Preparing transfer pricing documentation during pandemic

Businesses – which are not qualified as micro or small sized enterprises and have financial year in line with calendar year – are liable to prepare transfer pricing documentation about related transactions completed in 2020 and exceeding HUF 50 million (combined on the same type or coherent transactions) to support arm’s length character of applied prices. Transfer pricing documentation must be prepared by the date of filing CIT return due until 31 May. In our present entry we are focusing on some aspects of current issues.

What does transfer pricing documentation obligation cover?

Completion of transfer pricing documentation liability includes preparation of local file, assembling or updating benchmark study (if it is needed), but do not forget to obtain master file 2020 either according to deadline as it is decided by jurisdiction of the entity appointed within the MNE group for preparing master file, but until 31 Dec 2021 as latest. Since the lack of the master file can be penalized as if the local file would be missing, finally (when master file was not delivered in due course), Hungarian taxpayer should expect preparing master file by his own. Anyone puts together master file, it is also worth providing conformity of the local file to the master one.

Effect of the pandemic situation on the transfer pricing documentation

There are no changes in detailed provisions considering transfer pricing documentation liability. From the tax authority’s perspective continuance of the introduction of related transactions during the consecutive years is a stressed approach invariably. As a result, up to now there is a requirement to give an explanation in the transfer pricing documentationif there were any changes in the controlled transactions (functions performed, risks undertaken) or in important conditions (like pricing method, applied mark-up or charged interest) compared to the previous years.

The pandemic could significantly alter business circumstances, so in the present situation continuance of transfer pricing documentation can be provided by presenting in detail revised course of business mainly.

Increasing importance of market survey

Practically, detailed presentation of the market segment is suggested (how it was affected by pandemic, how businesses modified their views and expectations, or should the controlled transactions’ outlooks be amended). This situation can revaluate attitude of other independent parties, we might rethink reliable geographical scope of the benchmarks and deliberate impact of the governmental measures on the economy. We also might reconsider whether simple update of former benchmarks by financial figures of 2019 in a used manner is convenient for analysing profitability of controlled transactions, or if this is not the case, how and when we can get figures reflecting to consequences of the covid situation.

Extraordinary corrections

Adaptation to the pandemic situation might have triggered extraordinary actions, and non-budgeted expenses might have been emerged. These costs are also reasonable to be presented religiously, even more, they might be calculated as adjustments in realized profitability. This might underpin that costs were allocated, and decisions were made ab ovo there, where they had originally been considered because of the contractual relationship. However, pondering flows in 2021, you also must take into account, will extraordinary expenses emerged in 2020 be incurred in 2021 again? Might these expenses be treated as extraordinary ones newly? To think in terms of continuance, you have to prepare for after-covid world as any true-down in the profit nowadays should result true-up adjustment in upcoming ‘peacetime’.

Above mentioned examples are not complete lists of considerations, they refer only to necessity of extreme due care when preparing transfer pricing documentation for 2020 compared to previous years.

If you have any questions regarding the above, please feel free to contact us:

Krisztián Vadkerti, Partner
Márta Pénzely, Tax manager