Significant changes in the transfer pricing documentation rules

Preparation of the appropriate transfer pricing documentation tends to be a task taxpayers perform after the business year is over. Pursuant to the previous regulation, Hungarian companies were able to comply with their relevant obligation locally, even without the involvement of other group members (such as the parent company), by preparing the standalone documentation. Under the new regulatory framework, however, the possibility of standalone documentation has been eliminated, replaced by a two-tiered transfer pricing documentation approach, consisting of the Master file and Local file.

Two-tiered transfer pricing documentation

The possibility of preparing two-tiered transfer pricing documentation (differing from the newly established Master file – Local file approach) was already an option under the previous regulation. However, in Deloitte’s experience, the majority of companies did not take this opportunity. The new regulation requires an even wider range of information than the consolidated documentation did regarding both the group and the specific transactions of the local subsidiary.

The Master file must include, inter alia, presentation of the group’s global financial standing, description of its business, information about the group’s intangibles, financial activities and financial and tax position.

Therefore, in order to be able to prepare the Master file, close cooperation with the headquarters may be necessary. The scope of information to be presented in the Local file has also been extended: for example, Local files have to contain the presentation of the local strategy, as well as an explanation of how the financial data used for the analysis relate to the taxpayer’s financial statements. In practice, this means that groups must review their document templates for tax year 2018 at the latest.

The requirements of the new transfer pricing regulation generally correspond with the requirements set forth in the transfer pricing action plan of BEPS (Base Erosion and Profit Shifting), which has either already been included in the local regulations in other countries, or will shortly be included.

With the changing tax environment due to BEPS, our experience is that multinational companies try to prepare their documentation as efficiently as possible, in a centrally coordinated way. However, it is important to know that the local regulations are not uniform. Therefore, Hungarian companies may face default penalties if they do not meticulously tailor their documentation to meet the requirements/preferences of the Hungarian regulation and the Hungarian tax authority

– Judit Helybély, Deloitte’s transfer pricing director pointed out.

Two of the most frequent variances between Hungarian and foreign transfer pricing regulations is the scope of transactions affected by documentation obligation and the definition of related parties. While in Hungary, pursuant to the main rule, all transactions between related parties exceeding HUF 50 million should be analysed separately, other countries may determine a different limit, or even different set of criteria.

Furthermore, there are significant differences between the types of comparable data (which is one of the fundamental pillars of transfer pricing analyses) accepted in various countries. The new Hungarian regulation requires database searches to be re-run every three tax years, with financial updates in-between. Other countries require different timeframes for re-runs and updates, which may lead to problems at a group level and often generate extra tasks and costs

– Balázs Prágay-Szabó, manager of Deloitte’s transfer pricing team added.

According to Deloitte’s experts, from a Hungarian point of view, one of the greatest deficiencies of centrally prepared analyses is that such analyses may not be available for all relevant transactions on a timely basis or at all.
Overall, the new regulation distrupts the well established documentation approach and schemes previously used by companies. Therefore, sufficient time should be allowed for the preparation of transfer pricing documentation at the latest from tax year 2018.