TaxAlert - KPMG

TaxAlert New decree on transfer pricing documentation obligations 24 October 2017

Dear Client, On 18 October 2017, the Ministry of National Economy (“NGM”) issued its decree on the documentation obligations for the determination of arm’s length price (“NGM Decree”), which shall enter into force on the 30 th day following its promulgation. The new decree contains several changes to the provisions of the former Decree 22/2009. (X. 16.) of the Ministry of Finance on the documentation obligations in connection with the determination of arm’s length price (“Decree 22/2009”). This missive summarizes the key changes to the regulation. Fulfillment of documentation obligation In line with current international trends, the NGM Decree integrates the documentation practice introduced by reform measures from the OECD and the European Union. The new legislation aims to reform the previous Decree’s provisions on consolidated and standalone documentation. Based on the NGM Decree, in future the documentation will consist of a master file and a local file. –– According to the provisions of the NGM Decree, a group is obligated to prepare a master file, if it has at least one member registered outside of Hungary. The master file shall contain general, standardized information on all members of the group, based on the NGM Decree, including: –– information about the group’s organizational structure; –– a general introduction on the group; –– a depiction of the value chain of the group’s most significant products and an outline of its main geographic markets; –– a list of important service agreements concluded between related parties; –– a functional analysis showing the contribution

of each member entity towards value creation; –– information regarding the group’s intangible goods; –– presentation of the group’s inter-company financial activity (including significant financing agreements concluded with unrelated parties); –– the group’s financial and tax positions; –– a list and brief presentation of the group’s effective unilateral advance pricing agreements and other tax-related agreements on the distribution of income between countries; –– the master file’s date of preparation. –– The local file presents the local taxpayer and the agreements between the taxpayer and its related parties, providing information based on the NGM Decree, including: –– the organizational structure of the local entity; –– a description of the entity’s activity and its business strategy; –– presentation of main competitors; –– information on controlled transactions;

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–– a copy of effective advance pricing agreements and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions; –– the local file’s date of preparation.

Deadlines The requirements of the local file can be included via cross-reference in the master file. Such reference shall be sufficient if the master file contains the information defined in the NGM Decree and it is prepared by the filing date of the corporate tax return. If the master file for the relevant financial year is not available due to the regulations the group’s ultimate parent company is subject to, then it must be prepared before the deadline for the preparation of the master file of the group’s ultimate parent company, but no later than 12 months after the last day of the taxpayer’s tax year. Provided that the deadline for transfer pricing documentation preparation for the 2017 tax year is after the promulgation date of the NGM Decree, then completion of the documentation preparation obligation shall be performed in accordance with Decree 22/2009. However, the new NGM Decree on transfer pricing documentation can already be applied for the tax year starting in 2017, and it must be applied when fulfilling the documentation obligations in connection with the tax liability for the tax year starting in 2018. It can be concluded, however, that the scope of inter-company transactions to be documented will not be changed by introducing the NGM Decree, although the content requirements will change significantly. The legislation will require the presentation of information that is usually not available at a local level; therefore, the preparation of transfer pricing documentation might prove more burdensome for taxpayers in the future.

Modification of the transfer pricing documentation The NGM Decree also clarifies the rules of modifying the transfer pricing documentation in that it outlines that any modification can be performed up until the statute of limitation, but no later than the starting date of the tax audit. Therefore, similar to the self revision, transfer pricing documentation must not be modified during a tax audit. The modified documentation is required to illustrate how the original documentation did not comply with the legal requirements nor define potential errors effecting the tax base, the tax, the arm’s length price or the arm’s length price range. Based on the above, the transfer pricing documentation

shall be prepared according to the previous deadline, while modification after the deadline should only be made in special circumstances.

Update of the database search Another important clarification to the NGM Decree is that the taxpayer must perform a new database search at least every three tax years and the financial data of selected comparable transactions or companies must be updated annually at a minimum. The option for annual financial data update can only be selected if there are no significant changes in business activity which would be considered as influential by independent parties in the determination of the prices to be applied.

Reproducibility The NGM Decree modifies the requirements for searching for comparable data. According to the Decree, the taxpayer must document any future search for comparable data in a way that it is clearly reproducible by anyone. If this is not possible, the steps of the search must be completely documented.

Conceptual refinements The NGM Decree extends the concept of controlled transaction to the transactions described in subsection (7) of Section 18 of CIT, which also includes transactions between a foreign entrepreneur and its domestic permanent establishment, and transactions between a taxpayer and its foreign permanent establishment.

Arm’s length price range According to the effective Decree 22/2009, with the application of the regular transfer pricing methods described in subsection (2) of Section 18 of CIT, the arm’s length price range was determined by taking into consideration the middle half (inter-quartile range) of the sample used for the comparison. The uncontrolled comparable price method was an exception to this, which was not subject to the aforementioned restriction, so the range of the entire sample could have been taken into consideration when determining the arm’s length price range. However, according to the NGM Decree this exception was excluded from the regulation; therefore, the application of the inter-quartile range is mandatory in case of every named method if the conditions already introduced in Decree 22/2009 are not met in full. These conditions are modified to the extent that from now on a comparative analysis must take into account the data of 10 companies for three financial years at the least, or more than 30 observations. Consequently, if the sample used for the comparison does not


contain at least 30 observations, then use of the so-called inter-quartile range is mandatory with the application of every named transfer pricing method.

Low value-added intra group services

of Decree 22/2009, mark-ups between 3 and 7 percent are considered as arm’s length. The changes introduced by the new NGM Decree raise a number of questions from a practical point of view, so it may be worth seeking professional advice before their application.

According to the NGM Decree the arm’s length range applied in low value-added intra group services is modified. Similarly to the former rules

If you have any further questions concerning the points raised above, please do not hesitate to contact us. Alternatively, please contact your regular Tax advisor in the Tax Department of KPMG Advisory Ltd. Mihály Gódor Director T: +36 1 887 7340 E: [email protected]

Szabolcs Végh Senior Manager T: +36 1 8877213 E: [email protected]


Partners Gábor Beer Partner, Head of Tax and Legal Advisory T: +36 1 887 7329 E: [email protected]

Gábor Zachár Partner T: +36 1 887 6690 E: [email protected]

dr. Árpád Varga Director T: +36 1 887 4061 E: [email protected]

Indirect Tax Advisory and Compliance Services

International Tax

Transfer Pricing Advisory Group

Bálint Gombkötő Director T: +36 1 887 7159 E: [email protected]

Mihály Gódor Director T: +36 1 887 7340 E: [email protected]

Zsófia Pongrácz Senior Manager T: +36 1 887 7374 E: [email protected]

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”). © 2017 KPMG Tanácsadó Kft., a Hungarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.