Global Tax Alert (News from Transfer Pricing) | 5 August 2013
Hungary amends transfer pricing documentation rules
After a lengthy process, the amendment of Decree No. 22/2009 (X.16.) of the Ministry of Finance on the Documentation Requirements Related to Transfer Pricing (“Decree”) has been issued. Contrary to expectations, the schedule on the detailed rules of comparable searches was not included in the final text of the amended Decree.
In general, the majority of the changes are aimed at simplification and reducing administrative burdens. The key amendments are summarized below.
Validity of the Advanced Pricing Agreement (APA)
Where the tax authority has established the arm's length price for a controlled transaction by an APA, taxpayers continue to be exempt from the documentation obligation for such transactions. Practically speaking, the amendment extends the validity of the APA to six years because under the new rules the documentation requirements related to transfer pricing do not have to be applied in the tax year in which the APA request was submitted or in the tax year in which the APA expires.
Costs recharged without mark-up to a related party
Taxpayers are not subject to transfer pricing documentation obligations in connection with transactions where costs of services or goods are originally invoiced by third parties and recharged to a related party without applying a mark-up. The simplification is available irrespective of whether the services or transferred goods were undertaken as part of or in relation to the core business activity of the transferor.
The new rule is that taxpayers recharging the consideration for services or products to several related enterprises must substantiate that the allocation methodology (the allocation key) applied is at arm's length.
The threshold for exemption from the documentation obligation
The threshold for exemption from the transfer pricing documentation requirements is HUF 50 million (approximately US$224,000) of tangible or intangible property transactions. It is the transaction value in the tax year in question that must be taken into account. Low value adding intra-group services are subject to separate rules.
Conversion of foreign currency amounts
The legislation now stipulates the method of converting a consideration set in a currency other than Hungarian forints for the purposes of determining the HUF 50 million threshold for exemption and the HUF 150 million (approximately US$672,000) threshold for low value adding intra-group services. Taxpayers maintaining their accounting records in Hungarian forints are obliged to apply the foreign exchange rate used in their books when converting a foreign currency amount to Hungarian forints. For the taxpayers keeping their books in a convertible currency, the official foreign exchange rate of the Hungarian National Bank effective on the last day of the tax year must be used.
Changes concerning low value adding intra-group service
The amendment also provides that a mark-up applied to a low value adding intra-group service is considered to be at arm's length if it falls between 3% and 10%, as opposed to the range of 3% and 7% prescribed in the previous regulation.
In determining the applicability of the designated mark-up range for low value adding intra-group services, services with the same features must be aggregated for each tax year. Services with the same features means services listed under the same Roman numeral in Schedule 1 to the Decree. The Decree does not provide clear guidance whether only the services explicitly mentioned in Schedule 1 can be aggregated in this respect or all the services that would otherwise belong to the same NACE codes (Statistical Classification of Economic Activities in the European Community) as those listed in Schedule 1.
Furthermore, the amendment clarifies the definition of low value adding intra-group services by stating that only the services listed in Schedule 1 to the Decree can be regarded as such, provided that the service provider renders the service in question outside its main activity.
It appears that the new simplification rules regarding low value adding intra-group services would not be applied to services provided by specialized service centers; i.e., shared service centers (SSC). Given that the services in question represent the main activity of the SSC, the simplification rule may not be applied according to the definition currently provided in the Decree.
Parliament removed the provision allowing the applicability of the simplification rules concerning low value adding intra-group services where the mark-up applied does not fall between 3% and 10%. The former rules provided for partial relief in the case that the arm's length nature of the margin could be supported by a proper benchmarking analysis. As a result of the current amendment, the simplification rule will be applicable only to transactions priced with a mark-up between 3% and 10%.
Sources that can be used to determine the arm's length price
The amendment confirms that when determining the arm's length price, publicly available data on companies stored in public databases that the tax authority can audit, as well as data derived from other sources (e.g., AMADEUS and similar databases containing financial statement level data) can be used for comparable searches.
Documentation obligation of related party transactions concluded by a resident taxpayer's permanent establishment
The provision providing relief from transfer pricing documentation obligations based on section 18 (8) of the Act on Corporate Income Tax was eventually removed from the final wording of the officially promulgated Decree. As a result, transfer pricing documentation must be prepared – regardless of other rules pertaining to the avoidance of double taxation – in relation to transactions concluded by a foreign permanent establishment of a Hungarian company and its related parties.
Entry into force
The amendments of the Decree entered into force on 21 June 2013. However, as far as the reduction of administrative burdens is concerned, it is important to note that the amendments relating to the new simplifications may be applied with respect to the documentation for tax year 2012. It must be noted, that for the majority of the taxpayers, the statutory deadline for preparing the transfer pricing documentation covering financial year 2012 was 31 May 2013. Therefore the amendments detailed above can practically be applied by taxpayers whose business year differs from the calendar year.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, Eastern European Business Group, New York
- • Miklos Santa
+1 212 773 1395
- • Vladimir Sopkuliak
+1 212 773 4144
EYG no. CM3701