Hungary vs “GW Logistics”, March 2021, Appeals Court Curia, Case No. Kfv.I.35.320/2020/6

Category: Legality - Legitimacy - Constitutional, Transfer Pricing Documentation, Transfer Pricing Methods | Tag: , , , ,
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GW Logistics was engaged in the activity of transport management (shipping and Logistics) and a member og the German Gebrüder Weiss Group.

The tax authorities carried out an audit of the tax returns for the years 2010-2011 and increased GW Logistics’s taxable profit by HUF 189 159 000 for 2010 and by HUF 53 373 000 for 2011, because of the difference between the consideration paid by the applicant for related party transactions and the open market price.
Since GW Logistics had not prepared transfer pricing documentation for its maritime transport activities in 2010 and 2011, the tax authority imposed a default fine of HUF 1 500 000. The tax authority applied the TNMM method to determine the arm’s length profitability.

In the course of the audit, the tax authority informed GW Logistics that the data provided were not suitable for obtaining transaction-level profitability information. According to GW Logistics, its controlling system was not capable of providing the breakdown requested for each transaction and, as a result, the tax authority concluded that there was insufficient data to determine accurately the amount of related expenses attributable to the turnover from related parties. The tax authorities therefore applied an estimation procedure to determine the deviation from the arm’s length price.

Not agreeing with the assessment GW Logistics filed an appeal. It argued that the tax authority failed to take into account all the facts and circumstances relating to the activity under investigation and thus failed to fulfil its obligation to make a factual assessment.

The court of first instance decided in favor of the tax authorities.

GW Logistics then filed an appeal with the Court of Appeal claiming among other issues that a correct reference to the legal basis for the estimated assessment was missing in the decision.

Judgement of the Court of Appeal

The Court remanded the case to the court of first instance.

Excerpts
“Estimation is a method of proof which, in accordance with the law, establishes a probable basis for the actual tax or budgetary support. The tax authority shall prove that the conditions for the application of the estimate are met and that the data, facts and circumstances on which the estimate is based and the methods used in the estimate are likely to provide a basis for the tax [old Art. 108 (1) to (2)]. Paragraph 108(3)(a) to (e) of the old Art. specifies the cases in which an estimate may be used, such as when the tax or budget support base cannot be established; when the data, facts or circumstances available to the tax authority, which may be considered significant because of their number or content, give rise to reasonable grounds to believe that the taxpayer’s records are not suitable for establishing the actual tax or budget support base; or when the individual has made false, incomplete or omitted to make a declaration or declaration, etc.”

“In the application for review, the defendant argued that the limits of the application had been exceeded in the judgment of the court of first instance. Although the legal basis for the estimate was indeed disputed by the applicant in its application, it did not challenge the lack of a legal basis in this regard. However, it is of primary importance that the content of the final decision of the tax authority clearly states why the tax authority considered that there was a legal basis for the estimate and that the final decision also describes in detail the method of the estimate. Therefore, the Curia is of the opinion that the mere absence of a reference to the provisions of Article 108 (3) of the old Art. 339 (1) of the Old Law, the Court of First Instance has no jurisdiction to set aside the nullity of the final decision of the Court of First Instance only in the case of a procedural violation affecting the merits of the case, whereas the procedural violation referred to did not affect the merits of the present case in any way.”

“As a result of the above, the Curia set aside the final judgment on the basis of Article 275 (4) of the old Civil Code and ordered the court of first instance to initiate new proceedings and issue a new decision. In the new proceedings, the court of first instance must review the final decision of the tax authority on the merits. It must rule on whether the tax authority chose the correct method for determining the arm’s length price. It must also determine whether, in determining the arm’s length price for transactions with related undertakings, the tax authority lawfully chose to examine separately the road haulage activity and the multi-modal sea and air transport activity, whether the legal basis for the estimate in this area existed and whether the method of estimation complied with the legal requirements, and whether, on the basis of all of these factors, a default penalty was lawfully imposed.”

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Kfv.35320_2020_6





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