In its official Finančný spravodajca bulletin no. 34/2018 published in 2018, the Ministry of Finance announced new guidelines no. MF/019153/2018-724 (“Guidelines”) defining the contents of transfer documentation and which is accessible on the Ministry of Finance’s website at https://www.finance.gov.sk/sk/financie/financny-spravodajca/2018/.
Like the original text of the guidelines, documentation related to transfer pricing is classified as complete, basic or abbreviated documentation depending on its scope. However, a significant change compared to the original text is that the scope of transfer documentation has been decoupled from type of taxpayer and now depends on the type of controlled transaction (significant / insignificant, cross-border / domestic). Given the above, various controlled transactions may be reported in varying degrees, even though the same taxpayer is involved.
The Guidelines also resolve the documentation obligations of permanent establishments. No significant changes were made with respect to specific public sector transfer pricing rules.
The process of defining the significance of a controlled transaction does not have a minimum defined transaction value. The Guidelines, like the original text, refer to the definition of significance defined in the Accounting Act and in international IFRS standards. The guideline cancels the €1,000,000 minimum transaction value above which transactions were subject to detailed specification in documentation.
Another significant change is that the Ministry of Finance provided a standardised form for abbreviated documentation as an annex to the Guidelines.
Like the original guidelines, complete documentation or basic documentation is completed separately for every controlled transaction or collectively for a group of controlled transactions. If the documentation is completed for a group of transactions, the documentation must stipulate the reasons for including the transactions into a group. Documentation is maintained for the related tax year.
These Guidelines are applied for the first time when submitting documentation for the tax period beginning on 31 December 2017, while taxpayers may apply the original guidelines published in 2016 until 30 June 2019 at the latest.
|Type of controlled transaction||Complete||Basic||Abbreviated|
|Significant cross-border controlled transactions of a taxpayer obliged to report earnings in individual financial statements per the IFRS||X|
|Cross-border controlled transactions if the value of such controlled transactions for the tax period exceeded €10,000,000,||X
|Significant controlled transactions with related parties which are taxpayers of a non-contracting country||X|
|Controlled transactions for which the taxpayer requests that the tax administration issue a decision approving the valuation method||X|
|Controlled transactions for which the taxpayer requests a tax base adjustment other than modification of the income tax base modification (“tax base”) in relation to domestic controlled transactions||X|
|Controlled transactions for which a petition was filed to initiate the dispute resolution mechanism with respect to taxation for the given tax period.||X|
|Significant cross-border controlled transactions of a taxpayer applying tax relief in the tax period||X|
|Significant cross-border controlled transactions of a taxpayer whose total earnings from economic and financial activities in the given tax period exceeded €8,000,000.||X|
|Controlled cross-border transactions if the annual value of such controlled transaction exceeds €1,000,000,||X|
|Significant domestic controlled transactions of a taxpayer applying tax relief in the tax period.||X|
|Insignificant controlled transactions with related parties that are taxpayers of a non-contracting country.||X|
|Significant controlled transactions of a taxpayer required for the given tax period to have their financial statements verified by an auditor under §19 of the Accounting Act||X
|Significant controlled transactions of a natural person taxpayer who determines their tax base or tax loss under §17 of the Income Tax Act,||X
|Significant controlled transactions with related parties who are taxpayers with unlimited tax liability, except for controlled transactions in relation to permanent establishments of such taxpayers located abroad;||X|
|Significant controlled transactions of a taxpayer who is a consolidating accounting unit or consolidated accounting unit under §22a of the Accounting Act for domestic controlled transactions with other parties that are a consolidating accounting unit or a consolidated accounting unit under §22a of the Accounting Act or with parties specified in the point below||X|
|Significant controlled transactions of a taxpayer with direct participation or indirect participation of the government, municipality or higher territorial unit in assets, control or management which are not a consolidated accounting unit under §22a of the Accounting Act, for domestic controlled transactions with other taxpayers with direct participation or indirect participation of the government, municipality or higher territorial unit in assets, control or management which are not a consolidated accounting unit under §22a of the Accounting Act or with taxpayers per the point above||X|
|Significant controlled transactions of a taxpayer in the tax period in which tax relief is applied.||X|
In the case of controlled transactions for which documentation is not completed under these Guidelines, the obligation under §18 (1) of the Income Tax Act is met by filing a properly completed income tax return for the corresponding tax period, and especially the portion concerning transactions with related parties under §2 (n) of Act No. 595/2003 Coll. as amended.
