In its application for an individual interpretation, R. S.A. stated that it distributes fast moving goods in Poland, Lithuania, Latvia and Estonia. It purchases these goods from the company E. based in H. and sells them to independent wholesale distributors and retailers. At the applicant’s request, the Minister of Finance in 2015 issued a decision on a advance price agreement, recognising the correctness of the selection and application of the transactional net margin method in the applicant’s purchase of goods from a related party for further distribution in the Baltic States.
In the activities covered by the decision, R. S.A. performs the functions of a distributor with limited risk and limited marketing functions and incurs the associated operating costs, which consist of both its own costs (purchase from group entities of, inter alia, advisory, legal, technical, organisational, financial and marketing/sales services) and external costs (including the costs of services purchased from other entities, also related parties, subsequently re-invoiced to the beneficiaries of those services).
According to the decision, R. S.A. should have a constant profitability, determined on the basis of the operating profit ratio (operating profit related to the activities covered by the decision, shown in the income statement before financial income and expenses), with only selling and general administrative expenses included in operating expenses. To this end, an algorithm for the calculation of the transaction price in transactions for the purchase of goods was defined, which includes all types of costs referred to as operating costs, which also include the costs of intra-group services mentioned in the application, incurred in connection with the applicant’s distribution and marketing activities.
R. S.A. asked whether the described costs of intragroup services, due to the fact that they are already covered by the issued decision on the prior price agreement, are subject to the restrictions under Article 15e(15) of the Corporate Income Tax Act – taking the position that these restrictions do not apply.
In an individual interpretation the Director of the National Fiscal Information considered R. S.A.’s position to be incorrect. He pointed out that the prior price agreement was not concluded for the purpose of determining the amount of prices/expenses for the purchase of services from the other related parties in the group, and the decision issued in this respect involves an analysis of the conditions established only between the specified related parties, so it cannot be considered that also the services purchased from other related parties and included in the algorithm for calculating the transaction price constitute a confirmed element of the prior price agreement. Therefore, the restriction arising from Article 15e(1) of the APS will apply to the costs of intra-group services.
R. S.A. challenged this interpretation before the Administrative Court. The court noted that the interpreting authority did not fully and exhaustively refer to the applicant’s position contained in the request for an interpretation, namely that the costs of intra-group services constituting the content of the interpretation question were included in the algorithm for calculating the transaction price.
An appeal was then filed by the authorities with the Supreme Administrative Court.
Judgement of the Supreme Administrative Court.
The Court dismissed the appeal and upheld the decision of the Administrative Court.
Excerpts
“As aptly noted by the Provincial Administrative Court in the justification of the appealed judgment, since the operating costs inquired about by the applicant in its request for an individual interpretation of the tax law provisions were an element of the algorithm for calculation of remuneration in the transaction covered by the decision on the previous price agreement, which decision includes an analysis of the conditions established between certain related entities, it cannot be concluded that the services purchased from other related entities and included in that algorithm do not constitute a confirmed element of that agreement; the criterion that is decisive here is the subject matter criterion and not the entity criterion – provided that the profitability of the assessed entity in the distribution activity is not adversely affected as a certain percentage of the sales revenue agreed in the decision. Therefore, if it follows from the description of the facts presented in the request for interpretation that the algorithm for calculation of the transaction price includes all types of operating costs, including the aforementioned costs of intragroup services to which the question relates, then also these costs constitute an element of a confirmed prior price agreement.
Therefore, the Director of the National Fiscal Information unfoundedly alleged that the Voivodship Administrative Court in Warsaw breached Article 15e(15) in conjunction with Article 15e(1) of the A.p.d.o.p. by misinterpreting and, consequently, misapplying it. The assumption that Article 15e, paragraph 15 of the A.p.d.o.p. refers to the subjective scope of validity of the decision on price agreement referred to in Article 20a of the A.p.p. corresponds to the content of Article 15e, paragraph 15 of the A.p.d.o.p., which directly indicates the correctness of calculation of remuneration for services, fees and charges in the period to which the decision refers. There is also an entity criterion, but it refers to the addressee of the decision provided for in Article 20a of the P.P.O., i.e. – in the case at hand – the applicant Company. Although the decision on the previous price agreement includes an analysis of the conditions established between certain related entities, its essence is the determination of the correctness of the algorithm for calculation of the transaction price, and this correctness is not affected by the subjective side of the service provider, if it is still a related entity. Therefore, there is no normative basis for the conclusion proposed by the interpreting authority that, in the case of the acquisition of services included in the algorithm for calculating the transaction price from other related entities, the costs of these intra-group services – the characteristics of which have not changed in a manner affecting the correctness of the algorithm – are subject to limitations in inclusion in tax deductible costs under Article 15e(1) of the APS.
The allegations of infringement of procedural provisions raised in the cassation appeal are also unfounded. This is because the Provincial Administrative Court correctly noted that the interpreting authority did not fully and exhaustively refer to the applicant’s position contained in the request for an interpretation, namely that the costs of intra-group services constituting the content of the interpretation question were included in the algorithm for calculating the transaction price – which constitutes a violation of Art. 14c § 1 and § 2 of the VAT Act. The interpreting authority, in violation of Article 14b § 3 of the VAT Act, also made an unauthorised modification of the facts presented in the request, because, contrary to the content of the request, it did not assume that the costs of intra-group services were an element of a prior price agreement. As a consequence of the above, it is difficult to undermine the conclusion of the Provincial Administrative Court that the interpreting authority also violated Article 14c § 1 and § 2 of the VAT Act as well as Articles 120 and 121 of the VAT Act by undermining the principle of legality of tax authorities’ actions and conducting proceedings in a manner inspiring trust in them. Such a position of the Voivodship Administrative Court – contrary to the claim contained in the cassation appeal – cannot be read as violating Article 146 § 1 in conjunction with Article 145 § 1(1)(c) and Article 151 of the P.p.s.a.
In summary, the Supreme Administrative Court concludes that the cassation appeal has no justified grounds and is subject to dismissal pursuant to Article 184 of the P.p.s.a..
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