One question that arises in cases where the net profit indicator is weighted against sales is how to account for rebates and discounts that may be granted to customers by the taxpayer or the comparables. Depending on the accounting standards, rebates and discounts may be treated as a reduction of sales revenue or as an expense. Similar difficulties can arise in relation to foreign exchange gains or losses. Where such items materially affect the comparison, the key is to compare like with like and follow the same accounting principles for the taxpayer and for the comparables ...

One question that arises in cases where the net profit indicator is weighted against sales is how to account for rebates and discounts that may be granted to customers by the taxpayer or the comparables. Depending on the accounting standards, rebates and discounts may be treated as a reduction of sales revenue or as an expense. Similar difficulties can arise in relation to foreign exchange gains or losses. Where such items materially affect the comparison, the key is to compare like with like and follow the same accounting principles for the taxpayer and for the comparables ...

FISH MARKET a.s. was engaged, among other things, in the sale of live freshwater fish and that the margin on sales to a related party (KOLTER, a.s.) was much lower than on sales to other independent companies. The tax authorities therefore began to examine the reasonableness of the difference in the agreed selling prices of the fish. During the audit, the tax administrator found that the quantity of fish purchased from the selected distributors did not affect the price of the goods (e.g. the customer Human purchased 4.8 tonnes of live scaled carp at CZK 45.23 per 1 kg, the trading company Schultheiss GmbH purchased 27 tonnes in the period in question at CZK 46.1 per 1 kg. The claim that KOLTER had taken surplus fish and was therefore charged a lower price was not substantiated by the applicant and no evidence of discounted sales was produced or appears in the administrative file. The Regional Court agreed with that assessment. An appeal was then filed by FISH MARKET with the Supreme Administrative Court. Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities . When issuing a decision the tax authorities must prove that the price of the disputed transaction (the so-called transfer price) was agreed between related parties and that the transfer price differs from the price that would have been agreed between independent persons in normal commercial relations under the same or similar conditions (the so-called reference price). If these first two steps are fulfilled and the authorities finds a difference between the transfer price and the reference price, it must give the taxpayer an opportunity to explain and substantiate the difference. The burden of proof in the first two steps lies with the tax administration and shifts to the taxpayer only if it can prove that the parties are related and that they have agreed on a price that differs from the reference price. The taxpayer (if it wants to defend the amount of the agreed price) must then claim and prove special and normal market conditions, but at the same time economically rational reasons why the price between it and the related party was agreed differently from the reference price. Excerpts “Where the tax authority establishes a reference price on the basis of data on the actual prices actually achieved for an identical or similar commodity between genuinely existing independent operators, it must carefully examine the extent to which those prices were achieved under the same or similar conditions as those under which the price was negotiated by the connected persons and, if those conditions differ, make an appropriate adjustment to the reference price. The burden of proof on the tax authorities also relates to establishing the circumstances in which the price was negotiated by the connected persons. Also, where the tax authority establishes the reference price on the basis of data on the prices actually achieved for an identical or similar commodity between actually existing independent entities, this will normally lead to the establishment of a range of specific prices so achieved (e.g. For the purposes of determining the difference between prices, the price must be based on the range of prices within the evidentially fixed interval (see the judgment of the Supreme Administrative Court of 31 March 2009, No. 8 Afs 80/2007 – 105, published under No. 1852/2009 Coll. of the Supreme Administrative Court).” “In the present case, the tax administrator used the ‘comparable uncontrolled price method’ (CUP) to determine price comparability. This is the preferred method of comparison, which is used in transactions where there is a fully comparable (identical) product – a commonly traded commodity sold by the undertaking under examination to both related and independent undertakings. The identity of the product or commodity sold is thus an essential element. The tax authority analysed the structure of the applicant’s customers – distributors who purchased the same goods during the period under review; it found that Schultheiss GmbH (Germany), Bihl Raymond + Cie (France), TEHAG (Hungary), Human Inh. Paulus – Fischgrosshandlung (Germany), GYORI ‘ELORE’ HALÁSZATI TZS (Hungary). It found that Schultheiss GmbH (Germany) came closest to the volume of business carried out between the applicant and KOLTER a.s. The tax authorities thus selected six independent entities purchasing exactly the same product from the applicant during the periods under consideration. The result was to find the price range within which the agreed prices per kg of the identical product purchased during the period under consideration by the independent customers varied and to compare it with the price agreed with the dependent party-KOLTER a.s. With regard to the applicant’s claim that the price agreed with KOLTER a.s. is influenced by the low price level in Slovakia, the defendant argued that the price level in Hungary, for example, from where the three distributors in the comparative sample were selected, is entirely comparable. Moreover, the price level in the individual countries is not relevant; what is relevant is the level of the price arrangement between various independent persons at which those customers purchased the product from the applicant (it is therefore irrelevant at what price they then resold it on the market). The Supreme Administrative Court agreed with that conclusion. Moreover, by comparing the cost and revenue accounts of these persons, the tax administrator found that, in the period under review, the applicant’s margin on sales of fish to the related person, KOLTER, a.s., was significantly lower (1,71 %) than on sales to another independent customer, Schultheiss, GmbHP (11,62 %); the margin of KOLTER a.s. (these findings also support the defendant’s conclusion that the person associated with the applicant enjoyed commercial advantages, although the tax authorities did not use this finding as evidence but it became the initial reason for investigating whether any differences in the agreed prices existed). In so far as the applicant reiterates, both in the application and in the appeal, that the comparison between KOTLER a.s. and Schultheiss, GmbHP and Human and Schultheiss, GmbHP cannot be made ...