Hungary: Considerations for year-end transfer pricing adjustments

A year-end adjustment may be required when transfer prices applied between related parties and the profit realized at year-end differ from those under market conditions.

The Hungarian tax authority is known to closely monitor the appropriateness and justifiability of year-end adjustments, especially if a low amount of profit or even a loss is realized and no adjustment is made, or if for another reason, the adjustment results in a reduction of the Hungarian company’s tax base.

In considering year-end adjustments, taxpayers need to consider the following:

• The coronavirus (COVID-19) pandemic does not justify low profit/loss: According to the official position of the tax authority, the pandemic in itself does not qualify as a justification if a company realized lower profit or even loss—i.e., the transfer prices applied may need to be examined and, if necessary, a year-end adjustment may be required.
• Appropriateness of the market range: If an adjustment is made, the arm’s length range on which the adjustment is based needs to be supported by a detailed database search that meets tax authority requirements.
• Multiple types of taxes may be affected by a year-end adjustment: A transfer pricing adjustment, depending on the exact approach, may potentially affect other types of taxes such as value added tax (VAT), customs duties or local business tax. Therefore, these taxes need to be considered.

Tax professionals note that even a minor formal error may result in the establishment of a tax audit. Thus, it can be beneficial to pay special attention as to whether the adjustment is necessary, whether the level of the adjustment is appropriate, and how the adjustment can be made formally after taking accounting and other tax aspects into consideration.

Read a December 2021 report prepared by the KPMG member firm in Hungary