Documentation-related penalties imposed for failure to comply with transfer pricing documentation requirements or failure to timely submit required information are usually civil (or administrative) monetary penalties. These documentation-related penalties are based on a fixed amount that may be assessed for each document missing or for each fiscal year under review, or calculated as a percentage of the related tax understatement ultimately determined, a percentage of the related adjustment to the income, or as a percentage of the amount of the cross-border transactions not documented ...

Many countries have adopted documentation-related penalties to ensure efficient operation of transfer pricing documentation requirements. They are designed to make non-compliance more costly than compliance. Penalty regimes are governed by the laws of each individual country. Country practices with regard to transfer pricing documentation-related penalties vary widely. The existence of different local country penalty regimes may influence the quality of taxpayers’ compliance so that taxpayers could be driven to favour one country over another in their compliance practices ...

The tax authority conducted an inspection, where it found that PJSC Galnaftochim, when conducting business transactions with a non-resident related party, had to submit a report on controlled transactions. PJSC Galnaftochim, disagreeing with the results of the audit, appealed to the court to cancel the tax assessment notice, as there were no grounds for submitting the relevant report. When paying interest to a non-resident for using a loan, PJSC Galnaftochim paid a tax of 2% of the total interest amount and believed that the transaction was not a controlled transaction within the meaning of the Tax Code of Ukraine. The District Administrative Court upheld the claim of PJSC Galnaftochim in a ruling upheld by the Lviv Administrative Court of Appeal. The courts proceeded from the fact that the legislator, when defining the criteria for classifying a business transaction as a controlled transaction, emphasises that such a transaction must affect the object of income taxation. At the same time, the business transaction under study on payment of interest for the use of credit funds does not meet this criterion, and therefore cannot be reflected in the accounts provided for accounting for profits, losses and financial results. This transaction reduces assets, as it inherently involves writing off funds in favour of the recipient, and also reduces interest payment obligations without affecting the financial result. An appal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court partially upheld the appeal, cancelled the decisions of the lower courts and remanded the case for a new trial to the court of first instance. The determination of whether transactions are business transactions for transfer pricing purposes is based on their impact on the taxable profit reflected in the income tax return in accordance with the law. For the purposes of transfer pricing, only those business transactions that affect or may affect the taxpayer’s profit, as well as certain types of income that are taxed separately from the profit for non-residents and taxpayers, are taken into account. The courts should provide regulatory justification in their decisions for the conclusion that a transaction involving the repayment of interest on a loan cannot be recorded in the accounts used to record profits, losses and financial results, and that the transaction reduces receivebles and liabilities for interest payments without changing the financial result. The actual impact of the transaction on payment of interest on the use of the loan on the taxable profit reflected in the declaration cannot be left out of the study. Click here for English translation Click here for other translation ...

The tax authority conducted an inspection of Groklin-Carpathians LLC, which revealed that the company had failed to file a controlled transactions report for 2015. On this basis, the tax authority issued a documentation penalty notice to the company. Groklin-Carpathians LLC appealed the decision, which was upheld by both the District Court and the Court of Appeal. The tax authorities then appealed to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal. “Taking into account the circumstances of this case, as well as the officially expressed position of the fiscal authority on the procedure for determining the transaction as a controlled one, the panel of judges agrees with the conclusions of the courts of previous instances that the plaintiff has no statutory obligation to reflect the return of intangible assets in the TP Report, since such transactions do not in any way affect the increase or decrease of the plaintiff’s taxable object, which in turn indicates that the challenged tax notice is unfounded.” Click here for English translation Click here for other translation ...

In the case at hand a related-party transactions had been carried out between a person (shareholder) and a related company. The transaction took place in 2007 and 2008 and was exempt from Spanish transfer pricing documentation requirements. The tax authorities issued an assessment where the transfer pricing had been adjusted and a penalty/fine was added to the claim. The taxpayer was of the opinion that the exemption from penalties extended to cases where the controlled transactions were exempt from transfer pricing documentation requirements. On that basis an appeal was filed. The appeal was dismissed by the lower court Judgement of the Supreme Court The Supreme court upheld the decision of the lower courts and dismissed the taxpayers appeal. According to the court, the exemption from penalties provided for in the rule on related-party transactions requires the taxpayer to be obliged to prepare transfer pricing documentation, and is therefore not applicable to those taxpayers who are exempt from the documentation requirement. In order to use the exemption from penalties, the following requirements must be met: The transfer pricing documentation requirements have been complied with; The declared value coincides with the value derived from such documentation; That, notwithstanding the above, the Tax Administration has made a transfer pricing adjustment. If the taxpayer is exempt from the formal transfer pricing documentation obligations, the tax authorities may adjust the transfer price of the related-party transactions and apply the general penalty regime provided for in the General Tax Law. Click here for English translation Click here for other translation ...