Standardized transfer pricing documentation regulation?
Anomalies in the materiality thresholds
Transfer pricing documentation (TPD) rules in Hungary
The three-tiered documentation structure consisting of the master file, local file and the Country-by-Country Reporting (CbCR) have been implemented in Hungary as of 2018. Though the Hungarian rules introduced are based on Base Erosion and Profit Shifting (BEPS) Action 13 and Chapter V of The Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, there are some differences to take into consideration for companies having a Hungarian subsidiary (or PE) that is obliged to prepare TPD in Hungary.
Since the rules implemented in the G20 and OECD member states are based on the OECD documentation standards, it is expected that in most of the cases the master file prepared at the group level can be used by the Hungarian subsidiary. The Hungarian legislation contains the list of information to be indicated in the master file in accordance with Annex I to Chapter V of the OECD Transfer Pricing Guidelines. There is just one more additional requirement - which is important to avoid default penalty in Hungary - to indicate the date of preparation of the master file.
However, in our practice there might be differences between the national rules of the ultimate parent company and the Hungarian subsidiary, e.g. the regulation of the parent company might set different deadlines or materiality thresholds (or specific exemptions) for the preparation of the master file which might result in that the subsidiary is obliged to dispose of the master file even if there is no documentation obligation in the country of the ultimate parent company.
In Hungary, the deadline for the preparation of the local file is the actual filing date of the corporate income tax return (31 May). An extended deadline is applicable for the preparation of the master file if it is not available due to the different regulations applicable to the ultimate parent company. In this latter case the Hungarian taxpayer shall be in possession of the master file by the deadline applicable for the ultimate parent company under its domestic legislation, but 12 months at the latest after the last day of the tax year.
The TPD does not have to be filed to the National Tax and Customs Administration (NTCA), however it should be available by the Hungarian company and should be provided upon request without delay.
Exact materiality thresholds are not specified in the OECD TP Guidelines neither for the local nor for the master file. With regard to materiality it is recommended by the OECD TP Guidelines that the local file includes specific materiality thresholds that take into account the size and the nature of the local economy, the importance of the MNE group in that economy, and the size and nature of local operating entities, in addition to the overall size and nature of the MNE group. It states that measures of materiality may be considered in relative terms (e.g. transactions not exceeding a percentage of revenue or a percentage of cost measure) or in absolute amount terms (e.g. transactions not exceeding a certain fixed amount). Individual countries should establish their own materiality standards for local file purposes, based on local conditions. The materiality standards should be objective standards that are commonly understood and accepted in commercial practice. The master file is intended to provide a high-level overview of the group business compared to the local file providing detailed information on the specific intercompany transactions, therefore the materiality standards for the individual transactions might be higher than in case of the local files.
Besides some specific exemptions, a materiality limit of HUF50 million (approx. EUR156,000) is applicable for the preparation of TPD in Hungary. Should the arm’s length value of any transaction on consolidated basis exceed the above threshold, the Hungarian company will be obliged to prepare a local file. If the company is obliged to prepare a local file concerning any of its controlled transactions, it will be obliged to prepare or dispose of the master file as well.
In our practice this threshold is relatively low compared to the thresholds applied by the ultimate parent companies of our clients (see some examples in the table below).
Hungarian threshold for the local and master file
|Master file threshold of
the foreign parent company, e.g.
arm’s length value of any transaction/transaction type of HUF50m (approx. EUR156,000, calculated on consolidated basis)
EUR100 million revenue in the preceding fiscal year
Exceeding (or reaching) one of the following thresholds:
- EUR50m operating or financial income (excluding extraordinary items).
- total assets of EUR1 billion.
- average number of employees of 100.
Consolidated group turnover of EUR50m
Consequences of the different regulations
As a consequence of the above rules, the Hungarian subsidiary might become obliged to have a master file even if the regulation of the parent company does not prescribe a documentation obligation or it allows the preparation at a date following the deadlines prescribed by the Hungarian regulation. If there is no group level master file, the Hungarian company might face penalties in Hungary.
Any failure to comply with the Hungarian transfer pricing documentation regulations (including the failure to prepare the documentation in time or to meet the formal requirements) is subject to a penalty of up to HUF2m (EUR6,250) per documentation per year. In case of repeated failure of the preparation of the same documentation a penalty amounts to four times the general default penalty, i.e. up to HUF8m (EUR 25,000) might be levied. The above legal provision concerning the applicable default penalty has not been changed with the introduction of three-tiered documentation structure replacing the former separate (or consolidated) documentation rules per transaction type. This results in that the default penalty will be applicable per missing or inadequate documentation (i.e. master file or local file). If the Hungarian subsidiary prepares the local file, but due to the different national regulation of the parent company it is not able to present the master file, the penalty applicable at the first time HUF amounts up to HUF2m. (In addition to the default penalty for the failure of the documentation obligation, tax shortage, tax penalty and late payment interest might be levied if the prices applied by the Hungarian company in its controlled transactions are not arm’s length.)
In order to avoid penalties the Hungarian subsidiary might prepare a master file in addition to the local file, however in most of the cases the group level information required to be included in the master file are not available at the level of the subsidiaries which makes it impossible to properly comply with this obligation.
For more information, contact:
Andrea Kuntner – Tax Partner
 Par. 5.32. of the OECD Transfer Pricing Guidelines