Czech Republic: Transfer pricing issues remain under scrutiny

Tax inspections focusing on transfer price issues between related parties.

Tax inspections focusing on transfer price issues between related parties.

The tax administration has published information about tax inspections focusing on transfer price issues between related parties.

During 2020, tax administration conducted 249 transfer pricing inspections, and assessed additional corporate income tax of CZK 1.4 billion (based on increases of taxable income or decreases of tax losses of approximately CZK 7.9 billion). Thus, when compared to the amounts for 2019, the additionally assessed tax for 2020 increased almost four times.

Recent experience reveals that the tax administration has toughed up its procedures. In the last period, the tax administration mostly completed only inspections that it began before the pandemic, but the tax administration’s inspections have become more active recently, with an increasing number of new transfer pricing inspections initiated.

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

Based on information published for 2014-2020, the tax administration conducted a total of 2,431 tax inspections, after 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 following table reveals that the results have fluctuated over time (perhaps depending on the state of completion of separate tax inspections), but 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: Ministry of Finance

KPMG observation

Considering the budget’s deficit, tax professionals do not expect that the number of inspections focusing on transfer pricing will decrease in the upcoming years but, instead, the opposite could be more likely. For multinational corporate group entities, it will be vital to pay proper attention to this issue and to establish transfer prices correctly and to keep proper formal documentation of the pricing method. A proactive approach may also be useful—for instance, consideration for an advance pricing agreement (APA) that would provide a substantial level of legal certainty on selected transfer pricing methods, usually for three subsequent tax periods.

Read an August 2021 report prepared by the KPMG member firm in the Czech Republic


For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in the Czech Republic:

Petr Bruštík | +420 222 123 556 | pbrustik@kpmg.cz

 

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