The reaction of the Slovak Financial Administration to transfer pricing issues

Abstract

Purpose of the article The importance of transfer pricing over the past two decades, when changes in the digital environment reached their peak, has been fully demonstrated. Also, the authorities that deal with them are fully aware of this. It's not only supranational organizations like, for instance, OECD or EU, but also specifically the tax administrations of individual states. Therefore, the main purpose of this paper is to bring a new perspective on the connection of transfer pricing, its controls by the Financial Administration of the Slovak Republic and the transfer of the headquarters of Slovak companies to selected jurisdictions called tax havens.

Methodology / methods The analysis is based on the use of secondary data from the Annual Reports of the Financial Administration of the Slovak Republic and the company Bisnode, ltd. for the period 2005-2017. The paper uses graphical methods to visualize the development of the indicators, the number of tax inspections and the development of the number of Slovak companies that have moved their headquarters to tax havens. In addition, we use the calculation of the indicator which gives the ratio of corporate income tax revenues (CITR) per gross tax revenues (GTR). The last method is a simple linear regression model that detects the dependence between the number of companies that moved their headquarters into the tax haven and the number of transfer pricing controls performed, as well as the dependence between the number of Slovak companies which moved the tax haven to the selected indicators.

Scientific aim Based on available data, the scientific aim of this contribution is to analyze the approach of the Financial Administration of the Slovak Republic in the context of tax audits in the framework of transfer pricing, supplemented by an analysis of the relationship between controls on transfer pricing and the moving of Slovak companies into tax havens. The partial aim is to point out the indicators used by the Financial Administration of the Slovak Republic for tax controls for transfer pricing and the impact of transferring official seats of Slovak companies to tax havens on corporate income tax revenues.

Findings The total number of tax audits carried out by the Financial Administration of the Slovak Republic decreased between 2005 and 2017, but the level of findings and the effectiveness of controls increased. Since 2015, there has been a sharp increase not only in the number of tax checks for transfer pricing, but also in the level of findings. This year's adoption and progressive implementation of the BEPS plan, in which attention is paid not only to transfer pricing but also to tax challenges in the digital economy, is also underway. An increasing number of Slovak companies with the owner in midshore jurisdictions have a statistically significant impact on the number of checks carried out under transfer pricing and the number of Slovak companies with owners in Cyprus, Luxembourg and Liechtenstein has a statistically significant impact on the share of CITR per GTR.

Conclusions The main limits include the incomplete list of tax havens which are used at the first level of ownership by Slovak companies, for example Great Britain is missing. The outcomes of our analysis point to the statistically significant impact of the use of companies from Cyprus, Luxembourg and Liechtenstein on corporate income tax revenues, but do not specify the methods and techniques of profit shifting applied by the companies. On the other hand, however, it is one of the few empirical evidences that the direct equity connection of Slovak companies to selected tax havens has a direct impact on the collection of corporate income tax revenues.