The case reference information is: Nedávný rozsudek (1 Afs 101/2012 – 31 (23 January 2013))
Czech court decisions concerning the burden of proof typically in transfer pricing cases are typically viewed by tax professionals as being taxpayer-favorable. However, the January 2013 decision goes against this trend, and supports the transfer pricing assessment action of the tax authorities.
The case concerns a taxpayer engaged in a fish trading business. The tax authorities found that the taxpayer/company applied higher prices for supplies sold to unrelated parties when compared to prices that were charged to related (group) companies for sales of supplies.
The tax authorities compared the unit prices of goods sold to a Slovak subsidiary to those prices charged by the taxpayer to a cross-border sampling of customers (that were unrelated to the taxpayer and that had engaged in business transactions with the taxpayer and receive the same goods).
The tax authorities (1) determined the range of prices charged for transactions between independent parties, (2) calculated the difference between the prices of transactions with related parties and those with independent companies, and (3) asked the taxpayer to support this difference with appropriate documentation.
Taxpayer’s claim for lower pricing
The company claimed that it had applied a lower margin to transactions with its Slovak subsidiary due to fact that prices were generally lower in Slovakia. However, the tax authorities—and later, the Supreme Administrative Court—rejected this contention.
It was observed by the tax authorizes that the price level in Slovakia was similar to one in Hungary, where the taxpayer had sold goods to independent distributors-sales that were included in a comparison sample.
The credibility of the taxpayer’s explanations was further undermined by another finding by the tax authorities—that the margin on sales to the Slovak related party was approximately 2% whereas the margin applied to sales of the same goods to other, unrelated entities was almost 60%.
The taxpayer also argued that the Slovak subsidiary had purchased excess inventories (including fish of a lower quality with lower marketability). This allegation was not proved by the taxpayer before the court.
The Supreme Administrative Court agreed with the transfer pricing assessment made by the tax authorities in respect of the difference between the prices applied to independent distributors and the prices charged the Slovak subsidiary.
The Supreme Administrative Court examined the arm’s length pricing method used in this case, and stated that the preferred method is one that is based on the assumption that the products concerned are comparable (i.e., that the same product (commodity) is sold by the taxpayer to both related and unrelated parties).
The Supreme Administrative Court also stated that the conditions under which goods are resold by customers are not relevant (i.e., the price levels in individual markets to which products are distributed are not significant).
This decision once again confirms that it is essential for taxpayers to support their transfer prices with appropriate documentation, in particular when dealing with tax inspections and potential disputes with the tax authorities.
It has been observed that tax professionals in the Czech Republic are increasingly involved in transfer pricing inspections, often taking advantage of cross-border cooperation with other tax administrations. As a result, it may no longer be possible for taxpayers to rely on the fact that the tax authorities will accept mere statements as put forward by the taxpayer. If a company delivers the same products or services to customers both inside and outside the group in comparable volumes but at different prices, it is advisable to have appropriate supporting documentation.
For more information, contact a KPMG tax professional in the Czech Republic:
+420 222 123 602
Jana Pytelková Svobodová
+420 222 123 4
Contact a tax professional with KPMG's Global Transfer Pricing Services.