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First, the act on the grounding of the central budget amends Act LXXXI of 1996 on Corporate Tax and Dividend Tax. As part of this, in addition to the current documentation obligation related to determining the arm’s length price (transfer pricing documentation), taxpayers will also have to meet a new data provision obligation as part of the annual corporate tax return. The detailed rules related to this are not yet known. However, the act on the grounding of the central budget authorizes the minister responsible for tax policy to lay down the details in a decree. This is expected to take place during 2022, given that this data provision obligation will apply to tax returns submitted after 31 December 2022. It is important to point out that a similar data provision obligation has not been imposed on taxpayers until now.
Moreover, when determining the arm’s length price, should the taxpayer take into account data that is stored in a database or obtained from other sources for comparable products, services or companies, then it is mandatory to further narrow the elements of the resulting sample to the middle range in which half of the elements of the sample falls (interquartile range). Although the use of the interquartile range is considered common practice, its mandatory use has so far only been prescribed by the legislator under certain circumstances.
The amendment also stipulates that if the consideration applied by a taxpayer in a transaction concluded with its affiliated company is already within the arm’s length range, it is not possible to modify the profit before tax in connection with the arm’s length principle. This amendment may significantly affect the possibility of applying transfer pricing adjustments, which has been a frequently used procedure so far among large taxpayers.
Another change is that if the consideration applied by a taxpayer in a transaction concluded with its affiliated company falls outside the arm’s length range, in connection with the arm’s length principle, the adjustment of the profit before tax must be made to the median of the arm’s length range unless the taxpayer proves that a value within the arm’s length range other than the median value corresponds best to the transaction under review. In such cases, this value should be taken into account as the arm’s length price instead of the median value. Therefore, as a general rule, it is no longer sufficient to make the correction only to the nearest value of the arm’s length range.
The changes related to the application of the interquartile range and the modification of the profit before tax must first be applied when determining the tax liability for the tax year starting in 2022.
The act on the grounding of the central budget amends Act CL of 2017 on the Rules of Taxation as well on several points (hereinafter referred to as “ART”). As a result, the fee for the procedure for determining the arm’s length price (better known as the APA procedure) will be increased to five million forints in the case of a unilateral procedure, and to eight million forints in the case of a bilateral or a multilateral procedure (the fee until now has been two million forints multiplied by the number of jurisdictions involved in the procedure). The strict rules on banning tax inspections that have been in force until now in relation to APA procedures, will also change: except for tax audits focusing on the correctness of the VAT deduction, only tax audits in connection with the arm’s length price to be determined by the APA procedure will be prohibited. The ban on tax inspections applies from the submission of an APA application until the deadlines set by law have expired. This amendment gives the tax authority more leeway with respect to tax audits, since previously it could not conduct any audits in relation to transactions affected by the procedure. In relation to APA procedures, the section of the ART which prevents taxpayers who are not obliged to prepare transfer pricing documentation from submitting an APA request, will be repealed. In accordance with this, for example, members of a corporate tax group will also be entitled to initiate APA procedures in connection with transactions concluded among themselves.
The default penalties related to the preparation or the record-keeping of transfer pricing documentation will also increase. The previous default penalty of up to two million forints per documentation will increase to five million forints, while for repeated infringements, the previous default penalty of up to four million forints per documentation will increase to ten million forints.
The above amendments affecting the ART will enter into force on the thirty-first day after the promulgation of the act on the grounding of the central budget. The new default penalty regime will first apply to tax years starting after the amendments’ entry into force.
The changes summarized in this newsletter may have significant implications for the pricing of transactions between affiliated companies, as well as for the organization of internal corporate governance processes. We therefore recommend identifying any possible company- or transaction-specific consequences as soon as possible in order to deal with them in a timely manner.
If you have any questions regarding the above, please contact your usual relationship partner or Anita Mekler.
PR Senior Manager, PwC Hungary