Today, the pricing of related transactions is no longer “just” a documentation task: the Hungarian Tax and Customs Administration (NAV) uses targeted, data-based risk analyses and special teams of experts to audit transfer pricing practices. The number and depth of audits is continuously increasing, along with the volume of imposed penalties. The following article provides a summary of the most common mistakes that the companies concerned make in their transfer pricing practices. We will also list the advantages of Andersen Transfer Pricing Diagnostics, which helps to quickly identify these issues.
Why has transfer pricing become a key issue?
In recent years, transfer price audits have become increasingly prevalent and targeted in Hungary. This change is driven by the fact that since the tax year 2022, companies have been required to provide detailed, structured transfer pricing data as part of their corporate tax returns, which the NAV uses for risk analysis and for selecting which companies to audit. The tax authority also emphasis transfer pricing in its 2024 and 2025 audit plans, calling special attention to the conciliation and quality of the document and the data submitted.
The NAV uses the submitted structured data to carry out precisely targeted audits. It selects from among taxpayers on the basis of the reported data and the patterns, transaction types, and pricing methods outlined in the returns, with audits doing more than just focusing on high-volume transactions.
The related penalties have also become more stringent since 2023: they can now be imposed separately per record, almost on the level of individual transactions.
Increasing awareness, but with many recurring transfer pricing mistakes
Experiences show that technical knowledge concerning transfer pricing is continuously on the rise at the companies concerned, which are increasingly circumspect in the matter, with an increasing number of trained, specialised employees responsible for the tasks in question. Though the trend is positive and the improvement is tangible, there are still many mistakes and shortcomings in both form and content, which the tax authority can immediately detect in its tax audits.
Many of these are recurring, easy to categorize, and, thanks to Andersen Transfer Pricing Diagnostics, can be quickly identified and then remedied with support from consultants. The following provides a summary of the most common mistakes, without attempting to provide an exhaustive list:
MISTAKE #1: Incorrect geographical filtering during benchmark and database research
A common mistake is that international database searches (benchmark searches), i.e. ones that do not focus on Hungary, are not conducted using the appropriate methodology and do not follow the internationally accepted guidelines or those issued by the Hungarian tax authority. In this case, the geographical filter should, according to the recommendations, be started by filtering for Hungary and then, if the number of comparative companies is insufficient, it can be expanded to include first the V4 countries, then Central Europe, followed by the EU27 Member States (+UK) and ending with a global search.
Why is this important? Incorrectly setting the geographical filter may result in a distorted range and incorrect conclusions regarding profitability due to shortcomings in comparability.
MISTAKE #2: Failing to supply sufficient details for manual filters
The Transfer Pricing Catalyst is one of the most frequently used databases and was developed to determine and check market pricing, explicitly with an eye on the needs of tax experts. However, its independent filter is not always flawless in regards to which company qualifies as an affiliated undertaking. The filtered results should always be checked, for example by verifying the results using the information available on the websites of the given companies. However, many service providers (transfer pricing consultants) forego this step in order to save time. This leads to many affiliated undertakings remaining in the filtered results, both in the case of Hungarian and foreign companies, which is a general mistake. Not only does it negatively impact the reliability of the benchmark, which results in the imposition of a fine, but it also leads to an inexact interquartile range that may even lead to a tax difference.
MISTAKE #3: Failing to examine activities
Another typical shortcoming in benchmark research is a failure to thoroughly examine what the company included in the filtered list actually does. Among others, this raises the following questions:
- What is the company’s main activity?
- What other activities does the company perform?
- What is the company’s functional profile for the activity(-ies) (manufacturer, contract manufacturer, etc.)?
- How are these linked with the activity being examined or the activity being verified for transfer pricing purposes?
If we do not have exact answers to the above questions, the risks described in point 2 are quick to arise.
MISTAKE #4: Definition of characterisation
In many cases, the characterisation and role of the companies participating in the given transaction is not correctly determined in the course of the functional analysis. This leads to a fundamental issue, as characterisation determines the transfer pricing methodology used to determine the arm’s length price as well as the selection of the profit level indicator.
MISTAKE #5: Formal criteria of transfer price documentation
In 2023, new rules entered into effect for the structure and content of transfer pricing documentation. One of the important changes is that the local document has to be prepared differently than before. It should be broken down into two parts: a common (taxpayer) part and a transaction-level part. A common mistake is that companies do not prepare the documentation on the basis of the applicable rules and, for example, fail to correctly separate these two parts within the local document. Sometimes they also fail to take into account the more stringent rules on consolidation (e.g. procurement vs sale).
MISTAKE #6: Inconsistencies between the main document and the local document
It often happens that the narrative (supply chain, roles, intangible assets, transfer pricing policy, etc.) of the group-level master file prepared by a foreign consultant is contrary to the findings of the local file drawn up by the local consultant. However, the coherence of these two documents is a fundamental requirement: optimally, the master file is the basis, and the local file is an “imprint” of it supported with local facts and figures. Deviations are permitted in justified cases only and if given a reasoned explanation.
What penalties may apply?
A penalty may be imposed for failing to comply with the obligation to prepare transfer pricing records and even for the preparation of records containing incorrect data. The fine can be up to HUF five million per record, with up to HUF ten million per record possible for repeat offences.
It is important to note that the term ‘record’ was also amended starting from 2023. Previously, there was only one transfer pricing record and it consisted of a master file and a local file, meaning that the fine could only be imposed once. However, after the amendment the master file and the local files, which have to be prepared separately for each transaction, qualify as separate records, increasing the risk of omission penalties.
What advantages does the Andersen Transfer Pricing Diagnostics service offer?
Our experts have a wide range of experience in determining the arm’s length prices of transactions between affiliated undertakings, which is why we offer our customers a comprehensive transfer pricing service package. This includes our Transfer Pricing Diagnostics service, which helps quickly identify typical mistakes such as the ones listed above, minimising the risk of a hefty tax penalty.
Advantages:
- Immediate status report on the compliance of the transfer pricing methodology
- Timely identification of risks
- Recommended solutions for identified transfer pricing mistakes
According to the assessment of the prestigious international tax magazine International Tax Review, Andersen Adótanácsadó Zrt. was the best performing transfer pricing advisor in Hungary in 2024, which is why it was named TRANSFER PRICING FIRM OF THE YEAR. Our experienced experts are more than happy to help you.