How to avoid transfer pricing risks

Today, we answer the question regarding risks for taxpayers, who perform significant transactions with related parties without a transfer pricing documentation (TPD), which is required by the Slovak legislation.

The first risk of not having any transfer pricing documentation is a fine of up to 3000 EUR, which can be imposed by the tax authority repeatedly.

Another, even bigger risk, is that during an audit by the tax authority, the taxpayer does not have at hand any documentation supporting the fact that the prices set for transactions with related parties are set in accordance with the arm´s length principle. Without any transfer pricing documentation, the tax authority has many possibilities to question these prices and impose an additional tax as well as a fine. Thus, we recommend to taxpayers having their transfer pricing documentation ready.

Our experience shows that transfer pricing documentation of good quality gives less space for questioning your prices, because the tax authority would need sophisticated and detailed arguments; therefore, the opportunity for imposing additional tax is decreased.

Transfer pricing documentation of good quality primarily describes well transactions with related parties and includes a thorough functional risk analysis and benchmark analysis. In case of an audit by a client without any benchmark analysis, the tax authority prepares its own benchmark analysis, but the price would be the median price. That usually means that the imposed additional tax is going to be certainly higher.

The tax authority is currently keenly checking TPD with a team of specialized and trained people. The tax authority may start a tax audit of cross-border transactions up to 10 years back. In case of a tax audit opened in 2018 for financial year 2007. If the taxpayer does not have transfer pricing documentation for previous years, it may be problematic to submit documents required by the tax authority. This problem may be caused by natural fluctuation of employees, by storage/non-storage of data etc.

From 1 January 2014, the tax authority may ask the taxpayer to submit their transfer pricing documentation within 15 days, without even starting a tax audit. Preparing TPD of good quality within such short time is very time-consuming and requires significant costs. Therefore, we recommend having your TPD ready before the tax authority asks for it or starts an audit.

If you would like to pose a question about transfer pricing documentation or request a price proposal, please, do not hesitate to contact us.

Watch our video with English subtitles: