Documentation process

Hungarian transfer pricing documentation regulations require the taxpayer to document relevant information necessary to determine that the transfer prices used are consistent with the arm’s length principle.

As of 1 January 2010, Decree No. 22/20009. (X.16) of the Ministry of Finance regulates the transfer pricing documentation process, while the Decree No. 18/2003. (VII. 16) of the Ministry of Finance was repealed.

According to the provisions of Section 3 of Decree No. 22/20009. (X.16) of the Ministry of Finance (“Decree”) taxpayers can decide whether they prepare:

  • a country specific transfer pricing documentation, or
  • a combined transfer pricing documentation.

Taxpayers have to declare their choice in their corporate tax return.

Country Specific Documentation

According to Section 4 of the Decree the Country Specific Documentation shall contain the following:

  • description of agreements;
  • description of the market (industry analysis);
  • company analysis;
  • functional analysis;
  • description of the pricing method employed and selection criteria (economic analysis); and
  • the analysis regarding pricing methodology (financial analysis).

Description of agreements

The documentation shall include the subject matter(s), date of execution, amendment and term of the agreement as well as the assets or services in question (e.g., physical characteristics, quality and quantity, or nature and scope, as applicable), and the method and terms of performance.

Industry analysis

This analysis involves an examination of the market in which the relevant commercial relations exists (including factors such as industry structure, market share and trends, substitute goods, etc.). The purpose of this analysis is to identify the industry sources of competitive advantages, key processes and value drivers, key risks and influences on pricing.

Company analysis

As part of the documentation process the purpose of this analysis is to set the specific value-adding activities or sources of competitive advantage at the enterprise, in accordance with the management model, business strategy and responsibility structure.

Functional analysis

The purpose of this analysis is to identify the role of each participant in a related party transaction i.e. functions performed, risks borne and resources used (including intangible assets). The relative compensation earned by each participant should generally correspond to their relative contribution.

Economic analysis (method selection and benchmarking)

Economic analysis covers the selection of the appropriate transfer pricing method and definition of comparable search criteria. The objective is to identify comparable transactions that allow the assessment of the arm’s length price of the relevant transactions.

Financial analysis

This applies the results of the economic analysis to the inter-company transactions being tested, in order to compare the prices applied between related business entities with the range of arm's length prices, using financial indexes. A price adjustment will have to be made if the analysis identifies a significant difference between the company's price margins and those of comparable companies.

Combined transfer pricing documentation

According to Section 5 of the Decree combined documentation shall consist of two main parts:

  • the core documentation; and
  • the country specific documentation(s).

Core documentation

This contains the common standard information with regard to each member company resident in any Member State of the European Union.
According to Section 5 of the Decree the core documentation shall include:

  • the general description of the business enterprise and its business strategy including any change in the business strategy as compared to the previous financial year;
  • the general description of the group in terms of its organizational, legal and operational structure (including the organizational diagram, the description of group members and the parent company’s involvement in the operation of its subsidies);
  • the general denomination of the related parties conducting controlled transactions with EU group members;
  • the general description of the controlled transactions (the enumeration of significant controlled transactions, e.g. sale of assets,, provision of services
  • development of immaterial assets, provision of financial services and their amount);
  • the general description of tasks performed and risks assumed and any change in those as compared to the previous financial year;
  • information regarding the ownership of immaterial assets and the introduction of paid and received royalties;
  • the description of the transfer pricing policy or system within the group;
  • the cost contribution agreements, transfer pricing resolutions and court rulings regarding arm’s length price in accordance with Paragraphs (4) of Section (5); and
  • the date on which the documentation was prepared or amended.

Country specific documentation

The specific documentation consists of nearly the same part as the core documentation and shall include the following information:

  • relevant data of the related parties involved in the controlled transaction;
  • general description of the taxpayer’s business enterprise and business strategy;
  • description of agreements;
  • benchmark analysis and the description of comparable data; and
  • the date of preparation.

The group – at its own discretion – may incorporate any of the items listed above in the core documentation, provided it is as detailed as in the case of a country specific documentation.