Transfer pricing documentation - new guidelines on the determination of the contents
In December 2018, the Ministry of Finance of the Slovak Republic published in their Financial Newsletter the Guidelines No. MF/019153/2018-724 on determination of the contents of the transfer pricing documentation. The purpose of the new Guidelines is better targeting of the documentation obligation on the high-risk transactions and reduce the extent of such documentation for smaller, i.e. low-risk transactions.
The Guidelines also distinguish three levels of documentation complexity:
- the abbreviated documentation,
- the basic documentation, and
- the complete documentation.
According to the Guidelines, the extent of the documentation is no longer determined generally for tax payers on the basis of the distinguishing criteria (the obligation to keep the financial statements according to the IFRS, deduction of tax losses of more than EUR 300,000, etc.); the extent of the documentation is now determined for the individual transaction types in combination with the used pricing method.
More stringent rules apply to the extent, now being the “complete documentation”, of the documentation for insignificant transactions for which tax payers apply for the approval of the method (APA), adjustment of the tax base, or initiation of the mechanism of settlement of the tax-related disputes (MAP). Moreover, according to the new Guidelines, tax payers are now obliged to keep the complete documentation for cross-border transactions or a group of transactions which may be combined and exceed the amount of EUR 10 million.
Together with unfavourable changes, i.e. more stringent requirements for the documentation and the information on the documented transactions, the Guidelines introduce also changes that may be perceived by tax payers as positive. They simplify the abbreviated documentation for which they introduce a form (enclosed to the Guidelines). Also, for certain types of transactions which previously had to be documented at least in form of the abbreviated documentation, it is no longer necessary to prepare such documentation and the documentation obligation will be regarded as fulfilled upon the submission of a properly completed tax return on income tax, especially Table 1 – Transactions with Dependent Persons.
The obligation to keep the documentation will no longer apply, for example, to insignificant transactions made by tax payers obliged to keep the financial statements pursuant to the IFRS and to insignificant cross-border transactions made by other tax payers (unless they apply for APA, MAP, tax relief or a corresponding adjustment).
The benefit of the new Guidelines is that tax payers will not have to prepare the documentation for transactions that do not affect their income tax base.
Although in some cases it will no longer be necessary to keep the documentation, or only the abbreviated documentation will be required, the preparation of the complete or basic documentation will be subjected to even more stringent requirements than before.
The contents of the general section of the complete documentation will also, but not limited to, include the following:
- group risk-level factors;
- description of the supplier-customer chain and markets of five key products or services supplied by the group;
- description of substantial changes in the group’s structure;
- list of the key agreements between the group members concerning intangible assets, including the agreements on contributions to expenditures, licence agreements and agreements on research and development services;
- general description of financing the group; and
- general description of the pricing method for financial transactions between the group members.
Also, the requirements for the specific section of the complete documentation were extended. The most important change is the obligation to elaborate the analysis of functions, risks and assets of a tax payer and relevant dependent persons related to the particular transaction, separately for each transaction.
The Guidelines further specify that the determination of the degree of significance of a financial transaction is based on the highest value of the principal or the underlying assets. Therefore, from now on tax payers will more frequently have to document their financial transactions to a larger extent.
However, the Guidelines still do not specify a clear method of transaction significance determination and tax payers are only referred to the significance characteristics defined in the Accounting Act.
The new Guidelines will be applied for the first time to the submission of the documentation for the tax year commencing after 31st December 2017, and tax payers are allowed to apply the previous Guidelines of the Ministry of Finance of the Slovak Republic by 30th June 2019.
We recommend you contacting your tax advisor or your VGD contact for more detailed information and verification whether the changes described above apply to you.
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