Transfer pricing is a priority area for 2025 tax audits!
Considering the transfer pricing strictures introduced as from 2022 (transfer pricing reporting in the yearly tax return, obligatory median adjustment, increased penalties), the Hungarian companies have to count on far more stricter Hungarian transfer pricing rules, and the possibility of more efficient tax authority actions.
Transfer Pricing Audits
The latest audit guidelines of the Hungarian tax
authority identify transfer prices expressly as a priority audit area. Due to
the transparency provided by
the 3-tiered transfer pricing documentation, information exchanges, tax
authority and business databases, TP data reporting obligation; businesses can
be an „open book” for the tax authority. Continuously high attention is even growing this
year, which we also feel in the increased number of tax investigations focusing
both transfer pricing documentations and benchmark studies. The importance of value creation, added value
analysis, the functional analysis and proper characterization is constantly
emphasized.
Therefore, it is worth acting with the utmost
caution when preparing the transfer pricing data provision in Hungary, as the
tax authority's audit directions include the investigation of related
transactions classified as risky based on the transfer pricing reporting. Special
attention is given to taxpayers who carry out manufacturing or distribution
activities within a company group and who are loss-making or have very low
profits. The tax authority deeply
monitors the financial transactions between associated enterprises as well. Auditing of transactions involving the intangible
assets of associated enterprises is expected. As for taxpayer specificity,
affiliated food businesses can specifically expect transfer pricing audits in
2025.
Transfer pricing reporting in the yearly corporate
income tax return
A new obligation was introduced for the 2022 tax
year, according to which it is necessary to report detailed transfer pricing
and related party data in the yearly corporate income tax return in connection
with the determination of the arm’s length price. The transaction-based,
detailed data provision is another incentive tool to ensure that the transfer
pricing documentation is prepared together with the corporate income tax
return. The provision of data means additional information to make the tax authority’s
risk analysis more efficient.
By now, the structured data from these transfer
pricing reports created a huge database in the hand of the Hungarian Tax
Authorities, by which they are able to point non-compliant businesses in a more
focused manner. Increased volume of tax audits also gives possibility for data
clearing and further improvement of risk assessment methods. In such an era, it
is essential for multinational and local corporate groups to be cautious with
the transfer pricing documentation and benchmarking, especially in Hungary with
its record high penalties and compliance rules stricter than usual.
Transfer pricing adjustments
The obligatory rule for median adjustment was also
introduced starting from the 2022 tax year. In case of companies where the
applied transfer pricing results in a value below the lower or higher as the
upper quartile (i.e. PLI is out of the IQR), the adjustment must be made to the
median value, as required by law, and not to the lower quartile value anymore.
From this perspective, we call the attention for
special focus tax investigations, as the method and form of transfer pricing
adjustments and year-end true-ups not always accepted by the Hungarian finance
authorities, potentially generating double taxation situations. It is also
essential to handle not only the transfer pricing aspects of these adjustments,
but correctly cover the related invoicing, tax-compliance, VAT, Local business
tax and other consequences too.
