In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed these amendments. A complaint filed by DFH with the regional court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court rejected DFH’s appeal and upheld the decision of the tax authorities. Excerpts “[34] On the basis of the foregoing, the Supreme Court of Justice, like the Regional Court, considers that the complainant’s tax loss for 2006, as a relevant fact in terms of the reopening of proceedings, was incurred, assessed and could be deducted from the tax base pursuant to Section 34(1) of the ITA only on 8 July 2013, when it was decided upon or determined by the aforementioned additional payment assessment for 2006. Therefore, the Supreme Administrative Court fully agrees with the Regional Court’s conclusion that it was only on that date that the corporate income tax loss for the tax year 2006, which the applicant claims to apply for the tax years 2010 and 2011 pursuant to Article 34(1) of the ITA, was determined (increased). The assessment of the tax loss for the year 2006 in 2013 cannot, therefore, be regarded as a new fact from the point of view of the reopening of the proceedings, which came to light after the assessment proceedings for the tax years 2010 and 2011 had been concluded and which already existed at the time of the tax administrator’s decision in those original assessment proceedings. Therefore, the condition for the authorisation of the reopening of proceedings under Section 117(1)(a) of the Tax Code, consisting in the existence of a new fact already existing at the time of the decision, which has newly come to light and was not known to the taxpayer or the tax administrator at the time of the decision, despite its existence, was not met in the case under consideration. Therefore, the complainant cannot claim, by way of a retrial, a reduction of the corporate income tax base for 2010 and 2011 by the tax loss assessed for 2006 in 2013. [35] The fact mentioned by the complainant that the tax loss for 2006 stems from the adjustment of transfer prices in the context of the tax audit for the years 2005-2007 does not change the above conclusion that the condition for the reopening of proceedings has not been met, since in the present case the decisive factor in terms of the reopening of proceedings for the tax years 2010 and 2011, which were closed by final payment assessments (assessment of the novelty of the facts), is when the tax loss for 2006 was assessed, not when the fact giving rise to the tax loss occurred. In the present case, it was the tax loss that could be deducted from the tax base in certain circumstances, not the overvalued transfer prices in 2006, that was the fact that could affect the amount of the complainant’s tax liability. [36] Given that the complainant became aware of the transfer price adjustment giving rise to the tax loss on 19 July 2013, it can be accepted that, without fault on the part of the complainant or the tax authorities, the tax loss for 2006 could not have been claimed earlier. However, the complainant’s knowledge of the transfer price adjustment does not alter the fact that the assessment of the tax loss for 2006 in 2013 cannot be regarded as a new fact for the purposes of the reopening of the proceedings, which came to light after the end of the assessment proceedings for the tax years 2010 and 2011. [37] As regards the complainant’s reference to the judgment of the Municipal Court in Prague of 19 August 2020, no. 10 A 30/2020 63, and the proceedings on the complainant’s cassation complaint against that judgment (terminated against the complainant by the judgment of the Supreme Administrative Court of 11 November 2022, no. 4 Afs 287/2020 49), the Supreme Administrative Court states that the case in question does not affect the assessment of the present case, which, in brief, concerns whether the assessment of the tax loss for 2006 on 8 July 2013 constitutes a new fact in terms of fulfilling the conditions for the renewal of the corporate income tax assessment proceedings for 2010 and 2011. [38] The arguments raised by the complainant in relation to the fact that it did not take the opportunity to challenge the tax authorities’ decisions of 13 September 2013, nos. 819339/13 and 819349/13, by which the tax authorities discontinued proceedings in respect of the supplementary tax returns for 2010 and 2011 submitted on 27 June 2013, in which the complainant claimed the tax loss for 2006 in instalments, are not relevant to the fulfilment of the conditions for the authorisation of the reopening of proceedings. The Supreme Administrative Court therefore did not consider it further. If the complainant argued that he had fulfilled the condition expressed in Section 117(2) of the Tax Code, i.e. that it was not possible to file additional tax returns for the years 2010 and 2011 due to the reasons for the reopening of the proceedings, this also does not change the above conclusion that in the case under consideration the condition for the authorisation of the reopening of the proceedings pursuant to Section 117(2) of the Tax Code was not fulfilled. (1)(a) of the Tax Code, consisting in the existence of a fact already existing at the time of the decision, which had newly come to light and which, despite its existence, was not known to the taxpayer or the tax administrator at the time of the decision. The complainant’s reference to the judgment of the Regional Court in Brno No 29 Af ...

