In line with European and global trends, transfer pricing tax audits have played an increasingly important role in the practice of the Hungarian tax authority (NAV) in recent years. In this context, from the tax year 2022, the Hungarian transfer pricing regulations between related companies have been tightened up in several aspects. At the same time, the NAV has significantly expanded its toolbox in order to carry out transfer pricing tax audits efficiently.
Therefore taxpayers are recommended to review the methods and settlements applied in their transfer pricing and to prepare detailed and supporting transfer pricing documentation in the light of the transfer pricing rules in force in Hungary.
For what and how much default penalty can we pay?
Companies whose financial year is the same as the calendar year and are subject to the transfer pricing documentation requirement should also this year comply with their transfer pricing documentation obligation latest by the date they submit their 2024 corporate income tax returns, i.e. by 31 May 2025. Also, from that date onwards the Hungarian tax authority is entitled to request it for tax audit purposes. In addition, there is also an obligation to provide TP related data in the 2024 corporate tax return. The NAV may also examine the existence and adequacy of the data reporting in detail.
A clear sign of the increasing transfer pricing tax audits is that, based on the previous year’s half-yearly statistics, the Hungarian tax authority completed 126 compliance investigations, and transfer price risk was identified in 61% of these investigations.
In several cases, the tax authority found that transfer pricing documentation and transfer pricing data reporting were either missing or incomplete, for which the NAV imposed a default penalty.
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.
What exactly does the NAV check during transfer pricing tax audits?
In addition to formal compliance, the tax authority is increasingly scrutinising the content of transfer pricing documentation and related data.
In the course of transfer pricing tax audits, taxpayers who are required to prepare documentation can expect a detailed examination of the terms of transactions with related parties, including, among other things, a review of the functional profiles (characterisations) and related profitability achieved based on the functions performed and risks borne in the transactions, as well as the combinability of the transactions.
If, on the basis of the risks thus identified, it is determined that the consideration realised in the transaction being audited is inconsistent with the arm’s length principle, the Hungarian tax authority will make the necessary adjustment to the median arm’s length value, which could result in a significant tax loss and a tax penalty for the taxpayer.
Based on the experience of transfer pricing tax audits carried out in previous years, the NAV may reveal content-related 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 order to ensure that the taxpayers concerned can reliably reduce or avoid potential transfer pricing risks and penalties resulting from transfer pricing tax audits, it is recommended that they continuously monitor their transfer pricing practices on an annual basis and start compiling transfer pricing documentation in a timely manner. Our transfer pricing consultants are at your disposal to assist you in the preparation of the documentation and to answer any questions you may have.
This article provides general information and does not constitute advice.
