Inventec s.r.o. is a Czech manufacturing company that produces electronic equipment and components as part of an international group. The dispute relates to the 2015 tax year and arose from a transfer pricing adjustment made by the Czech tax authorities, who concluded that the prices applied in a controlled transaction did not reflect arm’s length conditions.
Having analysed Inventec’s functions and risks, the authorities classified the company as a manufacturer that bore certain material-related risks. Based on this classification, they determined that an independent enterprise in comparable circumstances would have earned a profit mark-up on the costs of material. Using a profitability indicator based on return on total costs – including material costs, they adjusted the company’s results to what they considered to be an arm’s length level. This resulted in an additional corporate income tax assessment of approximately CZK 28 million for 2015, together with a penalty exceeding CZK 5 million.
Inventec challenged the assessment, arguing that the tax authorities had incorrectly characterised its functional and risk profile, overstated the risks it bore and applied an inappropriate profit mark-up. The company also objected to the selection of comparables, the adjustments made for comparability, and certain procedural aspects of the audit, including the refusal to hear proposed witnesses. It maintained that its remuneration under the group model already reflected arm’s length conditions.
Judgment
The Regional Court rejected the challenge in full. It held that the tax authorities had sufficiently established the facts, correctly identified the functions and risks borne by Inventec, and were entitled to conclude that the company should make a profit on material costs. The court emphasised that its role is not to reassess the economic correctness of the chosen transfer pricing method or calculations, provided the authorities’ approach is logical, transparent and reviewable. The court also confirmed that comparability adjustments are permissible where differences between the tested party and the comparables are identified and that the OECD Transfer Pricing Guidelines support such adjustments as a means of improving comparability.
The court found no procedural defects that would render the assessment unlawful. In particular, it accepted that refusing to hear additional witnesses did not affect the legality of the decision since the relevant facts had already been sufficiently established. Consequently, the court upheld the tax authority’s adjustment and dismissed the taxpayer’s claim, with no costs awarded to either party.
(An appeal has since been filed by Inventec with the Supreme Administrative Court.)
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