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed the amendments. A complaint filed by DFH with the district court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Court rejected DFH’s arguments that the tax loss must be allowed under the Czech-German income tax treaty. DFH could not reduce its tax liabilities in the Czech Republic in 2010 and 2011 with the 2006 tax loss resulting from the German transfer pricing adjustment. The Court noted that the usual purpose of double taxation treaties is to regulate the place where income is taxed, but the actual rules for taxation or the deduction of expenses remain reserved to national law. In this case, the Double Taxation Convention could not be applied because there was no international aspect of taxation and the deduction of tax losses was a matter for national legislation. Excerpts “[38] In the present case, the complainant first invoked a motion for protection against the tax authority’s failure to act in relation to the activation of conciliation proceedings on 28 October 2019 in respect of the resolution of the case by way of an agreement under Article 25 of the Double Taxation Treaty. The Appellate Financial Directorate postponed this complaint on the grounds that the alleged inaction of the tax administrator (the Tax Office for the Pilsen Region) had been eliminated, as the tax administrator had submitted the case to the defendant 2) for resolution of the case by agreement under the said treaty. Subsequently, on 15 December 2019, the complainant submitted a request for removal of the inaction pursuant to Article 38 of the Tax Code, to which defendant 2 responded on 28 January 2020 by stating that it did not find the request for resolution of the case by agreement under the Arbitration Convention justified, since the tax administrator had issued additional payment assessments for the years 2005 and 2006, thereby accepting the adjustments made by the German tax administration and thus eliminating double taxation. The defendant also stated in its reply that the activation of the double taxation convention was not an option even for the tax years 2010 and 2011, since there would have been taxation in breach of that convention. On 7 February 2020, defendant 1 responded to this complaint by stating that it did not consider it justified, since the conciliation procedure under Article 25 of the Double Taxation Treaty and the measures under Section 39q(a) and (b) of the Income Tax Act did not constitute tax administration procedures and therefore could not be invoked as a defence against inaction; at the same time, defendant 1 also referred in this reply to the opinion of defendant 2.) [39] It is clear that defendant 2), which potentially had the competence to conduct conciliation proceedings under Article 25 of the Double Taxation Treaty (in conjunction with Article 9 thereof), acted in accordance with the above-quoted conclusions expressed in judgment No 5 Afs 468/2019-65 and informed the complainant of the reasons why conciliation proceedings could not be initiated. The reasons for its action (failure to adopt a measure pursuant to Section 39q of the Income Tax Act) were also communicated to the complainant by defendant 1). Those reasons were subsequently reviewed by the Municipal Court in the judgment under appeal in that it considered the possibility of submitting the matter to conciliation under the double taxation treaty or of adopting a measure under section 39q of the Income Tax Act. In so doing, it concluded that the issue raised by the applicant, for which it seeks an order requiring the defendant to adopt the measures repeatedly referred to, is not resolved by a double taxation treaty but is purely domestic in nature. For that reason, he did not consider that there was any merit in either the requirement to submit the matter by way of an agreement under a double taxation treaty or in the requirement to take measures in relation to a foreign country by defendant 1) under the Income Tax Act. …. “[41] The appeal is not well-founded for the reasons set out above and the Supreme Administrative Court therefore dismissed it pursuant to the second sentence of Article 110(1) of the Code of Civil Procedure.” Click here for English Translation Click here for other translation ...

This section describes three aspects of transfer pricing compliance that should receive special consideration to help tax jurisdictions administer their transfer pricing rules in a manner that is fair to taxpayers and other jurisdictions. While other tax law compliance practices are in common use in OECD member countries – for example, the use of litigation and evidentiary sanctions where information may be sought by a tax administration but is not provided – these three aspects will often impact on how tax administrations in other jurisdictions approach the mutual agreement procedure process and determine their administrative response to ensuring compliance with their own transfer pricing rules. The three aspects are: examination practices, the burden of proof, and penalty systems. The evaluation of these three aspects will necessarily differ depending on the characteristics of the tax system involved, and so it is not possible to describe a uniform set of principles or issues that will be relevant in all cases. Instead, this section seeks to provide general guidance on the types of problems that may arise and reasonable approaches for achieving a balance of the interests of the taxpayers and tax administrations involved in a transfer pricing inquiry ...

