Transfer pricing documentation obligation

In their transactions related parties that are subject to corporate income tax must consider the arms’ length price applied in transactions between independent business partners for tax base assessment purposes.

In this information, we present to you the most important tax regulations relating to the documentation of transfer pricing.

It is common knowledge that the state tax authority applies enhanced scrutiny to

• the timely fulfilment of the obligation of reporting contracts concluded between related parties,
• whether the prices applied between related parties (transfer prices) differ from the usual market price, and
• whether obliged entities prepared their transfer pricing documentation in compliance with the relevant requirements.

Who is this offer for?

Our offer is for entities subject to corporate income tax who maintain business relationships with their related parties or who intend to conclude some sort of transaction with related parties in the future and wish to avoid the sanctions of the state tax authority relating to transfer pricing.

Who are obliged to prepare a transfer pricing documentation?

Legal regulations only allow very few exemptions^* from the definition and documentation of the arms’ length price in respect of transactions concluded with related parties. This means that the entities having a business relationship with related parties must prepare a documentation on the definition of the arms’ length price until the submission of their corporate income tax returns.

^* A small or medium-sized enterprise may be exempted from the adjustment of its tax base and the obligation to prepare a documentation in the case of long-term contracts concluded for the purpose of joint acquisitions and sales with related parties in which the small or medium-sized enterprise in question holds more than 50 percent of the voting rights.

Which companies do not qualify as small enterprises?

A small enterprise is an enterprise with a total employee headcount of less than 50 persons and annual net sales revenue or total asset value not exceeding 10 million euros (calculated at the exchange rate of the National Bank of Hungary for the last day of the tax year). If both the enterprise’s annual net sales revenue and total asset value exceed 10 million euros, the entity cannot qualify as a small enterprise (irrespective of the headcount of its employees). For the purpose of this categorisation, the headcounts, the net sales revenues and the total asset values of the so-called related parties or partner entities must be considered jointly on an aggregate basis.

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From the perspective of the small enterprise status, entities must also consider the so-called two-year rule according to which if an enterprise exceeds or falls below the value limits presented above, its classification only changes if it exceeds or remains below the relevant value limits for two reporting periods in succession.

What rules apply to transfer pricing documentation?

Transfer pricing documentations may be prepared independently or in the form of a joint documentation. However, companies should pay attention to the fact that if they intend to choose the preparation a joint documentation, they must make a declaration in this regard on the main sheet of the corporate income tax return. The joint documentation consists of two parts: the main document containing the elements pertaining to the whole of the company group and the specific documentation(s) presenting information on the contracts concluded between the taxpayer and its related parties.

What are the potential risks?

If obliged taxpayers do not meet the transfer pricing documentation obligation or meet this obligation with delay or if the prepared transfer pricing documentation does not comply with legal requirements, the state tax authority may impose a default penalty of up to 2 million forints for each transfer pricing documentation not prepared, prepared with a delay or not prepared in compliance with the relevant regulations.

Why should you turn to us for help?

1. After the receipt of the necessary information, we assess within a short time whether your company is obliged to prepare a transfer pricing documentation.
2. Based on information on the transactions concluded with related parties, our competent experts are able to determine which method should be used in the case of your company for the definition of the arms’ length price.
3. Having received the necessary documents and information, we prepare the transfer pricing documentations of your company within a short time and in full compliance with legal regulations.
4. If your company has already been obliged to prepare transfer pricing documentations in the previous years, we will update for the current year the documentations prepared for the previous periods based on the necessary information.
5. Upon request, we express an opinion on the transfer pricing documentations prepared by your company and, if necessary, suggest modifications.
6. Our company can revise the transfer pricing documentations prepared by your foreign parent company to comply with Hungarian regulations.
7. Thanks to our many years of transfer pricing experience, we can provide our clients with effective assistance during ongoing tax authority audits or in answering questions relating to transfer pricing.