Although the pandemic is not (yet) over and its final accounting and tax effects are uncertain in the long run, the Hungarian tax authority did not stop inspecting Hungarian subsidiaries of the foreign companies from a transfer pricing perspective. Some of the actual tax inspections now relate to the pandemic year of 2020, when business was flourishing for the vast majority of the companies in the first quarter.
One month before the OECD published its guidance on the transfer pricing implications of the COVID-19 pandemic in December 2020, the Hungarian tax authority published a guideline in connection with the TP effects of the pandemic. The gist of the summary is that the Hungarian tax authority generally follows the international trends and is actively participating in working group discussions, but the tax authority also made it clear that every case will be reviewed considering all economic circumstances. Referring to this, companies with limited risk profile cannot simply refer to the pandemic as a major factor in declining profitability.
The aforementioned summary describes similar statements to that published by the OECD. The main points are as follows:
- If there has been a change at the company as a result of the pandemic, this should be detailed in the transfer pricing documentation.
- In contrast to the 2008/2009 crisis, which started from the financial sector and gradually spread to various geographical regions and economic sectors, the impact of the pandemic on the economy appears in a short period of time and in a concentrated way (less chance to find useful data to compare periods).
- Any adjustment(s) made shall be justified and should be traceable.
- The allocation of losses is generally not acceptable. Adverse economic conditions alone do not justify the allocation of losses, it is also necessary to examine the risks and how they are controlled.
- Companies characterised as limited-risk firms based on the functional analysis can therefore be expected to keep on operating with the stable profitability they have had.
- If database filtering is used to support the profitability level of a limited risk company, permanent loss-making comparable companies should continue to be refused.
- If the vast majority of independent players with the same characteristics in the given sector have been loss-making due to the effects of the pandemic, it is not necessary to exclude loss-making companies from the sample.
- Amendments and submission of APAs has to be planned carefully and taking into account specific features of the pandemic.
The use of professional company databases when applying TNMM will still remain important, also looking at the fact that the Hungarian tax authority has access to these databases although, to date, a mass volume of financial company data reflecting the economic challenges caused by the pandemic is not really available. Lastly, we have to note that the tax authority requests the Master File as well in tax inspections, although not all foreign mother companies are preparing said documents with the details required by the Hungarian tax laws (which are based on EU and OECD rules). A lack of these documents can trigger default penalties up to approximately EUR 6,000. Nevertheless, we also see a trend in which the tax authority focuses more on the determination of the market prices by also using their access to international databases, rather than just making statements about incomplete transfer pricing documentations.
Read the WTS Global Transfer Pricing Newsletter here.
