A Russian subsidiary of the Suzuki/Itochu group had been loss making in 2009. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were due to non-arm’s length transfer pricing within the group and excessive deduction of costs. Decision of the Court The Court decided in favor of the tax authorities and upheld the assessment. “In view of the above, the appeal court considers that the courts’ conclusions that the Inspectorate had not proved that it was impossible to apply the first method for determining the market price and that the Inspectorate had incorrectly applied the resale price method were unfounded.” “In this light, the courts’ conclusions that the Inspectorate incorrectly applied the second method of determining the market price are unfounded.” “In such circumstances, the Inspectorate’s conclusion on the overstatement of the purchase price of vehicles is based on the application of market data and made in compliance with Article 40 of the Tax Code. The courts had no grounds to satisfy the applicant’s claims for the recognition of the Inspectorate’s decision in this part.” “The rest of the judicial acts are lawful and justified. In accordance with Article 252 of the Tax Code recognizes expenses reasonable (economically justified) and documented costs, performed (incurred) by the taxpayer. Herewith, any expenses are considered as expenses on condition that they were incurred for the realization of activities aimed at receiving income.” An appeal filed by Suzuki to the Russian Supreme Court was later dismissed in December 2016. Click here for English Translation ...

A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses on a reoccurring basis. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies and issued an assessment for FY 2009 – 2010 in the amount of 857 741 779 rubles. The assessment was partially  upheld by the Arbitration Court and then appealed to the Supreme Court. Decision of the Russian Supreme Court The Supreme Court dismissed the appeal lodged by HYUNDAI. “In checking the calculation of the market price of the goods, the court, having assessed whether the data given in the calculation of the market price for the acquisition of the vehicles corresponded to the data contained in the primary documents, came to the conclusion that the calculation presented by the inspectorate was justified. The court considered that the tax authority had made the calculation on the basis of the particular characteristics and sale of each particular car (according to the VIN). Under such circumstances, the court concluded that the taxpayer overstated the amount of costs to reduce income from sales for 2009 in the amount of 136 475 133 rubles, for 2010 – in the amount of 500 997 837 rubles. The cassation appeal contains no arguments related to the episode involving application of thin capitalization rules to interest on bank loans. In studying the arguments contained in the complaint, it was established that they were reduced to a review of the factual circumstances of the case established by the courts and could not be the subject of the Judicial Board of the Supreme Court of the Russian Federation, which in virtue of paragraph 1 of Part 7 of Art. 291.6 of the Arbitration Procedural Code of the Russian Federation with authority to review the circumstances established by the courts of lower instances. The courts have not committed any violations of the rules of substantive law or of the requirements of procedural law, which entail unconditional cancellation of the judicial acts.“ Click here for English Translation ...

A Russian subsidiary of the Mazda Motors Group had been claiming losses. Following an audit the tax authorities concluded that losses for FY 2009, was due to overstatement of the purchase prices of Mazda cars. An assessment was issued where the pricing was determined using the Resale Price Method, resulting in additional income of 1,362,172,034 rubles. The Arbitration Court held in favor of the tax authorities and this decision was upheld by the Arbitration Court of Appeal. The decision was then appealed to the Supreme Court. The Supreme Court denied the appeal and upheld the decision of the Arbitration Court. Click here for English Translation ...

A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses in fiscal years 2008 and 2009. In the opinion of the tax authority, losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies. Decision of the Russian Arbitration Court According to the court, the applied transfer pricing method is not applicable in the present case. A comparison with wholesalers in the Russian automotive market cannot be made, it said. The reason for this is the common sales strategy of automotive groups in Russia. Almost all non-Russian manufacturers distribute their automobiles through affiliated wholesale companies, which in turn purchase the vehicles from affiliated companies abroad. The only exceptions in this context are currently companies such as Volkswagen or BMW, which operate their own production facilities in Russia. Therefore, a reliable identification of comparable business transactions with regard to independent Russian importers is not possible. The second conclusion of the court refers to the negative market development caused by the financial crisis in 2008/2009. Accordingly, the economic development alone does not constitute a sufficient reason for the recognition of losses of a distribution company. With this assessment, the courts followed the opinion of the competent tax authorities in characterizing the local HYUNDAI sales companies as routine companies. A Russian sales company with a low risk level is generally entitled to a stable, positive remuneration. In this respect, the Russian Arbitration Court supported the view of the tax authorities that a local sales company would also not have to bear the losses caused by the financial crisis. In the opinion of the tax authorities as well as the court, the affiliated business partner abroad should have borne the losses instead of the Russian HYUNDAI company. The Court also stated that agreed contractual clauses that provide for increased costs for advertising and marketing without offering a correspondingly higher added value for the sales companies do not comply with the arm’s length principle. Click here for English Translation ...

A Russian subsidiary of the Mazda Motors Group had been claiming losses. In the opinion of the tax authority, the losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies. An assessment was issued where the pricing had been determined using the Resale Price Method. Decision of the Russian Arbitration Court “Having evaluated the arguments of the parties and the evidence presented in the case, taking into account the provisions of Art. 71 APC RF, the appeal court considers the conclusions of the court of first instance as motivated, consistent with the circumstances of the case and the requirements of the law.In the presence of these circumstances, the claims claimed by the company were rightly rejected by the court of first instance.Thus, the decision of the court is legal and justified, corresponds to the materials of the case and the current legislation, in connection with which it is not subject to cancellation. href=”https://tpguidelines.com/wp-content/uploads/Russia-vs-Mazda-Motor-Rus-Ltd-2014.htm”>Click here for English Translation ...

The Bundesfinanzhof confirmed that losses incurred by a simpel distribution entity over a longer period of time trigger a rebuttable presumption in Germany that transfer prices have not been at arm’s length. A German company, Loss Distributor GmbH, imported goods from their Swiss sister company S-AG and had made continious losses over a period of time. The tax authorities found that the purchase prices paid to the S-AG had increased since 1989 and that the German company could not fully pass on the increased purchase price to its customers. Since at the same time the price of the Swiss franc had fallen since 1989, the purchase prices paid to the S-AG in the years of the dispute had been inflated and currency gains had been transferred to Switzerland in this way. A tax assessment was therefor issued. The German company appeal the assessment to the Bundesfinanzhof. The Federal Tax Court ruled in favor of the tax authorities. Click here for English translation Click here for other translation ...

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany. The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the median value. The assessment must instead be based on the best value for the taxpayer. Distributors incurring losses for more than three years: The Senate understands its ruling in BFHE 170, 550, BStBl II 1993, 457 to say that whenever a distribution company sells products of an affiliate company and suffers significant losses for more than three years, a rebuttable presumption is triggered that the agreed transfer price has not been at arm’s length. The assumption of a rebuttable presumption means that the taxpayer can explain and prove why the actually agreed transfer price is nevertheless appropriate. This applies if the articles purchased exceeds 95% of the total turnover. The taxpayer may, For example, explain why the actual development is either due to mismanagement or other reasons that were not foreseen and, above all, that timely adaptation measures have been taken. Losses can be accepted over a period of more than three years if the corresponding proof is provided. It may be necessary to extend the period within which profit must be achieved. If proof is not provided and the taxpayer does not take any adaptive measures, a reasonable profit can be estimated and spread over the years. Click here for English translation Click here for other translation ...