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Tranfer pricing documentation 2018

In the following we briefly inform you about the most important changes related the transfer pricing documentation, which are effective from 1st of January 2018.

Copyright: Andreas Hermsdorf/Pixelio

The new regulations must be applied at first for transfer pricing documentation, which is prepared about business year starting in 2018. (If the business year complies with the calendar year, that means the transfer pricing documentation about 2018, which should be prepared until 31st of May 2019.)
In case of transfer pricing documentation about 2017 (If the business year complies with the calendar year, that means the documentation, which should be prepared until 31st of May 2018) the application of the new rules is optional.

I. Obligatory application of the Master File

The following table summarizes the most important change in connection with applicable types of transfer pricing documentation

Types of transfer pricing documentation until 31st of December 2017
Joint documentation, which includes

  • Master File
  • Local file

The Master File contains common, standardized information for each member company of the group, which are resident in the EU.
The Local file contains data of the Hungarian company, description of its activities and the presentation and analysis of transactions between the Hungarian company and its affiliate companies.

Application: optional

Types of transfer pricing documentations from 1st of January 2018

Register, which includes:

  • Master File
  • Local file

The minimum obligatory elements of the Master File are listed below.
The Local file contains the data of the Hungarian company, the description of its activities and the presentation and analysis of the transactions between the Hungarian company and its affiliate companies.
Application: obligatory


The Master file is practically prepared by “mother company” of the group, as this member of the group has all the necessary data and information.

Master File is an obligatory element of transfer pricing documentation from 1st of January 2018.
Because of breaking of rules related to transfer pricing documentation, tax authority is entitled to impose fine up to HUF 2 million (up to HUF 4 million in case of repeated breaking of rules) per documentation.
In practice, that means if the “mother company” of the group (or other member of the group, who was assigned to this task) doesn’t prepare the Master File or give it to the Hungarian member of the group, in this case the Hungarian company must prepare the Master file.

There can be differences between regulation of each countries related to content requirements of the Master File, because of this we will list below the minimum obligatory elements according to Hungarian rules, which existence will be checked certainly by the Hungarian Tax Authority in a tax audit.

Organizational structure

  • The legal structure of the group.
  • The ownership structure of the group.
  • An illustration of the geographical location of the organizations.

Description of the group

  • Driving forces of the business results.
  • Related to the top five products and services of the group and products and services which make above 5 % of the group's total turnover:

    • Description of the supply chain by revenue (description can be presented in spreadsheet or chart format);
    • Description of the main geographic markets.

  • Related to significant service agreements between members of the group (excluding research and development services)

    • solo list
    • a short description of the agreements, including a description of the capacity of main venues providing significant services and a transfer pricing policy for allocating service costs and for determining service fees payable among the group.

  • A brief functional analysis, which describes the value added contribution by certain actors within the group, especially the performed functions of key importance, the significant borne risks, significant applied assets.
  • The description of transactions regarding significant business restructuring, acquisitions and sale of branches that were realized in the business year.

 

Intangible assets

  • The description of the overall strategy regarding the development, ownership and utilization of intangible assets of the group, including the main geographical locations of the research and development facilities and the research and development management.
  • The list of significant intangible assets or its groups, as well as their legal owners.
  • The list of agreements concluded with affiliated companies regarding intangible assets, including cost contribution agreements, most important research service and license agreements.
  • The general description of the transfer pricing policy of the group in respect of research and development and intangible assets.
  • The general description of any intangible asset-related significant assignment of interest, that took place among affiliates during the business year, including the affiliated companies, countries and received or provided compensations.

Financial Activity

  • The general description of the group’s financing, including the significant financing agreements with not affiliated creditors.
  • All the identifiers of the group members that provide the group with central financing, including the country, the laws of which prevail for the financing organization, furthermore, the location where its operative management is situated.
  • The description of the general transfer pricing policy regarding the financing agreements among the affiliated companies of the group.

Financial and taxation situation

  • The annual consolidated report of the business year of the group, if non-existent, any other financial, regulation, internal management, taxation or other report.
  • The list and brief description of the effective one-sided transfer pricing agreements of the group, as well as other taxation agreements (including advance ruling, among others), which concern the distribution of earnings among countries.

II. Low value adding intra-group services

Concerning to low value adding intra-group services the upper limit of the margin range – which is considered to be the fair market price (arm’s length price) – has been changed from 1st of January 2018:

Profit margin as a fair market price (arm’s length price) until 31st of December 2017:
3% -10%

Profit margin, as a fair market price (arm’s length price) from 1st of January 2018:
3% -7%

Therefore the upper limit of the fair market price (arm’s length price) range has been decreased from 10% to 7%; thus the former upper limit (which was effective from 20th January 2012 until 20th of June 2013) returns.
Regarding to the above mentioned information, we recommend you to pay attention to the applied margin, by the calculation of the low value adding intra-group services after 1st of January 2018.

The new regulations must be applied at first for transfer pricing documentation, which is prepared about business year starting in 2018. (If the business year complies with the calendar year, that means the transfer pricing documentation about 2018, which should be prepared until 31st of May 2019.)
In case of transfer pricing documentation about 2017 (If the business year complies with the calendar year, that means the documentation, which should be prepared until 31st of May 2018) the application of the new rules is optional.

Due to the general nature of our Information letter, this can’t be considered as a decision -justifying consultation. With regard to this, please be as so kind to contact our colleagues with your specific questions in connection with this Information letter.

Budapest, 21st January 2018

Dr. Anikó Emese Boros, Tax advisor
Krisztina Gubicza, Cert. tax expert Managing director

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