In its application for an individual interpretation, R. S.A. stated that it distributes fast moving goods in Poland, Lithuania, Latvia and Estonia. It purchases these goods from the company E. based in H. and sells them to independent wholesale distributors and retailers. At the applicant’s request, the Minister of Finance in 2015 issued a decision on a advance price agreement, recognising the correctness of the selection and application of the transactional net margin method in the applicant’s purchase of goods from a related party for further distribution in the Baltic States. In the activities covered by the decision, R. S.A. performs the functions of a distributor with limited risk and limited marketing functions and incurs the associated operating costs, which consist of both its own costs (purchase from group entities of, inter alia, advisory, legal, technical, organisational, financial and marketing/sales services) and external costs (including the costs of services purchased from other entities, also related parties, subsequently re-invoiced to the beneficiaries of those services). According to the decision, R. S.A. should have a constant profitability, determined on the basis of the operating profit ratio (operating profit related to the activities covered by the decision, shown in the income statement before financial income and expenses), with only selling and general administrative expenses included in operating expenses. To this end, an algorithm for the calculation of the transaction price in transactions for the purchase of goods was defined, which includes all types of costs referred to as operating costs, which also include the costs of intra-group services mentioned in the application, incurred in connection with the applicant’s distribution and marketing activities. R. S.A. asked whether the described costs of intragroup services, due to the fact that they are already covered by the issued decision on the prior price agreement, are subject to the restrictions under Article 15e(15) of the Corporate Income Tax Act – taking the position that these restrictions do not apply. In an individual interpretation the Director of the National Fiscal Information considered R. S.A.’s position to be incorrect. He pointed out that the prior price agreement was not concluded for the purpose of determining the amount of prices/expenses for the purchase of services from the other related parties in the group, and the decision issued in this respect involves an analysis of the conditions established only between the specified related parties, so it cannot be considered that also the services purchased from other related parties and included in the algorithm for calculating the transaction price constitute a confirmed element of the prior price agreement. Therefore, the restriction arising from Article 15e(1) of the APS will apply to the costs of intra-group services. R. S.A. challenged this interpretation before the Administrative Court. The court noted that the interpreting authority did not fully and exhaustively refer to the applicant’s position contained in the request for an interpretation, namely that the costs of intra-group services constituting the content of the interpretation question were included in the algorithm for calculating the transaction price. An appeal was then filed by the authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Court dismissed the appeal and upheld the decision of the Administrative Court. Excerpts “As aptly noted by the Provincial Administrative Court in the justification of the appealed judgment, since the operating costs inquired about by the applicant in its request for an individual interpretation of the tax law provisions were an element of the algorithm for calculation of remuneration in the transaction covered by the decision on the previous price agreement, which decision includes an analysis of the conditions established between certain related entities, it cannot be concluded that the services purchased from other related entities and included in that algorithm do not constitute a confirmed element of that agreement; the criterion that is decisive here is the subject matter criterion and not the entity criterion – provided that the profitability of the assessed entity in the distribution activity is not adversely affected as a certain percentage of the sales revenue agreed in the decision. Therefore, if it follows from the description of the facts presented in the request for interpretation that the algorithm for calculation of the transaction price includes all types of operating costs, including the aforementioned costs of intragroup services to which the question relates, then also these costs constitute an element of a confirmed prior price agreement. Therefore, the Director of the National Fiscal Information unfoundedly alleged that the Voivodship Administrative Court in Warsaw breached Article 15e(15) in conjunction with Article 15e(1) of the A.p.d.o.p. by misinterpreting and, consequently, misapplying it. The assumption that Article 15e, paragraph 15 of the A.p.d.o.p. refers to the subjective scope of validity of the decision on price agreement referred to in Article 20a of the A.p.p. corresponds to the content of Article 15e, paragraph 15 of the A.p.d.o.p., which directly indicates the correctness of calculation of remuneration for services, fees and charges in the period to which the decision refers. There is also an entity criterion, but it refers to the addressee of the decision provided for in Article 20a of the P.P.O., i.e. – in the case at hand – the applicant Company. Although the decision on the previous price agreement includes an analysis of the conditions established between certain related entities, its essence is the determination of the correctness of the algorithm for calculation of the transaction price, and this correctness is not affected by the subjective side of the service provider, if it is still a related entity. Therefore, there is no normative basis for the conclusion proposed by the interpreting authority that, in the case of the acquisition of services included in the algorithm for calculating the transaction price from other related entities, the costs of these intra-group services – the characteristics of which have not changed in a manner affecting the correctness of the algorithm – are subject to limitations in inclusion in tax deductible costs under Article 15e(1) of the APS. The allegations of ...

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal lids for jars etc. The Polish tax authorities had issued an tax assessment for FY 2009 – 2012 based on a TNMM benchmark study where financial results of comparable independent manufactures operating in the packaging industry showed that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities The Court of first instance held in favor of the tax authorities. The case was then brought before the Administrative Court of Appeal. In the Court’s view, the authorities did not subject the case to thorough verification in accordance with the legal standards on which the decision was based – including, in particular, the analysis of comparable transactions (CUP’s). In the Court’s opinion, the authorities have illegally equated the fact of the loss achieved by the applicant with the data resulting from the general financial ratios for the entire activity of the applicant in 2013. The economic rationality of the transaction should be assessed, in the opinion of the Court, through the prism of the benefit that a specific entity may obtain from the transaction and not in relation to general financial ratios of the compared entities covering the entirety of their activity for a given year. For as long as the tax authority does not prove that the difference in price conditions was only for the purpose of tax avoidance and did not result from economic conditions, the abovementioned Article 11 cannot be applied (cf. glossary to the judgment of the Supreme Court of 22 April 1999, Case No III RN 184/98, OSP 2000, No 5, p. 264). Click here for translation ...

