FlashNews | Transfer Pricing The Curia of Hungary decided on a transfer pricing issue March 26th, 2021 An important judgment has been made by the Curia of Hungary1 regarding the application of the transactional net margin method (‘TNMM’) transfer pricing method. In the exemplary case the Supreme Court ruled on - among others - the correct application of the portfolio approach (i.e. in which cases it is possible to analyse individual product or service portfolios in a consolidated manner in terms of transfer pricing) and the applicability of the minimum-maximum range as arm’s length one. Please find below our summary about this key decision. Background For the taxpayer in question, the Hungarian tax authority performed a comprehensive tax audit for the 2013 and 2014 tax years. The taxpayer was engaged in the production and sale of passenger cars and related spare parts during the examined periods and sold its products to both related companies and independent parties. In 2013, sales to affiliates accounted for 48% of its total sales, whilst 59% in 2014. According to the transfer pricing documentation compiled for the periods under investigation, the taxpayer: • determined the arm’s length range of the operating margins using the TNMM method; • performed a database search in the Bureau van Dijk Amadeus database for 2013; • defined the arm’s length range of operating margins as an interquartile range between 2.13% and 9.78% for 2013; • the database search was not updated for 2014, on the basis of available data for 2013 the taxpayer considered the minimum-maximum range to be an arm’s length margin range given that its operating margin for the given year was below the interquartile range but within the minimum-maximum range; • when calculated the operating margin of the underlying tax year it did not separate the related party and unrelated transactions, the operating margin was calculated at an entity level and was 2.22% in 2013 and 1.52% in 2014; • concluded that its calculated operating margin fell within the arm’s length margin range in both tax years examined so that the transfer prices of the products sold to related companies were determined in line with the arm's length principle. The findings of the tax authority • The tax authority did not make any findings in relation to the method used (TNMM) and the combined treatment of the two product groups (passenger cars and spare parts). • However, the tax authority has penalised the taxpayer because the taxpayer examined the arm’s length nature of the transfer prices applied using a company level operating margin. According to the tax authority, the taxpayer made a loss on its transactions with related parties in both tax years examined. 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. | • The tax authority also found that for both tax years, the lower quartile (2.1%) should have been considered by the taxpayer as the lower value of the arm’s length price range. The findings of the Curia • The Curia upheld the tax authority's finding that the taxpayer should not have determined the operating margin at a company level using its total operating profit, but rather calculated separately on sales to related companies and sales to independent parties. • Moreover, the Curia confirmed that the taxpayer was eligible to use the minimum-maximum operating margin range as an arm’s length range upon determining its 2014 tax liability (the mandatory application of the interquartile range has already been rejected by the Court of First Instance), the relevant part of the judgment of the Court of First Instance was therefore not affected by the Curia. * * * * * 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] | .