Loss of investment incentives in relation to transfer pricing
The Income Taxes Act (ITA), as amended until 30 April 2015 (“the old wording of the ITA”), specified that if the corporate income tax payer increased the tax base by conducting related party transactions in a way that did not comply with the economic principles of ordinary business relations, it would denote a breach of conditions for drawing investment incentives in the form of tax relief, leading to a subsequent loss of investment incentives. This provision was amended with effect from 1 May 2015 (“the new wording of the ITA”): currently, in the case of a breach of the aforementioned conditions, the loss of investment incentives will not be complete and will not affect all periods in which the tax relief was or could have been claimed.
In the event of an undue increase in the tax base by conducting related party transactions, the tax relief will only be decreased by the value of the tax calculated from the amount by which the tax base was unduly increased. In this context, professional discussions have taken place in the past about which wording should be applied in individual cases. Additionally, the Supreme Administrative Court issued a decision in this matter clarifying the problem.
The dispute concerned a tax audit of a taxable entity for the taxation periods of 2011 and 2012 initiated on 18 December 2014 by the tax administrator; during the audit, the tax administrator exposed an undue increase in the tax base caused by related party transactions. The tax administrator thus found a breach of conditions for drawing investment incentives in the form of tax relief and proceeded as if the taxable entity had completely lost the investment incentive in the form of tax relief (the old wording of the ITA was applied). The tax administrator claimed that the new wording of the ITA would only apply to cases where the breach and the subsequent tax liability arose after 1 May 2015. According to this interpretation, the new wording of the ITA could only be applied to taxation periods where the tax liability arose after 1 May 2015. The taxable entity did not agree with this opinion and the Supreme Administrative Court ruled in its favour. In this context, the Court stated that according to the transitional provision of the new wording of the ITA, it is by no means decisive whether the breach of the conditions for drawing investment incentives occurred before or after the new wording of the ITA came into effect.
In conclusion, disputes concerning a breach of conditions for drawing investment incentives by unduly increasing the tax base by conducting related party transactions should not result in the absolute loss of investment incentives in the form of tax relief, regardless of whether the taxation period the dispute pertains to ended before or after the new wording of the ITA came into effect.