The legitimate question nowadays is what we can expect during a tax audit if transfer pricing (tp) issues also emerge. Supposing, we possess master file presenting our group, our local file is available, and – if selected method for analysing prices triggered its need – we also have the benchmark study, are we prepared properly for the tax inspection?
Our newsletter below highlights some aspects of inquiry of the tax authorities to avoid any surprise we could face when tax authority appeared.
According to statistics of the tax administration, in 2020 slightly over 200 audits related to tp issues took place. It seems to be not too much. However, that is a thought-provoking fact, 73% (almost three quarters!) of the audits was closed with assessment of tax shortage. Average of the disclosed deficit (not including related penalties) approached to HUF 80 million. Furthermore, as an expressive data, HUF 8 billion default penalty was levied due to inappropriate documentation. These figures support, that one seeks, finds.
Gladsome, that tax authority improved his communication strategy during the recent years. So, they published professional newsletters and rulings several times, in which they announced their expectations of tp-documentations and described considerations needed for proper functional analysis. These are worth for following and compiling tp-docs in line with up-to-date expectations. Even if some of the requirements are disagreed, in the tp-doc we can explain our approach to prevent potential assessment related to the challenged matter.
According to our experience, in the beginning of a tax audit the auditor calls for providing an excerpt of our tp-doc. We must summarize annually in an excel-sheet the nature of the related transactions, the applied databased search, the thought-out range of profitability or arm’s lengths interest. However, the advantage of this method is the transparency, the drawback of these spreadsheets is the brevity (not many comments can be inserted to the rubrics). Fly in the ointment is that completing these schemes exceeds liabilities of the taxpayers as they are fixed in legal provisions. (Whilst laws require detailed presentation of related transactions above a specific threshold, charts should be filled for all the IC-trans.) So, we must decide whether we put in tables in line with tp-docs or we focus on only the proper completion of the spreadsheets (but in this later case it is not guaranteed that each of the arm’s length profitability or interest are available).
We also can notice that auditors read tp-docs and use them to be informed about course of business and understand strategic goals of the taxpayer. They increasingly ask details as well. So, for example nowadays it is not obvious that management services provided by the mother company are accepted. You also must improve, that real services were delivered for the benefit of the subsidiary. Referring to the OECD-guideline tax authority will reject those charged items of expenses which incurred for the favour of the owner or the group, and as such they cannot be attributed to the subsidiary.
Since basically preparing tp-doc cannot result an incommensurate burden to the taxpayer (however neither relieves from liability for completion), practically it is worth for ranking our position considering tp issues voluntarily. Although if value of related transactions is beyond the threshold of documentation liability, but it is inappropriate to make any influence on the overall profit of the year due to insignificant portion to the total performance, let we state confidently our low risk for tp purposes. We can achieve the same result if we do not pay for services provided in centralized format (namely there is no tax risk in Hungary), or we have no cross-border transactions at all. These risk-moderating factors can also affect to the level of ‘incommensurate burden’: the more exposure we have considering tp risks the more carefully we have to detail related transactions.
Present newsletter was prepared only for shtick purposes. So, not all the lessons were listed which might be drawn as conclusions from the tax audits. What we can surely fix is that an adequately reasoned tp doc can prevent from extra assessments, so compiling a professional tp doc have an apparent benefit as well.
If you have any questions regarding the above, please feel free to contact us:
Krisztián Vadkerti, Partner
Márta Pénzely, Tax manager