Tax Litigation Topics in the Automotive Sector
The automotive industry has undergone a significant structural transformation in recent years. Car producers and their suppliers are investing in electromobility, production automation, process digitalisation and the restructuring of global supply chains. While these developments create new business opportunities, they also increase tax risks and the intensity of audits conducted by tax and customs authorities.
During tax audits, tax authorities have long focused not only on individual transactions themselves, but also on the broader economic context of a company's operations. In the area of transfer pricing and holding structures, they typically examine the actual allocation of functions and risks within the group, the performance of management and strategic functions, and the economic rationale of the chosen operating model. In many cases, the key issue is not only the correct interpretation of tax legislation, but also a company's ability to substantiate its claims through sufficiently detailed written evidence and other relevant supporting documentation.
The Czech automotive sector is characterised by a strong concentration of multinational groups. Manufacturers and R&D centres are frequently part of international groups that engage in a significant volume of intra-group transactions. In the area of transfer pricing, tax authorities focus primarily on the allocation of functions and risks within the group and the corresponding level of profitability of Czech entities. During periods of significant market volatility, questions often arise as to whether extraordinary losses or declines in profitability have been allocated appropriately among individual group companies. In some cases, tax audits also focus on licensing arrangements and intra-group services, particularly where such charges are incurred in addition to the company's core manufacturing or development activities.
Transfer pricing has therefore remained one of the key priorities of the tax authorities for several years. Tax audits also frequently focus on investment incentives, which are often received by companies in the automotive sector. Corporate income tax audits often examine the tax deductibility of recorded expenses. In addition, tax authorities regularly review whether companies are entitled to claim R&D tax relief. Group restructurings involving e.g. changes to supply chain models or the transfer of functions and risks among group companies are also frequently subject to review. In recent years, tax authorities have increasingly focused on intra-group financial transactions as well.
Although this article primarily reflects experience from the Czech Republic, automotive companies in other Central European countries face similar challenges. While the specific nature of tax audits may vary between jurisdictions, issues such as transfer pricing, intra-group transaction documentation and preparedness for tax audits remain common challenges across the region.
Successful procedural defense requires not only properly prepared transfer pricing documentation, but also the systematic collection, retention and archiving of relevant supporting evidence. Tax authorities frequently require companies to substantiate matters relating to previous tax periods. It is essential that the documentation accurately reflects the actual conduct of the local business and its specific circumstances. Documentation prepared at the group level may not always fully capture these local particularities.
Tax authorities also focus intensively on other areas within the automotive sector. In relation to VAT, they review the entitlement to deduct input VAT and the application of VAT exemptions to cross-border chain transactions. In the area of personal income tax, audits frequently examine employee and management benefits, their correct tax treatment and the associated tax and social security contributions. Within manufacturing businesses, authorities also frequently scrutinise the use of agency workers and the provision of services. Tax authorities and other supervisory bodies pay particular attention to situations where the actual nature of the arrangement could indicate disguised employment or an attempt to circumvent labour and tax obligations.
How Deloitte can help?
Tax disputes today require a combination of deep expertise in tax law, procedural rules, tax advisory services and current case law. Deloitte brings together the largest integrated team of professionals specialising in tax disputes, tax advisory and related legal services in the Czech market. Through the close cooperation of lawyers and tax advisors, we provide comprehensive support, from interpreting tax legislation and developing a strategy to representing clients in tax disputes. At the same time, we continuously monitor the latest developments in case law and incorporate them into our solutions and defence strategies to help clients achieve the best possible outcomes.
We support clients from the outset of a tax audit, assisting them in communicating with the tax authorities and protecting their rights throughout the process. If a dispute progresses further, we represent clients throughout the appeals process, before regional courts and before the Supreme Administrative Court. We also help clients reduce penalties imposed in connection with additional tax assessments.
Beyond dispute resolution, we place a strong emphasis on prevention. We help companies establish internal processes that prepare them for future tax audits while mitigating risks associated with management liability. To support these objectives, we have also developed proprietary technology solutions that facilitate future defence in tax proceedings. These include tools for the ongoing collection and retention of evidence demonstrating that transfer pricing arrangements are appropriate, as well as tools designed to assess potential business partners.
Our practice also includes the recovery of interest on retained excessive VAT deductions and claims for compensation for damage caused by illegal procedures of the state.
At a time when the automotive sector is facing a period of exceptionally rapid change, tax risks represent another factor that can significantly affect business operations. Well-designed preventive measures, timely defence in tax proceedings and an experienced partner in resolving tax disputes can determine whether a tax audit remains a manageable part of doing business or becomes a source of long-term financial and operational complications.
