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.

Article 4 of the Decree sets out the content of such documentation which includes

• Description of the market (Industry analysis);
• Analysis of the company details (Company analysis);
• Activities performed (Functional analysis);
• Description of the pricing method used and selection criteria (Economic analysis);
• Framework of analysis in relation to pricing used (Financial analysis).

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.