The Hungarian government has submitted the proposal for the 2023 tax package, according to which multinational enterprises are facing major changes regarding the rules of transfer pricing. In addition to the transfer pricing regulation, the proposal also amends the rules of KATA (small taxpayers’ itemized lump-sum tax) and the company car tax. It was emphasized that the regulations may be subject to further amendments before the proposal is adopted.
Expanding data provision
Based on the law proposal, a new obligation is planned to be introduced in respect of transfer pricing. The proposed changes seem quite dissonant with those international efforts which aim to ease the huge administrative burdens of taxpayers connecting to transfer pricing; from then on, not just the transfer pricing documentation must be compiled in time, but the provision of certain information on transfer prices in the CIT return will also be required. Although the transfer pricing documentation had to be prepared by the submission date of the CIT return so far as well, neither its submission nor any data provision was necessary to the tax authority. So, on the one hand, this rule will generate an additional task in the field of transfer pricing, and on the other hand, stricter circumstances regarding the administrative (accounting, audit, tax) workflows and deadlines seem expected.
The exact content and extent of the data provision is not yet known; it will be prescribed by a new transfer pricing decree. The reporting obligation arises for the first time in a CIT return filed after 31 December 2022.
Increase in penalties
Along with the growing administrative burden, a drastic increase in transfer pricing penalties can also be expected. The measure of the default penalties (up to now HUF 2 million, and HUF 4 million in case of repeated violation) may increase by two and half times, to HUF 5 million and HUF 10 million. This means that a high degree of accuracy is expected from multinational companies in the future to properly document their intra-group transactions and will also be a significant deterrent to breaches of the obligation, as intended by the legislation.
Application of interquartile range
The rules on the use of the interquartile range are planned to be renewed. According to the law proposal, the interquartile range must be used if it is applied to publicly available data stored in a public database or from other public sources (also accessible by the tax authority) – i.e., they are not comparative data available from the affiliated companies’ independent transactions. The definition of the interquartile range remains unchanged, i.e., the first and last 25% of the sample should be eliminated.
Arm’s length price and transfer pricing adjustment
The proposal also introduces new provisions for determining the arm’s length price. Based on this, if the remuneration applied in an intra-group transaction fall outside the interquartile range, then – as the main rule – only the median value of the range can be considered as the arm’s length price, and the transfer pricing adjustment should also be made to this value. The current regulation allows adjusting to the closest quartile of the range, i.e., the upcoming changes will result in a significant tax revenue surplus in the case of transactions that need to be adjusted.
There is a relief of the proposal if the taxpayer can demonstrate that a value of the interquartile range other than the median corresponds more to the arm’s length price of the intra-group transaction, then this value may be used instead of the median for the adjustment, however, it may be seen that this may evoke risks in terms of the possible subjectivity of the methods of proof.
Advance pricing agreement
Advance pricing agreement (APA) proceeding will be available to all taxpayers in the future. However, the fee of the APA also increases from HUF 2 million to HUF 5 million in the case of a unilateral procedure and HUF 8 million in the case of a bilateral or multilateral procedure.