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Jiří Jakoubek | December 6, 2022

From the case-law: Cash pooling under tax control

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On 27 October 2022, the Supreme Administrative Court (SAC) issued a judgment on the issue of the normal price in the case of cash pooling, including the tax administrator’s obligation to document and prove the normal interest.

The judgment is worthy of close attention at the least because it deals with cash pooling, which in the Czech transfer pricing environment is an area that has so far received little attention from our courts. So far, cash-pooling has been dealt with as a secondary area of a specific judgment that would primarily be dealing with a different issue. Although this judgment also discusses in particular the tax administrator’s misconduct in failing to comply with his obligation to document and prove the normal amount of interest, the tax administrator’s obligations and his failure to carry the burden of proof are discussed in relation to this specific type of intra-group financing.

The basic problem of the taxpayer was a significant (one-off) reduction of deposit rates in cash pooling from 1M PRIBOR + 3% p.a. (in 2009) to 1M PRIBOR + 0.17% p.a. (in 2012). Although the SAC generally agreed that such a significant reduction in rates might normally appear suspicious (at the very least, it gives some indication of an attempt to obtain a tax advantage for one party to the transaction), it is the tax administrator, who must document and prove the normal interest rate if he disputes the rate applied by the taxpayer. In addition, the tax administrator ignored the taxpayer’s repeated explanations about the change in the functioning of cash-pooling (in particular its full automation, settlement of balances on a daily basis, savings in administrative and labour costs), while repeatedly claiming only that the newly applied rate of 1M PRIBOR + 0.17% p.a. is not a price that meets the requirements of the arm’s length principle. The tax administrator himself did not set the normal price during the entire process and only repeatedly disputed the transfer price applied by the taxpayer. The SAC thus agreed with the conclusions of the Regional Court as to the tax administrator’s failure to sustain the burden of proof.

The judgment is not a ground-breaking case law in terms of the appropriateness of the methodology used in cash pooling, but it does suggest that an examination of the reality, economic nature and reasonableness of relatively sophisticated transactions involving financing or handling of, for example, intangible assets can be commonly expected in tax audits. This is confirmed by our experience in tax audits.

Author: Jiří Jakoubek, Lukáš Veitz