Newest judgements of the Hungarian Highest Court in transfer pricing related cases
The careful preparation of transfer pricing documents and elaboration of transfer pricing policy are becoming increasingly important
Based on our recent experiences, the Hungarian tax authority starts paying increasing attention not only to the simple existence of transfer pricing documents, but to their contents as well, for example, to the prices applied in controlled transactions and the findings of the tax audits held by the foreign tax authorities at the parent companies abroad. A dedicated organisational unit within the Hungarian tax authority is in charge of the transfer pricing issues, and its inspectors attest growing professional skills in the course of tax audits.
Therefore, it becomes increasingly important that from the very beginning the taxpayers apply the utmost diligence in preparation of transfer pricing documents. Further, an elaboration of a transfer pricing policy is highly recommendable, whereby transparent principles compliant with the transfer pricing requirements in effect may be established based on which the member companies of the multinational enterprise (“MNE”) groups should conclude intercompany transactions and decide on the applied prices. Failing this, taxpayers increasingly expose themselves to tax audit findings which they may challenge in a judicial procedure only. In such a way, several transfer pricing related cases recently reached the level of the Hungarian Highest Court.
In one of the mentioned court cases an Austrian parent company, in response to the findings of the Austrian tax authority, charged research and development costs to its Hungarian subsidiary company which accounted for them as extraordinary (i.e. one-off) expenses. As opposed to this accounting treatment, the Hungarian tax authority held the view that these expenses should have been capitalised as an intangible asset. Therefore, it established an appr. HUF 60 million (EUR 163,000) tax underpayment and, on top of that, imposed a HUF 27 million (EUR 73,000) tax penalty and HUF 8 million (EUR 22,000) late payment fee. The taxpayer filed a lawsuit to a court against this decision. The court of first instance repealed the decision and referred the case back to the tax authority for a new procedure, so that proper consideration could be taken of the accounting and tax legal consequences of the Austrian tax authority’s findings. The Hungarian tax authority appealed to the Hungarian Highest Court against this verdict, but the latter deemed the appeal unfounded and maintained in force the verdict of the court of first instance.
Under the circumstances of another transfer pricing related court case a non-financial institution MNE group operated a cash pooling system. The Hungarian member company of the MNE group considered the financial transaction similar to bank deposit services and determined the arm’s length interest rate based on bank deposit interest rates. The tax authority held the view that without a regulatory permit to accumulate deposits the parent company was not entitled to accept deposits, hence the arm’s length interest rate should have been governed by credit interest rates which would have resulted in a higher taxable revenue for the Hungarian company placing its free cash with the parent company. The court of first instance dismissed the taxpayer’s action, but the Highest Court repealed this decision of the court of first instance and referred the case back to the tax authority for a new procedure. Pursuant to the verdict of the Highest Court, the Hungarian tax authority’s procedure should not be aimed at qualification of legal titles (i.e. to existence or absence of a regulatory permit to accumulate deposits), but it should attempt to establish an arm’s length consideration for the contractual relations closest to the examined transaction’s parameters. For example, in the case of cash pooling transactions relevant provisions of the Hungarian Act on Credit Institutions and Financial Enterprises should be regarded.
Therefore, further tax procedures are expected in both cases. However, the cases demonstrate that the taxpayers should have reached the highest judiciary level in order to prove their standpoints. Such litigations and tax procedures in progress may negatively affect the companies’ position if any business transformations or large borrowings are planned. Another lesson learned from the cases may be that the tax authority will examine the background of the related party transactions with increasing level of detail, therefore taxpayers should apply the utmost diligence in the preparation of the transfer pricing documentation from the very beginning, so that to spare themselves the pains of defending their standpoint before the court.
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The transfer pricing specialists of VGD Hungary constantly monitor the latest developments and provide effective assistance in the appropriate documenting of the related party transactions, as well as in the elaboration of transfer pricing policies.
Should you have any questions regarding this newsletter, the tax experts of VGD Hungary will be pleased to assist you.
