Transfer pricing in Hungary: All you need to know
Compliance with international and national transfer pricing rules (i.e. setting a standard price for intra-group transactions) is a classic problem for multinational companies. In case of strong market competition, most companies are forced to review their corporate structure and reallocate their revenues within the framework of reasonable tax planning.
In the case of companies (related companies) under the same ownership or management, special tax risks may arise. These companies are generally not independent of each other because the decision-making process remains concentrated in one person, thus creating conditions that differ from market conditions among the group members.
This is the case when intra-group companies mutually apply favorable prices and conditions compared to the prices charged in their relations with other companies outside the group.
The deviation from the market price affects the profitability, earnings and profit of each group member and may also affect the extent of their tax obligations. National and international transfer pricing rules (OECD, EU) are intended to regulate the transfer of income between countries. On the basis of the transfer pricing documents required by the regulations, the relationship between the prices of products and services within the corporate groups in relation to the market price is examined.
The current Hungarian transfer pricing legislation is very strict and rigorous, so that insufficient knowledge of the rules carries enormous tax risks. Find out more about the transfer pricing regulations in Hungary so that you do not take unnecessary risks and continue to comply with all legal requirements!
Transfer pricing rules in Hungary :
- Compliance with the standard market price principle
- Methods to stabilize the standard market price
- The principles of transfer pricing management: master file and country file
- Transfer Pricing Management: Deadlines
- Transfer Pricing: Language
Transfer pricing rules in Hungary
In 1992, Hungary introduced transfer pricing rules into its tax legislation based on the OECD guidelines, which stipulate that the principle of the normal market price should be applied in setting transfer prices.
Compliance with tax legislation is becoming an increasingly important issue, as evidenced by the growing number and in-depth nature of transfer pricing investigations conducted by specific tax authorities. During inspections, the tax authority pays particular attention to the examination of clearing prices between related companies, related taxpayer procedures and compliance with registration requirements.
In the case of transfer pricing, the companies have the following tasks, among others:
- Investigation of related companies
- Investigation of transactions carried out by affiliated companies
- Compliance with the standard market price principle
- Creation of a transfer pricing journal
- Compliance with notification and transfer pricing obligations
Compliance with the standard market price principle
Related companies are subject to Act LXXXI of 1996 on Corporate Income Tax (hereinafter referred to as “Tao”). There is an obligation to apply the standard market price principle described in Section 18. The Tao. tv. indicates when a transfer pricing adjustment is required.
This means that if the related company uses a price in its transactions that is lower or higher than the price that would have been adjusted under normal market conditions, the corporate tax base must be adjusted accordingly, as defined by law.
The normal market price is generally only determined at the end of the year, when the transfer pricing register is established. In addition, the taxpayer is obliged to pay tax on the amount of the taxable income of the taxpayer’s enterprise, and to pay tax on the amount of the taxable income of the taxpayer’s enterprise, as well as on the amount of the taxable income of the taxpayer’s enterprise. It may therefore be useful to determine in advance the price to be charged between the related parties before establishing and concluding their contract, thus avoiding any subsequent change in the corporate tax base. A useful way to do this is to prepare preliminary benchmark analyses and create transfer pricing policies. The objective of the former policy is to set the normal market price of the related transaction in advance, the latter also outlining the pricing principles, the methodology used and the conditions for transfer pricing adjustments.
For this reason, we strongly recommend the preparation of benchmark analyses for all related transactions.
These analyses can serve as appropriate background documentation in a possible tax investigation to verify whether the pricing standard is correct.
Methods of checking compliance with the standard market price principle in Hungary
How to check whether the standard market price principle has been complied with? And how to prove it?
The choice of the right procedure and method is a very difficult task, in which all circumstances must be carefully considered.
Article 18 of the Tao Law lists the methods that can be used to meet the standard market price, but the presentation of actual evidence (comparable contracts, prices, profit margins, interest rates and pricing principles) by the company concerned is often incomplete.
