New rules of procedure for tax disputes over transfer pricing
Authors: JUDr. Lukáš Duffek, Mgr. Martin Dolnák, Mgr. Simona Mlýnek Štursová
On the 15th of September, the new Act No. 335/2020 Coll., on International Cooperation in Resolving Tax Disputes in the European Union came into force. The Act primarily regulates international cooperation of the member states in resolving tax disputes regarding controversial questions under double taxation treaties and the convention on the elimination of double taxation in connection with the adjustment of profits of related parties (disputes over connected transactions between related parties – the issue of transfer pricing).
This type of tax dispute is usually resolved according to the Tax Code, unless provided otherwise by the new Act. The new Act also grants that tax disputes over transfer pricing can even lead to international arbitration, which is regulated in more detail in the Act.
The introduction of the new legislation is related to the Tax Administration’s increased activity in the area of transfer pricing control. In recent years, there has been a significant increase in the number of tax audits in transactions between related parties, especially those related to loss-making enterprises providing group services, and enterprises with limited functions.
Such transactions are evaluated for tax purposes in terms of whether they are set in compliance with the arm’s length principle, and if they are not, this may result in the reassessment of taxes, penalties or late charges. In case of companies that have received investment incentives, the incorrect setting of transfer pricing may even cause the company to lose the option to use these incentives.
According to established case law, in the sphere of transfer pricing, in case of tax audits the burden of proof lies primarily upon the tax administrator, who must determine the actual transfer price (market price) and calculate the difference. The administrator must then provide the taxpayer with an opportunity to comment on the determined difference, to provide an explanation and additional evidence.
In these situations, it is crucial to choose the right strategy of defense in tax proceedings and also to ensure that the tax administrator acts in compliance with the rules of procedure and does not infringe the procedural rights of the taxpayer protected by the Tax Code or case law.