Relief from the documentation obligation does not mean relief from compliance with the arm’s length principle

In December 2018, the Ministry of Finance of the Slovak Republic issued an amendment to the guidelines on the determination of the content of documentation pursuant to Art. 1 of Act No. 595/2003 Coll. on income tax. The new guidance has the number MF/019153/2018-724 (“the new guidance”) and is published in the Financial Bulletin 2018 as paper no. 34.

This new guideline should be seen positively as it reduces the administrative burden for SMEs by completely removing the obligation to prepare transfer documentation or reduces the documentation obligation to only abbreviated transfer documentation which is in a simplified structured form. At the same time, this Guideline introduces a documentation obligation only for significant transactions.

However, it is necessary to point out to all taxpayers who adjust the tax base within the meaning of Sections 17 to 29 of the Income Tax Act (all corporations and certain individuals) that, irrespective of the documentation requirement, Section 17 para. 5 of the Income Tax Act has not been changed and the tax authority may still adjust the taxpayer’s tax base if the prices for goods and services between dependants are not set at market rates (in accordance with the arm’s length principle).

This means that if the taxpayer does not have a documentation obligation, the tax administrator cannot penalize him. However, if the taxpayer is not obliged to submit the transfer documentation to the tax administration, it does not mean that the tax administration cannot ask the taxpayer to demonstrate the pricing set-up for the transactions under audit.

If the taxpayer has a documentation obligation and thus has to prepare abbreviated, basic or full transfer documentation, the tax administrator may also ask the taxpayer to submit additional information to demonstrate that the prices used in the controlled transactions comply with the arm’s length principle. For this reason it is also important to have a properly set transfer pricing policy.

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