Transfer pricing tax audits: challenges of the new questionnaire

For the 2022 tax year, the number of transfer pricing tax audits has increased compared to previous years. Due to the changes in the Hungarian transfer pricing rules and the new data provision obligations, it was foreseeable that the content of the transfer pricing questionnaires received during the Tax Authority's audit would also change. Based on our experience the tax authority is increasingly cracking down on taxpayers during transfer pricing audits, forcing them into a position of having to explain themselves. In more than one case, companies are forced to defend their position in legal proceedings. When it comes to tax audits, you can rely on the transfer pricing and tax representation experts of VGD Hungary.

Within the framework of the transfer pricing data provision obligation already to be fulfilled for the year 2022, taxpayers are required to upload the information specified in Decree of Ministry for National Economy No. 32/2017. (X. 18.) (hereinafter: Decree) to the Tax Authority as part of their corporate income tax return.

The Tax Authority's unhidden aim is to use the information collected in the reporting process to help identify transactions that may be subject to compliance investigation or tax audits.

In line with the data provision, the content of the transfer pricing questionnaire to be filled in during the tax audits for the year 2022 has also been modified, which now includes questions on data provision.

Fully completed data provision

In the first question of the new transfer pricing tax audit questionnaire, the Tax Authority asks the taxpayer to declare whether it has fully complied with its transfer pricing data provision obligations.

In accordance with the Decree, all related party transactions that exceed the HUF 100 million threshold and do not qualify as a stock exchange transaction under the Act on Capital Market, and where the price is not a fixed regulatory price or a specific price determined by legislation, are subject to the data provision obligation.

The above suggests that it is not sufficient to report only the transactions presented in the local documentation.

Taxpayers must also provide full information on transactions recorded in arm's length price rulings issued by both foreign and Hungarian authorities.

In addition, the legislators allow limited data provision for the following transactions exempt from the documentation requirement:

• a contract signed with an individual not proceeding as a private entrepreneur;
• free transfer and receipt of cash;
• cost recharges (first for the tax year 2023).

For the above transactions, information is required on the typical TEÁOR code, the name and tax number of the related parties, the value of the transaction and the amount of the related tax base adjustment.

If the taxpayer has not complied with the data provision obligation, it is not recommended to give a concise negative answer to this question of the Tax Authority. If the taxpayer has failed to comply in whole or in part with the obligation, it is necessary to list in detail the related party transactions for which it should have provided information and the reasons for its failure to do so.

Focus on the „Other” category

The new reporting system has been a challenge for taxpayers. The classification of all transactions was not clear, so many used the "other category" option to categorise transactions. The experience of the tax audits shows that if the taxpayer indicates 53 "Other category" as the type of transaction, this is a red flag in the Tax Authority's system.

For the second question of the new transfer pricing audit questionnaire, it is necessary to specify the transactions classified in the other category. The taxpayer must justify the circumstances under which the transaction under examination cannot be classified in one of the 52 types of transactions indicated in the data provision.

Of course, there may be many cases where, due to the specific nature of the related transaction, or because the categories provided do not cover all transaction types, it is necessary to select the Other category and to justify the appropriateness of the choice of category in the questionnaire.

Transactions exempted from data provision

During a tax audit or a compliance investigation, the Tax Authority previously requested a full list of related party transactions.

Surprisingly, the new transfer pricing questionnaire requires detailed information on exempt transactions that are not subject to the data provision obligation to be provided to the Tax Authority during the tax audit in relation to:

• the arm's length pricing method used,
• the source of the comparable data (e.g. name of database), or
• the arm's length price and range.

For these transactions, which are not subject to data provision obligation (e.g. due to their low value), transfer pricing documentation is still not required, so in most cases no arm's length pricing method, benchmarking study or arm's length price and range is determined.

So taxpayers may legitimately wonder whether the Tax Authority might want to request information that is not available to taxpayers in accordance with the law.

Although the Decree states that undocumented transactions must also be in line with the arm's length principle, for transactions that are exempt from the transfer pricing documentation requirement, the burden of proof of arm's length price is on the Tax Authority.

By mapping certain transactions with a lower transaction value during the tax audit, the Tax Authority aims to obtain a more comprehensive picture of the related transactions and serves as a tool to verify the correct determination of the consolidated documentation. However, for a larger company, the detailing of complete transactions involving transactions with a marginal value can create a significant administrative burden in the case of a tax audit.

The new transfer pricing audit questionnaire requested by the Tax Authority provides a detailed overview of the information taxpayers are expected to provide on transactions between related parties. Data provision is a particular focus of the tax audit, and consistency and cooperation are the keys to the successful completion of tax audits. With correctly submitted data provision and carefully and timely compiled transfer pricing documentation, taxpayers can feel secure in the event of a tax audit.

*** 

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.