At issue in the case of „RĪGAS DZIRNAVNIEKS” was if the interest rates charged on loans between related parties were at arm’s length.
Judgment of the Court of Appeals
The Court remanded the case to the Regional Court for a new hearing.
Excerpts
“As already indicated above, paragraphs 84, 91 and 92.3.1 and 92.3.2 of Regulation No 556 deal with the need for adjustments and mathematical calculations when significant differences in the comparable data and their material effects are established. The need for adjustments is also underlined in point 1.35 of the Guidelines.
Guidance on how differences between comparables are to be addressed is provided, inter alia, in paragraph 3.57 of the Guidelines. It may be the case that, although every effort is made to exclude items with a lower level of comparability, the result is a series of figures for which it is considered that, given the process used to select the comparables and the information available on the limitations of the comparables, certain comparability defects remain which cannot be identified and/or quantified and are therefore not corrected for. In such cases, if the range includes a large number of observations, a statistical tool that takes into account the central tendency to narrow the range (e.g. to an interquartile range or other percentiles) could help to improve the reliability of the analysis.
Thus, the Guidelines consider those cases where the analysis ends with a series of numbers. In such cases, various statistical tools should be used to narrow the range as much as possible.
Reading these legal provisions in their context, it is clear that, although Regulation No 556 does not explain how adjustments and mathematical calculations are to be made, it is clear that, according to these legal provisions, the consistency of the transaction price with the price range indicated in the database used for a given type of product is not sufficient in itself to recognise the conformity of the price to be verified with the market price. The above-mentioned provisions of paragraphs 84, 91 and 92 of Regulation No 556 set out a number of relevant factors for the comparability of transactions. This means that for each transaction carried out with a related company, a detailed comparison should be made with the data used, indicating similar and dissimilar circumstances and adjusting the data where necessary.
Consequently, the fact that the interest rates applied in the transactions between the applicant and its related companies fall within the range of interest rates used by the District Court does not, in itself, give rise to a finding beyond reasonable doubt that the applicant’s transaction prices are in line with market prices and that no corresponding adjustments are necessary.
Moreover, the Regional Court merely referred to the first paragraph of Article 6(4) of the Law on Corporation Tax, which governed the adjustment of taxable income for interest payments during the audit period. However, the Regional Court has not explained whether that provision is also applicable in the present case. Nor has the Revenue Service, in its cassation appeal, put forward any arguments concerning the application and applicability of that provision to the dispute in the present case. Therefore, when examining the merits of the case, if it is concluded that the use of the statistical data compiled by the Bank of Latvia requires an adjustment, it must also be ascertained whether appropriate adjustments are not to be made in accordance with the procedure laid down in the first paragraph of Section 6.4 of the Law on Corporate Income Tax.”
Click here for English translation
Click here for other translation