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SAC on claiming tax loss from transfer pricing adjustments abroad

Transfer prices are at the heart of many disputes with tax administrators not just in the Czech Republic but also abroad, often dragging on over many years. If tax is additionally assessed for one of group companies abroad, is it at all possible to claim the higher costs of the other company involved in the transaction in the Czech Republic, and how? This is especially problematic where a tax loss is additionally assessed after the expiry of the deadline for claiming it.

In its decisions of 11 and 16 November 2022, the Supreme Administrative Court commented on the issue; the dispute involves the same case subject to two cassation complaints.

In 2013, a Czech taxpayer filed an additional tax return for 2006, 2010, and 2011, following the German tax authority’s tax inspection and the decision that the Czech entity had overstated its transfer prices. For these reasons, the Czech taxpayer was additionally assessed a tax loss for 2006 and decided to claim it against the tax liability of 2010 and 2011 by applying for the reopening of proceedings (note: tax loss cannot be claimed after five years from its assessment; at the time of the case, a specific rule applied allowing to claim a tax loss only against a higher tax base). The tax administrator discontinued the proceedings and did not allow the claiming of the tax loss.

The taxpayer defended themselves in two ways: firstly, they sought to invoke retaliatory measures by the finance ministry to ensure reciprocity or to remove the harshness of law under Article 25 of the Czech-German Double Taxation Treaty. The tax administrator denied the request, arguing that they had accepted the transfer pricing adjustment for 2006. Subsequently, the tax administrator decided that the dispute lacked an international element, as the claiming of the 2006 tax loss in 2010 and 2011 was a matter of domestic law. The SAC confirmed this view.

As a second defence, the taxpayer applied for the reopening of the proceedings for 2010 and 2011. The tax administrator denied the request. The tax administrator found the claiming of the tax loss to be unjustified (this was also confirmed by the SAC), as the tax loss for 2006 was only assessed in 2013. As such, it did not exist in 2010 and 2011, therefore the conditions for reopening of the proceedings had not been met.

To conclude: an adjustment to the tax base due to a change in the assessment of transfer prices in a cross-border situation may lead to double taxation if it results in an increase in a tax loss that cannot be claimed under the general rules of the Income Tax Act for claiming losses in a domestic situation.