General transfer pricing rules have been implemented in Slovak legislation even before 2001, however, only in 2001 specific methods of application of arm´s length principle were introduced by Slovak Income Tax Act.
The obligation to keep the transfer pricing documentation became effective on 1 January 2009. Starting January 1st, 2015 this obligation applies not only to foreign related parties but to domestic related parties, as well. Pursuant to the Slovak tax legislation, all related parties are 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.
In the recent years the number of tax inspections on Transfer Pricing rapidly increased, that is why we recommend to focus on this area and especially on preparation of the proper Transfer Pricing documentation. In this regard, our experts have prepared an useful “2017 Transfer Pricing Overview for Slovakia (PDF)”, that you may also read in the chapters below:
- Income Tax Act No. 595/2003 Coll. (Sections 17/5, 17/6, 17/7, 18)
- Double Tax Treaties
- Financial Reporters No. 14/1997, 20/1999, 3/2002 where OECD Transfer Pricing Guidelines from 1995 and 1997 were published in Slovak language
- Financial Reporters No. 1/2009, 8/2014, 5/2015, 7/2016 where administrative guidance of the Slovak Ministry of Finance on content of the Transfer Pricing documentation were published
As an OECD Member State and an EU Member State, Slovakia adheres to the OECD Transfer Pricing Guidelines and to the EU Code of Conduct on Transfer Pricing documentation for associated enterprises.
Arm's length principle
The arm’s length principle is based on a comparison of the terms which were agreed in any business or financial transactions between related parties and the terms which would have been agreed between unrelated parties in similar business or financial transactions, in comparable circumstances.
The review of comparability of the terms is made by confronting in particular the businesses conducted by the parties, including, but not limited to their production, assembly works, research and development, purchase and sale, the scope of their business risks, the characteristics of the compared property or the service, the terms agreed between the parties to the transaction, the economic environment in the marketplace, and the business strategy.
The terms shall be considered comparable if there is no difference at all or if only minor adjustments would compensate such a difference.
If there is a difference between the prices agreed in transactions of related parties, and the prices applied between unrelated parties in comparable business transactions, as long as such difference results in a reduction of the tax base or increase of tax loss. The related party shall include that difference to its income tax base.
The term “related party” means – close persons or persons with economic, personal or other ties.
By “close persons” should be understood close persons pursuant to Civil Code.
By “economic or personal tie” should be understood:
- the person’s interest in the property, control or management of other person, or
- the mutual relation between persons who are under control or management of the same person or his/her close person, or
- where such person or his/her close person has direct or indirect ownership interest
Interest in the “property” or “control” means more than a 25% direct or indirect interest or indirect derived interest in the registered capital or in voting rights; where the indirect derived interest exceeds 50%, all persons used in the calculation thereof shall be deemed to have economic ties irrespective of the actual amount of their interest.
The term “management” means the relationship between the members of the statutory bodies, the members of the supervisory bodies or the members of some other similar bodies of a legal entity to that legal entity.
The term “other ties” means a legal relationship or any other similar relationship established particularly for the purposes of tax base decrease or tax loss increase.
The Transfer Pricing documentation represents a set of information, data and facts which demonstrate and explain the method of taxpayer’s price formation in controlled transactions.
Transfer Pricing documentation in general consists of general and of specific part. General part contains a set of information giving an overall picture of the group of related parties, while the specific part contains specific information related to the taxpayer and to the controlled transactions in which the taxpayer is engaged.
Transfer Pricing documentation shall be prepared for each controlled transaction separately or for each group of aggregated controlled transactions.
The documentation shall be prepared in Slovak language, however, the tax authority may upon request agree with other language.
Transfer Pricing documentation shall be kept for the respective tax period. If no new facts occur – facts that would affect the valuation method for controlled transactions, when preparing documentation for the next period – a taxpayer may refer to information stated in documentation for the previous taxation periods.
The taxpayer shall submit the Transfer Pricing documentation within 15 days from delivery of the tax administration’s or financial directorate’s request. Such request may be for the Transfer Pricing documentation for the relevant tax period, sent no earlier than on the first day following expiry of the period for tax return filing for that particular tax period. Due to short 15 day period it is recommended having the documentation prepared in advance.
