The activity of the financial administration in the context of transfer pricing audits

In recent years, there has been an increased amount of interest on the part of the tax administration in the area of transfer pricing. The intensity of audits has been increasing practically continuously since 2014, when the obligation was implemented to complete a separate supplement concerning transfer pricing in the context of corporate income tax returns.

The goal of transfer pricing or, more precisely, conducted audits, is to prevent profit spillover and tax evasion. Incorrect setting of transfer pricing between related entities may result in an unexpected tax audit with subsequent tax assessment, including relevant penalties. In the context of prevention, it is therefore advisable to devote the appropriate attention to the setting of transfer pricing, and in an ideal case to have at one’s disposal processed documentation on transfer pricing. During a tax audit, the tax administrator scrutinizes individual transactions between related entities and the manner in which the arm’s-length principle has been applied. In the event that the price of the realized transaction differs from the market value, the company has to justify the discrepancy under the burden of proof, otherwise the tax administrator may levy the appropriate amount of tax to the entity that has unduly reduced it.

On the basis of statistics which the financial authority has made public, it is clear that not all companies devote adequate attention to this area. In 2020, income tax assessment amounting to CZK 1.4 bn was levied and the tax base increased by almost CZK 7.9 bn.

Zdroj: https://www.mfcr.cz/cs/aktualne/tiskove-zpravy/2021/financni-sprava-domerila-v-lonskem-roce-42033

At the same time, we would like to point out that following the issuance of the instruction on transfer pricing in the area of financial transaction, which we mentioned in our article of 18.02.2021, the GFD issued an unofficial translation into Czech in August this year.