Tag: Gross Profit Ratio  

Russia vs Lesprom Forestry Company, May 2017, Appeal Court, Case No. A29-7607/2016

Lesprom Forestry Company had sold sand and construction services to a related party, Road Company LLC. The tax authority concluded that the Company had created a tax avoidance scheme aimed at artificially underestimating the income on transactions with Road Company LLC. The price for sand and construction work was revised and tax liabilities on income tax and VAT recalculated. Determining the arm’s length price of sandAn official website of the Federal State Statistics Service posted information on the average prices of manufacturers of industrial goods… [however] this statistical information does not contain the physical characteristics of the product and the terms for its sale. Therefore this information could not be used.The minimum and maximum gross margin amounted to: 14.25 and 27.04 in 2012, 2.39 and 6.57 in 2013, and 3.04 and 25.58 in 2014. The gross profitability received by Road Company LLC in 2013-2014, was significantly above the arm’s length range of gross margins, 51.87% and 73.55%, respectively.” Determining the arm’s length price for construction workGiven that the Company’s accounting of income and expenses in the audited period was conducted on the basis of the cash method, the amount of costs required and incurred by the taxpayer in connection with the performance of contract works could not be reliably determine. To determine the price of the work performed , the tax authorities had analysed the cost of comparable work (preparatory work on the development of exploration wells, construction of bridges on the road entrance to exploratory wells, preparatory work for drilling wells in public sources of information. According to the information and price agencies Platts, Argus etc. do not contain detailed information on the terms of the transactions. Thus, publicly available information could not be used ….The only comparable transactions available to Lesprom LLC, were transactions concluded between Road Company LLC and a sub contractor, Trans-Stroy LLC. According to these agreements cost of the general construction services amounted to 5% of the total cost of the work. On that basis, the market price for construction services delivered by Lesprom was set to 5% of the total cost of the work. The courts of three instances found the tax assessment legal. Click here for translation A29-7607-2016f ...