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E-Book VAT Dispute;

Supplier’s Financial Condition to Be Considered;

Insufficiently Documented Difference between Standard Prices and Transfer Price for Tax Purposes;

Employment-Related Financial Benefits

  • E-Book VAT Dispute

The EU’s Court of Justice decided that e-books are subject to the base VAT rate, which ends a lengthy dispute among Member States with differing views since the VAT Directive makes no reference to e-books.

The debatable decision may serve as an impulse for EU legislative bodies and speed up the relevant legislative steps needed to unify tax rates applicable to physical books and e-books.

  • Supplier’s Financial Condition to Be Considered

One of the Supreme Administrative Court’s recent rulings features a fairly substantial review of the circumstances under which the tax authority can call upon a customer (as a guarantor) to pay VAT which the supplier failed to pay. The guarantee will apply in cases where the customer knew or should and could have known at the moment the taxable supply was made that the supplier would deliberately not pay the tax.

In the case in question, the supplier, which was in poor financial condition, sold goods to the customer and rented real property to the customer on a long-term basis. The customer paid by offsetting the price against the debt owed by the supplier. However, the supplier was not financially capable of paying the VAT and subsequently went bankrupt. The tax authority then called upon the customer to pay the VAT (on the grounds of the customer-guarantee). Subsequently, the customer filed a lawsuit seeking annulment of the tax authority’s decision. After having reviewed all circumstances, the Supreme Administrative Court held that the customer could and should have known that the supplier was not financially capable of paying the tax and, therefore, that it had no intention of doing so.

The interpretation which the Court chose in relation to the supplier’s indirect intention not to pay the tax is fairly broad and could, under certain circumstances, lead to a situation in which all the authorities would try to claim unpaid VAT from customers whose suppliers went bankrupt. Therefore, parties doing business with suppliers who they know are currently or potentially financial unstable should thoroughly consider the tax implications.

  • Insufficiently Documented Difference between Standard Prices and Transfer Price for Tax Purposes

The dispute involved a transaction in which the claimant agreed to rent a land tract to a company in which she owned a 50% stake for the token amount of CZK 1 without increasing her tax base by the difference between the token and arm’s length rents. Since she failed to reason the difference sufficiently to the tax authority, it increased her income tax based on the difference and assessed tax accordingly. Both the Regional Court and the Supreme Administrative Court dismissed the lawsuit and confirmed the tax authority’s approach.

The reasoning of the court rulings implies that if a tax entity wants to satisfactorily justify the difference between an agreed and arm’s length (standard) price (see Section 23(7) of the Income Tax Act) they must claim and prove that there are special, out-of-the-ordinary market conditions yet economically sound and rational grounds for the agreed price to differ from the arm’s length price. Grounds such as the parties’ interest in tax optimization or in maximizing the joint revenue of related parties, which the claimant presented, cannot be considered to constitute satisfactory documentation of the difference as per Section 23(7) of the Income Tax Act.

  • Employment-Related Financial Benefits

The Supreme Administrative Court dismissed a special appeal filed by the Appellate Financial Directorate regarding the tax implications of a financial benefit granted to an employee in 2009: the employer granted its employee a loan whose interest was lower than the arm’s length interest. The dispute arose because the employee was also a member of the employer’s executive body and a sole member in the company which was the sole shareholder in the employer. The special appeal was dismissed as illegitimate.

Although the relevant provisions of the Income Tax Act changed, the reached an important conclusion regarding the application of statutory arm’s length provisions. The Supreme Administrative Court held that the arm’s length provisions do not apply to performance granted to employees since the employment income tax provisions are special provisions in relation to the general arm’s length provisions.

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