SAC on proving intra-group services
In November 2017, the Regional court in České Budějovice ruled against a taxpayer in a dispute concerning the provision of services within a group. The court agreed with the tax administrator’s conclusions as to the lack of probative value of the evidence supporting the price of the services. The taxpayer then filed a cassation complaint with the Supreme Administrative Court, which recently dismissed the complaint as groundless.
The SAC pointed out, among other things, that the more difficult it is to verify the costs incurred by taxpayers for services, the more emphasis is put on taxpayers conclusively proving them. In the case in question, the taxpayer failed to do so: to support the specific cost (price) of individual services received, the taxpayer only provided a general description of the services. The taxpayer was neither able to allocate the time spent for individual services nor to quantify the amount attributable to specific services of the total invoiced amount.
The SAC agreed with the tax administrator’s conclusions: the submitted documents’ lack of probative value is due to the fact that it was not clear who had prepared them and when; as for the calculations, the court as well as the tax administrator challenged, among other things, a year-on-year increase in the remuneration of the service provider’s staff not corresponding to the development in staff numbers or the time supposedly spent on the services. As for transfer prices, the SAC confirmed the unsuitability of using a simple allocation key (50% of costs) for the specific type of expenses. According to the tax administrator, the key did not reflect the relative performance of the taxpayer compared to other divisions of the group.
As the taxpayer failed to bear the burden of proof, and, at the same time, the tax administrator proved that there were serious and justified doubts as to the reliability and completeness of the evidence submitted, the SAC approved the tax administrator’s decision to assess additional tax using auxiliary tools. Using the Amadeus database, the tax administrator had determined the usual (arm’s-length) percentage of intra-group services as a proportion of turnover, resulting in the exclusion of a major portion of tax-deductible expenses. From the transfer pricing perspective, it is worth mentioning that the court in fact approved the use of turnover as a relevant criterion. Also interestingly, the SAC did not find it at all unusual that the final comparable sample only included two (!) companies.
In light of the presented case law, please note that documentation should capture the substance of the services received, as well as support the manner of setting the transfer prices, which should be based on mutually linked information and considerations. The continuing logic of the setup of intra-group relations is equally important. In disputes with tax administrators it is crucial not to underestimate the comparative analyses prepared by them using the Amadeus database, and to thoroughly look into their deficiencies in the process.