New guidance on the content of transfer pricing documentation (criteria for preparation of documentation, materiality of transactions) – PART 1

In December 2018, the Ministry of Finance of the Slovak Republic issued an amendment to the guidelines, which regulates the requirements for the content of transfer documentation. This change can be seen as positive from an administrative point of view, but it did not significantly relax the obligations for tax entities trading with related parties.

The most significant changes in the preparation of transfer documentation are:

• changes in the criteria of taxpayers and transactions for the obligation to produce some of the documentation;
• the obligation to prepare documentation only for significant transactions;
• the possibility of exemption from the documentation obligation;
• a significant extension of the scope of the full documentation;
• the creation of a structured template for abbreviated documentation; and
• some general principles (rights of the tax administrator, transactions that do not affect the tax base, group documentation treatment, etc.)

Changes to the criteria for taxpayers to be required to prepare any of the transfer documentation

Abridged transfer documentation

According to the new guidelines, abbreviated transfer documentation is prepared only for significant controlled transactions of these taxpayers:

• Audited taxpayers – the new guidance increases the size threshold for the obligation to prepare abbreviated transfer documentation from a micro-entity to a taxpayer subject to the obligation to have its financial statements audited by an auditor;
• Permanent establishments – the transfer documentation obligation has not changed for transactions with a permanent establishment in the territory of the Slovak Republic;
• Natural persons – nothing has changed for natural persons, as the Ministry has methodologically already provided guidance in the past that the transfer pricing rules and the adjustment of the tax base for natural persons apply only if these persons proceed in determining the tax base in accordance with Sections 17 to 29 of the Income Tax Act; and
• Public administration entities – as under the previous guidance, abbreviated transfer documentation is prepared by public administration entities for transactions with other public administration entities.

The only exception to materiality is for taxpayers claiming tax relief. These taxpayers are required to have abbreviated transfer documentation for all controlled transactions, except for those controlled transactions where they are required to prepare basic or full transfer documentation.

Basic transfer documentation

This documentation is prepared by taxpayers who have total annual revenues of more than EUR 8 million. It concerns their significant and cross-border controlled transactions.

It also prepares the basic transfer documentation:

• a taxpayer for a cross-border controlled transaction (or group of controlled transactions) over 1 million EUR;
• a taxpayer claiming tax relief on domestic significant controlled transactions; and
• the taxpayer in the case of insignificant controlled transactions with dependants who are taxpayers of the so-called. non-contracting state.

Full transfer documentation

As regards full transfer documentation, here the obligation has to be seen in the context of several criteria:

• according to the entity, the obligation only applies to significant cross-border controlled transactions, namely for (i) a taxpayer that has an IFRS accounting obligation and (ii) a taxpayer that claims a tax credit;
• according to the transaction, the obligation applies when (i) a controlled transaction (or group of transactions) above EUR 10 million EUR (ii) in the case of a significant transaction with a dependent person from the so-called (ii) a related party of a non-Contracting State; and
• for applications, the following (i) an application for a decision on the approval of a valuation method (ii) an application for adjustment of the taxable amount of a cross-border transaction (iii) a request for the initiation of a dispute resolution mechanism for taxation disputes.

In the new guidance, the requirement to prepare full transfer documentation has been removed for taxpayers amortising tax losses to any extent.

Significance of the transaction

The new guidance also generally abandoned the rule that if a taxpayer was required to prepare basic or full transfer documentation for significant transactions, it was required to prepare abbreviated transfer documentation for all other controlled transactions.

What constitutes a significant transaction is for the taxpayer to determine, primarily in the context of the Accounting Act. However, in general terms, a significant transaction is a transaction that is worth more than one per cent of the taxpayer’s annual turnover. Under the Accounting Act, information is considered material if its omission or misstatement in the financial statements could affect the judgement or decision-making of the user.

Author of the article: Mgr. Andrej Choma, transfer pricing specialist