Transfer pricing policy in Hungary – everything you need to know | News Flash

The terms transfer pricing policy, transfer pricing documentation, transfer pricing records and transfer pricing guidelines are commonly used as synonyms by many people. They are all terms around the same theme, but they mean different things.

The transfer pricing documentation or transfer pricing records is a study of transactions up to the threshold of HUF 100 Million, consisting of a local file and a master file.

The Transfer Pricing Directive is an OECD guideline setting out the principles for accounting for transactions between related companies.

A transfer pricing policy or transfer pricing rule is an internal rule that predetermines the pricing of transactions between related parties, which can be prepared in a much simpler and freer form than the transfer pricing documentation above.

What is transfer pricing policy?

The transfer pricing policy is an internal policy that defines the methodology and internal company principles for transfer pricing between the member companies of a group. The preparation of a transfer pricing policy or policy is a key element of transfer pricing planning, whereby the company (group) lays down in advance the pricing methodology for each (or expected) related party transaction. This includes the allocation of costs and revenues, contractual and functional contributions, and the arm’s length price or expected benefit of the transactions.

Is it mandatory to have a transfer pricing policy in Hungary?

The preparation of a transfer pricing policy is not a legal obligation. The relevant laws and regulations do not directly(!) require the preparation of a transfer pricing policy.

Why to make a transfer pricing policy if it is not mandatory?

Practicality and utility justify the creation of a transfer pricing policy. Although the legislation does not directly require a transfer pricing policy in Hungary, it is indirectly justified. The Corporate Tax Act (Tao) states that if related companies apply a higher or lower consideration than the arm’s length price in their contracts or agreements, the company must adjust its pre-tax profit or loss by an amount equal to the difference between the arm’s length price and the consideration applied. Thus, everyone(!) must monitor whether the price applied with related parties is in line with the arm’s length price, because if not, the corporate tax base must be adjusted even if no transfer pricing documentation is required (e.g. because the transaction does not reach the annual threshold of HUF 100 Million).

In the event of an audit by the tax authorities, the company must prove the correctness of the prices applied. It is practical and useful to have a transfer pricing policy in Hungary in place for this purpose, which the company has already prepared in advance of the related party transactions.

Is a transfer pricing policy in Hungary needed if I have no transfer pricing obligations?

Yes! Even if the transactions do not reach the annual threshold of HUF 100 Million, it must still be proven during a tax audit that the prices used correspond to the arm’s length price. Ad absurdum, even in the case of a HUF 1 linked transaction, it must be proved that it was at arm’s length.

Is a transfer pricing policy in Hungary needed even if I have transfer pricing documentation?

Yes, it is useful to have a transfer pricing policy even if the transaction is likely to be subject to transfer pricing documentation. Based on the experience of tax audits, the tax authorities are also paying increasing attention to the content of transfer pricing documentation. Therefore, there is less and less space and less opportunity for the company to try to support inadequate transfer prices in the transfer pricing records. It is important that the prices used are genuinely in line with normal market prices and that the company is not only faced with the problem of not being able to substantiate the transfer price after the year-end.

Conclusion

Having a transfer pricing policy also makes life easier for companies at operational level. It allows the continuous monitoring of the correctness of pricing and the management of background analytics during the mid-year processes. At the year-end, it simplifies the preparation of transfer pricing records and the ex-post price justification.

The use of pre-established transfer prices reduces the possibility of subsequent tax base adjustments and the additional administrative work involved. For example, if the transfer pricing documentation of a Hungarian affiliate does not follow the parent company’s policy, multiple taxation may occur.

Köő-Tóth Zénó

Senior Transfer pricing Specialist | Accace Hungary

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