A municipal court in Prague agreed with the Czech tax authorities that the amount of consideration received from a third party for marketing services rendered abroad was includible in the tax base for purposes of determining a local supply of goods and therefore was subject to value added tax (VAT) in the Czech Republic.
In this case, a Czech drug distributor sold drugs in the Czech Republic and Slovakia, and invoiced certain marketing services to the Swiss drug supplier. Due to price regulations in the Czech Republic, the purchase price of the drugs purchased from the Swiss supplier was greater than the sales price of the drugs in the Czech market.
During the course of a tax audit (that was focused on transfer pricing issues), the Czech drug distributor claimed that the marketing activities represented an inseparable part of the distribution of the drugs. During the course of an ensuing VAT tax audit, the tax authorities considered the marketing services to be an ancillary supply to the main supply (i.e., the sale of the drugs), and the tax authorities further considered that such marketing services were provided directly to the final buyers of drugs.
The municipal court observed that because of the drug price regulation, the Czech distributor could not demand payment of a price that included all the components (such as the marketing services). Therefore, the marketing activity was treated as having been reimbursed by the Swiss supplier (the third party). As such, the tax authorities reclassified the marketing services as being aligned with the place of supply in Switzerland and further that the consideration received for marketing services from the Swiss supplier for the drugs supplied in the Czech Republic was subject to the Czech VAT.
The municipal court also considered the entire business model was artificially created and that application of a more advantageous tax regime for part of the consideration was not appropriate.
Read an October 2020 report prepared by the KPMG member firm in Slovakia
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