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Executive summary

On 19 July 2022, the Hungarian Parliament passed a bill that sets out important changes to the transfer pricing (TP) rules. Specifically the bill:

• Introduces a significant additional reporting obligation regarding intercompany transactions as part of the corporate income tax (CIT) return.
• Requires TP adjustments to be made to the median.

Detailed discussion

Summary of the new legislation

• Companies subject to TP documentation requirements will have a new reporting obligation. They will be required to provide transaction-level details on their intercompany dealings in their annual CIT returns. The exact content of the reporting obligation is not included in the bill but will be determined by an upcoming Ministry of Finance Decree. It is expected that the transactional volume, profit and loss impact and TP method retained to be part of the new data reporting obligation.
• The default penalty for violating the TP documentation requirements will increase from HUF2 million to HUF5 million per intercompany transaction. In the event of repeated infringements, the maximum default penalty will increase from HUF4 million to HUF10 million.
• The use of the interquartile range will always be mandatory for comparable searches based on a public database. If the return/price falls outside the arm's-lengths range, it will be obligatory to adjust to the median of the benchmarking study.
• The new reporting obligation applies for the first time to CIT returns submitted after 31 December 2022, while the new rule regarding the adjustments applies for the first time to tax years started in 2022.

Implications and actions required

• The prescription of additional reporting obligations, the change in the rules for adjustments and the simultaneous increase of default penalties by 150% clearly show that transfer pricing will be a priority for the Hungarian Tax Authority(HTA).
• The new rules will apply to the current financial year. Therefore, immediate action is required, with TP compliance processes needing to be reviewed and updated.
• In the past, it was not necessary to submit the documentation and deadlines were not strictly enforced. A significant portion of companies prepared the documentation after filing their CIT return. However, since the TP method will need to be disclosed in the CIT return for each intercompany transaction, going forward this will be a riskier option.
• Centrally prepared benchmarks also will pose a significant risk going forward. The aim of the HTA will be to determine whether the return falls outside the interquartile range of the benchmark prepared based on their specific requirements. If it does, the adjustment will be made to the median instead of the closest quartile which may result in a significant increase in volume and thus the tax impact of adjustments.
• Also, to avoid adjustments to the median, companies will have to prepare their segmented P&Ls under Hungarian GAAP by the time they submit their CIT return.

The new rules require taxpayers to significantly alter their CIT and TP compliance processes. Since the bill affects the current financial year, companies should start preparing and implementing adjustments as soon as possible. Naturally, the Decree with additional rules will need to be monitored; however, taxpayers should start their review and preparation without delay.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Consulting Ltd, Budapest

• Zoltán Lipták |zoltan.liptak@hu.ey.com
• András Módos | andras.modos@hu.ey.com