News Transfer prices through the eyes of the Minister of Finance
The Tax Authority has published on its website the information that it conducted 800 inspections last year focusing on the transfer pricing used between the related parties, which resulted in an additional assessment of income tax amounting to 450 million CZK. Moreover, for the first months of this year it additionally assessed 500 million CZK.
According to the General Financial Directorate, the issue of transfer pricing is currently viewed as a high-risk area used by multinational companies for aggressive tax planning and tax evasions. This is why the attention is devoted to this area both at local and international level (e.g. the OECD initiative aimed to tackle tax avoidance, Base Erosion and Profit Shifting or ‘BEPS’).
At local level the focus on transfer pricing was clearly manifested in 2014 when an attachment to the corporate income tax return, ‘overview of related-party transactions’ was introduced. This attachment is mandatory for taxpayers who satisfy one of the criteria for mandatory audit and make a related-party transaction (direct or indirect capital stake or share in voting rights exceeding 25%).
Data from the attachment enable the Tax Authority to better target tax inspections to potentially risky entities and transactions, making more effective the control of transfer prices. In 2015 the number of controls of transfer prices rose by 237 compared to the year 2014 and the additionally assessed tax was higher by 387 million CZK. Furthermore, tax losses of the inspected entities were reduced by 391 million CZK. Minister of Finance Andrej Babiš has said that taxpayers had begun to file on their own initiative additional tax returns in which they rectify their tax liabilities.
The controls namely focus on these areas:
- the place of effective management,
- the beneficial owner of the income,
- whether a declared transaction really took place,
- whether reported costs are related to the taxpayer’s economic activity,
- correct price calculation between related parties,
- the division of functions and risks between group companies and the choice of pricing method,
- unreasonably high payments for management services, licence fees and interest rates,
- corporate restructuring.
The Tax Authority will continue the trend of increased interest in this area. We will be happy to assist you with the drafting of documentation of transfer prices or a revision of the current price setting.