BEPS action plans implementation to the Czech Tax legislation
The Ministry of Finance has published a document on the 22nd of April 2016, as a reaction to the European directive ATAD to open the discussion about the implementation of the BEPS action plan into Czech legislation. Some of the action plans are mentioned below, which either have been implemented or are still waiting for implementation into Czech legislation.
Action 2: Neutralising the effects of hybrid mismatch arrangements
There are a lot of qualification conflicts, when a different assessment of a taxable entity participating on cross-border transactions or a different assessment of substance of the transaction results in double non-taxation. For example, a payment, which is admitted like a tax eligible interest in one contracting state, while it is exempt from tax as a paid out dividend in another state.
Since 1.5.2016, there is a rule in the Czech Republic that the parent company cannot apply the exemption of received dividends in the case that the dividends can reduce the taxable amount. This limited condition will be spread to the sale of shares in the parent company as a consequence of the amendment’s proposal.
Action 3: Designing effective controlled foreign company (CFC) rules
CFC rules say that the profits of a daughter company established in the country with a lower level of taxation could be taxed by the parent company, as if it had been the profits of this parent company.
There is no right for exemption from income tax from the dividends and income from the transfer of incoming shares by the parent company, if the parent company:
- is established in a country out of the EU, which is not contracted about limiting double taxation
- is subject to income tax, whose tax rate is lower than 12 %
It is enough for this limitation to apply if the parent company has 10 % of the subsidiaries share.
Action 4: Limiting base erosion involving interest deductions
According to the national measures of the majority of European states, the interest deductibility is limited only to interest paid to the related party, while the limit of this exemption is set with regard to the ratio between the debt and one’s own capital. The limit is set to the ratio of 4:1 in the Czech Republic.
The rule proposed by the OECD would be applied to the interest paid to the unrelated party. The tax eligibility limit should be set on the ground of the ratio of the interest to EBITDA (10 – 30%). The new rule would be applied to a higher number of companies. Its exercise should be influenced not only by the amount of the debt, but also by the changes in the interest rate.
In time of economic growth, which the Czech Republic is now going through, this is a question on what influence should this rule have on the willingness of companies to invest into new projects.
Action 5: Countering harmful tax practices more effectively
The provision regarding the automatic exchange of tax resolutions and assessments of transfer pricing was included into the law on the national cooperation for the purpose of limiting the harmful influence of the unilateral assessment of transfer pricing.
Action 8-10: Adaptation of transfer pricing to economic activities
The Czech Republic has a main principle of market distance, which is anchored in the Act on Income Tax and interprets the basic standards through methodological guidelines.
Since 1.1.2015 (for first time for the year 2014), there is an obligation to fill out an annex about a transaction with related party together with a tax statement. The Czech tax authority uses the data from this annex to choose which risky subjects to control. One of the risk criteria is the amount of the licence fees paid out of the EU.
The Czech Republic has no provision in its tax rules at this time, which can stop the movement of assets (intellectual property or patents) into countries with a more profitable tax system. The Toll Manufacturer or Contract Manufacturer became Full Fledged Manufacturer in the last few years, who invested into research and development.
It is a question, if the exit taxation should be applied during the change of function profile, when parts of the product’s chain are moved into the countries with a lower tax rate. The motivation for this movement could be not to the lower tax rate, but to save on the product’s costs because of cheaper labour. The issue of the movement of valuable assets and their taxation abroad, in considering of growing wages and failing labour, might become significant in the Czech Republic.
The same rule is often used during tax controls on the content level, not on the level anchored in the tax system. The transactions between the controlled entities are verified, where the economic activities are really carried out and not during the contractual arrangement between the parties of the transaction.
Action 13: Country-by-country reporting
The directive, DAC4 implementation, will be realised with the amendment about international cooperation during tax administration, which will be valid from the 5th of June 2017.
The obligation to submit a notification to the tax administration, which contains the report according to the countries, will apply to the multinational group with their consolidated turnover of more than 750 million EUR, for the first time for the financial year starting 1.1.2016. That period for the submission will be 12 months from the end of the financial year.
The obligation of the submission will apply to:
- the highest parent company
- the representative member-company
- the Czech member-company, and only in case when the public system of the automatic exchange of information fails
The notification will be submitted in a standardised form, which will have 3 parts and will contain:
- the summary information about a group in relation to each country
- the income
- the results before taxation
- the paid tax
- the current tax
- the registered equity
- the accumulated result
- the number of employees
- the assets value
- the information about the member-entities and their activities
- the specification of the data source
For any breaches of the submission of the obligation, the highest parent company will pay a penalty of 3 000 000 CZK. The notification submitted by the Czech entities will be the subject of automatic exchange of information.
Action 14: Making dispute resolution mechanism more efective
About 20 cases were solved according to the contract of double-taxation or according to the Arbitration Convention in 2015. No case was provided to the Advisory Commission.
The Czech Republic has concluded 86 valid contracts about the avoidance of double-taxation up to 24.8.2016 and has been discussing the existing contracts to be able to comply with the requirements. However, none of these existing contracts includes Article 25(5) about the Arbitration, which would guarantee the value reaching the avoidance of double-taxation in case of transfer pricing adjustment. The Czech Republic will observe the experience with the arbitration, it does not count on its implementation.
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