The latest challenges for tax administration

The battle against tax evasion continues, and is being fought determinedly through new measures introduced on all fronts. As usual, the costs (hopefully tax-deductible) will be borne by a majority of “innocent” taxpayers. The measures are based on BEPS (Base Erosion and Profit Shifting) reports, the Communication of the European Commission regarding transfer-pricing and other similar steps aimed at preventing illegal and “nearly” legal tax optimisation that takes advantage of the inconsistent, obsolete and imperfect nature of tax laws, whether national, EU or international (OECD treaties and their interpretations). In respect of income taxes, the planned measures include the introduction of a new enclosure submitted with the corporate income tax return.This attachment will apply to returns filed for 2014. Containing the identification of related-party transactions, the enclosure will enable the tax authorities to obtain information concerning related-party transactions in time (so far this information has only been acquired during a tax audit). This measure has been introduced to quickly identify risk areas/transactions and to allow a fast and efficient response in the form of a tax audit of such transactions. Companies that meet at least one of the criteria for a mandatory audit (i.e. with assets exceeding CZK 40 million, a turnover over CZK 80 million or more than 50 employees) will be mandatorily required to fill in the enclosure. Typically, this will involve the identification of transactions with foreign related parties. Nevertheless, where a company is loss-making or the recipient of investment incentives, it should also report transactions with Czech related parties. The information disclosed in the enclosure should include identification of the related party, the country in which it is registered, the identification of the transaction in terms of type and value, and a list of receivables and liabilities. In this context, we recommend thorough preparation for inquiries raised by the tax administration concerning the justification of prices applied to related-party transactions. In major transactions, it is advisable to have updated transfer-pricing documentation available to the extent required by the tax authorities. We will keep you informed about other measures prepared by the tax administration.