In line with ongoing trends, tax administrations not only in the Czech Republic continue to focus intensively on transfer pricing audits. The existence of additional tax assessment on one side of the transaction without the corresponding adjustment on the other often leads to double taxation. In such cases, taxpayers have an option to initiate a proceeding between tax administrations involved to avoid double taxation. Tax administrations then need to find understanding in their mutual assessment of the relevant transaction from the perspective of transfer pricing.

It is probably not surprising that the proceeding, which involves tax administrations from different countries – either for the purpose of finding common understanding in the preliminary assessment of transfer pricing or, even more so, in a potential dispute – may not always be smooth in practice.

To make related proceedings more efficient, OECD has recently issued two manuals on procedures of bilateral binding assessments (Bilateral Advance Pricing Arrangements (BAPAs)) and the handling of multilateral mutual agreement procedures (MAPs).

Recommendations on bilateral binding assessments

The first manual – Bilateral Advance Pricing Arrangement Manual (BAPAM) – aims to unify and streamline the procedures for the assessment of transactions by tax administrations from different countries through 29 best practices described. BAPAM is intended for taxpayers and tax administrations.

Based on recommendations and practical instructions, the manual aims at increasing the transparency of the assessment process, ensuring the symmetry of information between tax administrations, eliminating unnecessary time delays in the proceeding, or ensuring realistic expectations for all parties involved. The best practices described neither impose the new set of binding rules nor define a uniform formal procedure for the assessment of transactions.

The best practices stated by OECD include the following recommendations:

• a BAPA should be ideally signed with tax administrations within two years;
• the term of the BAPA should generally be a minimum of five years;
• the taxpayers should discuss the content of the application for a binding assessment prior to its formal filing;
• tax administrations should coordinate the information gathering process; joint visits to the operating premises of the taxpayer are recommended; and
• the relevant tax administrations should also not disclose their position papers to taxpayers; taxpayers should not attend substantive discussions between tax administrations.

From the Czech perspective, it should be noted that several recommendations stated in the manual have already been formally implemented in Czech tax regulations, while others are widely applied by the Czech tax administration in practice even without their formal establishment.

According to statements of representatives of the tax administration, no further formal modification of rules is currently expected, and the tax administration intends to continue with the established practice without changing the existing rules.

In our experience, the environment for binding assessments in the Czech Republic is predictable, cultivated, and generally supportive of applications for binding assessments compared to other OECD countries or neighbouring countries. Although the legal establishment of certain partial processes, such as formalising the pre-filing discussions or the possibility to obtain the assessment also for the past, i.e. the APA roll-back, would certainly further enhance tax certainty.

Dispute prevention: APA in the Czech Republic as useful instrument

• Advance pricing arrangements allow taxpayers in the Czech Republic to proactively participate in reducing the tax risk by having their future transfer pricing methodology approved by one or more tax administrations.
• Negotiated APAs help companies manage the transfer pricing risk, eliminate potential double taxation, and prevent tax disputes.
• In our experience, negotiations with tax administrations are very constructive; the aim of the proceedings is to find a mutually acceptable solution.
• The success rate of APAs in the Czech Republic has long been above 90%. This is a significant difference compared to tax audits, which in most cases statistically result in additional tax assessment.
• APAs are recommended particularly in situations where the level of uncertainty and time required to defend transfer pricing in the event of a tax audit represent an unacceptable business risk for a company.

Recommendations on handling of multilateral mutual agreement procedures and on binding assessments

The second of the published manuals was prepared by the OECD group focused on the wider application of multilateral MAP and multilateral APA processes. The published Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements (MoMA) should be used as a guide for multilateral APA and MAP processes, namely from the legal perspective.

The manual is the first complete document issued by OECD that contains coherent and comprehensive information on how multilateral MAP and APA cases should be resolved legally and procedurally. The MoMA again does not aim at the formal regulation or implementation of binding rules but rather seeks to describe the common features of practical approaches to MAP and APA from the perspective of both taxpayers and tax administrations.

The MoMA covers the following four topics: i) the description of the legal basis for the handling of multilateral MAP and APA cases; ii) the presentation of procedural aspects to be considered in multilateral cases; iii) the presentation of examples of multilateral cases; (iv) the outline of an ideal timeline for a typical multilateral case.

In line with the intense focus on transfer pricing audits, the number of cross-border disputes resolved by agreement between tax administrations has been increasing in recent years. In the Czech Republic, many cases resolved by the Czech tax administration were initiated by a foreign counterparty. In such cases, the dispute is primarily between tax administrations, and the Czech company does not, in principle, intervene in the proceeding.

In the Czech environment, the published second manual may be useful for further specification of rather procedural aspects of multilateral binding assessments or in cases where a Czech company is subject to double taxation, and the company considers initiating a dispute.

The published manuals correspond to a large extent to the Czech practice and provide taxpayers with practical guidance where the Czech regulations end.

The concept of the binding assessment and the environment conducive to it provides Czech taxpayers with a very useful instrument to increase tax certainty. If there has already been additional tax assessed based on transfer pricing, or if a company is in the crosshair of tax administration, it is always a good idea to think about how to prevent potential double taxation already during the tax audit proceedings. The OECD provides practical guidance in this regard; however, it should not be overlooked that the way the tax audit itself is conducted can be decisive for the effective use of the means of avoiding double taxation.