As more and more companies operate regionally or globally, transactions between associated enterprises are becoming more frequent and complex. Accordingly, tax authorities have increased their interest in and their ability to ascertain the proper allocation of profits and losses deriving from these transactions.
Internationally, the first transfer pricing regulations were introduced in the United States in the late 1960s. In 1995, the OECD adopted the Transfer Pricing Guidelines based on previous reports published since 1979 and encouraged taxpayers and tax administrations to comply with them. OECD Members States have acknowledged that the arm's length principle as defined in Article 9 of the OECD Model Tax Convention is the international transfer pricing standard to be used.
"(When) conditions are made or imposed between two (associated) enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly." (Article 9, OECD Tax Model).
Hungary became a member of the OECD in 1996 but had already introduced transfer pricing legislation in 1992 in Section 18 of the Hungarian Corporate and Dividend Tax Act (CDTA). A series of minor amendments followed thereafter. Section 18 of the CDTA states that if associated enterprises (as defined in Section 4.23) use prices other than arm's length prices in their transactions, the corporate tax base of the Hungarian taxpayer must be adjusted accordingly.
Enterprises are defined as associated if:
- they are connected by direct or indirect majority shareholding;
- they are able to appoint or dismiss the majority of the key management or the supervisory board;
- they have a common direct or indirect majority shareholder.
Moreover, transfer pricing regulations apply to transactions between the general enterprise and its permanent establishment(s) as well as to domestic inter-company transactions.
In January 1, 2003, and in line with worldwide trends in establishing and updating transfer pricing legislation, a new subsection introducing transfer pricing documentation requirements was added to Section 18. This provision was followed by regulations contained in Decree No. 18/2003 of the Ministry of Finance, which is effective from September 1, 2003. These regulations require taxpayers to document each qualifying inter-company agreement and arrangement by the time the corporate tax return is due. A 'qualifying agreement' is understood as one transaction or group of identical or closely related transactions. The documentation should be modified if there is a change in the relevant circumstances that would cause unrelated enterprises to renegotiate the pricing terms and conditions.
The documentation (in Hungarian) does not need to be submitted with the tax return, but should be readily available at the request of the tax authority.
Transactions need to be documented by the filing date of the corresponding tax return. For the financial year ended 31 December 2007 that would mean that transactions should be documented by 31 May 2008.
The documentation requirement does not apply to:
- Small or micro enterprises (as defined in Act XXXIV of 2004)
- Private individuals
- Taxpayers in an unprivileged market position due to their size, who establish affiliated companies for the purpose of joint purchases and sales (certain retail entities)
- Transactions conducted on the stock exchange or at an officially set price (with the exception of cases involving insider trading, fraudulent attempts to influence exchange rates or applying prices in breach of legal regulations, which are not exempt)
- Public benefit and prominently public benefit non-profit organizations and such taxpayers in which the state is connected by direct or indirect majority shareholding
