Binding ruling for transfer pricing
Transfer pricing has in recent years become one of the most discussed topics in the area of direct tax both in the Czech Republic, and at the EU level and in other OECD member countries. The Czech Tax Authorities have expressed particular interest in the issue of transfer pricing and in 2014 announced that upon conducting tax inspections they shall focus on transactions between associated enterprises. This endeavour to monitor transactions between associated enterprises more closely led to a number of new obligations, articles, and guidelines issued by the General Financial Directorate (GFD).
Their most recent act relating to transfer pricing was Guidance D – 32 on how to carry out binding rulings of (i) how the price was agreed on between the associated enterprises, and (ii) the method of determining the tax base from activities conducted through a permanent establishment of a non-resident taxable person. This Guidance is to replace Guidance D – 333 from 2010. As opposed to the older Guidance, this new one provides for binding rulings on the method of determining the tax base of a permanent establishment of a taxable non-resident, provided for in Article 38 of the Income Tax Act and in force since January 1st, 2018.
With Guidance D – 32 the Tax Authorities are aiming to list all the requisites that any request for a binding assessment must have, and by so doing to ensure that they are able to issue a decision based on that information.
The binding ruling shall be issued by the locally relevant Tax Office, or by the GFD at the request of the tax subject. The binding ruling is supposed to be a confirmation of the Tax Authorities that the amount of the transaction between the associated enterprises was set correctly, and that the assessment method for determining the tax base of a permanent establishment of a taxable non-resident was adequate. An affirmative ruling means that the tax subject gains legal certainty for defending the transfer prices from that time period in case of their being the subject of a tax inspection; the authorities should see the prices (or rather the tax base) set under these conditions as standard. The binding ruling can be applicable for as long as three years, and the time period begins in the taxable period stated in the ruling.
On the other hand, the tax authorities will view the binding ruling as effective only if the reality upon the inspection is reflected in the information based on which the ruling was decided. If the tax authorities prove that the conditions stated in the application by the tax subject do not reflect the reality, the ruling cannot be applied.
All binding rulings issued by the tax administration are subject to an administrative fee of CZK 10.000. However, this fee may increase with respect to the amount of facts and realities that must be assessed.
The binding ruling serves as a tool to increase legal certainty especially for transactions which are unique or specific in nature (e.g. the amount). Before we conclude, we must point out that the binding ruling does not serve to substitute documentation for transfer pricing, or a benchmark study for tax base assessment.
For more detailed information please see Guidance D – 32 on the GFD’s website or contact our firm directly.