Hungarian government proposes new tax package with restrictive measures on transfer pricing operations

On the 23 June 2022, Law Amendment Proposal Number T/360 on Hungary’s 2023 State Budget was presented to parliament by Finance Minister Mihály Varga, which can also be deemed as this year’s relevant tax package. The Hungarian Parliament accepted the Proposal on 19 July 2022. Effective from the 2022 taxation year already, the proposal would change regulation on various tax forms, and notably contains heavy tightening provisions on transfer pricing operations. TP-related amendments to relevant legislation include new obligations on data provision, stricter applications of the arm’s length range and transfer price adjustments, alongside increased penalties. The following paragraphs present a concise summary of amendments with implications on transfer pricing.

Obligations on data provision

The proposal would sanction new data-disclosure obligations concerning transfer pricing. Tax returns due after the 31st of December 2022 – thus concerning the 2022 taxation year already – will incorporate additional data-provision duties, later to be specified by the minister responsible for tax policy in an upcoming decree on transfer pricing documentation. Although the exact provisions of the decree remain to be unknown to date, it will likely warrant information on the applied transfer price, the method used in the transfer pricing analysis and relevant supporting evidence.

Applications of the interquartile range 

A further amendment also allows less leeway for taxpayers in determining the
transfer price in terms of the applicable arm’s length range. When
comparability is being proven with external database research, tax authorities
would only recognise the interquartile range of the cited data sample (the
middle 50% of observations) as the arm’s length range. This measure would
entail a serious restriction on transfer pricing operations in Hungary, making
the interquartile the standard for determining the arm’s length. So far, using
the interquartile instead of the full range of samples has only been necessary
under specific circumstances.

Transfer price adjustments

Another proposed change in legislation would further limit the range of options available for determining transfer price adjustments. The amendment does not approve any adjustment to the transfer price if the applied price falls within the recognised arm’s length range. However, if the applied price falls outside the arm’s length range, the consequent adjustment point is exclusively the median, unless the taxpayer demonstrates the best approximation for a third-party price to be otherwise. Such exceptions are only expected to be made under highly special circumstances. Once again, this measure would imply serious tightening in transfer pricing procedures. Previous
legislation as confirmed by legal practice allowed for any adjustment price
within the arms’ length range (this usually being the one closest to the
applied price), arguing that every point of the range could be considered arm’s
length. 

Different fees for APA procedures

A new fee structure would also be implemented by competent authorities for issuing Advance Pricing Arrangements (APAs). So far, the fee for the procedure was HUF 2 million, times the number of involved parties. The new fee structure of the proposal would charge HUF 5 million for unilateral procedures, and HUF 8 million for bi- and multilateral operations.

Audits during ongoing APA procedures

According to the current wording of the law, as long as an APA procedure is still
ongoing, tax audits cannot be ordered upon the concerned taxpayer. The new
amendment would limit this protection to only apply to comprehensive audits creating a closed audit period.

Higher default penalty rates for missing transfer pricing documentation

Currently, in case of failure to meet obligations on transfer pricing documentation, the tax authority may sanction a default penalty with an upper limit of HUF 2 million, and HUF 4 million if the violation is repeated. The proposal would raise this upper limit to HUF 5 million, and HUF 10 million in case of repeated violation.