Last year Hungary was in severe economic difficulties, suffering a currency crisis. The government introduced a range of austerity measures including raising the VAT rate to the maximum allowed by EU law and reducing public spending.
Despite the success of these measures resulting in the Hungarian deficit being among the lowest in Europe, transfer pricing audits are increasing as the authorities look to further increase revenues.
“We’ve seen over the past year more focus on transfer pricing by the tax authorities,” said Tamas Feher, an associate at CMS Cameron McKenna.
“Five years ago the authorities started to investigate transfer pricing issues. They were only interested in compliance, transfer pricing documentation. Lately tax authorities are investigating documentation in detail, checking whether prices are arm’s length,” he added.
Although the tax authorities may be checking transfer pricing in more detail, others believe that having sufficient documentation is still the key concern of the authorities.
“There is the usual Hungarian reaction to transfer pricing. They are formulistic. Taxpayers will definitely be fined if they don’t have transfer pricing documentation in place,” said Paul Grocott, a partner at PricewaterhouseCoopers.
Compared to a few years ago, the tax authorities are gaining specialist knowledge of transfer pricing issues so they are better placed to conduct audits.
“The authorities are building up knowledge of transfer pricing,” said Grocott.
“They [tax authorities] have expertise now in transfer pricing, there has been specialised training which wasn’t in place four or five years ago,” said Feher.
This greater expertise has been apparent to advisers when defending their clients in audits.
“There is much greater focus on what actual transfer pricing model is being used and whether it is appropriate,” said Grocott.
Given the aggressive nature of the authorities, advisers strive to help clients avoid audits.
“We try to protect clients by advising them not to give the authorities a reason to audit. Unfortunately in Hungary even when you do your best it is hard to predict what the tax authorities will do,” said Feher.
