International Tax Planning and Transfer Pricing Planning: Czech Republic from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Czech Republic in the OECD context
    • 2.3 Transfer pricing rules of the Czech Republic
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Reporting requirements
      • 2.3.6 Definition of related companies
      • 2.3.7 Documentation requirements
      • 2.3.8 Cost sharing
      • 2.3.9 Business restructurings
      • 2.3.10 Interaction between customs valuation and transfer pricing
      • 2.3.11 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between the Czech Republic and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty CZ-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 The Czech Republic in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from the Czech Republic to the US
      • 2.4.8 Case study 2: Interests from the Czech Republic to the US
      • 2.4.9 Case study 3: Royalties from the Czech Republic to the US
      • 2.4.10 Case study 4: Management and technical service fees from the Czech Republic to the US
      • 2.4.11 Case study 5: Capital gains with the Czech Republic as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to the Czech Republic
      • 2.4.13 Case study 7: Interests from the US to the Czech Republic
      • 2.4.14 Case study 8: Royalties from the US to the Czech Republic
      • 2.4.15 Case study 9: Management and technical service fees from the US to the Czech Republic
      • 2.4.16 Case study 10: Capital gains with the US as asset country and the Czech Republic as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, the Czech Republic confirms in 2016 with a gross domestic product (GDP) of US$ 193,535 million the seventeenth-highest GDP of the European Union. In the Czech Republic, the general rate of corporate income tax is 19.00%. Foreign-source dividends derived by a resident company constitute a separate taxable base, which is subject to a 15.00% tax. The Czech Republic applies a modified classical system of taxation of corporate profits. Nevertheless, the Czech Republic is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. The Czech Republic has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in the Czech Republic, stable economic growth is projected for 2017 and 2018. Solid labor demand will push unemployment towards its lowest rate in the last two decades, accelerating wage and supporting consumption. Investment was cut sharply in 2016 due to the transition in EU funding programs, but is projected to rebound in 2017. Rising cost pressures will push consumer price inflation to the 2% target during 2017. The central bank has committed to preventing exchange rate appreciation against the euro until at least the second quarter of 2017, to insure against deflationary forces. The policy rate could then cautiously be lifted, as the deflationary threat recedes, with fiscal policy supporting demand if needed. This chapter provides a survey on the actual tax law frame conditions in the Czech Republic and provides practical support in international tax planning and transfer pricing planning between the Czech Republic and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing the Czech Republic applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the cost plus method, the profit split method, the comparable uncontrolled price method, the transactional net margin method, and the resale price method. There is no hierarchy between the methods. Companies are regarded as related for transfer pricing purposes under following conditions: a company owns more than 25% of the capital or voting rights in the other company, or several other companies, which in this case also are regarded as related; or a company participates in the management or control of the other company, or two companies are controlled by or control the same company, or companies which for the purpose of tax avoidance have created a relationship. There are reporting and documentation requirements. Cost sharing is allowed. There is interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between the Czech Republic, that possesses a developed, high-income economy with a per capita GDP rate that is 87% of the European Union average, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] the Czech Republic confirms in 2016 with a gross domestic product (GDP) of US$ 193,535 million the seventeenth-highest GDP of the European Union. In the Czech Republic, the general rate of corporate income tax is 19.00%. Foreign-source dividends derived by a resident company constitute a separate taxable base, which is subject to a 15.00% tax. The Czech Republic applies a modified classical system of taxation of corporate profits. Nevertheless, the Czech Republic is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. The Czech Republic has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] in the Czech Republic, stable economic growth is projected for 2017 and 2018. Solid labor demand will push unemployment towards its lowest rate in the last two decades, accelerating wage and supporting consumption. Investment was cut sharply in 2016 due to the transition in EU funding programs, but is projected to rebound in 2017. Rising cost pressures will push consumer price inflation to the 2% target during 2017. The central bank has committed to preventing exchange rate appreciation against the euro until at least the second quarter of 2017, to insure against deflationary forces. The policy rate could then cautiously be lifted, as the deflationary threat recedes, with fiscal policy supporting demand if needed. Structural policies addressing skill shortages and raising productivity would help sustain the expansion and increase inclusiveness. These include expanding childcare, increasing incentives for business R&D and reducing entry and exit barriers for firms. Public debt is low and the budget is broadly in balance, providing room for fiscal support to enhance growth. Boosting investment should be a priority, and can take advantage of EU funds. Tax and spending policies could better support sustainable growth and equality, notably by lowering the tax wedge on labor income and increasing spending on childcare.

According to Orbitax, [3] (Daily Tax News Digest of 2 November 2016) the Czech Ministry of Finance has announced[4] that the change in the responsible payer for immovable property transfer tax is effective from 1 November 2016. From that date, the buyer of Czech immovable property is required to pay the transfer tax due, and in no case may the tax obligation be contractually assigned to the seller. Under prior rules, the seller was required to pay the transfer tax while the buyer was only required to act as a guarantor in certain cases.

According to Orbitax, [5] (Daily Tax News Digest of 1 November 2016) the Czech Ministry of Finance has launched a public consultation seeking input on income tax issues as it prepares for the recodification of the country's income tax laws. The consultation covers both general and specific issues for the new law(s), including: The purpose of income tax; The type of tax system (accrual vs. cash); The guiding principles for tax legislation; Whether personal and corporate income tax should be regulated by a single law or separate laws; The terminology of the tax law; The structure of the tax law; The appropriation of income taxes; Transition from the current law; The basis for the definition of income and determination of the tax base; and Cross-border issues, including whether to adopt a territorial tax system or maintain current system, exit taxes, and others. [6] Comments are due by 10 November 2016.

According to Orbitax, [7] (Daily Tax News Digest of 17 august 2016) the Czech Ministry of Finance has launched a public consultation on draft legislation (Czech language) [8] for the introduction of Country-by-Country (CbC) reporting requirements in line with Action 13 of the OECD BEPS project, and the requirements included in Council Directive (EU) 2016/881 on the exchange of CbC reports (previous coverage). The consultation runs through 30 August 2016, after which final draft legislation will be submitted to parliament for approval. As drafted, the CbC reporting requirement will apply for fiscal years beginning on or after 1 January 2016 for Czech-parented MNE groups meeting the standard consolidated group revenue threshold of EUR 750 million in the previous year (or equivalent in Czech koruna based on the January 2015 exchange rate). The draft legislation also provides for secondary reporting requirements, whereby a CbC report will need to be filed by a constituent entity in the Czech Republic or a surrogate parent entity if the Czech authorities are unable to obtain a CbC report through exchange from the ultimate parent's jurisdiction of residence. In general, the secondary reporting requirements will apply for fiscal years beginning on...

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