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Flashnews | Transfer Pricing Decision of the Curia of Hungary: Cash Pool

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Flashnews | Transfer Pricing Decision of the Curia of Hungary: Cash Pool FlashNews | Transfer Pricing Decision of the Curia of Hungary: cash pool transactions in focus March 26th, 2021 Background The group provided liquidity to the group members using the cash pool method. Multicurrency financing transactions were conducted by the members of the group through the taxpayer. The balance of the group members' monthly short positions was transferred to the Parent Company’s main account at the end of each month as a long-term loan between the Parent Company and the respective member company. As a member of the scheme, the examined taxpayer also deposited funds into the main account of the Parent Company and received funds from the main account. The taxpayer's transactions were partly short-term (up to 1 month) and partly longer-term positions. Some transactions were classified as “deposit placements” by the taxpayer in its transfer pricing documentation, and when applying the transfer pricing rules, it considered the deposit interest rates of HUF 1-12 monthly current accounts available in the Reuters database. The findings of the Hungarian tax authority • The tax authority conducted an audit of the taxpayer for the years 2012-2014 covering all taxes. • The tax authority has argued that the Parent Company is not a credit institution, however, according to the Hungarian laws on Credit Institutions and Financial Undertakings, only a credit institution is entitled to collect deposits. • The Parent Company was not a credit institution, so in its case the level of risk will obviously be higher. According to the tax authority, the risk of return borne by the taxpayer is not comparable to the risk taken by deposits placed at a credit institution. • The tax authority concluded that the given transaction was rather a loan transaction in which the taxpayer had granted a loan to the Parent Company and that its risk was not comparable to that of the deposits at financial institutions. The pricing of transactions should clearly be considered as a lending transaction, the arm’s length price should be determined based on the interest rates used by independent financial institutions on similar loans provided. • Based on the audit, the first instance tax authority found - among other things - that the taxpayer did not amend its corporate income tax base with the difference between the received and the arm’s length interests (as considerations) during the period under review and applied lower interest rate than the arm’s length one. As a result of the finding, a tax shortage of HUF | 9.2 million was incurred for the 2012/2013 business year and HUF 19.9 million for the 2013 / 2014 business year. The findings of the Curia • According to the Curia of Hungary1 depending on the underlying facts, the issue of transfer pricing may be a technical issue and may be a purely legal issue. In the given case, the tax authority shaped the decision into a matter of law by basing it on the Hungarian laws on Credit Institutions and Financial Undertakings. • However, the taxpayer rightly argued that in the present case the classification of the underlying legal relationship was not the main question - rather the determination of the consideration applied to the legal relationship closest to the parameters of the given transaction. • In this case, it cannot be decisive whether the Parent Company has the right to collect deposits. The risk elements of the classic credit institution / deposit scheme indicated by the tax authority cannot be applied in the same way as for independent credit institutions, as cash pool systems have special operating parameters, this special intercompany situation necessitates the application of the transfer prices. • It follows from the above that in the case of the lawsuit, according to the Curia's assessment, no decision can be based on the rules of Hungarian credit institution laws. The issue is not a legal issue, no substantiated decision can be made without examining transfer pricing as a professional issue. • The Curia therefore ordered the annulment of the final judgment and ordered the tax authority to perform a new audit procedure regarding the case. The Transfer Pricing Team will keep you up to date on such matters. Please do not hesitate to contact us with any questions or comments regarding the above case. Author Sándor Balázs Hegedüs – Director [email protected] 1 The Curia of Hungary (Hungarian: Kúria), also known as the Supreme Court of Hungary (Magyarország Legfelsőbb Bírósága) before 2011 is the Supreme Court and highest judicial authority of Hungary. .
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