Segmentation in Light of the New Transfer Pricing Regulation

One of the most significant changes introduced by the new transfer pricing regulation, which will become mandatory from 2026, is the tightening of the segmentation requirements. While the professional discussion has focused primarily on the simplifications – such as the increased thresholds and the corresponding simplification of the documentation requirements – our day-to-day advisory experience shows that clients perceive the changes quite differently. For many of them, implementing the segmentation requirements represents a major challenge, leading them to feel that their compliance burden has increased.

This is particularly true for the 2025 tax year, which, as a transitional year, combines the compliance risks arising from both the old and the new rules.

The Role of Segmentation in Transfer Pricing Compliance

The purpose of segmentation is to ensure that the economic results of related-party transactions can be presented separately and on a functionally consistent basis. This is not merely a documentation issue, as segmentation forms the basis for

• the benchmark analysis,
• the calculation of profitability indicators,
• and the transfer pricing data reporting (ATP).

The new transfer pricing regulation clearly shifts away from a company-level, aggregated approach towards measuring results at the transaction level or, at a minimum, at the level of individual business activities. This means that it is no longer sufficient to treat the economic effects of individual related-party transactions as a whole.

It is worth noting that the Hungarian tax authority’s (NAV) requirements regarding segmentation are not entirely new. In previous tax audits, the NAV has consistently examined whether the results of the tested party were genuinely attributable to the relevant related-party transaction(s) and whether the reported profitability combined activities with different functional profiles. A recurring finding has been that, while revenues could generally be allocated to the relevant transactions without difficulty, the allocation of costs was often based on ad hoc, undocumented, or changing allocation keys. As a result, the segmented results were not reproducible.

The novelty, therefore, does not lie in the underlying approach, but in the fact that the regulation explicitly makes proper segmentation and its substantiation an explicit compliance requirement. What was previously regarded as best practice or a debated expectation will, from 2026 onwards (and already as a result of the transitional options available for the 2025 tax year), become one of the key issues in ensuring consistency between the transfer pricing documentation and the ATP data.

What Constitutes Proper Segmentation Under the Transfer Pricing Regulation?

Under the new regulation, segmentation is one of the central elements of transfer pricing analysis. Both the legislator and the NAV’s practice are based on the principle that only an economic unit that is meaningful in its own right in an arm’s length comparison can be analysed reliably.

This means that:

• the results presented must reflect the functions performed by the tested party,
• the revenues and costs attributable to each related-party transaction must be consistently presented on a separate basis and
• the segmented results must be suitable for benchmarking.

Overly broad, company-level segments in themselves raise questions, regardless of whether the applied transfer price falls within the arm’s length range.

Practical Experience: Why Segmentation Is Where Most Taxpayers Fail

Advisory experience shows that segmentation is not a theoretical issue but rather a data- and systems-related challenge. Most companies’ accounting and controlling systems are not structured around the logic of related-party transactions but instead operate along legal entities, cost centres, or business lines.

This issue is particularly evident on the cost side. The separation of direct costs is often incomplete, while the allocation of indirect costs is typically based on ex post estimates or simplified allocation keys. These methods are often not reproducible and are difficult to defend during a NAV tax audit.

As a result, for many companies, segmentation is driven not by what is economically appropriate, but by the data available. The new regulation, however, explicitly emphasizes the primacy of economic reality over administrative convenience.

Why Segmentation Is Particularly Risky in 2025

The 2025 tax year is characterised by the fact that taxpayers may choose to apply the new regulation only for local documentation purposes, while transfer pricing data reporting remains subject to the previous rules. This may easily lead to inconsistencies between the logic underlying the calculations and the approach applied for transfer pricing reporting.

For example, taxpayers may present a segmented profit and loss statement in their local documentation based on the new regulation, while the ATP forms continue to be completed using company-level data or submitted based on a different breakdown. As the NAV’s risk assessment is primarily based on ATP data, differences in the underlying calculation logic may create additional explanation requirements and increase audit exposure. This is where shortcomings in segmentation become directly connected with transfer pricing reporting risks.

The Close Link Between Segmentation and Benchmarking

The quality of segmentation directly determines the usability of the benchmarking analysis. It may be difficult to identify appropriate independent comparables for an overly broad segment, while artificially fragmented segmentation may lead to a distorted profitability profile.

The practical test comes down to a simple question: would an independent enterprise in the market perform only this activity in this manner?

If the answer is not an unequivocal yes, the segmentation will most likely need to be revised.

Segmentation Is an Issue That Cannot Be Deferred

With the introduction of the new transfer pricing regulation, segmentation has become a cornerstone of transfer pricing compliance. During the 2025 transitional year, this area represents a particularly significant risk, as local documentation, transfer pricing data reporting, and benchmarking analyses must be prepared under different sets of rules.

The safest and most forward-looking approach is for companies to use the fulfilment of their 2025 transfer pricing obligations as an opportunity to review and stabilise their segmentation approach, and only subsequently decide whether early application of the new TP regulation is appropriate. In most cases, the associated risks outweigh the short-term administrative benefits.

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