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Companies that are loss-making should expect a tax audit in the near future. The tax administration is mainly examining transfer

For the past few weeks, the Financial Administration has started intensive audits across Slovakia of all manufacturing companies that report long-term losses. This move is related to the upcoming change in transfer pricing rules, but also reflects the governments desire to raise additional tax resources. Silvia Hallová, partner at Grant Thornton, advises on what companies should prepare for and what steps to take to defend their financial statements. 

WHAT CHANGES WITH TRANSFER PRICING

The most significant change ,proposed by the Ministry of Finance in the amendment to the Income Tax Act, which, once approved, is expected to take effect from 1 January 2023, relates to companies (taxpayers) that do not have transfer pricing set on an arms length basis and are outside the intra-quartile range. This is a statistical range in which, for example, the profitability of a sample of companies is located and contains a lower value, an upper value and a midpoint (median). In such a case, the administrator may assess the income tax according to the mean (median) of the independent comparables found.

How the income tax is calculated from the comparables (model example): From a database of companies, which is also available to the tax authorities, the auditors draw a sample of companies for which they are going to ascertain the profitability for a specific period on the basis of various criteria. For example, they select manufacturing companies involved in the production of packaging materials and find that over the last 5 years they have had the lowest profitability of 3%, the highest of 7% and the median (middle value) of 5%. If a company subject to a tax audit has a profitability outside these values, the tax office will tax it at 5% profitability.

It is likely that the law will later add the possibility that, in the context of a tax audit, the taxpayer may demonstrate that it is more appropriate in the circumstances to adjust to another value within a given range of independent values, and if the tax authority accepts this, the tax base will be adjusted according to this value. In the aforementioned example, if the taxpayer demonstrates that a profitability of 3% is in fact more appropriate on the basis of economic arguments and analysis, the tax authority may also accept this lower value.

WHAT AND WHO IS AUDITED BY THE TAX ADMINISTRATION

In their audits, the staff of the tax authorities focus on manufacturing companies that have been loss-making for a number of tax years. "We have information from several clients that the tax inspectors want to see the production, that they check what is the organisational structure of the company in Slovakia and that they check which activities are carried out in Slovakia and which ones are carried out abroad. If the production is solely in Slovakia and customer acquisition and strategic decisions are made outside of Slovakia by a related company, these loss-making companies will be having tax problems in Slovakia", says Silvia Hallová, partner at Grant Thornton.

MANUFACTURING COMPANIES WITH MANAGEMENT ABROAD MAY HAVE A PROBLEM

"Companies that have been reporting losses for a long time, should look at what activities they are carrying out in Slovakia. If they are allocated production contracts by a related party that contracts with customers and provides production through a Slovak related company, these companies should pay attention, as they may soon be subject to tax audits", Silvia Hallová warns. These companies should adress their group, regarding how they have set transfer prices, i.e. prices for the supply of goods and services between related parties.


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Ing. Silvia Hallová LL.M., DipIFR
Partner, Tax Advisor
T (direct) +421 2 59 300 4-74
T (office) +421 2 59 300 4-00
E silvia.hallova@sk.gt.com
Grant Thornton Slovakia