Following a tax audit the tax authority conducted a on-site inspection of PJSC Odesa Port Plant on the completeness of tax calculation in respect of controlled transactions on the export of mineral fertilisers to non-resident companies Ameropa AG (Switzerland), “Koch Fertilizer Trading SARL (Switzerland), Nitora Commodities (Malta) Ltd (Malta), Nitora Commodities AG (Switzerland), Trammo AG (Switzerland), Trammo DMCC (United Arab Emirates), NF Trading AG (Switzerland) for FY 2013 and 2014, as well as business transactions on import of natural gas in gaseous form from a non-resident company Ostchem Holding Limited (Republic of Cyprus) for FY 2013. Based on the results of the inspection, an assessment of additional taxable income was issued. The assessment was based on the following considerations of the tax authority: – it is impossible to use the “net profit” method to confirm the compliance of prices in PJSC Odesa Port Plant’s controlled transactions for the export of mineral fertilisers in 2013 and 2014, since the “comparable uncontrolled price” method should have been used to determine the price in the said controlled transactions. The position of the tax authority is based on the fact that the application of the “net profit” method for determining the price does not allow to objectively determine the relevance of the price of the controlled transaction due to the lack of consideration of the impact of global trends in the nitrogen fertiliser market; information on derivative data available in officially recognised sources of information may be considered sufficient to determine the market price range (range of exchange prices) and calculate the level of arm’s length prices; in the presence of a market price range (range of exchange prices), – PJSC Odesa Port Plant’s transactions with Ostchem Holding Limited for the purchase of natural gas are controlled and PJSC Odesa Port Plant used the method of comparable uncontrolled price in determining the price in controlled transactions for the import of natural gas. However, PJSC Odesa Port Plant is a related party of PJSC Sumykhimprom, therefore, comparing the price in the controlled transaction with the prices in transactions that are also recognised as controlled. – it is not possible to use the “comparable uncontrolled price” method and it is appropriate to use the “net profit” method for natural gas import transactions, since no official source of information contains information on comparable uncontrolled transactions; it is not possible to adjust for the price of natural gas transportation from the European hub to the territory of Ukraine to ensure the proper level of comparability of the price in controlled transactions, and therefore the tax authority to find comparable transactions to apply the “net profit” method. It was found that the contract holder, Ostchem Holding Limited, did not perform any functions that could have influenced the increase in the sale price of natural gas. In the course of the audit, the Amadeus database was used to select independent companies that are comparable to Ostchem Holding Limited in terms of activities within the controlled natural gas import transaction. The sample included, in the tax authority’s opinion, independent companies with comparable activities and a similar functional profile to Ostchem Holding Limited. As a result of the search for comparable companies, 3 companies were selected, which, in the tax authority’s opinion, are fully comparable to Ostchem Holding Limited with key financial indicators for 2013. Based on the results of the analysis of the financial indicators of the comparable companies and the calculation of the range of profitability indicators, the tax authority found that the minimum value of the net profitability range for the comparable year 2013 was 0.04%, and the maximum value of the net profitability range was 1.51%. Thus, the net profitability of the controlled transaction with Ostchem Holding Limited exceeds the maximum value of the market range of net profitability of comparable companies by 30.34%. PJSC Odesa Port Plant disagreed with the tax assessment and filed an appeal. The district court upheld the appeal and dismissed the tax assessment. Subsequently, the Court of Appeal upheld the decision of the District Court and ruled in favour of PJSC Odesa Port Plant. The tax authority then appealed to the Supreme Court, which sent the case back to the Court of Appeal, which in the new trail upheld the tax authority’s assessment. This decision was then appealed to the Supreme Court – again – because, according to PJSC Odesa Port Plant, the Court of Appeal did not follow the instructions and conclusions of the Supreme Court in the course of the new procedure. Judgement of the Court The Supreme Court found that the violations of procedural and substantive law had been committed by the courts of first instance and appeal, and the failure to take into account the relevant correct conclusions of the Supreme Court, give grounds for sending the case for a new trial. In the new trail, it is necessary to take into account the above, to comprehensively and fully clarify all the factual circumstances of the case, verifying them with appropriate and admissible evidence, and to make a reasoned and lawful court decision with appropriate legal justification in terms of accepting or rejecting the arguments of the parties to the case. Excerpt in English “Subparagraphs 39.2.2.8 – 39.2.2.9 of paragraph 39.2.2 of Article 39.2.2 of the TC of Ukraine stipulate that, when determining the comparability of commercial and/or financial terms of comparable transactions with the terms of the controlled transaction, the characteristics of the markets for goods (works, services) where such transactions are conducted are analysed. At the same time, differences in the characteristics of such markets should not significantly affect the commercial and/or financial terms of the transactions conducted there, or such differences should be taken into account when making the appropriate adjustment. In determining the comparability of the characteristics of markets for goods (works, services), the following factors are taken into account: geographical location of markets and their volumes; the presence of competition in the markets, the relative competitiveness of sellers and buyers in the market; the ...

Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%. However, Banana S.A. had continuous losses and for 2016 its return on total costs (ROTC) was -1.83%. To this end, an “adjustment” was made by adding “unearned income” related to storm damage to the actual results, which increased the company’s ROTC from -1.83% to 3.57%. The tax authorities disagreed with both the transfer pricing method used and the “adjustment” made to the results. An assessment of additional taxable income in an amount of B/.20,646,930,51. was issued, where the CUP method (based on quoted commodity prices for bananas) had been applied. Judgement of the Court The Court agreed with the tax authorities that the “adjustment” for “unearned income” was not allowed. “….In this sense, we agree with the Tax Administration when questioning the adjustment made by the taxpayer, attending to the reality exposed by the itself in the appeal , explaining that —————– produces different types of bananas according to their characteristics which are direct consequence of the position of the banana in the bunch, so that in the scenario of having lost an approximate of 700,000 boxes due to climatic events, it is impossible to claim that the total of boxes lost would have had a cost of USD 8.30, already that this would represent that the lost bunches, only had bananas extra quality, so that of according to the taxpayer’s own explanations is impossible. …. Based on the above, we can conclude that the taxpayer did not disclose the weather event that affected its plantations in the audited income statement for the period 2016, nor in its audited financial statements, since at the information financial that is uses to make the adjustments of comparability,such events were not reported since there is no financial information that validates their existence and therefore they are rejected.” However, as regards the transfer pricing method, the Court agreed with the taxpayer that although the product was the same, other comparability factors were not. On this basis, the assessment of the additional taxable income was changed by the court to the result previously determined by the tax authorities using the TNMM, without taking into account the adjustment for unearned profits. “….Tax Administration undermined the conclusions and results presented in the Transfer Pricing Study of ———————- for the year 2016, which were established using the Transactional Net Margin Method (TNMM), by not accepting that the taxpayer’s income and margin, which would have been higher had the weather events that caused losses not occurred, notwithstanding, the taxpayer emphasises that the Tax Administration accepted all the comparables used in the Transfer Pricing Study. In this regard, the taxpayer adds that had the weather events that caused the loss of 719,531 boxes of bananas not occurred, the company’s margins would have been within the inter-quartile ranges of the comparables selected for the Transfer Pricing Study, and secondly, being weather events of an exceptional nature. In this regard, the appellant adds that by using the Transactional Net Margin Method (TNMM), it is possible to adjust the company’s revenues and costs in order to show what the margin would have been………………………. .The operating margin of —————— was -1.83% in 2016, due to the damages caused by the weather events, which, had they not occurred, the adjusted margin would have been 3.57%. Since the Directorate General Revenue did not accept this argument, it concluded that since the appellant’s margin is not within the inter-quartile range, which is 0.71%, up to 11.09%, it then proceeded to adjust the operating profit margin of ——————, to the value of the —————- of the operating margins of the comparable companies selected for the Transfer Pricing Study, which is 4.83% and in order to achieve this profit margin, it proceeded to increase the appellant’s revenues in the amount of B/.6,747,901.75.” Click here for English Translation Click here for other translation ...

