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Finance Focus
Anita Mekler Email: mekler.anita@hu.pwc.com
Transfer Pricing: Maintaining Compliancy in Hungary
“Statistics show that transfer pricing related assessments by the tax authorities increased more than 10 times in the last 5 years.”
Q A
nita Mekler is a tax director in the PwC Budapest office, leading the transfer pricing practice in Hungary. Here, she discusses how to maintain compliance in Hungary’s TP environment.
How would you characterise Hungary’s Transfer Pricing environment?
Hungary is one of the CEE countries who took a lead in developing a legislative framework for transfer pricing. Transfer pricing documentation rules has been introduced since 2003.
In today’s challenging business environment and with the more intense focus on BEPS transfer pricing continues to be a high priority issue both for tax authorities and taxpayers. Lower tax revenues resulting from the economic downturn in Hungary encourage tax authorities to increase their focus on the examination of cross border transactions and strengthen their enforcement capabilities. The recession of recent years has encouraged companies to look more closely at how they are structured and, where appropriate, rationalizing their business supply chains to deliver sustainable business models.
Clearly, the recession has increased the pressure on Governments to reduce budget deficits and Hungary is no exception. We have seen increased activity by the dedicated transfer pricing audit team of the Hungarian tax authorities particularly in encouraging compliance with transfer pricing regulations. Missing documentation and adjustment in corporate tax liability may trigger large penalties in Hungary. Statistics show that transfer pricing related assessments by the tax authorities increased more than 10 times in the last 5 years.
Companies with large and long term losses or decreasing profits due to a restructuring or model changing, group
financing, IP transactions are the most popular targets of the audits.
Q
What methods of transfer pricing are currently available there?
Hungary as an OECD member state follows the OECD Transfer Pricing Guidelines by implementing all transaction and profit based methods in the local legislation to support the arm’s length nature of inter- company transactions.
The legislation on documentation requirements went through major changes in the recent years. In Hungary transfer pricing legislation requires taxpayers to document each inter-company transaction exceeding the value of USD 250,000 under which delivery was performed during the tax year in question by the time the corporate tax return was due. To ease of taxpayers’ burden certain simplification was introduced to the documentation rules, i.e. Master File approach, Hungarian language is not required, safe harbour for low value added service, other exemption from documentation in special cases.
Q
Are there any challenges related to transfer pricing that companies should be aware of?
What causes headaches for local CFOs currently is the ambiguous legislative background of mid-year or year- end adjustment between related parties. Companies often make adjustments to the original inter-company transactions during the financial year to bring the year- end results arm’s length. As there is no clear regulation how to make these adjustment companies may face with long discussions with tax authorities on i.e. local business tax or VAT treatment of the these transactions. The decision made by tax authorities usually depends on case by case basis after the deep review of the nature of the original transaction and the adjustment. Considering
the fact that tax authority may review the past 6 years a consistent inaccurate approach applied by the taxpayer may result in long audit process and large tax penalties.
Q
How might companies tackle these challenges?
In Hungary rulings – either binding or non-binding – are frequently used by taxpayers to get guidance from the Ministry of National Economy or tax authority. In addition Hungarian rules allow taxpayers to ask for Advance Pricing Arrangements (“APA”) from the Hungarian tax authorities which is binding for tax payers and tax authorities.
Our experience assisting companies during the APA procedure shows that taxpayers increasingly value the advantages of having an APA and are willing to enter into negotiations with the tax authorities on more complex transfer pricing issues.
Q
What are your top tips for maintaining compliancy for transfer pricing in
Hungary?
Today, CEO’s and CFO’s see transfer pricing as a potential high risk area that more frequently requires more attention from the management as tax authorities increase tax collection activity not only in Hungary but trading partners too. The highest risk in transfer pricing audits in addition to the local penalties is double taxation. The number of mutual agreement procedures and arbitration procedures are increasing as each state wants its own tax revenue. Therefore transparency and conscious preparation for a tax audit by testing the applied group transfer pricing policy may provide more certainty to taxpayers in Hungary.