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February 2012 - Tax & Private Client. Legal Developments by Wolf Theiss.

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The question of transfer prices is getting increased emphasis both in Hungary and internationally as more than 60% of world trade transactions are made up of inter-company group deals.

The adequate pricing of transactions may offer company groups an outstanding opportunity for tax planning; however, the related burdens of documentation involve serious costs. The modifications in force since 1 January 2012 are partly aimed at reducing such burdens even though some rules tend to be more stringent. From now on records must be kept of each transaction and not of each contract, and a company failing to document its inter-company group deals properly may receive a penalty of up to 4 million Forints. Moreover, penalties apply to each record and in the event of repeated default the previous penalty may be quadruplicated.

In Hungary keeping a record of transfer prices has been compulsory since 2003. The obligation to keep records mostly applies to transactions in between companies which employ at least 50 persons on the company level and the joint net sales revenue or balance-sheet total of which reaches 10 million Euros annually.

"As from 2012 the fact that no records must be kept of some transactions as opposed to the previous rules makes things easier. For example, this applies if the joint market price of services that may be consolidated comes to no more than 50 million Forints excluding VAT in a tax year, or if there is a transfer of financial assets free of charge. In addition, no records must be kept if goods or services acquired outside the group are transferred within the group in an unaltered form and without a surcharge. The only exception under the latter is where the group member providing the service acts within its main scope of activity," says Dr. Balázs Békés, Tax Partner of a Faludi Wolf Theiss Attorneys-at-Law.

The administrative burdens of large companies may also drop. If they have the – otherwise rather costly – preliminary price setting decision issued by the tax authority, then during the term thereof they are not required to keep a record of the transactions stated therein. In addition, in the event that a Hungarian company has a place of business abroad, it does not have to document the transfer price of its transactions conducted with such place of business if its revenue deriving from such transactions are exempted from tax in Hungary on the basis of a relevant double taxation agreement. In this case no corporate tax adjustment is needed either.   

It often happens especially in the case of multinational firms that the documentation is prepared at the group level and the records made by the foreign parent company or group member are intended to be used in the procedure before the Hungarian tax authority. This is possible if the documentation is in compliance with the Hungarian requirements. Moreover, today the tax authority may not even ask for a certified translation of documents in English, German or French. However, it must be kept in mind that since the foreign requirements are often much simpler than the Hungarian specifications in terms of form and content, the Hungarian authority may find the documentation prepared on the basis of the foreign rules inadequate. In this case, the taxpayer is subject to serious penalties.

In contrast, there are rules which tend to be more stringent. "Although it might be insignificant at first glance, in practice it is an important change that as from 2012 the transfer price records must be prepared not for each contract but for each transaction. If a company regulates miscellaneous services in a contract, the tax authority may consider these as separate transactions and may require separate records (possibly consolidated records). In this case the amount of default penalty may significantly grow as it is always imposed by the tax authority as per record (transaction)," explains Dr. Balázs Békés.

Severe tightening up is expected in terms of the legal consequences as well. The majority of small companies did not attach great importance to documenting inter-group transactions; however, the auditing directive of the tax authority stated already last year that it is not only multinational companies that should expect tax authority audits. Starting from 1 January, risks further increase; the tax authority may impose a penalty of up to 4 million Forints, and this should be interpreted per documentation. If the tax authority establishes repeated infringement in relation to the same transaction, it may impose a penalty equalling four times the amount of the previous penalty.

In the absence of proper records, companies can expect not only a default penalty; if they invoice at a price different from the market price, the tax authority may modify their corporate tax base, and may establish a considerable tax penalty and late charges. Therefore, in 2012 affiliated companies must make sure to document each transaction accurately.

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