The number of transfer pricing tax audits continues to increase
The number of transfer pricing tax audits has increased in recent years, and this trend is expected to continue.
Increasing focus on transfer pricing tax audits
According to its 2024 tax audit plan, the Hungarian tax authority is focusing on examining related companies and intercompany transactions, as evidenced by the increase in transfer pricing audits this year.
Since 2022, taxpayers have been required to provide information in accordance with their local transfer pricing documentation as part of the transfer pricing data reporting obligation, which has become a significant tool for the tax authority to launch targeted transfer pricing tax audits and compliance investigations. Based on the information received from the transfer pricing data reporting, the tax authorities could easily identify those taxpayers who might be exposed to transfer pricing risks. Due to the transfer pricing data reporting, the tax authorities not only have access to the company-level reporting data of companies but also to key information on transactions to support risk analysis.
According to the tax authority, transfer pricing audits have been scheduled for 137 affiliated companies from March 2024. As of the end of May, 126 compliance investigations had been completed, and transfer price risk was identified in 61% of these investigations.
During the transfer pricing tax audits, the tax authority revealed issues such as the selection of the inappropriate transaction category, incorrect transaction amount, selection of inappropriate transfer pricing method, incorrect profitability ratio and inappropriate arm's length price range.
In several cases, the tax authority found that transfer pricing documentation and transfer pricing data reporting were either missing or incomplete, for which the tax authority imposed a default penalty.
In addition, from 2023 a default penalty of HUF 5 million (HUF 10 million in case of repeated violations) might be imposed for missing or incomplete transfer pricing documentation according to the stricter rules. In this context, it is important to note that from 2023 transfer pricing documentation must be prepared on a transaction-by-transaction basis, so if a taxpayer fails to prepare a Local File for more than one transaction, a multiple of the above-mentioned default penalty could be imposed. In addition, the obligation of transfer pricing documentation preparation also includes the master file, which is considered separate documentation.
Also the penalty for failure or incompletion of transfer pricing data reporting obligation was increased, to the maximum penalty of HUF 1 million.
According to our experience, the tax authority is increasingly strict with taxpayers during transfer pricing audits, conducting deeper, more detailed investigations of transactions between related companies.
The tax authority is expected to focus even more on transfer pricing tax audits in the future, therefore taxpayers are recommended to review the methods and settlements applied in their transfer pricing.
Proposals on transfer pricing investigations in the autumn tax package
The proposed tax package for 2025 submitted in autumn 2024, contains a remarkable amendment to Section 91 (1) of Act CLI of 2017 on Tax Administration and the Regulation of Tax Administration, according to which it would be codified in law that the tax authority may initiate a compliance investigation concerning the transfer pricing documentation obligation. In this context, the tax authority might examine whether the taxpayer has complied with the preparation of transfer pricing documentation, data reporting and the obligation of keeping related documents, and might also verify the veracity or truthfulness of the information, facts and circumstances included in the documentation.
In addition, the autumn tax package proposes a 60-day deadline explicitly for conducting transfer pricing compliance investigations, which is double the deadline for compliance investigations in general.
The reason for this proposal is that the legislator would like to increase the effectiveness of compliance investigations related to arm's length pricing, allowing time for more detailed and in-depth analyses.
Obviously, the tax authority has so far been able to examine the transfer pricing obligations of affiliated companies in the framework of a compliance investigation, but the inclusion of this in the legal framework and the longer investigation period also indicates that transfer pricing is becoming more important in the Hungarian legislation than ever before.
Under the proposal, for the Advanced Price Agreement procedure the possibility of the two extensions of the deadline would be increased from 60 days to 90 days.
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In connection with transfer pricing tax audits, we recommend reading our article on the updated transfer pricing questionnaire required during tax audits:
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Should you have any questions regarding this newsletter,
the tax experts of VGD Hungary will be pleased to assist you.
This newsletter provides general information and does not constitute tax advice.
