Supplementing the corporate tax return with detailed data on related transactions

The Ministry of Finance released the draft amendment to the decree on the registration of arm’s length price determination for social consultation.

The draft contains two essential changes: on the one hand, it requires detailed information on related transactions in the corporate tax return, which must be completed by the 2022 tax year first, and on the other hand, the method of preparing the local document will also change from the 2023 tax year.

Tasks affecting the 2022 tax year: detailed data provision

Anyone who has already had a comprehensive tax audit in recent years had to answer dozens of questions about the company’s related transactions in text form and in a separate Excel spreadsheet at the start of the audit. Essentially, this data collection is raised to the legal level, in the form of machine processability.

It may even apply to the 2022 tax year that detailed records must be made only of transactions exceeding HUF 100 million aggregate. (Conceptual definitions help determine which transactions can/should be combined when calculating HUF 100 million, and each type of transaction is also listed item by item, e.g., financial transactions are remarkable too!) However, the range of data detailed in the corporate tax return is wider than the set of transactions to be worked out in detail in the local file. The reason for this is that transactions that are exempt from the registration obligation must also be included in the declaration (such transactions concluded with private individuals not in their capacity as sole proprietors and the free transfer and receipt of money, and from 2023, the invoicing of the cost-recharges of independent parties between related parties).

Since, in addition to the breakdown of the value of the transactions by related parties, the method used to analyse the arm’s length price and, if applicable, the applied profitability indicator and its normal market range must also be reported, thus the preparation of the benchmarks in time is a condition for correct data provision.

Preparation for the 2023 tax year: changes in the local file and addition to the registration system

As of the 2023 tax year, it is not possible to combine related transactions where the related party only undertakes “production”, but performs different functions within that framework (e.g., the related party brings the material for the order but does not invoice it, or in the other case it is also invoiced, and in the third case the raw material is purchased by the manufacturer from an independent party). The more detailed the terms of related contracts are, the more the registration system must be prepared for the segmented statement of the profit of each type of transaction, because – also from 2023 – the transfer price documentation must also present in detail how the accounting system relates to the data used to analyse related transactions.

It is no secret that due to the expansion of the possibilities of fines, the pre-2018 system that the transfer price documentation must be prepared by transaction type will return from the 2023 tax year. The local file, therefore, contains the “common parts” of the given year (e.g., the organizational structure, the most important competitors, and the business strategy followed), but the types of deals must be detailed separately. As a result, the fine that can be imposed due to missing or incorrect documentation (increased from HUF 2 million to HUF 5 million) will ultimately be multiplied per transaction.

Please feel free to contact our colleagues regarding the above or other questions regarding taxation:

Krisztián Vadkerti, partner

Márta Pénzely, manager

Franciska Magyarné Schilling, junior tax advisor

This newsletter provides only high-level information and insufficient for tax advisory purposes. We reserve the right to change the information and opinions presented thereof, without prior notification. Neither PKF nor its partners and employees are responsible for the completeness and accuracy of the newsletter nor for any damages resulting from actions and inactions established thereon.

PKF Hungary is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms.

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