Updated guidelines for transfer pricing discipline in the Czech Republic
Obligations
In general, the tax legislation in the Czech Republic does not contain a provision that imposes how to prepare transfer pricing documentation, nor does it mention the need for the preparation of framework documents by the parent company (e.g., Master File and Country File). However, taxpayers have the option (not an obligation) to request a prior ruling from the tax administration based on the anticipated methods and criteria they intend to follow. Advance Pricing Agreements (APAs) are binding agreements between the tax authority and the taxpayer, valid for up to 3 years if the conditions and laws remain unchanged. APAs define the methods for determining transfer prices in transactions between related parties. In the Czech Republic, there is a fee of 10,000 CZK for each transaction covered by an APA.
Nevertheless, taxpayers are always required to provide documentary evidence of all facts that they will subsequently indicate in their tax returns or in other communications with the tax administration. In this context, taxpayers may be asked to demonstrate how transfer prices were determined in their transactions with related parties and whether they comply with the arm’s length principle. Considering that the arm’s length principle requires that transfer prices charged between related parties be equivalent to those that would have been charged between independent parties under the same circumstances, we suggest preparing an internal directive (parent-subsidiary) that governs the flow of information and documents between related parties, clearly indicating the criteria and methods to be followed for the application of transfer prices to accounting entries and consequently for tax obligations.
Methodology
The methods adopted in the Czech Republic, based on OECD guidelines, for the application of transfer pricing between related parties are:
Traditional transactional transfer pricing methods
- Comparable Uncontrolled Price method (“CUP”)
- Resale Price method (“R-“)
- Cost Plus method (“C+”)
Profit-based transfer pricing methods
- Profit Split method (“PS”)
- Transactional Net Margin method (“TNMM”)
Directive D-334 from the Tax Office
The Ministry of Finance has issued a specific directive providing information on the scope of documentation that can be used for transfer pricing purposes. The directive provides legally non-binding recommendations that, however, are advisable to follow to ensure regular tax control. It is essential for the taxpayer to have supporting documentation in case the tax authority decides to initiate an audit, as the burden of proof rests with the taxpayer. During a tax audit, the tax authority may request any documentation that reasonably justifies the substance of the transaction, the tax benefits for the taxpayers, the adequacy of fees, and the selected transfer pricing method.
Penalties
There are no specific penalties for the incorrect application of transfer prices. Generally, in case of additional taxable income determined, a penalty of 20% of the unpaid tax or 1% of the reduction in taxable losses applies. Additionally, interest on delayed payment is assessed for 2023 at an annual late payment rate of 14% plus the REPO rate.
Additional obligations for taxpayers
Taxpayers are required to complete the specific section on transfer pricing in the annual corporate income tax return. This attachment describes intra-group transactions. Companies required to complete this section must disclose information about related parties (name, registered office) and provide relevant financial data exchanged.
Sources: https: https://accace.cz/
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