ZERAIM IBERICA SA, a Spanish subsidiary in the Swiss Syngenta Group (that produces seeds and agrochemicals), had first been issued a tax assessment relating to fiscal years 2006 and 2007 and later another assessment for FY 2008 and 2009 related to the arm’s length price of seeds acquired from Zeraim Gedera (Israel) and thus the profitability of the distribution activities in Spain. The company held that new evidence – an advance pricing agreement (APA) between France and Switzerland – demonstrated that the comparability analysis carried out by the Spanish tax authorities suffered from significant deficiencies and resulted in at totally irrational result, intending to allocate a net operating result or net margin of 32.79% in fiscal year 2008 and 30.81% in 2009 to ZERAIM IBERICA SA when the profitability of distribution companies in the sector had average net margins of 1.59%. The tax authorities on there side argued that the best method for pricing the transactions was the Resale Price Method and further argued that the companies in the benchmark study provided by the taxpayer were not comparable. The authorities also pointed to the fact that ZERAIM IBERICA SA prior to entering the distribution agreement had a gross margin of around 40%, and now after entering the agreement would have a net margin of only 1.5%. The Court held in favor of the tax authorities due to (1) lack of explanation to the shift in profitability of ZERAIM IBERICA SA before and after entering the distribution agreement and (2) lack in comparability between the companies selected for the benchmark study and the Spanish distributor and (3) the transactional net margin method presented by the taxpayer in accordance with Spanish regulations is subordinated to the direct methods (resale price minus etc.). Click here for English translation Click here for other translation ...

During the period from 1 January 2003 to 31 December 2005 all the products marketed by GE Healthcare Clinical Systems (France), a company wholly owned by the American company GE Medical Systems Information Technologies and the exclusive distributor in France of medical equipment produced by the General Electric group, were supplied to it by its German subsidiary, GE Medical Systems Information Technologies (MSIT) GmbH, of which it held 100% of the capital. Transfer prices were determined based on the cost plus method. Following an audit of the accounts of GE Healthcare Clinical Systems, the tax authorities dismissing the cost plus method and instead set up a sample of eight companies considered comparable to GE Healthcare Clinical Systems. The difference between the operating loss declared by this company and its arm’s length operating results, calculated on the basis of the median of the net operating margin of the eight companies deemed to be comparable, constituted an indirect transfer of profits granted without consideration by GE Healthcare Clinical Systems to its supplier, GE MSIT GmbH, within the meaning of Article 57 of the general tax code. This transfer of profits constituted income distributed to a company established in Germany, within the meaning of the provisions of Article 111c of the General Tax Code, the administration subjected GE Healthcare Clinical Systems to the withholding tax provided for in Article 119a(2) of this code, in respect of the 2004 and 2005 financial years, at the rate provided for by the French-German tax treaty GE Medical Systems, which took over the rights and obligations of GE Healthcare Clinical Systems following the merger of that company, is appealing against the judgment of 3 January 2013 by which the Montreuil Administrative Court dismissed the latter’s application for discharge of the withholding tax and the corresponding penalties to which it was subject in respect of the financial years ended in 2004 and 2005, which were levied on 30 April 2009; Judgement of the Court of Appeal The Court of Appeal upheld the assessment of the tax authorities and dismissed the appeal of GE Medical Systems Excerpts “22. Considering that the administration, which did not limit itself to noting the loss-making results, with the exception of the year 2000, of GE Healthcare Clinical Systems during the financial years 1998 to 2005, which are not attributable to salary and structural costs as the applicant company maintains, failing to provide any proof of its allegations, and to pointing out that these losses represented 60% of the turnover for the year 2005, thus provides proof of the relevance of the method derived from the study of net transactional margins; that in these circumstances, given the size of the difference between the operating losses declared by GE Healthcare Clinical Systems and the company’s arm’s length operating results resulting from the application of the transactional net margin method, which amounted to EUR 3,675,112 for 2004 and EUR 5,025,107 for 2005, it must be regarded as establishing that the company’s operating losses were in line with the net margin method, it must be regarded as establishing that in the financial years 2004 and 2005 GE Healthcare Clinical Systems, by paying GE MSIT GmbH purchase prices that were excessive in relation to an arm’s length situation, transferred to it profits in the amount of the difference recorded, respectively, in respect of each financial year, within the meaning and for the application of Article 57 of the General Tax Code ; – As regards the justification of the advantages granted : 23. Considering that neither GE Healthcare Clinical Systems nor GE MEDICAL SYSTEMS establishes or even alleges that the advantages granted by GE Healthcare Clinical Systems to its German subsidiary were justified by the obtaining of counterparties favourable to the activity of GE Healthcare Clinical Systems or to its operating results; 24. Considering that it follows that the tax authorities were right to consider that GE Healthcare Clinical Systems indirectly transferred to its German subsidiary profits amounting to EUR 3,675,112 for the 2004 financial year and EUR 5,125,107 for the 2005 financial year;” Click here for English translation. Click here for translation ...