Tax compliance practices are developed and implemented in each member country according to its own domestic legislation and administrative procedures. Many domestic tax compliance practices have three main elements: a) to reduce opportunities for non-compliance (e.g. through withholding taxes and information reporting); b) to provide positive assistance for compliance (e.g. through education and published guidance); and, c) to provide disincentives for non-compliance. As a matter of domestic sovereignty and to accommodate the particularities of widely varying tax systems, tax compliance practices remain within the province of each country. Nevertheless a fair application of the arm’s length principle requires clear procedural rules to ensure adequate protection of the taxpayer and to make sure that tax revenue is not shifted to countries with overly harsh procedural rules. However, when a taxpayer under examination in one country is a member of an MNE group, it is possible that the domestic tax compliance practices in a country examining a taxpayer will have consequences in other tax jurisdictions. This may be particularly the case when cross-border transfer pricing issues are involved, because the transfer pricing has implications for the tax collected in the tax jurisdictions of the associated enterprises involved in the controlled transaction. If the same transfer pricing is not accepted in the other tax jurisdictions, the MNE group may be subject to double taxation as explained in paragraph 4.2. Thus, tax administrations should be conscious of the arm’s length principle when applying their domestic compliance practices and the potential implications of their transfer pricing compliance rules for other tax jurisdictions, and seek to facilitate both the equitable allocation of taxes between jurisdictions and the prevention of double taxation for taxpayers ...

Where two or more tax administrations take different positions in determining arm’s length conditions, double taxation may occur. Double taxation means the inclusion of the same income in the tax base by more than one tax administration, when either the income is in the hands of different taxpayers (economic double taxation, for associated enterprises) or the income is in the hands of the same juridical entity (juridical double taxation, for permanent establishments). Double taxation is undesirable and should be eliminated whenever possible, because it constitutes a potential barrier to the development of international trade and investment flows. The double inclusion of income in the tax base of more than one jurisdiction does not always mean that the income will actually be taxed twice ...

Both the arm’s length price-setting and the arm’s length outcome-testing approaches, as well as combinations of these two approaches, are found among OECD member countries. The issue of double taxation may arise where a controlled transaction takes place between two associated enterprises where different approaches have been applied and lead to different outcomes, for instance because of a discrepancy between market expectations taken into account in the arm’s length price-setting approach and actual outcomes observed in the arm’s length outcome-testing approach. See paragraphs 4.38 and 4.39. Competent authorities are encouraged to use their best efforts to resolve any double taxation issues that may arise from different country approaches to year-end adjustments and that may be submitted to them under a mutual agreement procedure (Article 25 of the OECD Model Tax Convention) ...

A move away from the arm’s length principle would abandon the sound theoretical basis described above and threaten the international consensus, thereby substantially increasing the risk of double taxation. Experience under the arm’s length principle has become sufficiently broad and sophisticated to establish a substantial body of common understanding among the business community and tax administrations. This shared understanding is of great practical value in achieving the objectives of securing the appropriate tax base in each jurisdiction and avoiding double taxation. This experience should be drawn on to elaborate the arm’s length principle further, to refine its operation, and to improve its administration by providing clearer guidance to taxpayers and more timely examinations. In sum, OECD member countries continue to support strongly the arm’s length principle. In fact, no legitimate or realistic alternative to the arm’s length principle has emerged. Global formulary apportionment, sometimes mentioned as a possible alternative, would not be acceptable in theory, implementation, or practice. (See Section C, immediately below, for a discussion of global formulary apportionment.) ...

In the case of tax administrations, specific problems arise at both policy and practical levels. At the policy level, countries need to reconcile their legitimate right to tax the profits of a taxpayer based upon income and expenses that can reasonably be considered to arise within their territory with the need to avoid the taxation of the same item of income by more than one tax jurisdiction. Such double or multiple taxation can create an impediment to cross-border transactions in goods and services and the movement of capital. At a practical level, a country’s determination of such income and expense allocation may be impeded by difficulties in obtaining pertinent data located outside its own jurisdiction ...

In order to avoid double taxation, “Fashion Distributor A/S” had requested the Danish Tax Authorities, in parallel to the review of a transfer pricing assessment, to conduct a mutual agreement procedure under Article 6 of the EC Arbitration Convention 1990. The Danish Tax Authorities rejected the request on the grounds that it did not contain the minimum information required by paragraph 5(a) of the Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (EU Code of Conduct 2006). Judgement of the High Court The Court held that the reference in Article 7(1) of the EC Arbitration Convention to Article 6(1) had to be understood as referring only to the ‘timely presented case’ and did not imply that case was also ‘submitted’ within the meaning of Article 7(1). Furthermore, the Court found that the company’s complaint of double taxation undoubtedly appeared justified, and that the tax authorities rejection of the case was therefore unjustified. On that basis it was decided that the Danish Tax Authorities should initiate and pursue the mutual agreement procedure on the basis of the company’s request. Click here for English translation Click here for other translation ...

