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Czech Republic: What to expect in a transfer pricing inspection

Czech Republic: Transfer pricing inspection

The tax authorities have heightened their focus on transfer pricing issues.

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  • From 2016 and 2017, more than CZK 14 billion was additionally assessed (including the reduction of losses) based on tax inspections focused on transfer pricing issues.
  • From 2012 to 2014, only a little over CZK 1 billion had been additionally assessed. 

Tax administrators have now turned their focus on corporations that generate losses or incur significant expenses for intra-group services. Tax inspections usually begin with a request to submit transfer pricing documentation or a request to complete an extensive questionnaire focusing on a corporation’s functional and risk profile and on documentation supporting received services. Regardless of the extent of information provided by the corporation in response to the questionnaire and the quality of provided supporting documentation, the corporation may almost be certain that the tax administrators will subsequently and repeatedly request additional and more detailed information as well as other supporting materials.

In addition to the oversimplified interpretation of a corporation’s functional and risk profile and a subsequent reclassification of a corporation to a contract manufacturer or contract distributor, the tax administrators increasingly often select and assess evidence with the single purpose of assessing additional tax.

KPMG observation

In instances when no significant transactions have actually taken place within a group of companies, tax professionals have been surprised that the tax administrators have attempted to treat a parent company as being responsible for poor results and incorrect business decisions of a local company (which in the tax authority’s opinion, is actually a contract manufacturer, and as such must generate at least a minimum profit). Experience reveals that the tax administrators subsequently will not hesitate to devise a fictitious transaction, assess additional tax, and request that damage in the form of losses incurred by a Czech company be settled by its parent company. In many instances, the company subject to inspection often soon may be convinced that the inspection’s outcomes were decided long before the inspection actually commenced.

Companies usually try to avoid any further interactions with the tax authority during appellate and subsequent court proceedings and decide to “sacrifice” one year (i.e., pay the additionally assessed tax without any appeal). This, however, may be viewed by the tax authority as an invitation to inspect all other open years.  

It is up to each company to select the right strategy, but experience has shown that if real economic arguments exist for a particular situation, it may be preferred to seek a judicial resolution. The more judicial decisions on transfer pricing, the clearer the limits for transfer pricing examinations.

 

Read a July 2018 report prepared by the KPMG member firm in the Czech Republic

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