Tax alert: Nearly one billion to the state budget through transfer pricing (4/2016)

On Thursday 21 April 2016, a press conference of the Ministry of Finance was held, summarizing the results of the tax audit of transfer pricing for the last year and the first quarter of this year, which were achieved thanks to the continuously increasing preassure and attention of Financial Administration of the Czech Republic.

On Thursday 21/4/2016 the Ministry of Finance held a press conference summarising the results of a tax inspection of transfer pricing for last year and the first quarter of this year, which was achieved thanks to the constantly increasing pressure and attention of the Financial Administration of the Czech Republic (hereinafter the "Financial Administration") targeted at transfer pricing.

In the course of 2015, 800 inspections focussing on transfer pricing were conducted, recovering a total of CZK 446,000,000 and almost further CZK 500,000,000 for the first quarter of this year. The main merit can be attributed to the Financial Administration's so-called Action Plan, which included:

  • the introduction of a separate annex to the tax return, which provided the Financial Administration with a tool for selecting transactions with a potential additional tax assessment (in which tax subjects presented a summary of individual transactions with related entities and their amounts for the first time of the year 2014),
  • the creation of specialised inspection teams and the introduction of a series of educational processes for Financial Administration staff,
  • focus on thorough inspections of high risk transactions, which enabled a considerable increase in their efficiency and intensity.

Thanks to the abovementioned points the percentage of inspections ending in additional assessment has increased by 35%. The introduction of a separate annex also means that many taxpayers have begun to submit additional tax returns in order to settle to their tax obligations.

The most frequent areas in the Financial Administration's sights include:

  • a division of functions and risks within a transaction (whether a company with decision-making functions also bears the associated risks),
  • the method of transfer pricing,
  • excessively high payments for management services and licensing fees, and
  • corporate restructuring.

Yet, such transactions are carried out in virtually every company group.

The attention of the Financial Administration continues to be attracted by long-term loss-making companies entering into intra-group transactions.

At the same time, this press release together with the results confirm the unpleasant reality that the issue of transfer pricing is not given sufficient attention on the part of taxpayers and the Financial Administration has therefore successfully managed to increase the amount of additionally assessed tax. Current development not only in the Czech Republic, but also in the fields of the OECD and EU, also demonstrates increased attention and tightening of the rules regarding transfer pricing, a fact to which consulting firms have recently been drawing increased attention.

The question therefore remains, whether the perception of taxpayers regarding the issue of transfer pricing will change after this press release is published, or whether we will continue to witness similar outcomes.

We are prepared to offer you advice on the matter of transfer pricing, and not only in relation to the most frequent areas of inspection listed above.

Should you be interested in an expert discussion on this topic, our specialists in the field are available to you.