Czech Republic: Transfer pricing examination trends

Czech Republic: Transfer pricing examination trends

It has been almost one year after the Czech Republic introduced a requirement that taxpayers include in an appendix to their corporate income tax returns information summarising transactions with related parties. Accordingly, it is not surprising that tax inspections primarily have tended to examine companies that reported losses in one or more tax periods while listing material transactions with related parties. Corporations showing significant fluctuations in profit also have attracted the tax administration’s interest.

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At a recent press conference, the Minister of Finance confirmed that the financial (tax) administration, following the example of the OECD and the EU, has been using the term “action plan for transfer pricing check” for these activities.  According to the tax administration, more than 10,000 taxpayers submitted the mandatory appendix last year. After performing an analysis of these appendices, the tax administration has determined several risk criteria according to which entities are selected for in-depth transfer pricing “checks” including ones that focus on:

  • Where the actual management of a corporation is located
  • Who the beneficial owner of income is
  • Whether the reported transaction has actually taken place
  • Whether the reported expenses relate to the taxpayer’s economic activity
  • Whether prices between related parties have been correctly set—a transfer pricing review (including the selection of a transfer pricing method)
  • What the distribution of functions and risks is
  • Whether management fees, royalties, and interest rates are not inadequately high
  • Company restructuring
  • Corporations recognising losses in the long-term

The ministry stated that up to CZK 1 billion has been additionally assessed as a result of transfer pricing checks and inspections focusing on tax havens conducted in 2015 and in the first quarter of 2016.

KPMG observation

Experience shows that the tax authority’s scenario on how to proceed is generally as follows—after the tax authority conducts the initial assessment of the situation, it invites executives from selected departments (such as procurement or sales) in for questioning. In good faith, the executives provide simplified answers to questions meant to determine how the parent company may influence the Czech company. After that, the tax authority arrives at the simple conclusion that the loss-making Czech subsidiary is in fact in a position of a contract manufacturer or contract distributor, whose business risks are rather low and therefore ought to generate profit. The re-classification of a loss to a profit, even of a small percentage, usually results in the additional assessment of tax, and related penalties and default interest. Given this practice, prudent taxpayers will want to carefully consider their responses and involve tax specialists from the very beginning of the entire process.

Also, experience shows that tax examiners are now quite often use “securing orders” before the end of tax inspections. The concept of “securing orders” is available for use in instances when there is reasonable doubt that a tax that is not yet due or has not yet been assessed will not be recoverable or will be collected with considerable difficulty. “Securing orders” are payable within three days—sometimes immediately—and may be used to begin collection proceedings instantly—e.g., garnishments of bank accounts or receivables, real property, or a car fleet. 


Read a May 2016 report [PDF 489 KB] prepared by the KPMG member firm in the Czech Republic: Transfer pricing checks growing stricter

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