ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. The Supreme Court cancelled the decision of the lower courts and sent the case back for re-consideration. The conclusion of the lower courts that in the period 2012-2013 the Inspectorate carried out price control for compliance with the market prices was erroneous. The price control was not carried out, but a set of circumstances was established, testifying to the coherence of actions of interdependent persons in order to obtain unjustified tax benefit. Taking into account the proof of the fact that the Company received an unjustified tax benefit, the tax authority correctly calculated the income that the Company should have received when selling goods directly to an interdependent person without using intermediary firms. Click here for translation ...

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. Click here for translation ...

US doctrine of corporate entity ...