Pgnig Upstream Norway AS (PUN) sold dry gas to its sister company (PST). According to the tax authorities the price for the gas had not been determined at arm’s length, cf. Section 13-1, first paragraph, of the Tax Act, and an assessment of additional income was issued. Judgement of the Court The Court decided in favour of the tax authorities. It found that the tax authorities had correctly concluded that there was a reduction in PUN’s income, and that the reduction was due to parties being under common control. The key point for the Court was that there was an imbalance in the functional profiles of PUN and the sister company, PST. Through certain deductions in the purchase price, PUN had indirectly been charged for parts of the sister company’s downside risk, without being allowed a share in potential upside profits. Excerpts “(…)In any event, the Court of Appeal finds reason to note that the [text removed] agreement in any event does not support PUN’s view that the price in the internal agreement is at arm’s length. In this regard, the Court of Appeal notes that the [text removed] agreement, like the Interconnection Agreement, concerned the purchase of all the gas offered by the seller ([text removed]) each day. The volume of gas was about 1/3-1/4 of the volume in the Interconnection Agreement, i.e. a fairly significant volume. The contract period was three years, whereas in the Interconnection Agreement it was ten years. The delivery point and price basis were essentially the same. Both contracts also contain deductions for balancing costs and transport/entry costs in the downstream market area. The main difference is that while the Interconnection Agreement makes deductions from PUN’s remuneration for MAC, DOF and OHSC (“Out of Hours Service-Cost”), the [text removed] Agreement instead provides for a premium for the seller. This amounts to [text removed] Euro/MWh. To the Court of Appeal, it appears prima facie balanced and market-based to grant the seller a share in the buyer’s profit potential upon resale, as the Court of Appeal understands the [text removed] Agreement to express. It is not necessary for the Court of Appeal to assess in detail the other agreements referred to by the Norwegian State, which have several differences from the Internal Agreement. In any event, it is more likely than not that there was a reduction in income due to the community of interest between PUN and PST. The Court of Appeal adds that the Appellant also cannot succeed with the argument that the Oil Tax Office, prior to the court proceedings, has selected agreements based on selection criteria that exclude relevant agreements. The nine agreements in question were selected by the Petroleum Tax Office and submitted to the Directorate of Taxes in connection with a request for evidence from the PUN relating to contracts that were the subject of the Petroleum Tax Office’s “observations” during the administrative proceedings, see above. The Directorate of Taxes did not grant an exemption from the duty of confidentiality for these agreements, see Section 22-3, second paragraph, of the Dispute Act. It is not argued by PUN that this constitutes a procedural error, but that it has an impact on the assessment of evidence as to whether there is a reduction pursuant to Section 13-1 of the Tax Act. The Court of Appeal cannot see that this is the case. It is in the nature of the case that the taxpayer may in practice find it difficult to substantiate its view. However, this must be seen in light of the fact that the content of dry gas agreements is highly sensitive information, which is subject to a duty of confidentiality. The Court of Appeal considers that any incomplete overall picture of the pricing of dry gas is not such as to indicate that the price in the internal agreement is at arm’s length. Moreover, any criticism of the administration’s selection of agreements during the court proceedings can hardly be seen to support the invalidity of the prior administrative decision. In any event, the selection appears to be objective, based on the considerations relating to the duty of confidentiality that apply. Accordingly, there is a reduction pursuant to Section 13-1 of the Tax Act due to the community of interest between PST and PUN. (…) The Court of Appeal notes that the assessment is clearly neither arbitrary nor grossly unreasonable. The exercise of the discretion is specific and thoroughly justified in relation to the facts of the case. Shell’s remuneration under the dispatching agreement with PUN appeared, at the time of the decision, to be the best available basis of comparison for PST’s services related to booking the necessary capacity and nominating the gas to make it available for sale at the hub. It was clearly relevant to emphasise that Shell performed dispatching up to the beach, and that PST’s tasks were (only) related to the further fate of the gas after this delivery point. There is no reason to doubt that neither the MAC deduction nor the relevant parts of the DOF deduction were a type of deduction recognised by the tax office in its own database. This could be taken into account in the circumstances, see above. The deductions that the administration did not accept must also be seen in the light of the deductions that were actually accepted: costs related to transport capacity (exit and entry tariffs), costs related to making the gas available for sale at the hub (nomination costs, etc. – i.e. the part of the DOF deduction that was accepted), and costs related to imbalances (discrepancies between nominated and allocated volume). These are costs that have either facilitated PUN’s access to the market in a larger perspective or are related to circumstances for which PUN is most likely to bear the risk. The Court of Appeal finds that the discretion takes due account of the division of functions between PUN and PST, when only those parts of the deductions that are specifically linked to ...

