Transfer Pricing Services

Transfer Pricing Risks in Hungary

A comprehensive obligation for transfer pricing documentation was introduced in Hungary in 2006.

Since transfer pricing documentation has become obligatory, the audit of transfer prices applied among associated undertakings has played an increasing role in the audit policy of the Hungarian Tax Authorities.

The outstandingly high tax adjustments and fines imposed on the basis of transfer pricing audits have become one of the most significant taxation risks for international companies in Hungary. Incorrect transfer prices sometimes result in double taxation for the group as a whole.

The danger of double taxation exists not only on the international level but also on the domestic one. In case if the tax authority reveals that transactions among associated undertakings have not been made at fair market prices, the authority may exercise a sanction called "double tax base increase". In pursuance of this the tax base increase may be imposed not only upon the undertaking which paid  less tax  originally, but on the other party as well.

Avoidance of Transfer Pricing Risks

Transfer pricing risks should be managed well in advance in order to minimize the likelihood of tax fines later on. The basic tool of transfer pricing risk management is the continuous monitoring and evaluation of economic relations with associated undertakings and the adjustment of prices in the light of current market circumstances.

A review of transfer prices by independent experts may provide comfort to the company in making sure that transfer prices correspond with the OECD guidelines and the Hungarian Tax Authority's practice. The review should concentrate not only on the transfer prices themselves but also on the price calculation methods applied (classical or profit based methods) and the completeness of the documentation.

A further method of transfer pricing risk avoidance is a well structured transfer pricing documentation based on an appropriate accounting system. The main objective of well-prepared transfer pricing documentation is to persuade the tax authority that the transfer prices used by the company are correct. Based upon the individual and specific market situation of the enterprise, the functional and the financial analysis of the documentation highlight the factors, such as economic functions, risks, market circumstances, business strategies, etc., which support the price calculation method chosen by the company.

The Calculation of Transfer Prices

In most cases intercompany prices are stated by the parent company with the participation of foreign tax consultants. However, the one-sided calculation of transfer prices may result in tax adjustments and fines in Hungary.

The main reason is that every jurisdiction has different transfer pricing rules. In many cases foreign parent companies disregard the peculiarities of Hungarian economy when calculating transfer prices. Frequent examples of factors not considered are differences in market structures, price levels, piece-work productivity, etc.

Consequently, it is worth while having international transfer prices effective in Hungary reviewed by independent Hungarian experts. This way, the parent company will be informed if there are any observations and will be in the position to take further steps if necessary.

Preparing Transfer Pricing Documentation

The mandatory form and content of correct Hungarian transfer pricing documentation is defined by domestic law.  

Yet, transfer pricing documentation for Hungarian subsidiaries is often prepared centrally by the parent company abroad.  Such documentation often lacks the mandatory elements required by Hungarian law and pays insufficient regard to the particularities that are characteristic of the Hungarian subsidiary.

Accordingly, it is advisable to complement transfer pricing documentation that will be used for Hungarian purposes with the elements that are necessary for it to comply with Hungarian legislation. That way, the risk of tax fines will be reduced.

We also consider it important to note that the domestic subsidiary should prepare its transfer pricing documentation during the business year or shortly after closing. While in practice many types of accounting reports can be compiled retrospectively, this is not true of transfer pricing documentation, as comparable market data are frequently not available even few months have after the business year.

How can we help?

We support our clients with the professional preparation of transfer pricing documentation as well as the review of already existing transfer pricing studies. In the documentation we include  specific calculations and analysis based on the individual economic situation of the business.

For those businesses which would like to keep  record of their transfer prices themselves, we offer transfer pricing advice and support in complying with documentation requirements.

We support our clients by reviewing the transfer prices and price calculation methods applied within the group. As independent experts we objectively evaluate the transfer prices and if they do not correspond with the market prices we make proposals for correction.

We represent our clients in transfer pricing tax audits and APA procedures (APA - Advance Pricing Agreement) before the tax authorities.

Structural changes (mergers, demergers, reorganisations, etc.) entail the transformation of the economic relations within the company. In such cases management often does not recognize that the changed economic relations also affect the transfer pricing situation. In case of reorganisations and structural changes we can support the business by pointing out necessary changes in the transfer pricing policy.

An optimal transfer pricing structure can significantly lower the global tax obligations of a group. Examples for the optimization of the transfer pricing structure of a group are the transfer the ownership of intangible assets (trademarks, patents, etc.) into a country with more favourable tax rates or using commission schemes and low risk manufacturing schemes in high-tax jurisdictions.

Based on our many years of international experience we can help optimize the global transfer pricing structure of international groups, relying also on the international co-operation of over 300 DFK advisory firms worldwide.