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The Hidden Pitfalls of Transfer Pricing

The Hidden Pitfalls of Transfer Pricing

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In the audit practice of the Hungarian Tax and Customs Administration (HTA), the audit of transfer pricing is gaining importance. Moreover, the relevant regulations are becoming more complex with each passing year. As the deadlines for transfer pricing documentation approach, it is worth reviewing what hidden pitfalls should be avoided when preparing documentation and providing data.

Amidst the rush to finalize annual reports, it is often overlooked that the deadline of May 31st is significant for another reason: businesses are also required to prepare their transfer pricing documentation by this date. Furthermore, based on a legislative amendment that came into effect last year, the taxpayers simultaneously have to comply with a separate transfer pricing data reporting obligation. Under this, data must be provided for any transaction with a transaction value exceeding HUF 100 million – regardless of whether the transaction was concluded with a domestic related party or a foreign one.

As reporting obligations expand, the tax authority is increasingly engaging in transfer pricing audits. During the audits, the HTA request the taxpayers to fill a questionnaire – that is almost exclusively fillable by professionals – and any error or inaccuracy immediately triggers a red flag at the HTA.

In this environment, caution is advised when preparing transfer pricing documentation and meeting reporting obligations. The unaware taxpayer may encounter several easily overlooked pitfalls.

Pricing of Minor Transactions

One of the biggest pitfalls are related to transactions exempt from reporting and documentation obligations. Although businesses do not provide data on these transactions and do not keep records of how transfer prices were determined, the HTA often requests a detailed presentation, including the pricing methodology, the price range compared to the arm's length price, etc. Ultimately, this means that even for these transactions, it's prudent to have some background documentation, as the market conformity of applied prices must be demonstrable.

Similar Transactions

There are transactions that fall under the obligation of consolidation based on the similarity or identity of contractual terms, services, or products, or similarity in payment structures. While many of these transactions may not individually reach the HUF 100 million threshold individually that triggers reporting and documentation obligations, they do so when consolidated. Many tend to underestimate this obligation, although the tax authority has recently been paying attention to these transactions and easily imposes multi-million HUF penalties for non-compliance with documentation obligations.

One Transaction - Multiple Documentations

A transaction subject to transfer pricing involves two parties. However, often the documentation covering such transaction is only prepared by one of the related parties, not the other. In such cases – however absurd it may seem – the HTA may impose a HUF 5 million penalty on the party failing to prepare the transfer pricing documentation, as it has already been seen in the practice of the tax authority. Unfortunately, it must be accepted that transactions must be fully documented from both sides.

The "Other Category"

During transfer pricing data reporting, businesses may fall into the pitfall of not attempting to classify their transactions into the available groups, instead labelling them as "other transactions." It is important to be aware that labelling transactions as the "other category" is a red flag to the tax authority. If someone categorizes their transaction in this manner, significantly increases the risk of an audit. Therefore, it is advised to use the "other category" only when there is no other, more specific type of transaction to indicate.

By Péter Barta, Senior Attorney, Jalsovszky


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