If compliance with Transfer Pricing (TP) rules is globally among the hottest themes in the realm of Tax Law, one thing is for sure: Transfer Pricing in Slovakia is even further. It could not be different, since the Slovak TP legislation applies the obligation to prepare the documentation not only to foreign related parties but to domestic related parties as well. Arguably, the need for specialized consulting in terms of TP, is becoming an urgent need for a CEO, CFO or a business owner.
Here comes an extra advantage for your enterprise, as long as you address a competent TP analyst: according to the Slovak TP law – unless facts and circumstances affecting the method of TP compliance change – a taxpayer may refer to information stated in documentation for the previous fiscal years. That means hitting two (or more) birds with one stone.
Now, let’s have a brief introduction to the actions a Slovak enterprise shall take, when it comes to TP compliance.
Any Slovakia-based enterprise is obliged to prove the method applied for setting the prices of controlled transactions (domestic or cross-border) between related parties and keep a relevant documentation justifying this method. Transfer Pricing documentation shall be prepared for each controlled transaction or for each group of aggregated controlled transactions. Slovakia is an OECD member, thus the Slovak TP rules established in the Income Tax Act are generally refer to the OECD Guidelines.
TRANSFER PRICING IN SLOVAKIA: Obliged entities and TP documentation types
Regarding enterprises with considerable size in Slovakia, there are three different types of Transfer Pricing documentation; the complete documentation, the basic documentation (simplified documentation) and the abridged one (extra-simplified documentation).
The following Slovak taxpayers qualiy for a complete documentation:
- Adopt the IFRS in bookkeeping and preparation of financial statements,
- Perform transactions with a related party registered at a state with which Slovakia has no Tax Information ExchangeAgreements ,
- Opt for an Advance Pricing Agreement (APA) or who claim a tax relief,
- Ask for secondary adjustments according to double tax treaties,
- Deducted in the tax period more than 300.000 € of tax loss from previous years or deducted in two consecutive years more than 400.000 € of tax loss from previous years
Required content of TP documentation is stipulated in Guidance MF/8288/2009-72 of the Slovak Ministry of Finance (as already said, TP rules generally conform with the OECD Guidelines).
The complete TP documentation consists of a Master file as well as a Local file (Country file).
The Master file includes information relating to the whole group. Basically, it provides an overall description of the MNE’s global business.
On the other hand, the Local file provides information about the Slovak entity (subsidiary or permanent establishment) and it contains disclosures of facts. Such facts are the corporate organization structure, management and administration information of the company, information regarding main competitors, intercompany transactions and application of the benefits test to intercompany services. What is more, a country file should include a transfer pricing study.
Small and mid-sized companies
Other companies – usually midsized ones – must keep basic documentation.
Enterprises which do not have to prepare financial statements under IFRS may keep the basic TP documentation. The basic TP file focuses on evidence proving compliance with the arm’s length principle for significant controlled transaction with foreign entities. Entities which do not perform any intra-group transactions with foreign companies are currently out of TP scope.
A third type of TP Documentation (‘abridge’) – a kind of even simpler documentation than the basic one –applies for domestic intra-group transactions. Attention: this rule applies unless the taxpayer is liable to keep complete documentation because of an APA (Advance Pricing Agreement), secondary adjustments, tax losses or tax relief.
Country-by-country reporting (CbCr)
As part of BEPS Action 13, the Slovak Republic has committed itself to impose a Country-by-Country Reporting requirement. This requirement refers to the ultimate parent entity of large multinational groups generating a consolidated annual turnover above 750.000.000 €. In a standard form, MNEs report annually to the tax authority of their state of residence some crucial information. In more detail, their global allocation of profit, taxes paid, borrowings, number of employees and certain indicators of economic activity are disclosed for the countries in which they do business.
The Slovak Republic follows the TP methods outlined in Chapter II of the OECD Guidelines, namely; the comparable uncontrolled price method; the cost-plus method; the resale price method; the profit split method; the transactional net margin method. A combination of methods is also acceptable and other methods are permitted if they comply with the arm’s length principle. Before the application of the TP method, two transactions have to be comparable in the first place. Finding comparable transactions can be a very delicate task as they do govern the procedure until the end. Of course, our multi-faceted experience can be of your aid here.
The taxpayer shall submit the ΤP file within 15 days from the delivery of the Tax Authority’s request. Such request may be sent no earlier than on the first day following the deadline for tax return filing. In other words, taxpayers shall not deliver contemporaneous transfer pricing documentation with the annual corporate tax return. Given the little time of notice (15 days), we highly recommend the preparation of the TP file by then.
Concerning the possibilities of undergoing a tax audit, transactions having to do with management fees, interest, technical consulting and royalties, constitute an area of relatively straightforward challenge. Therefore, full TP studies on these matters are a must. Trusted TP studies assure TP compliance, mitigate potential risks and avoid any unwanted implications. A case by case analysis and an up-to-date benchmarking study can be conducted by www.transferpricing.com.cy upon request. We retrieve benchmarking data from online databases (such as Thompson Reuters, Amadeus, Compustat, Orbis) and other globally credible sources.
What about Advance Pricing Agreements (APAs)?
According to Section 18(4) of the Slovak Income Tax Act, taxpayers in Slovakia can apply for an Advance Pricing Agreement (APA). Taxpayers submit such an application at least 60 days before the beginning of the respective tax period. Upon discussion with the Tax Authority, this application may provide a beforehand approval of a particular method of Transfer Pricing. If approved, the APA is effective for a maximum of five tax periods. A filing fee of 10.000 € applies for unilateral APAs and one of 30.000 € for bilateral and multilateral APAs.
For any type of non-compliance with the TP documentation law, the auditor can impose a penalty up to 3.000 €. During the tax inspection, tax base may be adjusted and additional tax may be levied by Slovak tax authorities. This incurs if the audit revealed that the transactions with related parties resulted in reduction of the tax base. More precisely the Slovak tax authority can impose a penalty of 20% or three times the base interest rate of the ECB (whichever is higher) on the sums equal to differences in the newly determined tax liability of the taxpayer. What is more, a tax inspection can occur within even a ten-year period after the end of the year from the obligation to submit a tax return.
But even if a tax inspection is on the go, we can be of aid. Particularly, there is an option to submit a supplementary tax return within 15 days from the tax audit beginning. This option allows taxpayers to reduce the penalty at 7% or twice the ECB base interest rate per year.
Provision of Transfer Pricing Services
Complying with TP regulation in Slovakia could emerge with the preparation of a preliminary study. Such a study contributes to assess the intragroup margins in the provision of products or services. A competent TP analyst may use benchmarking data from reliable resources, to facilitate managerial decisions around the profit margins.
We should mention that in Slovakia the best practice followed is conducting a fresh benchmarking search every year.
The first tax audits – focused solely on TP issues – have already commenced. This fact connotes that TP compliance constitutes a need that cannot be obviated in Slovakia. Tax authorities are more and more familiar with TP issues and the inspections are more circumstantial and efficient. For instance, the tax authorities are preparing their own benchmark studies for cross-checking purposes. Moreover, industry experts deem that tax audits regarding TP law will increase in the following years (i.e. 2019 and 2020). Also note that Slovakia refreshed its penalty system. Therefore, a new group of TP-related penalties can crucially harm any enterprise which does not abide by the TP legislation.
From the question whether a company falls into the scope of TP rules and a full TP study, until the preparation for an APA agreement, the strict legal framework, the devotion of the Slovak Tax Authorities as well as the occupational hazard from non-compliance, render the provision of specialized TP services absolutely necessary.