Sogefi Filtration S.p.A. received a notice of assessment for the 2003 financial year concerning various issues, including the deduction of royalties paid for the use of a trademark, interest income on a loan granted to a foreign subsidiary and the denial of a tax credit for dividends received by a French subsidiary. Sogefi appealed to the Regional Court, which ruled largely in its favour. Not satisfied with the decision, the tax authorities appealed to the Supreme Court. Judgement of the Supreme Court On the issue of transfer pricing the Supreme Court clarified, that the French arm’s length provision is not an anti-avoidance rule. Excerpt “4.1. The plea – admissible as it does not concern questions of merit but the correct application of the rule – is well founded. 4.2. It should be noted, in fact, that Art. 76 (now 110) tuir does not incorporate an anti-avoidance regulation in the strict sense, but is aimed at repressing the economic phenomenon of transfer pricing (shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations) considered in itself, so that the proof incumbent on the tax authorities does not concern the higher national taxation or the actual tax advantage obtained by the taxpayer, but only the existence of transactions, between related companies, at a price apparently lower than the normal price, it being incumbent on the taxpayer, pursuant to the ordinary rules of proximity of proof under Art. 2697 et.e. and on the subject of tax deductions, the taxpayer bears the burden of proving that such transactions took place for market values to be considered normal in accordance with the specific provisions of Article 9(3) of the Income Tax Code (see Court of Cassation no. 11949 of 2012; Court of Cassation no. 10742 of 2013; Court of Cassation no. 18392 of 2015; Court of Cassation no. 7493 of 2016). Such conclusion, moreover, is in line with the ratio of the legislation that is to be found “in the arm’s length principle set forth in Article 9 of the OECD Model Convention””, so that the assessment on the basis of the normal value concerns the “economic substance of the transaction” that is to be compared “with similar transactions carried out under comparable circumstances in free market conditions between independent parties” (see. in particular, Court of Cassation No. 27018 of 15/11/2017 which, in recomposing the different interpretative options that have emerged in the Court’s case law, expressly stated “the ratio of the rules set forth in Article 11O, paragraph 7, of the Income Tax Code must be identified in the arm’s length principle, excluding any qualification of the same as an anti-avoidance rule”). Incidentally, it should be noted that the current OECD Guidelines, in terms not dissimilar from what has been provided for since the 1970s, are unequivocal in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 and 7.15 with respect to the identification and remuneration of financing as intra-group services, as well as 7. 19, 7.29 and 7.31 with respect to the determination of the payment), that the remuneration of an intra-group loan must, as a rule, take place through the payment of an interest rate corresponding to that which would be expected between independent companies in comparable circumstances. 4.3. However, in the case in point, the CTR excluded the application of the institute on the assumption that “a more favourable interest rate granted to a subsidiary for the acquisition of a company operating in the same sector in Spain is not necessarily of an avoidance nature” and, therefore, although faced with the objective fact of the divergence from the normal value, it excluded its relevance on the basis of an irrelevant assumption extraneous to the provision, the application of which it misapplied, resulting, in part, in the cassation of the judgment.” Click here for English translation Click here for other translation ...

This section describes three aspects of transfer pricing compliance that should receive special consideration to help tax jurisdictions administer their transfer pricing rules in a manner that is fair to taxpayers and other jurisdictions. While other tax law compliance practices are in common use in OECD member countries – for example, the use of litigation and evidentiary sanctions where information may be sought by a tax administration but is not provided – these three aspects will often impact on how tax administrations in other jurisdictions approach the mutual agreement procedure process and determine their administrative response to ensuring compliance with their own transfer pricing rules. The three aspects are: examination practices, the burden of proof, and penalty systems. The evaluation of these three aspects will necessarily differ depending on the characteristics of the tax system involved, and so it is not possible to describe a uniform set of principles or issues that will be relevant in all cases. Instead, this section seeks to provide general guidance on the types of problems that may arise and reasonable approaches for achieving a balance of the interests of the taxpayers and tax administrations involved in a transfer pricing inquiry ...

