Taxing authority and tax law
Tax authority: Ministry of Finance (MF)
Tax law: The Income Tax Act §23(7) — arm’s length principle, and §38nc — APA scope and procedures
Relevant regulations and rulings
Directive D-258 discusses the application of international standards in the taxation of transactions between associated companies (i.e., transfer prices). D-258 confirms the applicability of the OECD TP Guidelines for both international and domestic transactions (with certain exceptions).
Directive D-292 outlines requirements concerning §38nc of the Income Tax Act. D-292 comments on the principles of binding assessments, which correspond to the preliminary price agreement principles within the meaning of the OECD guidelines.
Directive D-293 outlines requirements on the expected scope of documentation of a TP method agreed between related persons. D-293 comments on the scope and nature of TP documentation in accordance with the European Union (EU) TP Documentation requirements created by the EU Joint TP Forum.
Directives D-258, 292 and 293 are not legally binding but are usually followed in practice by the tax authority.
OECD guidelines treatment
Based on Directive D-293 (not legally binding), the OECD guidelines as well as the Code of Conduct on TP Documentation for Associated Enterprises in the EU are generally accepted in the Czech Republic. This directive also mentions that TP documentation prepared in accordance with the Code of Conduct “should be sufficient” for substantiating the method of calculation of the arm’s length price.
Priorities/pricing methods
The MF follows the OECD TP Guidelines. Use of profit-based methods is possible where substantiated.
Transfer pricing penalties
There are no specific TP penalties. Generally, upon a successful challenge of TP by the tax authority, a penalty of 20% of the unpaid tax or 1% of the decreased tax loss will be applied. Thereafter, interest is assessed at 14% above the “repo rate” (or repurchase agreement rate) of the Czech National Bank (for five years at maximum).
Penalty relief
There is no specific penalty relief regime in place. It is at the discretion of the MF to decrease penalties; however, this is limited to specific situations.
Documentation requirements
There are no specific statutory requirements in place. It is crucial for the taxpayer to have supporting documentation in case the transactions are audited by the tax authority, as the burden of proof remains with the taxpayer. The tax authority has great discretion in deciding what level and nature of documentation is sufficient. During the tax audit, the authority may request any documentation that reasonably substantiates the actual character and substance of the transaction, its benefits for taxpayers, the appropriateness of the level of fees and the TP method selected. The analysis of a controlled transaction and the identification of comparables could be useful. Therefore, a high level of formal evidence may be necessary to support various aspects of the transaction. Deadlines for submitting the required documentation may be 15 or 30 days after the request is delivered to the taxpayer.
D-293 describes the documentation that is expected and may be required by the tax authority. Nevertheless, as the directive is not legally binding, there is no legal requirement to prepare documentation.
D-292 sets out documentation that should serve as the initial basis for filing the application for issuance of a binding assessment. The submitted documentation should contain information on the group, information on the company, information on the business relationship, information on other circumstances affecting the business relationship and information on the TP method.
Documentation deadlines
There is no specific deadline to prepare documentation, since no specific statutory documentation requirement exists.
In the event of a TP challenge, the taxpayer must file information before the statutory deadline for tax proceedings. This is generally within 15 days of the receipt of a request by the tax authority. This time limit may be extended at the discretion of the tax authority if a request is made by the taxpayer.
Statute of limitations on transfer pricing assessments
The general statute of limitations applies. Effective since 1 January 2011, the limit set by the Tax Code is three years from the end of the period for filing of the return of the taxable period in question, i.e., in which the tax liability arose. However, if the tax authority undertakes an act directed at the assessment of tax, then the three-year time limit begins again. The limit will also be prolonged if the supplementary tax return for the respective period is filed (should the taxpayer file an additional return in the 12 months prior expiration of current limit, the limit is extended by one year) or if a tax loss carry forward may be utilized in the particular period. Tax may not be assessed, however, later than 10 years or 17 years if tax losses were incurred (15 years in case of tax losses incurred in 2004 and onwards).
Return disclosures/related-party disclosures
Effective from 1 January 2001, the executives of a controlled entity are required to complete a memorandum with respect to relations and transactions with companies in the group. This does not apply if a controlling agreement is concluded. Note that this is based on commercial legislation rather than tax legislation, and the memorandum has no direct tax impact or tax aspects. Taxpayers must provide documentation of transactions with related parties in the corporate income tax return.
Audit risk/transfer pricing scrutiny
The risk of TP issues being reviewed under an audit is high. The tax authority has adopted a global approach. Audit subjects are selected based on complex criteria and TP is only one aspect among many others. Intangibles, royalties and service fees are seen as the most likely TP audit issues. Although no specific country is targeted for TP audits, transactions with tax haven countries are closely scrutinized. The tax authority intends to increase scrutiny of TP. According to press statements of MF’s representatives, the tax authorities should particularly focus on TP and fully dedicated specialists forming specialized sections have already initiated this increased scrutiny.
APA opportunity
APA regulations were established under §38nc of the Income Tax Act, which became effective on 1 January 2006. Upon the tax entity’s request, the tax administrator decides whether a taxpayer has chosen a TP method that would result in a transfer price determination on an arm’s length basis. The binding assessment can only be issued for transactions effective in a particular tax period or that will be effective in the future. It is impossible to apply for a binding assessment of business relationships that have already affected the tax liability. D-292 details the procedure for issuing binding assessments and the necessary particulars for the application. Generally, the tax administrator should issue the decision within six months assuming all documentation and information are provided, but this deadline is not legally binding.
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