The standard market price can be determined in the following ways:
- Price comparison method
- Resale price method
- Cost and income method
Transaction profit methods:
- Net transaction profit methods
- Profit Allocation Method
- Other methods
Transfer pricing journal principles, master file and country file characteristics
The problem of transfer pricing, i.e. the difference in standard market prices between related companies, is primarily related to international transactions, as taking advantage of the tax advantage of different tax rates between countries can improve the tax situation of corporate groups.
The matching of transfer prices to market prices must be ensured by companies. One of the most appropriate means is the transfer pricing register, also called transfer pricing documentation. In Hungary, medium and large companies must establish a detailed transfer pricing register containing the content specified in NGM 32/2017, in the absence of which a standard penalty of up to HUF 2,000,000 may be imposed.
The sections of the price register must:
- Master file
The master file contains aggregated data at the group level. The preparation of this file is a very difficult task, because on the one hand it is difficult to decide which enterprises should be considered as a group and on the other hand it takes a lot of time to collect the branch data in time. The master file has to be prepared per group. By group we mean: the taxpayer and its affiliated companies (including subsidiaries). You may need to create multiple master files within a corporate group if not all companies in the group are considered related to each other. The master file issued by an international corporate group must always be subject to certain controls.
The master file contains a description of the group members, the structure of the group, the roles played by each member of the company, as well as the contracts concluded between them, the internal reorganizations of the group and the internal and external financial relationships.
This information provides the reader with a detailed overview of the business plan.
- The local file
The local file contains all transactions to be documented (audited transactions) with a detailed description of each transaction. The local file is a file that also contains elements such as a detailed description of the strategy, the management, the competitors of the taxpayer or the drafting of the essential provisions of the concluded transactions.
It is important to know that the transfer pricing register has to be established every year, so a new complete reference register has to be prepared every year.
The third element of the transfer pricing register is the so-called “Country by Country” report, which currently only covers domestic group companies with a stable turnover of 750 million euros.
The data of the examined groups of companies refers to the turnover of the previous year.
Deadlines for the preparation of the transfer pricing register
In principle, the taxpayer must complete the transfer pricing register before the date of filing the tax return. This deadline is May 31 of the year following the reference year.
If the company files its tax return at a later date, the transfer pricing register must also be completed by that date.
Due to the complexity of compiling the master file, in some cases, foreign enterprises will be delayed in compiling the transfer pricing register.
Rules on the use of the language of the transfer pricing register
Although it is possible to prepare the transfer pricing register in a foreign language other than Hungarian, it is necessary to remember that the Hungarian tax authorities may require the submission of documentation translated into Hungarian.
Our services are available for companies registered in Hungary:
Due to the strict local regulations, based on the knowledge accumulated so far, our team of experts at ITL AUDIT has transfer pricing know-how. With the help of this, we can compile for our clients the transfer pricing documentation that is not only suitable for the company operating in Hungary, but which can also serve as the basis for the complete documentation of the international group of companies.
- Preparation and review of annual transfer pricing documentation
- Consultation on the development of transfer pricing policy for companies and groups of companies
- Preparation of transfer pricing rules and advice to assist companies in carrying out their long-term independent transfer pricing activities, using their own internal resources
- Support and advice on transfer pricing issues during NAV-inspection.
Make an appointment with our team of experts and learn how to effectively manage transfer pricing operations.
The basis of effective collaboration is most certainly communication, and that’s why our professionals are always at your disposal.
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Entrepreneurs can sleep sweet dreams thanks to ITL Audit: their companies are in good hands. A financial report can only be truly verified when a thorough audit is carried out in line with international standards.
A successful and transparent audit also represents a guarantee for suppliers and clients. The rules are the same in Europe. Don’t underestimate a problem until it’s too late! Moreover, transfer pricing laws are extremely severe. We’ll carefully draft your documentation and prepare your internal regulation.
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