Transfer prices in the Financial Administration's crosshairs
In recent years, the Tax Administration has repeatedly indicated that it intends to continue tax audits focused on transfer pricing, in which it has become increasingly effective and successful. This is not the only reason why transfer pricing is still a topical issue that should be recalled on a regular basis.
Groups of companies linked by property or personnel should bear in mind that they must observe a seemingly simple rule when dealing with each other, namely that they must charge the prices at which they would provide the same goods or services to independent persons, i.e., in simple terms, market prices. Transfer prices can therefore be understood as prices applied to transactions between related parties and, in assessing compliance with the transfer pricing rules, the tax authorities apply the arm's length principle, the application of which is generally based on a comparison of the terms of the transaction between related parties with those of transactions between independent undertakings.
Non-compliance with arm's length transfer pricing may lead to a tax assessment. The difference between the prices charged to the independent entities and to the group companies then serves as the basis for the tax assessment. For tax optimisation, prices can be both reduced and increased for tax purposes, but in both cases the difference from the market price is used to determine the basis for the assessment. It should be noted that the tax assessment does not only apply to international transactions, but the same rules also apply to relations between Czech companies, which may also be subject to tax.
It is clear that market prices are a rather broad concept for some services or goods, or that some transactions are so unique that it is difficult to determine the market price. Tax administrations around the world have been dealing with this issue for a long time and there are very large databases of prices which make their work easier. In terms of preventing disputes with the tax authorities, it is advisable to have documentation on transfer pricing between related parties.
Moreover, transfer pricing often does not deal with whether the companies in the group sold, for example, machine parts to each other at the normal market price, but the problem is the attempt to optimise tax by providing marketing and similar services to each other or by reselling intangible assets. This is illustrated by the statement of the Tax Administration in a press release of March 2024 : "Recently, there have been many cases where intangible assets such as trademarks, trade names or software products are used to take profits out of the Czech Republic. These are sold abroad at the lowest or even zero price and then the original Czech owner is charged high licensing fees for their use,"
Although the issue of transfer pricing applies to all types of transactions, it is clear from the Financial Administration's press release what the Czech tax authorities are currently focusing on. It should be noted that the obligation to observe the market price also applies to intercompany loans. The interest rate that would typically be charged by a bank should be negotiated. The only exception is parent company loans to a subsidiary, which may be interest-free. However, interest above the normal market level must not be used, which could be considered as illegal tax optimisation and lead to a tax assessment.
The institution of transfer pricing is therefore, in simple terms, a set of rules that allow tax administrations around the world to combat tax optimisation in transactions within a group of interconnected companies. This area is also important for companies because transfer pricing can be used to influence the profit or loss of individual companies in a group and thus the amount of tax payable in a particular country, or to purposely prevent a loss for one of the companies in the group. As mentioned above, transfer pricing rules also apply to domestic transactions.