1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
Slovakia became a member of OECD in year 2000 and the current income tax law in Slovakia is consistent with the OECD transfer pricing guidelines. As of January 1 2009, the amendment to the Income Tax Act has introduced an obligation for all Slovak taxpayers involved in transactions with foreign related parties to prepare a transfer pricing (“TP”) documentation. Taxpayers are obliged to provide TP documentation in accordance with section 18 (1) of the Income Tax Act.
Consistently, the Ministry of Finance of Slovak republic issued guidelines, which lay down the content of the TP documentations to reduce any uncertainty concerning this issue. The Guidelines distinguish between two types of TP documentation. The basic TP documentation is more complex, but it is obligatory only for material transactions undertaken by Slovak taxpayers that prepare their financial statements in accordance with International Financial Reporting Standards (IFRS). Other Slovak taxpayers involved in transactions with foreign associated enterprises shall prepare a simplified TP documentation that includes information on transactions with foreign associated enterprises and that has to be attached to the financial statements of the Slovak taxpayer.
2. What is the content of the documentation that must be prepared?
The Guidelines are based on the principles set out in the OECD Transfer Pricing Guidelines and EU recommendations. They were published in the Financial Bulletin on the official web site of Ministry of Finance of the Slovak Republic.
The basic TP documentation has two parts. It shall include a general documentation, relating to the whole group of enterprises and a specific documentation on the specifics of particular taxpayer.
The general part shall contain the following:
- Identification of the group members and description of the group ownership structure;
- Description of the business activities and business strategy of the group, including the industry identification;
- Planned business strategy in the future;
- Description of functions that the individual entities of the group carry out and the estimated risks assumed by them.
The specific documentation is directly related to the general documentation and contains information on the Slovak taxpayer. It shall contain the following information:
- Identification of the taxpayer and its ownership structure;
- Description of the business activities and the industry;
- Planned business strategy of the taxpayer in the future;
- List of intra group transactions of the taxpayer;
- Overview of the entities intangible assets;
- List of measures preceding the pricing, e.g. the reconciliation of the pricing method;
- General description of functions that the taxpayer performs and the estimated risks, which he bears;
- Benchmarking studies;
- Description of the system of taxpayer’s transfer pricing and information relating to the selected transfer pricing method.
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?
The purpose of the TP documentation is to evidence the process of pricing the business transactions of a foreign dependent person with related parties. The Slovak taxpayer has the obligation to maintain TP documentation on all its significant transactions with foreign associated enterprises.
b) What is the definition of “associated enterprises” for the purposes of this requirement?
For the purposes of Income Tax Act:
- The term “related party” – shall mean a close party or another party, which is economically, personally, or otherwise interrelated with the first party;
- The term “economic or personal interrelation” – shall mean a situation, in which one party participates in the ownership, control, or administration of another party, or shall mean a relation between parties, which are under the control or administration of the same party, or in which the same party has direct or indirect equity interest, while the participation in the:
- “Ownership or control” – shall mean any direct, indirect, or indirect derivative holding of more than 25% of the registered capital or the voting rights. Indirect holding shall be calculated by multiplying the percentages of direct holdings divided by one hundred, and by multiplying the result so obtained by one hundred. The indirect derivative holding shall be calculated by summing up the indirect holdings. The indirect derivative holding shall only be used to calculate the participation of a single party in the ownership or control of another party, where such a single party participates in the ownership or control of several parties, each of which holds a participation in the ownership or control of the same third party; if the indirect derivative holding exceeds 50%, then all the parties, which were included in the calculation thereof, shall be regarded as economically interrelated regardless of their actual interests;
- “Administration” shall mean the relationship of members of statutory bodies or supervisory bodies of a company, or co-operatives, towards such a company, or cooperative;
- The term “other interrelation” – shall mean a relationship established exclusively for the purpose of reduction of the tax base or increase of tax loss;
- The term ”non-resident related party” – shall mean a situation, in which a resident individual or legal entity is interrelated with a non-resident individual or legal entity; the above shall apply also to the relation between a taxpayer with unlimited tax liability and its permanent establishments abroad, and to the relationship between a taxpayer with limited tax liability and its permanent establishment in the territory of the Slovak Republic.
