The case identifying information is: No. 1 Afs 99/2012-52 (13 March 2013)
The taxpayer filed two consecutive “additional” (amended) tax returns for 2007.
- In the first additional tax return, the taxpayer increased its tax base and the amount of tax based on incorrectly determined transfer prices, and declared a loss on intra-group transactions.
- Two years later (after a change of management), the taxpayer filed a second additional tax return, disclaiming the previous additional tax return and reducing the tax liability to the amount reported on the originally filed regular tax return.
On audit, the tax administrator, and subsequently the Regional Court of Justice in Hradec Králové, concluded that the taxpayer had failed to satisfy the burden of proof that the transfer prices in 2007 between the taxpayer and its parent company were at arm’s length.
The Supreme Administrative Court reiterated its position that, when the tax authority challenges the correct amount of transfer prices within a tax audit, the burden of proof is primarily on the tax administrator, and that the tax administrator must:
- Ascertain the actual transfer price
- Determine the “reference price” (i.e., the arm’s length price) and quantify the difference
- Provide the taxpayer an opportunity (1) to express its position concerning the difference ascertained, and (2) to provide an explanation or to produce additional evidence
However, as the appellate court noted, the taxpayer itself revised or, more precisely, disclaimed its assertion in the first additional tax return. In a situation like this case, the Supreme Administrative Court found that the burden of proof is shifted to the taxpayer.
The Supreme Administrative Court also addressed the application of the cost-plus pricing method, and denied that the parent company could reflect its loss on the sale of final products in the cost of raw materials supplied.
The court explicitly allowed the use of the profit split method for distribution of profits between the parent and the subsidiary.
While the tax authority had refused to accept an expert opinion, the court concluded that the auditor’s opinion on the report of taxpayer relationships could not be considered to be evidence of an arm’s length price.
The case shows that when two subsequent tax returns are filed, with the latter revising the former, the taxpayer can find itself rather at a disadvantage in terms of the burden of proof in transfer pricing proceedings.
Although the taxpayer’s position in terms of the burden of proof would not change regarding additional tax returns, it appears that the transfer of the burden of proof may, in certain cases, be applied as regards the first tax return.
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