Tax compliance practices are developed and implemented in each member country according to its own domestic legislation and administrative procedures. Many domestic tax compliance practices have three main elements: a) to reduce opportunities for non-compliance (e.g. through withholding taxes and information reporting); b) to provide positive assistance for compliance (e.g. through education and published guidance); and, c) to provide disincentives for non-compliance. As a matter of domestic sovereignty and to accommodate the particularities of widely varying tax systems, tax compliance practices remain within the province of each country. Nevertheless a fair application of the arm’s length principle requires clear procedural rules to ensure adequate protection of the taxpayer and to make sure that tax revenue is not shifted to countries with overly harsh procedural rules. However, when a taxpayer under examination in one country is a member of an MNE group, it is possible that the domestic tax compliance practices in a country examining a taxpayer will have consequences in other tax jurisdictions. This may be particularly the case when cross-border transfer pricing issues are involved, because the transfer pricing has implications for the tax collected in the tax jurisdictions of the associated enterprises involved in the controlled transaction. If the same transfer pricing is not accepted in the other tax jurisdictions, the MNE group may be subject to double taxation as explained in paragraph 4.2. Thus, tax administrations should be conscious of the arm’s length principle when applying their domestic compliance practices and the potential implications of their transfer pricing compliance rules for other tax jurisdictions, and seek to facilitate both the equitable allocation of taxes between jurisdictions and the prevention of double taxation for taxpayers ...

Where two or more tax administrations take different positions in determining arm’s length conditions, double taxation may occur. Double taxation means the inclusion of the same income in the tax base by more than one tax administration, when either the income is in the hands of different taxpayers (economic double taxation, for associated enterprises) or the income is in the hands of the same juridical entity (juridical double taxation, for permanent establishments). Double taxation is undesirable and should be eliminated whenever possible, because it constitutes a potential barrier to the development of international trade and investment flows. The double inclusion of income in the tax base of more than one jurisdiction does not always mean that the income will actually be taxed twice ...

A move away from the arm’s length principle would abandon the sound theoretical basis described above and threaten the international consensus, thereby substantially increasing the risk of double taxation. Experience under the arm’s length principle has become sufficiently broad and sophisticated to establish a substantial body of common understanding among the business community and tax administrations. This shared understanding is of great practical value in achieving the objectives of securing the appropriate tax base in each jurisdiction and avoiding double taxation. This experience should be drawn on to elaborate the arm’s length principle further, to refine its operation, and to improve its administration by providing clearer guidance to taxpayers and more timely examinations. In sum, OECD member countries continue to support strongly the arm’s length principle. In fact, no legitimate or realistic alternative to the arm’s length principle has emerged. Global formulary apportionment, sometimes mentioned as a possible alternative, would not be acceptable in theory, implementation, or practice. (See Section C, immediately below, for a discussion of global formulary apportionment.) ...

In the case of tax administrations, specific problems arise at both policy and practical levels. At the policy level, countries need to reconcile their legitimate right to tax the profits of a taxpayer based upon income and expenses that can reasonably be considered to arise within their territory with the need to avoid the taxation of the same item of income by more than one tax jurisdiction. Such double or multiple taxation can create an impediment to cross-border transactions in goods and services and the movement of capital. At a practical level, a country’s determination of such income and expense allocation may be impeded by difficulties in obtaining pertinent data located outside its own jurisdiction ...

The Supreme Tax Court has held that the costs incurred by a taxpayer in connection with a tax treaty mutual agreement proceeding are not costs of earning the relevant income, but has left open a possible deduction as “unusual expenses”. A US resident realised a gain on the sale of a share in a GmbH. The German tax office sought to tax the gain, but the taxpayer objected on the grounds that it was taxable in the US under the double tax treaty. This tax office did not accept this objection, so a mutual agreement proceeding was initiated in an effort to clear the issue. Ultimately, the two competent authorities agreed to split the taxing right in the ratio 60:40 in favour of Germany. However, the taxpayer had incurred various consultancy and legal costs in the course of the process and these should, he claimed, be deducted from the taxable gain, as they would not have arisen without it. The tax office refused this, too. The Supreme Tax Court held that the costs at issue were not direct costs of making the capital gain. They were incurred in the course of resolving a dispute over the right to tax it and thus did not arise until after it had been made. Admittedly, without the gain, they would not have been incurred at all, although this connection was too remote to allow classification as direct costs. The court explicitly left the question open as to whether they might have been allowable against total income as “unusual expenses”, as that deduction is only available to German residents. Click here for English translation Click here for other translation ...