New rules for resolving international tax disputes in the European Union

26.11.2019

In July, a government bill on the procedure for resolving international tax disputes was submitted to the Chamber of Deputies.

That this is an important document can be seen by the fact that the published Information on the activities of the Financial Administration, according to which in 2018 the corporate income tax was assessed at CZK 1,174,152,000 more than in 2017. One of the most frequent audit findings was the incorrect determination of the transfer price among companies belonging to a multinational group of related persons. There was also an increase in the number of cases in which the management services provided by a foreign enterprise in the Czech Republic resulted in the creation and taxation of profits from the permanent establishment of this foreign enterprise.

According to the international Arbitration Convention of 1990, any of the companies affected by the price or profit adjustment made by the Financial Administration may apply within three years of the date on which it became aware of the opening of the international negotiation procedure. The result of the conciliation procedure should be to achieve compliance with the foreign tax jurisdiction when dealing with a case whose assessment affects the level of taxation of the foreign related enterprise.

In 2018, the Financial Administration dealt with 28 conciliation proceedings, mostly caused by foreign companies. Czech companies rarely asked to open a conciliation procedure. The reason was the absence of a legal regulation that would clearly set out the requirements of the application and the deadlines for settlement of the dispute. The new legislation offers the institute of tax arbitration if the dispute is not resolved within two years through a conciliation procedure – all under the promise of simplified procedures and a lower administrative burden for domestic enterprises classified as small and medium-sized entities.

The bill was submitted on the basis of the Czech Republic’s commitment to the European Union to transpose the so-called DRM Directive of 10 October 2017 on tax dispute resolution mechanisms in the EU with effect from 30 June 2019 at the latest. The new rules taken from the Directive should apply to cases concerning the tax period beginning on or after 1 January 2018.

We will monitor the approval of the new law and are ready to provide you with assistance in resolving an international tax dispute.




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