Proving inter-company services and determining transfer prices
Almost all multinational groups of companies ensure part of their activities on a central basis and re-invoice shared services to group companies. This often involves significant amounts. It is therefore not surprising that tax administrators have started to pay increased attention to this area and are evaluating the adequacy of invoiced amounts.
In its recent decisions (10Af 5/2016, 50Af 11/2017), the Regional Court in České Budějovice dealt with the issue of inter-company services and in both cases ruled against the taxpayers.
In the first case, the taxpayer was to prove the price for which respective services had been provided. The taxpayer had submitted various items of evidence commonly available in multinational groups, such as e-mails, training presentations and action plans for production implementation, documenting the continuity and nature of the provided services. However, the tax administrator did not accept any of these as evidence supporting the extent and the price of the provided services. The tax administrator found it especially inadequate that the taxpayer only provided aggregate numbers without specifying (based on the hours spent on individual activities) a fee charged for a particular service and the proportion of this fee in the total invoiced amount.
The Regional Court also agreed with the tax administrator’s rejection of some other pieces of evidence submitted by the taxpayer, such as witness statements, claiming that these would not bring any new information to determine the price. After analysing discrepancies in documents submitted by the taxpayer, the tax administrator concluded that the taxpayer had prepared transfer pricing calculations retroactively during the evidence proceedings. The court agreed with these conclusions. The submitted means of proof were also refused for the fact that it took the taxpayer more than two years to provide evidence, repeatedly asking for the extension of the time limit. In addition, relevant contracts had been concluded as late as during the provision of the services.
The Regional Court did not challenge the performance of services but their price and agreed with the tax administrator that the taxpayer had not sufficiently proven the invoiced fee. The court also approved the tax administrator’s decision to assess the price using whatever information and materials available, in this case the Amadeus database, based on which the usual percentage of management services in the total turnover was determined. This led to the exclusion of a substantial portion of the invoiced amount from deductible expenses.
In the second case, the taxpayer was not able to prove the provision of services at all, which led the tax administrator to exclude the entire invoiced amount from deductible expenses. The court held, inter alia, that the mere submission of flawless documents and written contracts does not suffice to prove that services have really been delivered. The taxpayer did not submit any concrete piece of evidence other than a concluded contract to reliably prove that the supply claimed had really been delivered (i.e. the date the services were rendered, the scope of these services and the fee charged).
In both cases, the regional court decided in the first instance, so it is highly likely that the court’s judgments will be subject to cassation complaints filed with the Supreme Administrative Court.
We recommend paying increased attention to the preparation of adequate documentation on inter-company services provided during the year. The documentation should mainly reflect the substance of provided services and include details on how transfer prices were determined.