The Supreme Administrative Court dismissed a taxpayer’s appeal from a November 2017 decision of the regional court in České Budějovice concerning an issue about the provision of services within a taxpayer group. The court agreed with the tax authority’s conclusions concerning the evidence (or more specifically, the lack of probative value of such evidence) supporting the pricing of the services.
In this case, the taxpayer failed to provide evidence to support the cost (price) of the specific services received. The taxpayer only provided a general description of the services. The taxpayer was neither able to allocate the time spent with regard to the services nor quantify the amount attributable to specific services of the total invoiced amount.
The high court agreed with the tax authority’s conclusions that the submitted documents lacked probative value because it was not clear who had prepared the documents or when they were prepared. The tax authority had specifically challenged, among other things, a year-on-year increase in the amount of remuneration paid for the service provider’s staff as not corresponding to the development in staff numbers or the time allegedly spent on the services.
As for transfer prices, the appellate court affirmed the unsuitability of using a simple allocation key (50% of costs) for the specific type of expenses. According to the tax authority, this did not reflect the relative performance of the taxpayer when compared to other divisions within the taxpayer group.
Because the taxpayer failed to satisfy its burden of proof and because the tax authority showed there were serious and justified doubts as to the reliability and completeness of the evidence submitted, the Supreme Administrative Court approved the additional assessment of tax, and using certain auxiliary tools (a database), the tax authority determined the usual (arm’s length) percentage of intra-group services as a proportion of turnover, resulting in the exclusion and denial of a major portion of the claimed tax-deductible expenses.
Two interesting facts in this case—from a transfer pricing perspective—are that the court (1) approved the use of turnover as a relevant criterion, and (2) did not find it to be unusual that the final comparable sample only included two companies.
Tax professionals note that effective documentation would have captured the substance of the services received, as well as support the manner of setting the transfer prices (based on mutually linked information and considerations). The continuing logic of the setup of intra-group relations is equally important.
In disputes with the tax authority, it is crucial not to underestimate the comparative analyses prepared by them using a database, and taxpayers need to examine closely what could be deficiencies in the tax authority’s process.
Read an October 2018 report prepared by the KPMG member firm in the Czech Republic
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