International Tax Planning and Transfer Pricing Planning: Slovak 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 high tax country Slovak Republic in the OECD context
    • 2.3 Transfer pricing rules of the Slovak Republic
      • 2.3.1 Laws and rules
      • 2.3.2 Arm's length principle
      • 2.3.3 Transfer pricing methods
      • 2.3.4 Definition of related companies
      • 2.3.5 Reporting requirements
      • 2.3.6 Documentation requirements
      • 2.3.7 Cost sharing
      • 2.3.8 Interaction between customs valuation and transfer pricing
      • 2.3.9 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between the Slovak Republic and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Slovak Republic-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Slovak Republic in brief
    • 2.5 USA in brief
      • 2.5.1 Design of case studies
      • 2.5.2 Case study 1: Dividends from the Slovak Republic to the US
      • 2.5.3 Case study 2: Interests from the Slovak Republic to the US
      • 2.5.4 Case study 3: Royalties from the Slovak Republic to the US
      • 2.5.5 Case study 4: Management and technical service fees from the Slovak Republic to the US
      • 2.5.6 Case study 5: Capital gains with the Slovak Republic as asset country to the US as seller country
      • 2.5.7 Case study 6: Dividends from the US to the Slovak Republic
      • 2.5.8 Case study 7: Interests from the US to the Slovak Republic
      • 2.5.9 Case study 8: Royalties from the US to the Slovak Republic
      • 2.5.10 Case study 9: Management and technical service fees from the US to the Slovak Republic
      • 2.5.11 Case study 10: Capital gains with the US as asset country and the Slovak Republic as seller country
    • 2.6 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, the Slovak Republic confirms in 2016 with a gross domestic product (GDP) of US$ 90,263 million the seventeenth-highest GDP of the European Union. In the Slovak Republic, the national corporate income tax is levied at a rate of 22.00%. Thus, the Slovak Republic is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. The Slovak Republic has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, strong economic growth is set to continue in the Slovak Republic, reaching 3.8% in 2018. An improving labor market will underpin household spending. Investment is expected to recover, as a slowdown in projects financed by EU funds in 2016 will be compensated by other new public infrastructure spending and stronger business investment. Exports will continue to benefit from the expansion in the automotive sector, which is ramping up production. The euro area monetary policy stance remains supportive, but a more ambitious structural reform program is needed to share prosperity widely across society. In particular, measures to improve efficiency in health care and education services are important to enhance well-being and make growth more inclusive and sustainable. This chapter provides a survey on the actual tax law frame conditions in the Slovak Republic and provides practical support in international tax planning and transfer pricing planning between the Slovak Republic and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing the Slovak Republic applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the transactional net margin method (TNMM), and the profit split method (PSM). CUP, RPM and the cost plus methods are preferred over PSM and TNMM. A company is regarded as related to another if it holds, directly or indirectly, 25% of the capital or voting rights of the other company. For transfer pricing purposes, companies are treated as related if they have established a business relationship only for the purpose of reducing the tax costs. 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 Slovak Republic, a developed, high-income economy, with the GDP per capita equalling 76% of the average of the European Union in 2014, 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 Slovak Republic confirms in 2016 with a gross domestic product (GDP) of US$ 90,263 million the seventeenth-highest GDP of the European Union. In the Slovak Republic, the national corporate income tax is levied at a rate of 22.00%. Thus, the Slovak Republic is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. The Slovak Republic has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] strong economic growth is set to continue in the Slovak Republic, reaching 3.8% in 2018. An improving labor market will underpin household spending. Investment is expected to recover, as a slowdown in projects financed by EU funds in 2016 will be compensated by other new public infrastructure spending and stronger business investment. Exports will continue to benefit from the expansion in the automotive sector, which is ramping up production. The euro area monetary policy stance remains supportive, but a more ambitious structural reform program is needed to share prosperity widely across society. In particular, measures to improve efficiency in health care and education services are important to enhance well-being and make growth more inclusive and sustainable. Strong fiscal revenues driven by the improving cyclical position and better tax collection will provide tailwinds for the government's plan to reduce the deficit, as population ageing presents a serious medium-term challenge. Nevertheless, improving public-sector efficiency and changing the composition of spending can provide fiscal space to finance extra growth-enhancing measures in areas such as education and R&D. Additional support can come from rebalancing the tax mix away from direct taxes and social security contributions towards property and environmentally related taxes.

According to Orbitax, [3] (Daily Tax News Digest of 6 December 2016),

the Slovak parliament has approved several amendments to the income tax law as part of the 2017 Budget. The main changes affecting corporate taxpayers include:

  • The corporate tax rate is reduced from 22% to 21%;
  • A 35% withholding tax is introduced for dividend payments to non-treaty/TIEA jurisdictions (dividend payments to jurisdictions that have a treaty/TIEA with Slovak Republic generally remain exempt);
  • A 35% tax is introduce on dividends received from non-treaty/TIEA jurisdictions; and
  • Unilateral, bilateral, and multilateral advance pricing agreements will all be explicitly allowed.

Click the following link for the legislation as approved (Slovak language). The legislation must be published in the Official Gazette before entering into force and will generally have effect from 1 January 2017.

the Explanatory MemoOn 30 August 2016, the Danish government presented its tax reform plan for 2017 through 2025. The plan includes a number of major measures, including:

The introduction of an equity investment allowance in 2019 in the form of a notional interest deduction that will be based on equity in excess of the amount existing at the end of 2018, with an annual rate based on the average two-year Central Bank interest rate capped at 3%;

The introduction of an additional 50% deduction for qualifying R&D expenses from 2017 to 2025 for SMEs and an additional 25% for large enterprises (150% and 125% total deduction respectively);

The introduction of a three-year tax holiday exemption for new entrepreneur start-ups with a taxable income cap of DKK 7 million, which is to be available from 2017 and set to expire in 2021, but may be extended; and

A reduction in individual income taxation overall, with a reduction in the maximum tax burden, including state, municipal and health contributions, from the current 51.95% to 46.98%.

The reform measures must be approved by parliament, and are subject to change.

As part of the 2017 Budget, the Finnish government has proposed adjusting the individual income tax rates and brackets as follows:

EUR16,900 up to 25,300 - 6.25%

over EUR 25,300 up to 41,200 - 17.5%

over EUR 41,200 up to 73,100 - 21.5%

over EUR 73,100 - 31.55%

In addition, a proposal has been submitted that would decrease the pension contribution payable by employers, while increasing the contribution payable by employees. As proposed, the employer contribution rate would be decreased by 0.2% in 2017 and 2018 and by 0.4% in 2019 and 2020, with corresponding increases in the employee contribution at the same rates.

On 6 October 2016, the Portuguese government the approval of the Special Program for the Reduction of Debts to the State. Under the program, both individuals and businesses that pay outstanding tax and social security debts by the end of 2016 will not be subject to interest. The program also allows taxpayers to enter into an installment plan with a maximum duration of 11 years (150 payments) without the need to provide a guarantee. The regularization program is available for tax debts due up to 31 May 2016 and social security debts due up to 31 December 2015.

26.08.2016

According to recent...

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