The Supreme Administrative Court (SAC) has issued a judgment annulling the decision of a regional court confirming additional tax assessment on grounds of insufficient margin for a taxpayer – a contract manufacturer, which was made on the basis of a reference price analysis prepared by the tax administrator, but in the view of the SAC an incorrect and unreviewable one. 

Although the decision contains several passages addressing substantive issues, we consider the appeal of the SAC to procedural issues, which may remain hidden behind some of the commentary on substantive issues, equally or perhaps even more fundamental. 

As a result, the SAC has again emphasized that in the case of transfer pricing, i.e. especially when proving the reference price, the burden of proof is always and only on the side of the tax administrator, who is obliged to specifically and factually, based on proven facts, challenge the analysis prepared and applied by the taxpayer. Only if it succeeds in doing so can it proceed to the next stage, namely the preparation of its own analysis of the reference price, where it is obliged to obtain all the evidence needed to correctly establish the referential uncontrolled price, but even with this thoroughly substantiated and sufficiently reasoned analysis, it must give the taxpayer the opportunity to comment on and challenge or explain the differences that have arisen.

The SAC comments on the issues of the selection of companies with negative EBIT in the sample, insufficient reasoning for the choice of the method, the method of selecting and processing the data in the sample, and it also comments on other issues both substantive and procedural. 

We will be happy to assist our clients in analysing transfer pricing settings in light of the above case law as well. In any case, the need for clients to prepare a detailed transfer pricing analysis, ideally with the help of an expert, is again confirmed. It is necessary to stand by such a thoroughly prepared analysis in a tax audit, to respond properly and promptly to all doubts and arguments of the tax administrator and not to leave factual arguments until the highest instances of tax proceedings.

Given the scope and nature of the comments, in the coming weeks we will prepare a more detailed analysis of the conclusions presented in the judgment in cooperation with the taxpayer, we will confront these conclusions with the positions of the tax administration, and we will be happy to provide a more detailed view of the impact this judgment will have on future transfer pricing practice in the Czech Republic.

If you have any questions regarding this issue, please do not hesitate to contact us. 

Author: Jiří Jakoubek, Zuzana Kalincová