Tax controls involving transfer pricing are increasingly common in Hungary and are based on the structured data reporting required by companies since 2022. Transfer pricing played an important part in last year’s NAV (Hungarian Tax and Customs Administration) control plan last year as well, and all signs indicate that the tax authority is increasing this pursuit. This is supported by the fact that it is establishing transfer pricing expert departments in a number of locations across the country, for which it is continuously recruiting controllers.
The transfer pricing documentation obligation, in other words the regulation on recording related-party transactions, affects almost 20,000 companies in Hungary. Significant changes entered into effect starting from 2022. The essence of these is that transaction and partner-level transfer pricing data now have to be reported in the company tax return as well, requiring companies to submit substantially more complex and structured data reports to the tax authority than before.
Effective control tool added to the NAV arsenal
The Hungarian tax authority will have an extremely accurate means of control through the structured collection of transfer pricing data, which provides it with up-to-date information on the pricing, profitability, and profits of the players in the given industry. This enables cross-checking and detecting systemic errors while supporting risk analysis, making a significant overall contribution to more effective control activity. Using these methods, the NAV is now even able to use algorithms to automatically filter the received data to identify transactions where the pricing or volume differs from the norm.
Increasingly common transfer pricing controls
The first year following the introduction of the amended rules was basically considered a leniency period, meaning that, with the exception of the identification of major tax differences, errors and internal discrepancies in data reporting did not in themselves result in a fine. However, this period is now over, as clearly shown by the increased number of controls and the sanctions imposed. The NAV has not only learned to process the received data and utilise the new control tool, it seems to be enjoying its use.
This means the data, the data analysis methodology, and the technology is all available, and the tax authority is now devoting energy to developing its team of experts. This is shown by the ongoing recruitment of controllers who will be staffing the transfer pricing expert departments established in a number of locations around the country (Budapest, Miskolc, and Székesfehérvár).
All transactions in the crosshairs
Based on feedback from the affected companies, it can be determined that the tax authority is using the new control method to focus on more than just larger, multi-million transactions. Thanks to the structured data reporting-based risk analysis, all transactions are now in the crosshairs. It is also apparent that in addition to examining the quality of the data reporting, tax controllers are also endeavouring to gain a deeper understanding of the transactions and the participating parties, and to lay out their findings using international literature and ruling practices.
It should also be stressed that the delivery of the commissioning letter is almost certain if an affiliated undertaking is consistently generating losses while the group as a whole is profitable. This had been one of the main reasons that led to a tax control before as well—since the introduction of the new regulations, the tax authority is attributing even greater weight to such conditions.
As regards the individual industries, experience shows that auto industry suppliers are receiving higher-than-average attention in transfer pricing controls. Pharmaceutical companies and manufacturing industry companies are also subjected to controls more frequently, just as Hungarian companies with distributors in foreign countries. In these cases, the tax authority first and foremost checks how the distributor is characterised in the relationship between the Hungarian entity and the distributor.
More stringent penalties
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. A company that fails to prepare records is fined HUF 5 million, which rises to HUF 10 million for repeat offenders. These penalties may even be imposed more than once per tax year. This is combined with the penalty that can be imposed if a tax shortage is determined (up to 50% of the shortage) and the late penalty. All in all, the penalty package has a strong deterrent effect.
International outlook
The fundamentals of the regulations introduced in 2022 are not unique to Hungary. Though with different parameters and time limits, the same solution is applied in other countries, such as Poland. In an international comparison, the Hungarian regulations can be said to be moderately stringent in terms of the level of reporting detail and other requirements. For example, the Polish authorities require significantly more detailed data reporting from companies. What’s more, contrary to many other countries, Hungary does not require the submission of a detailed transfer pricing documentation.