|Type of controlled transaction||Complete||Basic|
|General group documentation|
|a) identification and legal form of individual members of a group of related parties (“Group”), a description of the organisational and ownership structure of the Group, including changes compared to previous tax periods,||X||X
|b) a description of the Group’s business activities and its business strategy,||X|
|c) the primary factors of the Group’s profitability,||X|
|d) a description of the supply chain and markets for the five most important (or all, if there are less than five) categories of the Group’s products or services,||X|
|e) a description of the supply chain and markets for categories of the Group’s products or services that account for more than 5% of the Group’s turnover,||X|
|f) a list and brief description of significant agreements on services within the Group, except for research and development services, and the valuation method for these services,||X|
|g) a brief description of the functions, risks and assets of the individual members of the Group, including changes compared to the previous tax period,||X||X|
|h) a description of important changes in the structure of the Group, significant acquisitions or sales of any part of the Group,||X|
|i) a description of the Group’s overall strategy towards creating, holding and using intangible assets, including the sites of primary research and development facilities in the Group and locations from which research and development activities are managed,||X|
|j) a list of significant items or categories of intangible assets in the Group with identification of their owner,||X|
|k) a list of important agreements between members of the Group concerning intangible assets, including agreements on contributions towards costs, licensing agreements and agreements on research and development services,||X|
|l) a general description of the pricing method used for controlled transactions concerning intangible assets within the Group,||X|
|m) a general description of significant changes in the ownership of intangible assets between related parties within the tax period, including identification of relevant members of the Group and payment made for such changes,||X|
|n) a general description of the method of financing within the Group, including significant agreements concerning financial with independent parties,||X||X|
|o) identification of Group members performing centralised activities in the area of Group financing,||X|
|p) a general description of the pricing method used in financial transactions between Group members,||X|
|q) the Group’s consolidated financial statements for the given tax period if completed after the submission of documentation,||X|
|r) a list and brief description of existing measures concerning prior valuation and binding tax opinions concerning the division of profits between individual members of the Group,||X|
|s) other information towards demonstrating the conformity of the prices that are used with the arm’s-length principle.||X|
|a) identification and legal form of the taxpayer, specification of its organisational and ownership structure, specification of organisational units within the Group who are subordinate to the taxpayer within the organisational structure of the Group, including changes in comparison with the previous tax period,||X||X|
|b) a description of the taxpayer’s business activities and its business strategy, including changes in the structure of business activities of transfers of intangible assets within the current or previous tax period, including changes compared to the previous tax period,||X||X|
|c) for an individual controlled transaction or group of controlled transactions:|
|1. a description of the controlled transaction or group of controlled transactions and circumstances of its implementation,||X||X|
|2. a financial statement as to the value of the controlled transaction or group of controlled transactions for the relevant tax period broken down by individual related parties,||X||X|
|3. a copy of the contract relevant to the controlled transaction or group of controlled transactions if available in written form,||X||X|
|4. analysis of the functions, risks and assets of the taxpayer and relevant related parties in connection with the given transaction,||X||X
|5. the valuation method applied to a controlled transaction and justification for its use, including prerequisites for the use of such method,||X||X|
|6. the selected test party for the purposes of comparability analysis, including justification for such selection, if relevant,||X|
|7. internal comparable transactions, external comparable transactions or data of independent parties, including specification of the sources and methods used to obtain such data, comparability analysis (information on the factors determining the comparability of controlled transactions with uncontrolled transactions, characteristics of assets or services, analysis of functions, contractual conditions, economic environment, specific business strategies),||X|
|8. a description of any modifications for the purposes of comparability, if performed,||X|
|9. justification for the conformity of the valuation of a controlled transaction or group of controlled transactions with the arm’s-length principle,||X||X
|10. summary of all financial information applied when using the specific valuation method for a controlled transaction or group of controlled transactions and a description of their links to data in the taxpayer’s financial statements,||X|
|11. a copy of any prior valuation measures concerning the specific controlled transaction or group of controlled transactions, such as approved valuation methods, if such measures were not published in Slovakia,||X|
|d) other information towards demonstrating the conformity of the prices that are used with the arm’s-length principle.||X|
Conclusion and recommendations
The new Guidelines make significant changes to the documentation obligation when preparing transfer documentation. These changes primarily affect small and medium enterprises. The Ministry of Finances notes that the Guidelines only specify the minimum scope of documentation. The tax administrator may call on a taxpayer to provide additional information to demonstrate the conformity of prices used in controlled transactions with the arm’s-length principle.
We note that the provisions of §17 (5) of the Income Tax Act remain unchanged. Therefore, the tax base for a related party includes the difference by which such prices or conditions differ in controlled transactions from prices and conditions in comparable transactions, whereby this difference is used to decrease the tax base or to increase a tax loss. This means that even if a related party is not obliged to maintain transfer documentation in certain cases, the tax administrator may call on the party to demonstrate the conformity of prices with the arm’s-length principle. In order to limit tax risk during a tax audit, we therefore recommend that you continue to apply the arm’s-length principle in price verification.