Transfer pricing in focus of tax audits


Due to increasing cross border activities between affiliated companies, tax authorities are focusing more on the prices applied by affiliates in their transactions in order to ensure the appropriate allocation of profits and losses, and thereby to avoid tax circumventions. Throughout the last few years Hungarian tax authorities have been increasingly concentrating their attention on this issue, and as from January 2012 legal regulations concerning the documentation requirements have been amended.

Corporation tax issues

The Hungarian tax law also acknowledges the arms length principle. Therefore, the Hungarian Act on Corporation Tax (LXXXI/1996, hereinafter referred to as the: Act) prescribes, that in case the pricing applied between affiliated companies differs from the fair market price  i.e. it is not at arms length taxpayers shall adjust their pre-tax profit according to the difference between the applied transfer price and the market price. 

The Act provides for the methods, which may be used to determine the market price. These methods are the three standard methods (comparable uncontrolled price method, resale price method and cost plus method), and in addition as from January 2011 the transactional net margin method and the transactional profit split method may also be applied. Since no ranking between these methods is provided by the Act, the most appropriate method to the particular case shall be applicable. In case the market price cannot be determined by any of these methods, the Act allows applying any other method; however, the taxpayer shall be able to prove the inappropriateness of the above mentioned methods.

Subjects covered by the regulations above are according to the Act ‘contracts and agreements between affiliated companies, furthermore the Act highlights issues being also subject thereof, such as among others capital contributions in kind, capital increases and decreases made in kind, or dividends paid in kind.

It should be noted that the provisions above shall, contrary to certain regulations (such as e.g. the German transfer pricing provisions), apply not only to cross border transactions but also to transactions between domestic affiliated companies.

Since 2007, the filing of a request for an advance pricing agreement (APA) with the Hungarian tax authorities has been possible, as the result of which the tax authorities determine the market price (or pricing range) of a future transaction, which is then binding for the tax authorities.

Transfer pricing documentation issues

Enterprises are required to prepare transfer pricing documentations concerning the transactions made with their affiliate companies. Besides the statutory provisions above the documentation requirements had been regulated at the level of a ministerial decree (Decree of the Ministry of Finance 22/2009, hereinafter referred to as the: Decree).

Exemptions from the documentation obligation have been extended as from January 2012, so, among others enterprises qualified as micro or small enterprises, transactions below a certain value threshold, transactions concerning which the transfer price has been determined by the tax authority within the framework of APA, etc, are exempt.

The Decree defines the formal requirements of the transfer pricing documentation in detail. These are, e.g. the date of preparation of the documentation, data of the contractual affiliates, detailed description of the transaction, description of the risks borne, functions fulfilled by the contractual parties, market study, description of the applied transfer pricing method, price analysis, etc. The taxpayer shall consider those data in the course of the preparation of the documentation, which were available to it until the fulfillment of the transaction. 

As from 2012 affecting the documentation requirements concerning the tax year 2011 simplified documentation requirements may be applicable for low value adding intra group routine services listed by the Decree in case of fulfillment of certain conditions. In this case the mark-up determined by the cost plus method is considered as the market price if it is between 3% and 7%.

The deadline to prepare transfer pricing documentation is determined by the Act; however, the documentation shall not be filed with the tax authorities, but it shall be prepared until the filing of the tax returns, and must be available in case the tax authorities request it in the course of a tax audit.

Transfer pricing risks

In case of a tax base adjustment made by the tax authorities, not only the tax liability of the taxpayer is affected, but the taxpayer may be subject to a tax penalty of 50% as well as to default interest due to late payment of the tax.

In case of failure or default of preparation of the documentation, a penalty amounting to HUF 2 million (approx. EUR 6,500), and in case of repeated default HUF 4 million, may be levied by the tax authorities.

Rödl & Partner provides legal and tax advice in Hungary since 20 years.


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