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| January 30, 2015

New supplement to the income tax declaration for transfer pricing

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Transfer pricing between related parties is a great challenge for the Czech tax administration. Its setup often has a significant influence on height of the income tax base of taxpayers in the Czech Republic. Transfer pricing has not been a significant subject during tax audits so far. For many reasons. The tide is turning now, however. The new supplement of the tax declaration, valid for the year 2014 already, is only one piece of the puzzle.

Why is there a new supplement for transfer pricing?

The tax administration is aware of the importance of transfer pricing in the fulfilment of tax duties. Last August and last December, for example, the tax administration published a report, in which it warns taxpayers in the Czech Republic that it intends to focus on controlling the setup of transfer pricing during tax audits. As the main reason, it quotes the concern that tax liabilities may be curtailed in the Czech Republic. Controls will no longer be random, however, but targeted on tax subjects based on a thorough preceding risk analysis. And the necessary input data for the risk analysis are to be provided in the new supplement of the tax declaration.

To whom does the new supplement apply?

The tax administration aims the supplement premeditatedly. The tax administration is not interested in everyone. First of all, it aims at subjects of considerable size. The supplement applies to taxpayers, who fulfil at least one of the following criteria: (a) assets of more than CZK 40m, (b) net turnover of more than CZK 80m (c) an average number of employees in full-time equivalents reaching more than 50. Also, the tax administration does not require the supplement from all such subjects. It only demands it in situations, when these subjects carry out transactions with related parties with a possible effect on the height of tax liability in the Czech Republic:

  1. The taxpayer carries out a transaction with a related parties residing abroad. In this case, the taxpayer fills in this supplement in relation to these foreign related parties.
  2. The taxpayer has posted tax losses, and at the same time the taxpayer has carried out a transaction with a related party, foreign and/or local. In this case, it fills in the supplement in relation to all related parties.
  3. The taxpayer is a recipient of an investment incentive in the form of tax allowance and at the same time the taxpayer has carried out a transaction with a related party, foreign and/or local. In this case, the taxpayer fills in the supplement in relation to all related parties.

What information does the tax administration demand?

First of all, the tax administration requires data for transactions per every related party (these are not aggregate data for all related parties). It demands information for example about the value of sales and purchases of fixed intangible, tangible and financial assets, goods, services, royalties, interest or other transactions with related parties, information about the use of some financial tools etc. Do you trade in goods or services with related parties? Do these transactions have a significant effect on your profitability or are they important in terms of volume compared to the total turnover? Have you sold a patent, a trademark or an asset to a related foreign party? Do you pay royalties or interests from financial loan instruments? Does not the foreign related party reside in an interesting tax destination, by any chance? The tax administration will have all of these data indicated in one form. It will thus be able to evaluate the significance of transfer pricing for the tax base of a given taxpayer directly.

While it can be argued that the tax administration was able to gain much information in the past already, for example from the financial statement or the report on relations, and nothing much happened, the significance of this new supplement consists in the intention of the tax administration, which declares directly that this supplement will serve for risk analysis of taxpayers for potential control of transfer pricing. The supplement thus becomes a tool of mass collection of data. The data will subsequently be analysed by experts from the tax administration and control of certain risk areas will be planned. The data will be sufficient for a basic risk analysis. The final aim will be specific instructions and a manual for specific control.

If this problem relates to you, we will be glad to help you with the matter. If the topic has caught your interest, we are available for possible consultation.