Czech Transfer Pricing Case Highlights Importance of Burden of Proof

In the case of Appellate Financial Directorate vs ERT Automotive Bohemia s.r.o, The Supreme Administrative Court of the Czech Republic ruled in favour of ERT Automotive in a transfer pricing dispute. This Czech transfer pricing case underscores the complexities of transfer pricing methodologies and the critical importance of the burden of proof in tax disputes.


This case will be discussed in detail at the upcoming “2024 WU Transfer Pricing Symposium: Transfer Pricing Case Law around the World” on DAY 1 under Transfer Pricing and Burden of Proof. Click here for more information on the symposium.

Importance of Burden of Proof in Transfer Pricing Cases

Establishing the Foundation of Transfer Pricing Adjustments

In transfer pricing cases, the burden of proof typically lies with the tax authorities to demonstrate that the prices set between related parties deviate from those that would have been agreed upon by independent entities under similar circumstances. This principle ensures that any adjustments made to a taxpayer’s income are based on clear and convincing evidence rather than assumptions or arbitrary decisions.

Tax Authorities’ Responsibility

  1. Proving Controlled Transactions and Reference Prices:
    • The tax authorities must first prove that the transactions in question occurred between related parties and that these transactions were controlled.
    • They must also establish the reference price—the price that would have been agreed upon between independent parties. This involves selecting appropriate comparable transactions and making necessary adjustments to account for differences between the controlled and uncontrolled transactions.
  2. Demonstrating Price Differences:
    • The tax authorities must convincingly demonstrate that the transfer prices set by the taxpayer differ from the reference prices. This requires a thorough and transparent analysis of the pricing methods and comparables selected.
    • In the ERT Automotive case, the tax authorities initially used the Transactional Net Margin Method (TNMM) and later shifted to the Comparable Uncontrolled Price (CUP) method. The court found that the tax authorities did not adequately justify their choice of comparables or adjustments, highlighting the importance of detailed and accurate evidence.
    • The court emphasized that the primary burden of proof lies with the tax authorities. They must demonstrate that the prices agreed between related parties differ from those that would have been agreed between unrelated parties under similar circumstances.

Taxpayer’s Responsibility

  1. Providing Explanations and Evidence:
    • Once the tax authorities establish a prima facie case, the burden shifts to the taxpayer to provide explanations and evidence supporting their transfer pricing policies.
    • In this case, ERT Automotive provided detailed explanations of the costs covered by their pricing and the business circumstances influencing their transfer prices. The court criticized the tax authorities for not adequately addressing these explanations.

Ensuring Fairness and Accuracy

  1. Protecting Taxpayers’ Rights:
    • The burden of proof ensures that taxpayers are not subject to arbitrary or unjustified adjustments. Tax authorities must base their assessments on solid evidence and logical reasoning.
    • By requiring tax authorities to substantiate their claims, the burden of proof protects taxpayers from potential abuses of power and ensures that tax assessments are fair and transparent.
  2. Facilitating Judicial Review:
    • A clear burden of proof helps courts evaluate the legitimacy of tax authorities’ claims and the adequacy of the evidence provided. In this case, the Supreme Administrative Court found that the tax authorities did not meet their burden of proof regarding the determination of the reference price and the adjustment of the taxpayer’s income.

Implications for Multinational Corporations and Tax Authorities

  1. For Multinational Corporations:
    • This case underscores the importance of maintaining meticulous transfer pricing documentation and being prepared to provide detailed explanations and evidence during audits.
    • Companies should ensure their transfer pricing policies are robust and defensible, with a clear rationale and supporting data for the prices set between related entities.
  2. For Tax Authorities:
    • Tax authorities must apply consistent and transparent methods when determining reference prices and making adjustments. They need to ensure their analyses are thorough, logical, and well-documented.
    • Adequately addressing taxpayers’ evidence and explanations is crucial to meeting the burden of proof and ensuring that tax assessments are fair and justified.

A Quick Analysis of Transfer Pricing Methods Used: CUP Method vs. TNMM

Revenue Authority’s Perspective:

  • CUP Method: The tax authorities preferred the CUP method, comparing the controlled transaction with a subsequent transaction between ERT Automotive Bohemia and Boshoku Automotive. They believed this method provided a direct comparison of prices for similar services.
  • TNMM: Initially used the TNMM, which compares the net profit margins of the controlled transaction with those of comparable independent transactions. The authorities later abandoned this method, possibly due to difficulties in finding appropriate comparables.

Taxpayer’s Perspective:

  • CUP Method: ERT Automotive Bohemia argued that the tax authorities’ application of the CUP method was flawed because it did not properly adjust for differences in roles and risks between the transactions.
  • TNMM: The taxpayer might have preferred the TNMM, as it considers overall profitability rather than specific transaction prices, which could be more favourable given their unique business circumstances.

Best Method

From a transfer pricing perspective, the best method depends on the specific facts and circumstances of the case. In this instance, a combination of methods might have provided a more comprehensive analysis. The TNMM could offer insights into overall profitability, while the CUP method, if applied correctly with appropriate adjustments, could provide a direct price comparison.


The ERT Automotive Bohemia case is a stark reminder of the critical importance of the burden of proof in transfer pricing disputes. It highlights the need for both taxpayers and tax authorities to approach these issues with diligence, thorough documentation, and well-substantiated analyses. As transfer pricing continues to be a focal point for tax authorities worldwide, understanding and effectively managing the burden of proof will be crucial for multinationals seeking to navigate this complex landscape.

By implementing robust preventative measures and maintaining comprehensive documentation, companies can significantly reduce their risk exposure and be better prepared to meet their burden of proof obligations in the event of a transfer pricing dispute. As the global tax environment evolves, staying informed about cases like ERT Automotive Bohemia and participating in forums such as the WU Transfer Pricing Symposium will be essential for professionals in this field.

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