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?
The Slovak Ministry of Finance issued Guidelines that outline the content requirements of the TP documentation in Slovakia. The Guidelines are based on the principles set out in the OECD Transfer Pricing Guidelines and the principles outlined in the Resolution of the European Council and of the representatives of the governments of the Member States on the Code of Conduct on transfer pricing documentation for associated enterprises in the EU. The guidelines are applicable to transactions carried out by Slovak taxpayers from 1 January 2009.
The guidelines distinguish two types of documentation: basic documentation and specified documentation. The basic documentation shall contain a general TP documentation (Masterfile), relating to the group and a specified TP documentation, containing information on the Slovak taxpayer. The basic documentation is obligatory to Slovak taxpayers who report their financial statements under international financial reporting standards (IFRS). For the rest of the taxpayers, involved in any intra-group transaction with foreign associated enterprises, is sufficient to maintain a simplified documentation that contains evidence on the taxpayers controlled transactions and evidencing the taxpayer’s adherence to the arm’s length principle in those transactions.
Though the basic TP documentation is not obligatory to all taxpayers, it is recommended to all Slovak entities involved in transactions with foreign associated enterprises to maintain a detailed TP documentation. During tax inspection, the entity involved in the above mentioned transactions shall evidence that it conducted the transaction in conformity with the arm’s length principle and it is highly unlikely that the required content of the simplified TP documentation is able to serve that purpose.
d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?
The TP documentation, which taxpayers are obliged to maintain, shall contain information on the group and its members. The main purpose of the provided information is to evidence that the arm’s length principle has been observed in controlled intra-group transaction. Therefore the precision of the information varies from case to case. According to the Guidelines, the minimum information required on the specific foreign group member is its identification, legal form and the explanation of its ownership structure. However the authorities may request from the Slovak taxpayer on foreign group members any other relevant information they deem important to evidence that the arm’s length principle has been observed in controlled transactions.
e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
The benchmark studies are a relatively new content requirement of the TP documentation. However, according to our experience a well prepared regional benchmark study is considered sufficient in most cases. In general, Slovak tax authority performs benchmark studies within local business environment.
f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?
The transfer pricing documentation must be provided in Slovak language, unless, upon request, the Slovak tax authorities approve the use of any other language.
3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?
The obligatory TP documentation shall be provided to the tax authorities during the tax inspection within 60 days counted from the day of request. As the simplified documentation is based on the information provided in notes to financial statement, it shall be provided regularly to the tax authorities when the income tax return is due. If simplified documentation is considered insufficient as a part of the notes to financial statement, tax authority could challenge the taxpayer to complete required scope of information.
4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.
In case the Slovak taxpayer does not provide the Slovak tax authorities with the obligatory TP documentation within the required deadline, tax authorities are empowered by law to impose penalties. Penalty could be imposed according to the Slovak Act No. 563 / 2009 on the administration of taxes (Tax Code) as amended, which stipulates, that if the taxpayers do not comply with their obligations of not material nature, a fine up to EUR 3,000 could be imposed by the tax authorities. An amount of penalty depends on nature of violation or continuation of a status offending the law.
5. Does the absence or incompleteness of documentation reverse the burden of the proof as regards the arm’s length character of the transactions?
In absence of the obligatory TP documentation or in case of incomplete documentation, fine is imposed on the taxpayer, but it does not affect in any way the obligation of the taxpayer to provide evidence and prove the adherence of the significant controlled transactions with the arm’s length principle. The burden of the proof remains on the taxpayer in case of tax audit. If the compliance with arm’s length principle is not proven, the tax authority could concern relevant transfer (expense) which decreased the taxable income as tax non-deductible item and levy the penalty for shortening of income tax.
6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?
The Slovak Republic ratified the Arbitration Convention and it came into force on 1 April 2006. The mutual agreement procedure commences upon request of the taxpayer. The written request shall be delivered to the Ministry of Finance of Slovak republic or to the tax authorities accompanied by the obligatory TP documentation. The imposition of any document related penalty or previous TP reassessment is not considered as an obstacle according to recent regulations.