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Transfer pricing remains under tax administrators’ scrutiny

The financial administration has published information about its tax inspections focusing on transfer prices between related parties. In 2020, tax administrators carried out 249 inspections, assessing additional corporate income tax of CZK 1.4 billion, resulting from increases of taxable income or decreases of tax losses of almost CZK 7.9 billion. Compared with 2019, additionally assessed tax increased almost four times.

Our recent experience has shown that the state has toughed up its procedures: whereas in the last period, the financial administration mostly only completed inspections commenced before the pandemic, it has become more active recently and initiated an increasing number of new transfer pricing inspections.

Beginning in 2014, the financial administration adopted a more systematic approach to transfer pricing when it introduced, among other things, a new separate appendix to tax returns for disclosing inter-company transactions and began to use information on the volume and nature of these transactions to select corporations about to be subject to a tax inspection. Since then, transfer pricing has been the key target during tax inspections.

Based on information published, in 2014-2020 tax administrators carried out a total of 2,431 tax inspections, in which it increased taxable income or decreased tax losses by a total of CZK 46.9 billion, resulting in additionally assessed tax of more than CZK 4.5 billion. The published table clearly shows that results fluctuate over time, probably depending on the state of completion of individual tax inspection, and that tax additionally assessed has been growing continuously. 

Year Additionally assessed tax (in millions of CZK) Increase of taxable income including decrease of tax loss (in millions of CZK)
2014 59 504
2015 446 2 823
2016 886 13 286
2017 189 1 264
2018 1 216 18 038
2019 356 3 130
2020 1 362 7 861
  4 514 46 906

Source: MF CR

Considering the state budget’s deficit, we cannot expect that the number of inspections focusing on transfer pricing will decrease in the upcoming years; instead, the opposite is more likely. For group entities, it will therefore remain vital to pay proper attention to this issue: set transfer prices in a correct manner and keep proper formal documentation of the pricing method. A proactive approach may also be useful, e.g., it is possible to apply for an advance pricing agreement (APA), i.e. an assessment of the method in which prices between related parties have been set (GFD Instruction D-32).

APAs represent binding assessments by the tax authorities that are to provide taxpayers with a substantial level of legal certainty on selected transfer pricing methods, usually for three subsequent taxable periods.