The Hungarian Tax Authority takes more stringent approach to the
transfer pricing documentation for the tax years affected by the COVID-19 pandemic

The Hungarian Tax Authority pays special attention to the examination of the financial years affected by COVID-19 pandemic. Therefore, companies should also place particular emphasis on examining their transactions with related parties, and on identifying the impact of the pandemic on their operations when preparing transfer pricing documentation for 2021.

In response to the economic impact caused by COVID-19, both the OECD and Hungarian Tax Authority (the “HTA”) have published guidance on the impact of pandemic on transfer pricing (Our previous article on the OECD guidance can be found here:  OECD guidance on the transfer pricing implications of the COVID-19 pandemic has been published

Overall, the OECD and the HTA’s approaches are consistent, but on some issues the HTA’s position is more restrictive for related companies affected by the economic impact of the pandemic.

Although the Hungarian legal background has not changed, we would like to draw your attention to some procedural practices where it is recommended to take into account the guidance published by the HTA when examining the financial years affected by COVID-19.

Guidance on comparability analysis

In general, the OECD Transfer Pricing Guidelines do not contain any overriding rule on the use of loss-making comparables, so as long as such data meet the comparability criteria, these can still be used for the analysis both for previous periods and the pandemic period.

On the other hand, the HTA highlights that a limited-risk enterprise can be expected to achieve a stable and positive profitability even in the economic environment impacted by the pandemic, therefore it is justified to exclude comparables with persistent losses from the data set.

Loss allocation and the allocation of the COVID-19 specific costs

In the HTA’s view, since the onset of the crisis is sector and company specific, loss allocation is not generally acceptable. Unfavourable economic conditions alone do not justify loss allocation, and it is also necessary to examine the risks and the control over them. Accordingly, in allocating legitimate losses, it is necessary to prove whether, in similar circumstances, the same loss of income would be incurred by unrelated parties.

Although the OECD Guidelines do not exclude the reality of short-term loss-making operations for an enterprise with limited risk, the HTA emphasises that an enterprise with limited functions and thus low risks, should achieve a low positive result despite the negative effects of the pandemic, and therefore, the functional analysis and, in this respect, the characterisation of the company is of particular importance in the context of the transfer pricing documentation for 2021.

Impact of government assistance programs for COVID-19

Based on the guidance published by the OECD, it is important to consider the impact of government assistance on the pricing of a controlled transaction, as it may be necessary to adjust for these effects in comparability analyses to increase the comparability.

The Hungarian Tax Authority highlights that in the case of Hungarian companies, it is primarily independent companies operating in the Hungarian market that can be considered comparable, thus eliminating the distorting effects of subsidies granted by other states.

Advance Pricing Arrangements (APAs)

For the APAs under negotiation, the OECD guidance applies the following three potential outcomes of a breach of critical assumptions: revision, cancellation, and revocation.

Furthermore, the OECD suggests several possible solutions, such as a short-period APA covering the pandemic period; separate APA covering the post-COVID period; extension of the period of the APA.

The HTA maintains its position that taxpayers are obliged to comply with the conditions set out in APAs even under the present circumstances, but gives the opportunity to amend or withdraw the pending APA procedures.

9 February, 2022

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Should you have any questions regarding this newsletter,
the transfer pricing specialists of VGD Hungary will be pleased to assist you.

This newsletter provides general information and does not constitute tax advice.