Global Tax Alert | 31 July 2014

Czech Tax Authority introduces mandatory intragroup transaction reporting

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In June 2014, the Czech Republic’s General Financial Directorate (GFD) introduced a draft mandatory enclosure to the corporate income tax return that will include mandatory reporting of intragroup transactions effective for 2014.

Qualifying companies will have to submit information regarding related parties (name, registered office) and a complete a list of selected transactions entered into with them in a special enclosure to their tax return. The transactions will be classified by type (sale of goods, provision of services, financial transactions, payment of royalties, etc.)

The level of detail contained in the enclosure is similar to what some taxpayers already regularly disclose e.g., in notes to financial statements or in the annual report on intragroup relations. However, taxpayers involved in a large volume of various types of transactions with many different related parties may find the reporting requirements time-consuming. The draft enclosure and the way the information is to be structured can be found in a presentation by GFD.1 The enclosure is set to become an obligatory part of the corporate income tax return for the tax year 2014.

By taking this measure the Czech tax administration has at least postponed the introduction of the mandatory preparation of transfer pricing documentation already required by the legislation of many EU countries. By introducing the obligatory enclosure to the tax return the tax administration is opting for a less administratively demanding reporting requirement, the main purpose of which is to ensure a streamlined approach to collecting specific information on related party transactions. The tax administration is expected to use this information to improve analysis and assessment of potential tax risks which is in turn likely to lead to more efficient targeting of entities for special tax audits in the future and improved tax collection. To illustrate the point, in 2013, having carried out 282 transfer pricing audits, the tax administration managed to assess only CZK 70 million (€2.5m) in additional corporate tax.

The new enclosure to the tax return will have to be filed by non-financial institutions entering into intragroup transactions that meet at least one of the following criteria:

  • Assets in excess of CZK 40 million (€1.5m);
  • Net turnover in excess of CZK 80 million (€3m);
  • Average headcount in excess of 50.

The requirement will not apply to companies that only transacted domestically unless they reported a loss on their tax return. On the other hand, the requirement will fully apply to all transactions of companies that have received tax relief as a part of an investment incentives package.

During its presentation the GFD also drew attention to the efficiency of the Advance Pricing Agreement (APA) as a transfer pricing risk management tool. In 2013, 30 APA applications were officially submitted. This is the highest number over the eight years that the APA has been available in the local law. Of the 30 applications, 12 were granted and 15 are still being processed. Since two applications were withdrawn, this means that only one application out of 30 was rejected last year. This statistic confirms the ever increasing importance and popularity of the APAs in practice.

Endnote

1. See http://kas.economia.ihned.cz/gallery/6/1937-radim_blaha_prevodni_ceny_pwc_2014pdf.pdf (in Czech only). The draft enclosure (the final form may yet be amended) can be found on page 13.

For additional information with respect to this Alert, please contact the following:

Ernst & Young s.r.o., Prague
  • Libor Fryzek
    +420 225 335 310
    libor.fryzek@cz.ey.com
  • David Zarecky
    +420 225 335 748
    david.zarecky@cz.ey.com

EYG no. CM4625