The transfer prices applied between related parties and the profit realized at year-end may differ from market conditions. In such cases, a year-end adjustment may be required.
Questions may arise in numerous areas of taxation due to year-end adjustments, and the Tax Authority will pay particular attention to examining the related circumstances and supporting documents during related tax audits.
It is important to emphasise that the Tax Authority will closely monitor the appropriateness and justifiability of year-end adjustments, especially if a low profit or loss are realised and no adjustment is made, or if for any reason the adjustment results in a reduction of the Hungarian company’s tax base.
In the text which follows, we would like to draw your attention to potential issues and possible actions to consider based on our audit experience.
Covid-19 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 should be supported by a detailed database search which 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 VAT, customs or local business tax – therefore, it is important that these are also fully investigated and addressed.
Based on our experience, even a minor formal error may result in the establishment of a tax audit; thus, it is worth paying special attention to examine whether the adjustment is necessary, whether the level of the adjustment is appropriate and how the adjustment can be made formally, taking accounting and other tax aspects into consideration as well.
Given that a year-end transfer pricing adjustment may affect multiple types of taxes, it is recommended to pay special attention when working out the details of an adjustment. For this purpose, the reason for the adjustment, related contractual background, and potential accounting treatment should also be considered, all matters which our professional team is happy to assist you with.
If you have any questions regarding the information provided above, please do not hesitate to contact us.
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