Transfer pricing rules have been implemented in Slovak legislation before 2001; however, it has become a hot topic in Slovakia only during past years. Since January 1st, 2015 obligation to keep transfer pricing documentation has applied 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. This has caused an increased interest in the topic not only by entrepreneurs, but mainly by tax authorities conducting tax inspections.
Find below, more information about Transfer Pricing in Slovakia from Lea Balogová, Senior Transfer Pricing Specialist | Accace Slovakia, in a brand new interview for the taxlinked.net community.
Does Slovakia follow the transfer pricing methods outlined in the OECD guideline?
Yes, as a member of OECD and EU, Slovakia adheres to the OECD transfer pricing guidelines and to the EU Code of Conduct on Transfer Pricing documentation for associated enterprises. It means that any traditional or other transfer pricing methods in compliance with OECD guidelines can be used while the principle of the best method should apply. If appropriate, other methods may be used too.
Moreover, transfer pricing rules in Slovakia are also governed within Income tax act, Double tax treaties and Financial reporters (No. 14/1997, 20/1999, 3/2002 where OECD Transfer Pricing Guidelines from 1995 and 1997 were published in Slovak language; 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).
What should the transfer pricing documentation contain?
The documentation consists of a general part, which provides an overall picture of the related parties, and specific part, which contains information about the taxpayer and controlled transactions they are engaged in.
The type of the documentation can differ in terms of the minimum required scope, and therefore they can be either complete, basic (simplified) or abridges (extra simplified) documentations. Regardless the type, each documentation shall be prepared separately for each controlled transaction or for each group of aggregated controlled transactions and kept in the respective tax period.
Can documentation be submitted in other than Slovak language?
Transfer pricing documentation should be prepared in Slovak language. However, the Slovak tax authority may approve other language upon request.
What are the most common problems of Slovak subjects regarding transfer pricing documentations?
In general, transfer pricing documentations follow the scheme issued by the Ministry of Finance, but content-wise they are often missing some fundamental basics, such as comparison to unrelated parties. Furthermore, a company shall determine which category of business they belong to and seek subjects for comparison in their related field.
What are the penalties for non-compliance?
In Slovakia, the current penalty can soar up to 3.000 EUR for a breach of non-monetary obligation. Furthermore, the tax base may be adjusted, and additional obligations may be issued by the Slovak Tax authorities. The tax difference is subject to inspection up to 10 years, and therefore an increased attention is advised for the future to avoid penalties. Stricter penalties apply for international violation of the arm’s length principle as of January 1st, 2017. Taxpayers who intentionally increase their tax loss or decrease their tax base with Transfer Pricing will face doubled penalties, more precisely a penalty rate of 20% p.a. instead of 10%.
What are the most frequent transactions between related parties and what challenges do the parties face?
The most frequent transactions in Slovakia are usually the manufacturing, distribution and services provided between related parties. The main challenge in those transactions is the determination of the type of manufacturer or distributor, as which company operates as. Also, another challenge is to find the comparable companies in the market, which operates as same type of manufacturer or distributor.
Are there any trends observed recently?
The main trend in transfer pricing is that tax authorities do not look only if the price agreed between companies are in compliance with the arm’s length principle, but also if the transaction as whole is in compliance with the arm´s length principle. It means, that transaction and all condition of transaction should be determinate same as between independent companies (for example the type of payments, transfer of risk and so on).