Too good to be true? Be suspicious even before NAV inspectors

Gergely Séra

Partner, Lawyer, EY Law Hungary

3 minute read 01 Apr 2021

Did you manage to make a deal so good that compared to the market prices it is almost too good to be true? You can expect that the tax authorities will also pay attention to this. Suspiciously cheaply purchased products or services can hide serious tax risks, which preparation is crucial to avoid. We will tell you that you can defend your truth before NAV inspectors.

The During procurement, the price is almost always emphasized, so applicants often underbid each other. A spectacularly low remuneration, even compared to the depressed pricing of competitors, may even arouse the interest of the National Tax and Customs Administration (NAV), as it may raise suspicions that it can only be achieved through tax evasion. If the supplier or the supplier's business partner is found to have engaged in tax evasion, it will be crucial whether the company can prove that the price was not unrealistically low.

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It's not (necessarily) a problem if it's cheap

 

During a tax audit, the price in itself is of course not conclusive. If, on the other hand, other factors point to tax evasion, then the too cheap purchase price can be one of the most important proofs that tax evasion should have been recognized during the purchase.

The question rightly arises, how? Even the NAV does not have an easy task during the proof. For example, the value of raw materials used for industrial production, or if a very narrow circle of entrepreneurs is active in the sector concerned. It may also happen that the office does not have enough information about business practices and pricing methods in the given sector (e.g. volume discounts, importance of the secondary market). In some cases, NAV requests price data from manufacturers and traders operating on the market.

In some cases, it is a particularly difficult task to determine the market price. At other times, however, the tax authorities have a very simple task. In the case of labor-intensive services, for example, concerns may arise if the fee paid to the contractor does not reach the hourly portion of the minimum wage plus taxes.  

 

When NAV knocks on the door...

As soon as we have received the mandate letter, it is worthwhile to proactively consider whether we have purchased too cheaply. If so, then it is worth examining the deal in more detail: is it really too cheap, or do the unique circumstances of the deal justify the price? In the second case, it is also worth preparing so that if the tax authorities ask about it, the information on the basis of which the market nature of the price can be proved is easily available.

The office can contact both competitors and manufacturers, and even so, it will have less knowledge about the operation of the sector than the taxpayer has.   

Colleagues dealing with taxation should therefore be in regular contact with the purchasing area, because this is the only way to ensure that all relevant information can be handed over to the tax authorities.

dr. Séra Gergely

EY Magyarország, Adó- és Jogi Tanácsadás, Partner

If they have a better overview of the industry, the process can be concluded more quickly and favorably for the company.

It is also important that, although NAV has a lot of information and vast experience, it is neither infallible nor unconvincing.

How EY can help

If procurement prices become the focus of the audit, it is a good idea to step in immediately and provide relevant data related to procurement prices and the market. In addition to being able to dispute the price determined by the tax authority and the methodology, it is important that taxpayers must present the relevant data and information at their disposal to the tax authority as soon as possible. If this happens too late, the tax authorities may even ignore them based on the rules in force since 2018. 

Since the market price is considered a professional matter, if necessary, the courts can involve an expert during the trial.


New areas of focus

In recent years, the tax office has placed special emphasis on the examination of pricing methods for general service areas such as security and cleaning. Since the use of subcontractors of this type is essential for the operation of many companies, it is worthwhile for both parties to examine the existing cooperation conditions and prepare for a possible investigation.

Summary

NAV also pays attention to acquisitions that are more favorable than the market price. Available and up-to-date market data, as well as an external expert's opinion, can be decisive during the authority's investigation. 

About this article

Gergely Séra
Partner, Lawyer, EY Law Hungary

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.