There are three different types of Transfer Pricing documentation in terms of the required minimum scope:
- complete documentation
- basic documentation (simplified documentation)
- abridged documentation (extra simplified documentation)
Obligation to keep the documentation
Complete documentation has to be kept by the following Slovak taxpayers:
- taxpayers who follow for statutory purposes the IFRS in booking or closing of booking
- taxpayers who perform business with a related party seated in a state which Slovakia has no double tax treaty or international tax information exchange agreement with
- taxpayers who opt for an APA (Advance Pricing Agreement)
- taxpayers who asks for secondary adjustments according to double tax treaties
- taxpayers who deducted in the tax period more than 300.000 EUR of tax loss from previous years
- taxpayers who deducted in two consecutive years more than 400.000 EUR of tax loss from previous years
- taxpayers who claim a tax relief
Other taxpayers are obliged to keep basic documentation except for individuals or so-called micro accounting entities that are allowed to keep only abridged documentation. Also some Slovak public entities may qualify for keeping of abridged documentation.
Controlled transactions that are not material for the taxpayer may be documented only with an abridged documentation (extra simplified documentation). Transactions with value of more than 1 million EUR has to be treated as material.
With respect to domestic controlled transactions generally applies that these transactions are subject to abridge documentation. This applies unless the taxpayer is obliged to keep complete documentation because of APA (Advance Pricing Agreement), secondary adjustments, tax losses or tax relief.
In that respect it has to be mentioned that simplified types of documentation may in the listed cases be sufficient from administrative point of view but will not help a taxpayer to prove the application of the arm´s length principle. Therefore, any material transaction from the perspective taxpayer (even if of value below 1 million EUR or even if it is a domestic controlled transaction) is recommended to be followed by functional and risk analysis and benchmarking.
Any traditional and other Transfer Pricing methods according to OECD Transfer Pricing Guidelines can be used while the principle of the best method shall be applied. Also combination of more methods is possible if necessary. If appropriate, other methods may be used by Slovak tax payers, too.
Methods based on comparison of prices
- Comparable uncontrolled price method – used mainly for transactions with tangible and intangible assets and financial transactions
- Resale minus method – used mainly for distributors of products
- Cost plus method – used mainly for transactions related to manufacturing and sale of semi finished products/ finished products which do not include high added value
Methods based on comparison of profits
- Net trading margin method – mainly for comparable transactions that significantly differs in functions
- Profit split method – suitable for very integrated transactions when the parties contribute in a unique way or they possess valuable tangible asset
Advance Pricing Agreements
Taxpayers in Slovakia can ask the tax authority for an Advance Pricing Agreement (APA) – an approval of a particular method of Transfer Pricing – at least 60 days before the beginning of the tax period during which the approved method shall apply. By this way they can approve the chosen methodology and avoid potential disputes as far as the method is concerned. Only the method can be approved with the APA, not the used transfer prices itself.
The tax administration shall issue a decision on the approval of the valuation method valid for no more than five tax periods. Extension for next five years is possible if the taxpayer demonstrates that no change has occurred in the conditions upon which the decision was issued.
The fee for applying for the APA will – as of January 1st, 2017 – no longer depend on the value of the business case, but is to be set as follows:
- an unilateral APA: 10.000 EUR
- a bilateral and multilateral APA: 30.000 EUR
For non-compliance with the Transfer Pricing documentation obligations a penalty up to 3.000 EUR for a breach of a non-monetary obligation can be levied. Moreover, tax base may be adjusted and additional tax may be levied by Slovak tax authorities during the tax inspection.
The tax authority can assess a tax difference up to 10 years after the end of year, in which the obligation to submit a tax return has arisen, i.e. tax return can be a subject of tax inspection during 11 years.
As of January 1st, 2017 stricter penalties will apply for intentional breach of the arm´s length principle. Doubled penalties will apply to taxpayers who decrease their tax base or increase their tax loss intentionally with the help of Transfer Pricing. Instead of penalty rate 10% p.a. from the tax difference a penalty rate of 20% p.a. shall be used.