Following a tax audit of controlled transactions in 2013 and 2015 for the sale of goods to foreign related parties, the tax authorities concluded that Totland had understated the price of the goods sold and thus its taxable income. On that basis an assessment of additional income tax was issued. Totland disagreed with the assessment and filed an appeal. Totland stated that the dates of the price information used by the tax authorities differed from the date of the controlled transactions in question, and furthermore that those uncontrolled transactions were carried out on different terms. Totland had based the pricing of the controlled transactions on stock exchange prices and noted that the tax authorities in the assessment had violated the requirements of the Tax Code of Ukraine by applying stock exchange prices established a decade before the controlled transactions were carried out. The District Court dismissed Totland’s claim and upheld the assessment. Later the Court of Appeal overturned the decision of the District Court and decided in favor of Totland. The Court  of Appeal concluded that the uncontrolled transactions on which the pricing and assessment had been based were not comparable with the controlled transactions. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Court The Supreme Court dismissed the tax authorities appeal and upheld the decision of the Court of Appeal. According to the Resolution of the Cabinet of Ministers of Ukraine dated 08 September 2016 No. 616 “On Approval of the List of Exchange Traded Goods and World Commodity Exchanges for determining the compliance of the terms of controlled transactions with the arm’s length principle”, the compliance of the terms with the arm’s length principle is determined by the CUP method. The components of this method are: use of the price range for stock exchange quoted goods; consideration of the volume of the controlled transaction, payment and delivery terms; consideration of the quality characteristics of the goods and the costs of their transportation. The provisions of sub-clause 39.2.1.3 of clause 39.2 of Article 39 of the Tax Code of Ukraine are special for controlled transactions on export and/or import of goods that have a stock exchange quotation and are included in the list approved by the said resolution. Sources of information on stock exchange quotations, criteria for comparability of controlled and uncontrolled transactions are determined in accordance with subparagraphs 39.5.3.1, 39.2.2 of Article 39 of the Tax Code of Ukraine. In the judgement the Supreme Court refers to its prior ruling in case No. 804/5360/17, where the Supreme Court, applying the provisions of the above subparagraphs of Article 39 of the Tax Code of Ukraine, concluded that the tax authority in determining the price range for controlled transactions of commodities must verify the reliability of the information sources used; the terms of uncontrolled transactions with the terms of controlled transactions; the compliance of the prices selected for comparison in comparable uncontrolled transactions with the terms of controlled transactions. Click here for English translation Click here for other translation ...

In 2014, RIF Trading House sourced and bought agricultural products in Russia – wheat, barley, corn and peas. These products were then exported to a trader in the UAE, which turned out to be related to RIF Trading House. However, RIF Trading House had not provide information on the relationship, nor the required transfer pricing documentation on the controlled transactions. Following an audit, the Russian Federal Tax Service came to the conclusion that the export prices had been lowered in the supply of products to the trader in UAE. The Russian Federal Tax Service independently conducted a transfer pricing analysis – functional analysis, analyzed the market, commodity exchange prices (Platts, ICAR) etc., and then issued a tax assessment where combinations of pricing methods and adjustments had been applied to determine the pricing of the controlled transactions and thus the income of RIF Trading House. Disagreeing with the assessment RIF Trading House brought the case to Court. The court ruled in favor of the tax authorities. Click here for translation ...