Wednesday, 28 August 2019

New transfer pricing regulation – the transfer pricing documentary obligation seems to be more difficult than ever

As of January 2018 the application of the new transfer pricing documentation regulation is mandatory. The amendment is necessitated by the OECD rules adopted in the framework of the BEPS package, according to which the Hungarian transfer pricing documentations shall be prepared in a more complex, more detailed way and should include more information as well.

Under the transitional provisions, the new rules might be applied for affiliated transactions carried out in 2017. However, the new provisions become mandatory from the business year 2018.

New documentation form

Namely, a new form of documentation has been replaced the usual scheme. The new type of transfer pricing documentation shall consist of a master file and a local file, which means that preparation of a solely documentation is no longer possible under the rules currently in force.

Many could be familiar with this dual structure, as the previous regulation of the Finance Min-istry also included it as "Joint Documentation", which however differs considerably from the new documentation: in addition to the fact that its usage was optional, it has also contained significantly less information. In addition to these files, the county-by-country reporting also provides a new and signifi-cant source of information for transfer pricing audits cross the border.

Master file

To prepare a master file, both foreign-owned and Hungarian-controlled groups are equally obliged. Therefore, it means a significant extra administrative burden to all Hungarian enter-prises, which have affiliated companies and are subjected to the documentary obligation based on the size of the group.

The master file should include - inter alia - general information about the structure, opera-tion, and main functions of the whole group. In the master file the following shall be described for instance: the supply chain for the five largest products and services of the group, a concise functional analysis of the group, if significant business reorganization were made in the tax year - such as acquisition or sale of branch- furthermore the group's intangible assets, financial activities within the company, and the financial and tax situation of the group.

Local file

The local file has been divided into two parts: on the one hand, it contains the general de-scription of the Hungarian entity (e.g. management structure, organigram, strategy, com-petitors), as well as a transactionspecific chapter. The transaction specified chapter should cover information about the transaction, the contract, the participating entities, the company, the supply chain, characterization. These should be supported by detailed functional, risk and assets-used analyses.

Key changes from as of 2018

The most important change concerning the content of the documentation was that all the unilateral APA resolutions of the group in relation to the distribution of income between the countries and other tax agreements (e.g. tax ruling decision) shall be listed and briefly pre-sented in the master file. Furthermore, a copy shall be enclosed to the local file of the current and relevant single, bilateral and multilateral APA agreements which were not issued by the HTA and also the copy of other tax agreements.

The preparation of the new type of transfer pricing documentation is certainly means a sig-nificantly greater administrative burden on the taxpayers concerned with the transfer pricing obligation. Also, the closer cooperation between the members of the group is a greater need.

The significance of the new regulation

The new transfer pricing regulation adequate to the BEPS ambitions, supplemented by the previously agreed rules on CbC (Country by Country) report, changes the legal environment in respect of the transfer pricing, its planning and the transfer pricing obligation.

The changes are resulting in a significant increase of the administrative burdens/costs of the taxpayers, as the scope and volume of the information to be reported majorly increasing significantly. Moreover, more thorough and profound tax audits will become possible; therefore, it is expected that the BEPS ambitions will have a tangible result.

It is advisable to entrust an advisor with the transfer pricing documentation tasks who is able to prepare the documentation in the country of the parent company as well. Therefore, LeitnerLeitner provides adequate solutions to the issue through the worldwide Taxand network.