The transfer pricing audits’ season has started in Hungary
In the summer period, after the filing deadline of the corporate tax returns for the tax year 2021 due in May 2022, the Hungarian tax authority (the “HTA”) usually starts to select taxpayers for transfer pricing audits with greater intensity. In our newsletter, we summarise the practical experience of the audits and list the transfer pricing audit areas set out for 2022.
Loss-making businesses
One of the main criteria for selection for transfer pricing audit is a loss-making operation and a permanently loss-making operation. The HTA's expects the companies having low-risk or limited-risk contract manufacturer functional profiles to continue operating with stable profitability. For loss-making taxpayers with a more complex profile, the HTA will look in particular into the additional costs (startup) not recoverable from customers, both from an administrative (matching the General Ledger) and a substantive (which project was the subject of the costs) perspective.
Transfer pricing adjustment
If the company has applied the transfer pricing adjustment, it is important to check whether the profitability after the adjustment falls within the arm's length price range
Use of databases
In the majority of cases, i.e. where there is no contract between completely independent parties for a comparable transaction, or where the company under investigation or its affiliate has a contract with an unrelated party, database screening is mandatory. The Hungarian regulations require the database screenings to be updated annually and re-performed every three years. During the audits, the NAV examines in particular whether a company has complied with this requirement.
It is recommended that the database screenings of Hungarian subsidiaries are carried out by a tax expert familiar with Hungarian legislation and the HTA's transfer pricing audit practices, or at least that the database screening carried out by the foreign parent company should be reviewed by such a tax expert.
Priority areas of the Hungarian transfer pricing audits
More details on the Hungarian tax authority’s annual audit plan for 2022 can be found here: https://vgd.hu/en/news/professional-publications-newsletters/the-hungarian-tax-authoritys-audit-plan-for-2022. In the context of transfer pricing audits, the audit plan specifically mentions the following three areas:
- Taxpayers linked to tax havens
The HTA’s priority task is the risk-based audit (including transfer pricing audits) of taxpayers with tax relations with non-cooperative jurisdictions and receiving profits therefrom. The HTA receives the necessary data in the framework of the international exchange of information.
As of 1 January 2021, the Hungarian Ministry of Finance regards the following 9 countries as non-cooperative jurisdictions for tax purposes: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, and Vanuatu. The EU blacklist includes 3 additional countries on the top of the aforementioned: Anguilla, Barbados and Seychelles. The Cayman Islands were removed from the European blacklist in 2020.
- Transfer pricing audits of the automotive sector
The COVID19 pandemic imposed significant burdens and additional costs on automotive companies and Hungarian suppliers of foreign car manufacturers. This led to losses or persistent losses in the industry. One of the objectives of the transfer pricing audits is to examine whether the loss-making operation is not due to loss allocations from foreign group members.
- Advanced pricing agreements
APAs are mostly used for the biggest (“high-value”) taxpayers, although companies in the SME sector also make use of this option for particularly high-value transactions. Tax authority audits focus on the companies’ ongoing compliance with the conditions set out in the APA.
The experts of VGD Hungary provide full assistance to their clients in the support of transfer pricing audits and the preparation of transfer pricing documentation, including the preparation and regular updating of database screenings, using internationally recognised databases also used by the Hungarian tax authority.
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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
21 June, 2022
