Transfer Pricing in Slovakia and Abroad 2023

Abstract

    Transfer pricing can be understood as a controlled process of determining the prices of controlled transactions that take place between related (dependent) persons in such a way as to correspond to the conditions of an independent relationship. The controlled process of determining the prices of controlled transactions is based on international and domestic regulations created for the purpose of fair taxation and preventing the transfer of profits between domestic and foreign tax entities that can be defined as dependent. Transfer pricing is carried out in accordance with international and domestic regulations against tax optimization of natural and legal persons, which may consist of transfers (transfers) of profits between dependent persons in transactions in Slovakia or in cross-border transactions, especially with multinational companies. Based on these regulations, dependent tax entities that do business are required to prepare documentation on transfer pricing, where it is proven that the realization prices applied by dependent persons are created based on the principle of an independent relationship.

Effective from 2009, the Income Tax Act required taxpayers to keep documentation on controlled transactions and the transfer pricing method used with foreign dependents. Since 2015, this obligation to keep documentation on transfer pricing has also been extended to controlled transactions between domestic dependents. In 2023, the law established new rules. From 2023, for the purposes of calculating the direct share, indirect share or indirect derived share, the shares of close persons are added up and if their sum is at least 25%, the relevant persons or entities are economically connected. A controlled transaction is mainly the sale of goods or services, but also the disposal of property, such as the sale of a car, or financial operations, such as the granting of a loan. The definition of a significant controlled transaction was added, and the Safe Harbor is understood as an addition to the definition of a significant controlled transaction, when the Income Tax Act took responsibility for determining the significance of a controlled transaction and relieved taxpayers of this responsibility, as well as changes in the transfer documentation and others. In practice, this means that every dependent person who carries out controlled transactions must be able to demonstrate that the price they applied to a dependent (connected) person is in accordance with the principle of independence, i.e., that it is a price that they would also apply to an independent person.

Business relations and transactions of multinational companies are primarily regulated by European Community regulations, which are binding on all countries of the Community, regardless of the state in which these entities are based. Multinational companies use transfer pricing as an effective method of tax planning. This method allows interconnected companies located in other countries to enter joint transactions so that they can generate low profits in high-tax countries while generating most profits in low-tax countries.

Multinational companies are the taxpayers with the greatest impact on the state budget. Therefore, another problem associated with transfer pricing from the state's point of view is when a higher tax rate in each country causes a loss of tax revenue due to the tax optimization of connected enterprises through transfer pricing. Valuation of mutual relations and transactions of interconnected persons is one of the important problems in the tax field. Its importance is growing, especially among interconnected companies, and it is one of the key problems even when checking the tax base by the tax administrator. Comparability with independent subjects can be included among the biggest problems. The publication is intended for experts and the lay public, mainly for students, but also for financial directors, tax advisors, auditors, accountants, and others.