transaction, have to be reported separately (e.g. in the case of cash-pool transactions, the deposit and the borrowing).
With regard to consolidation, the guidance highlights that the arm's length price should be substantiated on a transaction-by-transaction basis, not on an activity-by-activity basis, and that the fact that the profitability indicator should be calculated for one activity does not change this. It is also important to note that the fact that a single contract provides for several transactions, activities, services, etc. does not mean that it is a single transaction or several transactions that can be consolidated.
In practice, many taxpayers still determine their profitability indicator based on their main activity. If transactions are properly segmented, the determination of the profitability indicator corresponding to the activity classification of each transaction will require more resources.
- The interpretation and use of the NACE code
In the data report, a single NACE code should be selected which is most specific to the transaction and which does not necessarily coincide with the registered principal activity or other registered activities of the parties to the transaction.
- The amount of the corporate income tax base adjustment
It should be noted that in the tax return, it is not only the amount of the tax base adjustment applicable in the tax year concerned by the tax return that should be reported, but also the total amount of the tax base adjustment, i.e. including the amount(s) applicable in subsequent year(s).
This may arise, for example, in the case of a tangible asset acquired from a related company, where the difference between the arm’s length price and the consideration actually received will in fact affect the tax base over a number of years (until the end of the useful life), but should be reported in full. The purpose of this is to ensure that the full arm's length consideration for the transaction, as perceived by the taxpayer, is thus reflected in the year of the transaction.
The profitability indicator to be included in a separate box in the data report should also be calculated taking into account the transfer pricing adjustment applied.
If a taxpayer examines the profitability of a segment in which it has transactions with more than one related party, it should determine the profitability level for a given segment and reports it on a related-party basis.
- The transfer pricing method
If more than one method is used, the primary method should be indicated in the data report. The “other method” should be chosen if the use of several methods is of similar probative value. If more than one transfer pricing method has been used in the context of one method, only the latter method should be indicated.
- Applicable sanctions
The Ministry of Finance's guidance does not address the sanctions that may be imposed for failure to meet the obligation to determine the arm's length price, but we prefer to include this information in our newsletter.
Failure to correctly and fully complete the data reporting may in itself only be sanctioned by a general default penalty (up to HUF 500,000) - and even in this case, it can be assumed that the tax authority will first warn the taxpayer of the identified deficiencies in the course of a compliance check, thus ensuring the possibility of timely correction.
At the same time, inadequately completed data reports will highlight gaps in transfer pricing documents and existing transfer pricing problems for the tax authorities. The amended transfer pricing legislation has significantly increased the default penalty for breaches of transfer pricing documentation and document retention obligations: for the first time, a default penalty of up to HUF 5 million per transfer pricing document can be imposed, instead of the previous HUF 2 million per transfer pricing document (the default penalty for repeated infringements has been increased to HUF 10 million per document from HUF 4 million).
According to the ruling available to us, the increased penalties will only apply to the transfer pricing documents from the tax year 2023, but it is important that taxpayers remedy existing deficiencies as soon as possible with the involvement of a transfer pricing expert.
As we can see, completing the data reporting according to the amended transfer pricing legislation requires a great deal of attention and background knowledge. The transfer pricing experts of VGD Hungary Kft. have many years of experience in preparing transfer pricing documentation, transfer pricing consulting and keep abreast of the latest changes in legislation, therefore they can provide effective assistance to their clients in any questions that may arise with regard to the data reporting, too.
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This newsletter provides general information and does not constitute tax advice
