The GFŘ instruction is effective 1 January 2013.
According to the GFŘ, the aims of the instruction are:
- To provide for uniform application of the transfer pricing rules in evaluating services with a low value adding factor
- To reduce administrative demands on taxpayers when supporting the correctness of transfer prices set for these services
Low value adding services
The GFŘ instruction is based generally on the European Commission’s 2011 Communication containing the JTPF (Joint Transfer Pricing Forum) report—Guidelines on low value adding intra-group services report [PDF 88 KB]
Low value adding services are those that do not comprise the principal business of the entities, that involve routine functions, and that do not constitute a substantial cost or revenue for the parties involved.
Under the GFŘ instruction, these services must not exceed 10% of the provider’s turnover, or 20% of the recipient’s operating expenses and, at the same time, are not to exceed CZK 50 million. These include, for instance, services of an administrative, technical, financial, consulting or commercial nature which serve the group of enterprises to support their main business activity.
In reviewing low value adding intra-group services, tax administrators need to consider:
- Whether the provision of the services was substantiated
- What was the benefit of the services for the recipient
- What method was used to set the price
- What costs enter into the cost base for the cost-plus method
In applying the cost-plus method, tax administrators need to regard as arm’s length mark-ups of 3%–7% of the cost.
If the taxpayer sufficiently explains how the arm’s length price was determined, the tax administrator will not request full-scope transfer pricing documentation as per Instruction D-334 of the Ministry of Finance. The documentation, thus, would not need to include the sections recommended by the GFŘ Instruction—such as functional and risk analysis, comparative analysis for the cost-plus method and justification of the mark-up amount, market analysis, and general information on the group.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services group in the Czech Republic: