Ukrainian company “PJSP Gals-K” had been involved in various controlled transactions – complex technological drilling services; sale of crude oil; transfer of fixed assets etc. The tax authority found, that prices had not been determined in accordance with the arm’s length principle and issued a tax assessment. Gals-K disagreed and filed a complaint. The Administrative Court dismissed the tax assessment and this decision was later upheld by the Administrative Court of Appeal. Judgement of the Supreme Administrative Court The Supreme Court set aside the decisions of the Court of Appeal and remanded the case to the court of first instance for a new hearing. The court considered that breaches of procedural and substantive law by both the Court of Appeal and the Court of First Instance have been committed, and the case should therefore be referred to the Court of First Instance for a new hearing. Excerpts “Thus, in order to properly resolve the dispute in this part, the courts must determine, on the basis of the relevant and admissible evidence, whether the oil sales by the plaintiff to the non-resident GFF AG (Swiss Confederation) are controlled transactions within the meaning of paragraph 39. 2.1 of Article 39.2 of Article 39 of the Code of Ukraine. In this case, when establishing the validity of the position on the extension of the provisions of Article 39 of the CP of Ukraine to other legal relationships, the courts should also assess the validity of the opinion of the State Traffic Department regarding the improper valuation by the caller of a controlled operation when using the method of “comparative uncontrolled price”. For example, in the SO No. 35/4, the price that was set at the auction (auction certificate No. A185-186 of 23 January 2014 for the sale of oil on the domestic market) was reversed as the price of the export of oil from GFF AG to Orlen Lietuva.” “According to the appellant’s position, the transfer of the tangible fixed assets by the managing directorate of SD No 35/4 in the name of all the parties to the contract to one of the parties (PJSC “Ukrnafta”) in the person of its structural division (NGVU “Chernihivnaftogaz”) cannot be considered a sale, since the goods were actually transferred to the entire legal entity of PJSC “Ukrnafta”. In connection with the above-mentioned circumstances, during the cassation examination of the case, the plaintiff also pointed to the absence of legislative grounds for considering such a transaction as controlled, and the mention of the latter in the Report on Controlled Transactions constitutes a mistake made by the relevant administrative department. In accordance with this position, the courts of the previous instances have found that the use of the “resale price” method was unjustified. The College of Judges considers that, in resolving the dispute between the parties in this part, the courts of the previous instances did not fully appreciate the parties’ arguments on the dispute, which resulted in an incorrect assessment of the circumstances of the case. It should be noted that the sub-clauses of clause 14.1.139 of Article 14.1 and clause 153.14.5 of Article 153.14 of the Ukrainian Civil Code provide that for the purposes of the disclosure the obligations of the parties to the joint venture under the Joint Venture Agreement are specific civil law contracts. At the same time, the accounting treatment of transactions involving the transfer/sale of tangible goods has been subject to respect and legal scrutiny by the courts. In order to properly resolve the dispute in this part, the following should have been addressed: who and for what money the goods were delivered; to whom (PJSC “Ukrznafta” as a separate legal entity or PJSC “Ukrznafta” as a member of the Agreement No. 35/4) and on what legal basis the goods were exchanged/sold; how the relevant transaction was recorded in the accounting records and whether such recording corresponds to the primary documents that were created in connection with the transfer/sale of the goods.” “The Collegium of Judges notes that, in addition to the above-mentioned deficiencies in the absence of primary documents and accounting documents, which were created for the results of the business transactions, the documentation from the transfer pricing, which was provided to the audit, is also absent (volume 1, page 30). The above makes it impossible to establish officially the conditions of the case as to the method used by the caller, the arguments of the latter in the absence of the conditions for the inclusion of the joint operation in the controlled order with the self-inclusion of the operations of PJSC “Ukrnafta” in the Report for 2014 with the inclusion of the methods 303 “costs plus” and 305 “revenue allocation”, whereas in the letter No 1855/10 dated 22 March 2017 the caller informed the State Tax Administration about the use of only the 303 “cost plus” method.” Click here for English translation Click here for other translation ...

Samsung Electronics Baltic Ltd, is a subsidiary of Samsung Electronics Co. Ltd, which was established at the end of 2007. On 1 January 2008, Samsung Electronics Baltic and Samsung Electronics Co. Ltd entered into Distribution Agreement, under which Samsung Electronics Baltic was appointed as the distributor in the Baltic States of the products manufactured by Samsung Electronics Co. Ltd and its subsidiaries (‘the Distribution Agreement’). In 2008 and 2009, Samsung Electronics Baltic carried out business activities in the territory of Latvia, Lithuania and Estonia distributing the goods received from Samsung Electronics Co. Ltd under the Distribution Agreement. Samsung Electronics Baltic also provided warranty services for the goods sold by engaging service providers for that purpose, namely merchants who carried out repairs of the goods (‘Repair Services’). On 2 January 2008, Samsung Electronics Baltic concluded a Warranty Assumption Agreement (‘the Warranty Assumption Agreement’) with its sister company, Samsung Electronics Overseas B.V. (‘Dutch Samsung’), which was the distributor of Samsung Electronics Co. Ltd’s products in the Baltic States before the Applicant. Under the agreement, Samsung Electronics Baltic undertook to provide product warranty services for products sold by Dutch Samsung in the Baltic markets in 2005, 2006 and 2007, and Dutch Samsung undertook to pay Samsung Electronics Baltic a lump sum of USD 4 369 550 to fulfil the assumed warranty obligations. In order to fulfil its obligations under this contract, Samsung Electronics Baltic engaged the services of Repair Service Providers. Pursuant to the Distribution Agreement and the Marketing Fund Agreement (‘the Marketing Fund Agreement’) concluded on 1 January 2008 between Samsung Electronics Baltic and Samsung Electronics Co. Ltd, Samsung Electronics Baltic also performed marketing functions for the Samsung Group in 2008. In particular, Samsung Electronics Baltic engaged marketing agencies as marketing service providers in accordance with the marketing strategy set out by Samsung Electronics Co. Ltd. Samsung Electronics Baltic paid the service fees indicated in the invoices issued by these agencies and subsequently invoiced Samsung Electronics Co. Ltd (or other related companies) for the same amount. The State Revenue Service (hereinafter – the Service) audited Samsung Electronics Baltic for value added tax for the period from January 2008 to October 2009 and for corporate income tax for 2008. The administrative procedure before the authority was concluded by the decision of the Revenue Service of 15 February 2011 (hereinafter – the appealed decision), by which the value added tax, the related penalty and late payment fines were calculated for additional payment to the budget, the value added tax to be refunded from the budget and the related penalty were reduced, and the corporate income tax and the related late payment fines and penalties were calculated for additional payment to the budget by the applicant. As regards value added tax, the contested decision states that in 2008 and 2009 Samsung Electronics Baltic deducted as input tax in its value added tax returns the amounts of tax indicated in the invoices issued to Samsung Electronics Baltic by the Repair Service. According to the Authority, Samsung Electronics Baltic was not entitled to do so, since the transactions in question were not aimed at the pursuit of Samsung Electronics Baltic’s economic activity (transactions subject to value added tax). The Revenue Service considers that Samsung Electronics Baltic used the transactions in question to secure its warranty service obligations towards Samsung Electronics Co. Ltd and Samsung Netherlands, whereas, in the Revenue Service’s view, these relationships are not to be regarded as transactions subject to value added tax but as cost compensation transactions which are not subject to value added tax. As regards corporation tax, the contested decision states that Samsung Electronics Baltic, in performing the group’s marketing functions, has acted as an intermediary which undertakes to provide the related companies with the services of subcontractors (marketing agencies). The Authority found that since Samsung Electronics Baltic passed on the services received from the unrelated parties – the marketing agencies – to Samsung Electronics Co. Ltd and other related undertakings without a mark-up, it follows that Samsung Electronics Baltic provided services to the related undertakings below the market price, since an unrelated undertaking would have added a mark-up to such intermediation services in order to make a profit. Consequently, there are grounds for adjusting Samsung Electronics Baltic’s corporation taxable income by the difference between the value of the services reported by Samsung Electronics Baltic and the market value of the services as calculated by the Revenue Service. The method of adding up costs should be used to determine the market value of the services provided. Taking into account the information available in the Amadeus database, it is estimated that the operating cost or profit margin for unrelated undertakings ranges between 1,7 % and 4,05 %. Consequently, the market value of the services provided by Samsung Electronics Baltic to its affiliates was determined by applying the profit margin of 1,7 % to the sum of the value of the services received from the marketing agencies and Samsung Electronics Baltic’s agency costs as determined in the audit. In follows from the judgement that – If the arm’s length price is not applied and the goods or services are sold at a price below the arm’s length price, the taxable income for corporation tax purposes must be revised upwards by that part of the difference. The legislator has accepted that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which summarise the best practices in transfer pricing of OECD Member States, complement the explanation of the market price methods in the legislation and provide guidance to help calculate the market price as accurately as possible. Consequently, the application of market price methodologies should take into account and use, to the extent possible, the guidance provided in those guidelines. Determining the nature of the service provided is a prerequisite for application of the cost markup method. The essence of the cost markup method is the application of a mark-up to the costs incurred by the service provider in providing the service which is ...

In 2016 the Swedish Tax Tribunal ruled against the tax administration in the case of The Absolut (vodka) Company AB. The Administrative Court of Appeal has now overturned the Tribunal’s ruling and consequently SEK 247 mio. are now added to the taxable income of The Absolut Company AB. The Swedish tax administration found that The Absolut Company AB sold Absolut Vodka below the arm’s length price to a group company – The Absolut Spirit Company Inc. (ASCI). Furthermore, the swedish company acquired distribution services from ASCI at a price above the arm’s length price. The Court adresses: – timing of data and information in a Benchmarking search – use of interquartile range or full range – use of multible years data – the issue of hindsight Click here for translation ...