Transfer pricing: what not to forget when calculating tax payable


If your business is part of a multinational enterprise group, you must realise that the financial administration uses financial information to select entities for review. If your business’s profitability indicators are lower in the long run than the statistical profitability ratios of the industry in which you are operating in the Czech Republic, this is assessed as a risk and as a reason for initiating a tax audit of transfer pricing. Keep this in mind not only when determining the tax due.

The financial administration does not consider profitability ratios set at earnings before interest, taxes, depreciation and amortisation (EBITDA) used by managers for business management purposes to be sufficiently accurate.

By way of example, I refer to a situation where the group has decided to invest in expanding the production capacities of a stable and long profitable enterprise. The investment was financed by an intragroup loan. According to the current opinion of the Czech financial administration, the group, as a carrier of the strategic decision, must guarantee compensation to the company, which, taking into account depreciation and interest, will allow net profitability that is customary for the sector, regardless of the actual start-up of new production capacities.

If you are funded for a long time by a group, I would point out that the financial administration announced in a press release its intention to more closely test the valuation of financial instruments. In addition to interest on loans, the annex of the tax return must include information on the bank guarantees and financial guarantees received and provided.

If the group provides a financial guarantee free of charge to your business, it is a taxable property benefit. If, on the other hand, your business gives the affiliate a trademark free of charge, you should make a corresponding adjustment to the tax base for the costs associated with an intangible asset.

In view of the above, before the General Meeting approves the financial statements, I recommend preparing a functional, risk and comparative analysis of your company’s profitability. This is the only way to determine whether your company was under an obligation to adjust the tax base on price fixing set out in the group.

However, compiling a comparative analysis of profitability does not have to be complicated. The source of industry benchmarking information is the ORBIS database (which is similar to the AMADAEUS database with extended use worldwide) also used by the Czech Financial Administration. In cooperation with a transfer pricing expert, you can analyse and, if necessary, adjust the amount of tax due before the end of June.

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