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Hungary: Transfer pricing

Alessandro PasutTransfer pricing: in case related parties decide to use the new accounting method, differences relating to the current year are to be accounted for in the general ledger of the current year’s balance sheet preparation day at the latest. The authorities have also confirmed that the correction cannot be treated as a modification to the consideration of original and individual transactions if the correction solely aims at the proper profitability in accordance with the contract concluded between the parties. This practically means that issuing a correction invoice mentioned in the VAT Act is not required; the accounting is to be treated as falling out of the scope of VAT and it can be substantiated by any kind of document being considered as acceptable proof according to the Accounting Act. The above rules may significantly ease the operation of companies and clarify the year-end adjustment accounting practice. However an appropriate contractual background and the availability of proper documents are required.

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Hungary: Tax Audits

A directive concerning the 2010 tax audits has been issued, which describes the main areas that will come into focus. The Tax Authority will take more severe measures against tax planning that takes advantage of unintended administrative or legal loopholes.

Therefore the following categories of taxpayers can expect to be subject to tax audits in 2010: taxpayers whose records show frequent changes in registered address or ownership; businesses that have operated for several years with substantial loans from their shareholders; taxpayers who declared significant amounts of payable and deductible VAT during the period during which the company was under registration; and companies that have continued to operate despite continuing losses, with particular regard to the financing of large accumulated losses.

Special focus will be given to the accounting of expenses aimed at minimising the amount of taxes payable, spending a significant portion of the sales revenues on services, the use of tax base decreasing items, tax allowances and subsidies related to investments under the Corporate Tax Act, the use of tax base incentives for research and development and the operation of companies that regularly declare input VAT which they either leave on their tax accounts or have it transferred to another tax type.

The Tax Authority will also pay more attention to the actual content of transactions conducted between related parties and to the methods companies use to determine the arm’s length price. Compliance with the rules of investment tax benefits will also be strictly controlled.

Companies (sole traders) who pay their contributions on an income that is less than the “typical income” specified for the type of activity that they pursue will be subjected to closer scrutiny in order to ensure that the full amount of social security contributions due are paid and that taxpayers comply with their tax liabilities with reference to the minimum contribution base, incomes not exceeding twice the minimum wage, and typical incomes specified for the different activity types.