On 31 March 2021, the General Financial Directorate issued information on the effects of the Covid-19 pandemic on transfer prices (the “Information”) pursuant to recommendations of the OECD of December 2020 (the “OECD Guidance”). The General Financial Directorate notes that the OECD Guidance does not involve a special recommendation beyond the currently applicable Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “Guidelines”), it rather focuses on the application of the arm’s length principle in the context of the pandemic. Below, we summarise the opinion of the finance administration on certain issues which the General Financial Directorate discusses in more detail in its Information. Therefore, it can be assumed that the finance administration will proceed in line with the Information when examining the periods affected by the pandemic, although this does not constitute a change in the relating legislation. Together with the Information, the General Financial Directorate published the translation of the OECD Guidance into Czech.
We have discussed the recommendations by the OECD in transfer prices in the context of the Covid-19 pandemic in detail in the January article.
First of all, the General Financial Directorate emphasises the necessity to document the impact of the pandemic on business activities of local companies in periods affected by the pandemic, and it is necessary to separate other impacts affecting the activities of a company that do not relate to the pandemic. In other words, the statement itself that the pandemic (negatively) affected the business activities of a company is not sufficient, it is necessary to address individual impacts in detail.
A functional and risk analysis is an important aspect in an assessment of the impact of the pandemic on transfer prices. In this connection, it refers to “hazard risk” that none of the parties controls; which however affects various companies in a different manner, pursuant to the fact what risks the companies are able to manage. If there was no change in performed functions and risks taken before and after the pandemic, the General Financial Directorate sees no reason for a change in the approach to determining of transfer prices, only with the justification by the pandemic situation.
The General Financial Directorate attests that limited risk entities may suffer loss in the short-term pursuant to the materialisation of risks that such entity controls, concurrently it however refers to the need to analyse behaviour of independent entities. In long-term contracts with guaranteed profitability, the General Financial Directorate notes the possibility of using the existing benchmark analyses, i.e., with no adjustment for the effect of the pandemic, where the effect will be reflected in the benchmarking in the long-term automatically. In short-term relations, the General Financial Directorate admits implementation of comparability adjustments taking into account the situation on the market. However, it is necessary to make such adjustments in a consistent and long-term manner in order to eliminate a duplicate impact. Entirely beyond the recommendations stated in the OECD Guidance or the Guidelines, the General Financial Directorate comments on the procedure in the benchmarking analysis, referring to Guidance D-34 (e.g., exclusion of the companies that report a cumulative loss provided that it is not a common phenomenon).
In the end, the General Financial Directorate summarises that the effect of the pandemic and relating measures on individual companies is entirely individual. For the purposes of the documentation of specific impacts for a potential tax audit, it recommends collecting specific documents that may help understand the situation of a specific payer rather than general information with a mere reference to the pandemic situation.