Cargill Bulgaria’s main activity is trade and export of agricultural goods and products, including wheat, corn, barley, sunflower, and rapeseed.
During the audited period it was part of the Cargill group, and the examined controlled transactions were intra group sales of agricultural goods to related parties identified as CARGIL INTERNATIONAL S.A. (Switzerland), CARGIL N.V., CARGIL B.V., and CARGIL AGRICULTURA SRL. The dispute concerned whether the sales prices under these controlled transactions complied with the arm’s length principle.
The tax authority carried out a tax audit and increased the company’s financial result for the related party sales of goods by 6 286 943,88 leva for 2016, by 4 226 549,26 leva for 2017, and by 2 556 103,41 leva for 2018, leading to additional corporate tax for 2016, 2017, and 2018 in a total amount of 1 061 752,73 leva plus late payment interest in a total amount of 629 516,45 leva.
In the audit the tax authority reviewed the Cost Plus method and TNMM for the sale of goods and applied TNMM using a return on sales profit level indicator based on EBIT divided by revenues from sale of goods to related parties, benchmarked against five comparable uncontrolled companies with an interquartile range from 1,21 percent to 1,79 percent, and adjusted the result to the lower quartile 1,21 percent, with the deviation calculated as “revenues under market conditions” minus reported revenues.
The company challenged the tax audit before the Administrative Court, which later annulled the tax audit in the challenged part and focused its reasoning on the choice between two methods, Cost Plus as used by the company and TNMM as accepted by the tax authority, and referred to OECD Guidelines paragraphs including 2.45 to 2.48 and other provisions cited in its analysis.
An appeal was then filed by the tax authorities arguing that the first instance court accepted Cost Plus as the most appropriate method without adequate reasoning, accepted that Cost Plus was correctly applied based on the selected uncontrolled transactions, accepted lack of subordination incorrectly, and accepted that TNMM was incorrectly applied by the tax authority.
Judgment
The Supreme Administrative Court annulled in full the first instance court decision and returned the case for new consideration by another panel of the first instance court.
The court held that the first instance court did not set out its own motives on the opposing positions but reproduced the company’s theses without corresponding discussion of specific evidentiary material, and that key issues were not addressed, including whether Cost Plus was applicable given the tax authority’s objection that the case concerned sale of goods rather than production and subsequent sale of produce or services, and whether Cost Plus was applied correctly given the absence of a comparability analysis and the absence of the contracts from the evidentiary material.
It also found incorrect allocation of the burden of proof by the first instance court and instructed the first instance court on remand to allocate the burden of proof anew, explicitly indicating which facts each party must establish and which lack evidence, and then to analyze the facts, including if necessary with an expert witness, and to rule on the substantive legality of the tax audit.
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