Hungary

• The Hungarian transfer pricing regulation has been prepared in line with the OECD Guidelines, recognising that the arm’s length principle is the international transfer pricing standard to be applied. The legislation contains an explicit reference to the OECD.

The Hungarian regulations and OECD Guidelines don't establish a strict hierarchy among transfer pricing methods but encourage selecting the most appropriate method considering all economic circumstances. The accepted methods include the comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method, profit split method, and others, as long as the chosen method aligns with the company's functional and risk profile.

Hungarian taxes, including transfer pricing payments, are levied on a self-assessment basis. Companies must file returns and make payments by the due date without waiting for a formal assessment. Adjustments are required if transactions in statutory accounts are not on an arm's length basis, as per the Hungarian tax authority.

Hungary has adopted the OECD's transfer pricing documentation model based on the Master File and Local File approach, as outlined in BEPS Action 13. The Master File and Local File content is specified in the Decree. The Master File typically provides a comprehensive overview of the multinational group's global business operations, while the Local File focuses on specific details of intra-group transactions in Hungary.

The deadline for the preparation of the Local File in Hungary is the filing date of the corporate tax return, generally set for May 31. The administrative burden could be reduced under certain conditions: (1) the taxpayer may prepare simplified documentation for low value-added intra-group transactions, with specific services and limitations defined in the Decree, and (2) the company may explore the possibility of consolidating transactions.

Transfer pricing documentation and supporting documents in Hungary may be prepared in languages other than Hungarian, providing flexibility for multinational companies in meeting compliance requirements.

The transfer pricing reporting obligation applies to all annual corporate income tax returns filed after December 31, 2022, with a statutory deadline set after that date.

The deadline for preparing the Local File is the filing date of the corporate income tax return, typically set for 31 May. As for the Master File, its deadline is tailored to the ultimate parent company but must not extend beyond 12 months after the last day of the tax year. These deadlines are crucial for compliance with the specified documentation requirements.

Due to the new transfer pricing reporting obligation, early examination of pricing alignment with the arm's length range is crucial. Conducting necessary database research well in advance allows for potential adjustments before filing the corporate income tax return, offering a way to avoid excessive tax payments through contract amendments.

The rising number of transfer pricing-related tax audits indicates increased risks. Tax authorities, utilizing international databases, may request documentation upon audit, and businesses must ensure adequacy. Annual tax audit guidelines specifying industries under scrutiny add uncertainty.

Taxpayers facing consistent losses or with high intercompany service charges are at a higher risk of tax audits. Domestic legislation lacks specific rules on hard-to-value intangibles, guidance on pricing intangibles, and regulations on cost contribution agreements, creating compliance challenges.

• If the tax authority finds any deficiency, tax penalty and late payment interest on arrears may be impose in accordance with general rules of Hungarian taxation.

• Penalties for non-compliance: (1) According to the amendment to the legislation, the penalty for non-compliance may be up to HUF 5 million per (consolidated) documentation, and for repeated non-compliance up to HUF 10 million per (consolidated) documentation. To increase the deterrent effect of the default fine, the legislator provided for a higher rate based on the tax liability. (2) In the case of delayed, incorrect or incomplete fulfilment of CbC reports the fine is up to HUF 20 million. (3) Failure to register a related party (in the case of a new business partner) with the tax authority, the penalty is up to HUF 500.000.

• Penalties for underpayment of tax (1) A 50% tax penalty may be imposed on the additional tax payable (2) Interest on arrears may also be charged.

The OECD Guidelines govern comparability analysis, emphasizing reproducibility for tax authorities. Local data is preferred, but if unreliable, sources from other regions may be accepted. The arm's length price range for low-value intra-group services is 3-7%. The renewed regulation mandates interquartile range use for transfer pricing methods using verifiable public database data. The taxpayer must update comparable data annually and apply filters if reasonable. CIT defines TP adjustment cases when related party prices differ from those of independent parties. If the taxpayer's consideration falls outside the arm's length range, the median is the default arm's length price, unless the taxpayer demonstrates another suitable value within the range. No adjustment is needed if the consideration is within the arm's length range.

An Advanced Pricing Agreement (APA) is guidance from the Ministry of Finance on how to handle specific intercompany transactions. It's valid for 3 to 5 years (extendable by 3 years). Compliance deems the taxpayer's transfer pricing as arm's length for the reviewed transaction. The process starts with a consultation or formal request, and the tax authority manages unilateral, bilateral, or multilateral agreements.

Unilateral APAs take 120 days (extendable twice by 60 days). Bilateral or multilateral procedures must conclude within 2 years (extendable by 1 year if reasonable). The 2023 fee for determining arm's length price is HUF 5 million for unilateral and HUF 8 million for bilateral or multilateral procedures, with no installment or deferred payment options. These rules are outlined in Act CL of 2017 on the Rules of Taxation.

• There are some cases when the taxpayer has no liability for preparing TP documentation: (1) the transaction was made based on agreement with an individual, (2) the enterprise is considered small-sized, (3) medium-sized companies for certain transactions, (4) APA covers the transaction, (5) free cash transfer, (6) cost recharges, if the seller or party bearing the cost is not related enterprise, (7) transactions performed on stock exchange and fixed price specified by law, (8) taxpayer is public-benefit nonprofit business association, (9) the taxpayers in which the State has majority control – whether directly or indirectly, (10) the price used in the transaction is an official price or determined ad hoc by legislation.

• There are also exemptions based on the arm’s length value of the transaction: the value does not reach HUF 100 million (net) within the tax year. The contracts which may be consolidated are to be considered together. The Decree defines the conversion process for currencies other than HUF.

• For intra-group transactions between members of a corporate taxpayer group after the establishment of such a group (the possibility of establishing a corporate taxpayer group for corporate income tax purposes is available to Hungarian resident taxpayers from 1 January 2019).

• Act XXII of 2014 on Advertisement Tax of Hungary (hereinafter referred digital service tax or DST) only tax on revenues from online advertising. It is relevant to businesses that generate revenues of at least HUF 100 million.

• The tax rate is 7.5% (although temporarily reduced to 0% effective from 1 July 2019 to 31 December 2023).

• Documentation does not have to be submitted to the tax authority; however, it should be provided upon request.

• A tax audit may be initiated at any time and may relate to any tax year in accordance with the statutory limitation period. The tax auditors usually carry out on-site visits. The TP documentation is also part of the initial information package sent electronically to the tax authority. The audit may take several weeks.

• The tax authority will issue a report on its findings. The taxpayer has the opportunity to defend its own position.