Taxing authority and tax law
Tax authority: Slovak Tax Directorate, local tax authorities and Ministry of Finance
Tax law:
- Sections 2, 17 (5, 6, 7) and 18 of the Income Tax Act
- Act on International Assistance and cooperation by tax administrators
Relevant regulations and rulings
The Slovak transfer pricing rules laid down in the Income Tax Act generally conform to the OECD guidelines. The OECD Transfer Pricing Guidelines were published in the Slovak Financial Newsletter but are not legally binding. Nevertheless, the tax authorities should follow them in practice.
The Slovak Income Tax Act has been amended with effect as of 1 January 2009. The amendment introduced an obligation of the taxpayer to prepare and keep transfer pricing documentation supporting the transfer pricing method used in transactions with foreign related parties. The required content of transfer pricing documentation is stipulated in Guidance No. MF/8288/2009-72 of the Slovak Ministry of Finance.
OECD guidelines treatment
The tax authorities usually follow the provisions of the OECD guidelines. The acceptable methods listed in the Income Tax Act correspond with the methods stipulated by the OECD guidelines. However, the 2010 update to the OECD guidelines has not been reflected yet in the Slovak Income Tax Act.
Priorities/pricing methods
The Slovak Income Tax Act prefers the methods based on the comparison of prices over methods based on the comparison of profits, combined methods or other alternative methods. The method used must respect the arm’s length principle. The 2010 update to the OECD guidelines has not been reflected yet in the Slovak Income Tax Act.
Transfer pricing penalties
No penalties specific to transfer pricing exist. The penalty rate for unpaid (or understated) tax liability is three times the basic interest rate of the European Central Bank (at the date of issue 3*1% = 3%). As of 1 January 2010, the penalty rate will be three times the basic interest rate of the European Central Bank or 10 % (whichever will be higher). This is not a per annum rate, but rather the penalty would be a multiple of this rate and the under-declared tax, irrespective of the time of tax underpayment. In addition, a penalty for the breach of non-monetary obligations (e.g., non-existing or insufficient supporting documentation) of an amount up to approx. EUR 33,200 can be imposed. On assessing the penalty for the breach of non-monetary obligations, the tax authorities have to take into account all the circumstances that led to the breach of non-monetary obligations (e.g., importance, duration and consequences of the breach).
Penalty relief
There are no specific reductions in penalties. Generally, a penalty is reduced by half if the taxpayer submits a supplementary income tax return where the tax base is adjusted upwards. Upon a successful challenge of transfer prices by the tax authorities, no specific reduction in penalties is available.
Documentation requirements
The required content of transfer pricing documentation is stipulated in Guidance No. MF/8288/2009-72 of the Slovak Ministry of Finance. The intent of the Guidance is to conform with the EU Code of Conduct on transfer pricing documentation for associated enterprises in the European Union (No. 2006/C 176/01).
Transfer pricing documentation must be prepared for related-party transactions with an amount exceeding the level of materiality for accounting purposes (as defined by International Financial Reporting Standards). Documentation must be prepared separately for each transaction or homogenous group of transactions.
For taxpayers obliged to use International Financial Reporting Standards (banks, insurance companies, pension funds, companies exceeding a certain size), the Guidance prescribes the required contents of the transfer pricing documentation, which are generally in line with the master file approach set out by the EU Code of Conduct on Transfer Pricing Documentation. The documentation will consist of global (master file) and local documentation. The master file must contain information with regard to the whole group of related parties (overview of the industry, business strategies and general overview of functions, risks and assets of the members of the group). The local documentation will contain information regarding the Slovak taxpayer. Moreover, the approach to transfer pricing, methods used, and description of transactions with related parties should be covered by the documentation. The local documentation should also include analysis of the comparability of the transactions.
For other taxpayers, the Guidance does not stipulate the contents of the documentation. However, the transfer pricing documentation must prove that prices applied in related-party transactions conform to the arm’s-length principle.
The language of the documentation should be Slovak, unless agreed. The tax authorities have unofficially stated that documentation presented in English, German or French should also be accepted.
It is not clear from the Guidance whether the documentation requirements will also apply for transactions performed or contracts concluded prior to 1 January 2009. However, the tax authorities already require taxpayers to have sufficient transfer pricing documentation prepared in the case of a tax audit. This stems from the provision of the Income Tax Act stipulating that the burden of proof rests with the taxpayer.
Documentation deadlines
Transfer pricing documentation must be submitted wihin 60 days of a request by the tax authorities. The documentation does not have to be disclosed unless requested by the tax authorities.
Statute of limitations on transfer pricing assessments
The statute of limitations in Slovakia in the case of applying a double tax treaty is 10 years from the end of the year in which the respective tax return is filed.
Return disclosures/related-party disclosures
Transfer pricing documentation does not need to be enclosed with the tax return. The taxpayer should state (on a specific row of the tax return) the difference (if any) between the prices used in transactions with related parties and the prices at an arm’s-length level that decreased the tax base. The tax base must be at increased by this difference at the same time.
The corporate income tax return includes a summary table where the amounts of various types of related-party sales and purchases must be stated (regardless of whether there are differences from arm’s-length prices).
Audit risk/transfer pricing scrutiny
Overall, the likelihood that a company with significant related-party transactions will get a transfer pricing audit can be classified as medium.
The tax authorities have been historically relatively inactive in this area, with only few complex transfer pricing audits performed. However, following the amendment to the Income Tax Act applicable as of 1 January 2009, the tax authorities have intensified their activities in the area of transfer pricing and are increasingly focusing on the transfer pricing and related documentation when auditing companies that form part of a multinational group. Thus, we expect the level of risk to increase in the future.
APA opportunity
According to Section 18(4) of the Slovak Income Tax Act, in cases of cross-border related-party transactions, the taxpayer may request the tax authorities to approve the selected transfer pricing method. If approved, the method should be applied for a maximum of five tax periods. The Income Tax Act, however, does not explicitly stipulate that the tax authorities may approve the particular price or margin percentage used. Therefore the use of advance pricing agreements in Slovakia is rather limited.
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