Advance Pricing Arrangement (APA)

With effect from 1 January 2007 Hungary introduced advance pricing arrangements. This replaces the previous practice of requesting for provisional tax assessment on the transfer pricing of intercompany transactions. As of 9 July 2009 new APA regulations were introduced which mostly included the reduction in the fees of the procedure.

An APA provides an opportunity to reach an agreement between the taxpayer and the tax authorities on the transfer pricing method and – if possible – the price or the range of price employed in the future intercompany transactions. An APA can be unilateral (binding on the Hungarian tax authorities and the Hungarian taxpayer), bilateral (binding on the two related taxpayer and their respective tax authorities), or multilateral (binding on more than two foreign tax authorities and related parties).

An APA can cover a variety of related party transactions including sale or transfers of tangible and intangible property, goods and services, cost sharing and intra-group lending.

Clearly the advantage of having an APA is that it

• provides certainty on the transfer pricing methodology adopted;
• mitigates the possibility of disputes on transfer pricing used;
• mitigates the incidence of double taxation;
• reduces the costs of tax audit defence;
• reduces the costs of preparing transfer pricing documentation.

According to Section 132 of Act XCII of 2003 on the Rules of Taxation (ART)

• In terms of contents, applications must comply with the specific act on transfer pricing documentation requirements.
• Applications must be countersigned by a lawyer or a tax advisor before submission.
• The procedure is subject to payment of a fee based on the value of the transaction.
• Only future transactions can be subject to APA procedures.
• Before submitting the application for the APA, the taxpayer may apply for an advance consultative procedure at the Ministry of Finance.
• The procedure must be completed within 120 days where such may be extended by the Ministry of Finance for 60 days on two occasions.
• APAs are issued for a definite term, for no less than 3 years and no more than 5 years and may be renewed;
• requests for the renewal of the assessment must be submitted 6 months prior to the expiry of the resolution’s validity;
• in the case of bilateral and multilateral arrangements taxpayers must enclose the professional English translation of the application to their documentation;
• in the case of bilateral and multilateral arrangements – at the request of the Tax Authority – taxpayers must also attach the professional English translation of the parts of documentation necessary for conducting the bilateral or multilateral procedure.

The APA procedure is subject to payment. From 9 July 2009 the service fee amounts to:

• no less than HUF 500,000 and no more than HUF 5 million in the case of unilateral procedures provided that the transfer price can be determined by applying the comparable uncontrolled price, resale price, or cost plus method;
• no less than HUF 2 million and no more than HUF 7 million in the case of unilateral procedures provided that the transfer price can be determined by applying other methods;
• no less than HUF 3 million and no more than HUF 8 million in the case of bilateral procedures;
• no less than HUF 5 million and no more than HUF 10 million in the case of multiteral procedures;
• if the arm’s length price (or range) cannot be determined numerically the fee must equal the minimum fee applicable in the case of the procedure type in question;• the fee corresponds to 1% of the determined arm’s length price, or the median of the minimum and maximum value of the arm’s length range if the arm’s length can be established numerically.

The service fee is payable before the commencement of procedure. In the case of rejection, 75% of the paid fee must be refunded to the taxpayer. In the case of extension, 50% of the above fees must be paid to the tax authorities.