Transfer pricing – Focus on affiliated companies and intra-group transactions
Companies involved in transfer pricing documentation and transfer pricing data reporting should be prepared that within the audit of large taxpayers, the tax authority will place particular emphasis in 2024 on the audit of affiliated companies and intra-group transactions.
Although it is still not mandatory to submit or upload the transfer pricing documentation that was prepared by the date of the corporate income tax filing at the latest, with the introduction of transfer pricing data reporting (ATP forms) in the 2022 tax year, all relevant elements of the transfer pricing documentation (primarily the local file) must be included in the corporate income tax return.
Record number of direct transfer pricing audits
The reporting of transfer pricing data provide the Hungarian tax authority with direct information on
- whether the transfer pricing documentation was completed on time,
- what transactions the company had during the tax year that had to be documented,
- what method the company used for the price analyses,
- what the arm's length price was for each transaction according to the transfer pricing report.
The tax authority evaluates the processed data according to its own criteria, carries out a risk analysis, and if deemed appropriate, a transfer pricing audit may be initiated.
What increases the likelihood of a tax audit is typically a complex issue, but in general certain types of transaction, changes in the transfer pricing method, loss-making operation, or the industry itself, may be information that could lead to a compliance or comprehensive tax audit.
In our experience, the Hungarian tax authority launched a record number of direct transfer pricing audits in 2023 and the first half of 2024.
Under the 2024 audit directive, transfer pricing will be scrutinised even more closely in the second half of the year.
I HAVE A QUESTION REGARDING TRANSFER PRICING
Transfer pricing penalties: the tax authority may impose multiple penalties per transaction
Companies reporting transfer pricing data need to proceed with caution, as from 2024 the tax authority may impose multiple of the default penalty for missing or incomplete transfer pricing records.
The legislative changes affecting the 2022 transfer pricing documentation have already increased the maximum default penalty for missing or incomplete transfer pricing documentation by two and a half times, to HUF 5 million, and up to HUF 10 million in case of repeated non-compliance.
Indirectly linked to the default penalty is a formal change that affiliated companies had to apply for the first time for the tax year starting in 2024.
Formally, from the tax year 2023, the local file must consist of a joint taxpayer-specific part and a transaction-specific part or parts (one general part will be required per tax year, but companies will have to prepare as many transaction-specific parts as there were transactions to be documented in the tax year). Each part will be considered a separate records from 2023 onwards.
This means that in the case of transfer pricing documentation that is not prepared by the deadline, the maximum first default penalty is not limited in HUF 5 million, but HUF 5 million (HUF 10 million for repeated defaults) for the number of records each that the taxpayer should have prepared.
Please note that the tax authority may impose a default penalty not only for missing transfer pricing documentation, but also for incomplete documentation. Even if the main and local files are completed by the deadline, if they do not fully comply with the current Hungarian regulations in terms of form, the increased multiple default penalty will be imposed for these transfer pricing documents as well.
