The Hungarian tax office had carried out an an audit of “Seeds Kft” – a group company engaged in the trade in cereals and oilseeds – in relation to accounting for commodity futures. In the assessment decision, the tax office emphasized that the economic substance of the given transaction and the purpose to be achieved by the transaction are relevant. Clearing transactions are not settled by the delivery of the underlying commodities of the transaction and the payment of the forward price, but by financial settlement of the difference between the market price of the commodity and the forward price. With regard to the transfer pricing documentation, the tax office agreed with the pricing method chosen by Seeds Kft but found the application thereof arbitrary and therefore not resulting in establishment of a market price.
The Court of First Instance found the tax office’s claim to be partly well-founded and ordered the tax authorities to reopen the proceedings. On the issue of the legal nature of the options, the court noted that, according to the expert opinion obtained in the litigation, Seeds Kft had correctly applied passive accruals and had correctly booked the transactions as clearing transactions. With regard to the transfer pricing documentation, it was noted that neither the resale price method applied by the Seeds Kft nor that of the tax office was correct.
Following requests for review by both the tax office and Seeds Kft, the Court of Appeal partially set aside the judgment of the Court of First Instance and ordered the Court of First Instance to reopen the proceedings and to give a new decision. With regard to futures contracts, it was emphasized that the Court of First Instance did not rule on the issue of whether the transactions were clearing or delivery.
It is not excluded that the examination of the facts necessary for deciding a particular point of law may require particular expertise, but the legal nature of the transactions cannot be inferred from the findings of experts. The valuation of legal transactions, based on accounting standards and actual implementation, is a legal issue which the expert may decide on the applicability of accruals as a professional issue.
In regards to the legal nature of the contracts the Court stated that the first step was to determine whether they were correctly classified by the authority as delivery transactions and not clearing transactions.
Hungary 2018