Based on experience of recent years, the transfer pricing arrangements, related cost accounting and transfer pricing practices have become a priority topic for audits performed by the Hungarian Tax Authority. Moreover, the Tax Authority is not only examining the transfer pricing documents on a formal basis, but also performing in-depth technical analysis of the intercompany transactions.
In the current, highly globalised economy, where multinational enterprises play a prominent role, transfer pricing is crucial point on the agenda of OECD and European Union as well. In order to ensure that profits are taxed where economic activities – generating the profits – are performed, and where value is created, OECD has released a 15-point Action Plan (BEPS – Tax Base Erosion and Profit Shifting). The BEPS actions has several points which focus on transfer pricing, giving restated guidance on the examination of intercompany transactions, preparation of transfer pricing documents and Country-by-Country reporting. The OECD member countries (including Hungary) have already started to implement the BEPS recommendations into their own tax system. These steps indicate that compliance with the transfer pricing rules (including the application of arm’s length prices) and the control of artificial and unjustified profit shifting have, and will continue to have, a major role in tax inspections.
The adaptation of international guidelines as well as the „application” of past audit experiences well reflect by the fact that the Hungarian transfer pricing regulation has recently been changed significantly: from 2018, taxpayers are required to prepare transfer pricing documents based on a completely new decree issued by the Ministry for National Economy. The major novelty of the new transfer pricing regulation is that the documentation should consist of a master file document and at least one local document (formerly this two-tier documentary requirement was optional), and these documents should contain far greater amount and more detailed information on the multinational group and the underlying intercompany transaction. As a result, it may be a challenge for taxpayers to comply with the amended transfer pricing rules, and monitoring compliance with the recent changes is expected to be a priority of tax audits in the near future.
In addition, in some cases, a new audit tool and a new information base will be available for the Tax Authority since due to the recommendations of OECD BEPS Action Plan 13, the Country-by-Country reporting has become mandatory in Hungary, which contains detailed information on the operations of the affected multinational enterprise in each tax jurisdictions. Besides the Country-by-Country report impose a significant administrative burden on the members of multinational groups, it also affects the future transfer pricing audit practice of the Tax Authority.
The penalties associated with non-compliance with the Hungarian transfer pricing documentation requirements could be very significant (which even can lead to the loss of the reliable taxpayer status). The Hungarian Tax Authority may levy a default penalty of up to HUF 2 million per transaction per year, which may be significantly increased for repeated non-compliance to up to HUF 16 million. This penalty may be levied per each piece of missing or incomplete documentation. In addition, upon revealing technical findings, the Hungarian Tax Authority may levy a tax penalty of up to 50% of the tax shortage identified and a late payment penalty (the rate of such a late payment penalty is double the official interest rate of the National Bank of Hungary, calculated on a daily basis). In addition, failing to submit Country-by-Country reports and related notifications, late submission, or providing incorrect, false or incomplete information in the reports and notifications may be subject to a default penalty up to HUF 20 million.
- Examining of the possible related party relationships;
- Mapping, planning and prioritizing the intercompany transactions to be documented;
- Transfer pricing consultation, including planning, assisting in development and revision of transfer pricing policies;,
- Assessing the transfer pricing risk associated with related party transactions, advisory services on one-off transactions (high value in kind contribution, intercompany loan, transactions without consideration);
- Performing comparable analysis using databases approved and used by the Hungarian Tax Authority; development of benchmarking studies to support the transfer prices applied;
- Consulting on legislative changes, BEPS package, Country-by-Country reporting, and Anti Tax Avoidance (ATA) Directive;
- Review and comment on intercompany agreements;
- Preparation and submission of Advance Pricing Agreement (APA) requests, representation before the Tax Authority, prior consultation with the representatives of the Tax Authority;
- Preparation of full-scope transfer pricing documentation, review of the transfer pricing documentation prepared internally;
- Localisation of centrally prepared transfer pricing documentation, reviewing the compliance of group transfer pricing documentation with the local rules and auditing practices;
- Professional assistance during transfer pricing audits and tax disputes, drafting and submitting appeals, representation before the Tax Authorities, support in discussion with tax administrators.
- Assistance in fulfilling Country-by-Country reporting and related notification requirements
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