Poltova GZK is a Ukrainian subsidiary of the Ferrexpo group – the world’s third largest exporter of iron ore pellets. In FY 2015 the iron ore mined in Ukraine by Poltava GZK was sold to other companies in the group – Ferrexpo Middle East FZE, and the transfer prices for the ore was determined by application of the CUP method using Platts quotations. However, according to the tax authorities Poltava GZK used Platts quotations for pellets with a lower iron content when pricing the higher quality pellets, resulting in non arm’s length prices for the controlled transactions and lower profits in the Ukraine subsidiary. The tax authorities also found that Poltava GZK had overestimated the cost of freight – in the case of actual transportation of pellets by ships of different classes (“Panamax”, “Capesize”), the adjustment of the delivery conditions was carried out only at the maximum rate. On that basis an assessment was issued. Not satisfied with the assessment an appel was filed Poltova GZK, and in 2019 the Administrative Court and later the Court of Appeal set aside the assessment of the tax authorities. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court partially annulled the decision of the Administrative Court and Court of Appeal and ruled predominantly in favor of the tax authorities approving the position that the transfer prices of the iron ore pellets did not correspond to the arm’s length price. The Court confirmed the validity of the tax assessment and the legality of the issued tax notice-decision regarding the reduction of the negative taxable income in an amount of 1.3 billion hryvnias (~$35 millions).  The Court confirmed that the taxpayer did not take into account the actual properties of the products specified in the Quality Certificates, namely: the content of impurities (silicon dioxide) and the moisture level when pricing the controlled transactions. The court confirmed that the constant fluctuation of prices on the market of iron ore pellets is not a basis for comparing prices in CU with the average indicator in comparable operations for a certain period (month) without constructing a price range. Also, the taxpayer had overestimated the cost of freight. Click here for English translation Click here for other translation ...

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 ...