a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?
All transactions with associated enterprises must be documented. However, for low value adding intra-group services taxpayers may prepare TPD that encompasses a less detailed technical analysis. This type of documentation may only be applied if the value of the transaction does not exceed HUF 150 million (approximately EUR 526,400), 5% of the service provider’s net income and 10% of the recipient’s operational costs and expenditures in the tax year in question. In this case, the cost plus method is accepted without a separate analysis, and mark-ups between 3% and 7% are considered by the law to be at arm’s length.
In principle, TPD has to prepared separately for each transaction, however, a consolidated TPD may be prepared with respect to several transactions if the requirement of comparability is respected, and the subject of the agreements are the same, or similar. The fact of consolidation should be justified in detail in the TPD.
b) What is the definition of “associated enterprises” for the purposes of this requirement?
The relevant Hungarian definition of related parties basically states that two taxpayers will generally be regarded as related parties when one of them has direct or indirect majority control over the other. This also applies when a third person has such influence on two other persons (which makes those two persons “related”). The definition also applies to a head office and its PE. The term “majority control” is defined by the Hungarian Civil Code, according to which an individual or a legal entity has majority control in another entity if:
- It holds more than 50% of the votes in the other entity, either directly or indirectly;
- One of its members or shareholders is entitled to appoint or dismiss the majority of executive officers and / or supervisory board members of the other entity; or
- One of its members or shareholders controls, under an agreement with other members or shareholders, more than 50% of the votes in the other entity.
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?
As of 1 January 2010 a new Ministry of Finance decree on transfer pricing documentation requirements (“the Decree”) has come into force and was further amended as of 1 January 2012, aiming to bring the Hungarian legislation more into line with the EUTPD. However, this goal has only been partially achieved.
The Decree allows taxpayers to choose to adopt the EU masterfile / country file approach (as set out in the EUTPD) instead of unitary documentation.
However, it does not avoid the need to analyse each agreement / transaction separately. This means that in many (if not most) cases, it will be very difficult to save costs by using a masterfile for all EU companies in a group as the most costly analyses will still need to be prepared and presented on a transactional basis.
The masterfile should contain standardised information relevant for all EU group members. According to the relevant provisions these include the following:
- A general description of the business and business strategy (including changes in business strategy from the previous tax year);
- A general description of the group’s organisational, legal and operational structure;
- A list of intercompany transactions with group members operating in the EU;
- General identification of the associated enterprises which are engaged in controlled transactions involving enterprises in the EU;
- A general description of intercompany transactions (by listing the major transactions);
- A general description of functions performed and risks assumed;
- A description of the ownership of intangible assets, including amounts of royalties paid and / or received;
- The group’s intercompany transfer pricing policy, or a description of the group’s transfer pricing system;
- A list of cost contribution agreements, advance pricing agreements (“APAs”) and rulings covering transfer pricing aspects as far as these affect group members in the EU;
- A summary of any pending court or administrative proceedings relating to the determination of arm’s length consideration;
- The date of preparation and amendment of the masterfile.
According to the current Hungarian legislation the “country file” (which is to be prepared on a transaction by transaction basis, not simply on a country basis) should contain at least the following items:
- The name, seat and tax number of the related entity (if the latter is unavailable, the company registration number and the name of the court or authority with which it is registered);
- A general description of the taxpayer’s business and business strategy (including changes in its business strategy from the previous tax year);
- The subject of the agreement, the date it was made or amended, and its term;
- A comparability analysis (main attributes of the goods or services provided, functional analysis, terms of the agreement, economic conditions, specific business strategy);
- A description of the comparables used;
- A description of how the group transfer pricing policy was applied (with particular reference to the method used to establish fair market value);
- The date of preparation and amendment of the country file.
Please note that, if the group so decides, any of the above mentioned items can be included in the masterfile.
However they should be as detailed as is required in the case of the country file.
d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?
According to the current Hungarian provisions, Hungarian taxpayers are not obliged to insert a commitment in their masterfile, whereby they undertake to provide supplementary information upon request and within a reasonable time frame according to national rules. However, the Hungarian Tax Authority (“HTA”) can ask the foreign tax authority of another EU country or of another treaty country to collect the information.
e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
In general, regional benchmark studies are accepted by the HTA.
f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?
As of 1 January 2012 the HTA accepts TPD and the related supporting documents not only in Hungarian, but also in English, German and French.