C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. Judgement of the Administrative Court The Court found that the TNMM was the most appropriate method to determine the company’s income in 2016, and that the comparability analysis was carried out in accordance with the regulations and data available to the authority. However, the tax authorities have wrongly determined the income of the complainant, by referencing to its entire activity, despite the fact that 5% of the transactions are not subject to regulation under Article 11(1)-(3) of the A.p.d.o.p. Because of this, the court repealed the decision of the first-instance authority and stated that when re-examining the case, the authority should take into account the position expressed in the court’s decision. Excerpt from the judgement regarding adjustments where the result is within the inter quartile range “It is also necessary to share the Applicant’s position regarding the use of the median average, well, the authority of first instance, which was accepted by the Appellate Body, stressed on page 151 of the issued decision that the statistical analysis conducted by it used positional measures, as the comparative analysis is an approximation of the prices used in transactions between unrelated parties. In order to determine the range of prices, statistical tools in the form of quartiles (…) were used to analyse the results, the analysis carried out assuming that the appropriate range of results is the interquartile area (first quartile, median, third quartile). Hence, according to the authority, in practice, the most common assumption is that the market values are those that fall between the value of the lower quartile and the upper quartile of the sample population. The inter-quartile range is used to define the rules generally applicable in the market. It should be noted here that the inter-quartile area for 2016, ranges from 1.61% to 3.89%, so since the market value of the EBIT(2) operating margin is already the value of the bottom quartile of 1.61%, and the estimation made is to determine the margin obtained in comparable transactions by independent entities – §18 of the MF Regulation (and such market transactions are already at the level of the bottom quartile), there is no legal basis for determining the market values of EBIT(2) using the arithmetic average of the median operating margin.” Click here for English Translation Click here for other translation ...

Maderas Anchile exported wood chips to a Japanese corporation, Itochu, which indirectly owned 9.8499% of the shares in Maderas Anchile through another company, Forestal Anchile. At issue was whether these transactions between Maderas Anchile and Itochu were controlled. Based on the wording of the transfer pricing provisions in force at the time (Article 38 of the LIR), the tax authorities concluded that the transactions were controlled, and had issued a transfer pricing adjustment based on this assumption. >Judgement of the Supreme Court The Supreme Court applied a restrictive interpretation of the rule in article 38 of the LIR and decided in favour of Maderas Anchile. Excerpts “Ninth: That with regard to the validity of assessment No. 35, issued to Daio Paper Corporation, it is consequential to those affecting Maderas Anchile, and therefore, since the existence of transfer prices lower than those that would be set between independent companies has not been established, there are no tax differences in favour of the Treasury or sums that could be considered withdrawn by Daio Paper, in accordance with the provisions of Article 21 of the Income Tax Law. Tenth: That the judgment of appeal added that the hypotheses of “relationship” are not limited or restricted by the assumptions of relationship contained in Laws Nos. 18.045 and 18.046, because it is legally improper for the Internal Revenue Service to limit or restrict the express will of the legislator. In any case, Circular No. 3 of the Internal Revenue Service of 6 January 1998, which gives instructions on the amendments introduced to article 38 of the Income Tax Law by Law No. 19.506, does not indicate that this was the intention of the administration. But what is missing in this case is the basic assumption of “relationship”, which is the control exercised by one company over the other and which ultimately influences the determination of transfer prices. Eleventh: As can be seen, the point on which the liquidations are based arises from the text of article 38, third paragraph, of the Income Tax Law, modified by Law No. 19.506, of 30 July 1997, which at the time the audited operations took place, was as follows: “…. When the prices charged by the agency or branch to its parent company or to another agency or related company of the parent company are not in line with the values charged for similar operations between independent companies, the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the operation, or the production costs plus a reasonable profit margin…”. Consequently, it was necessary to elucidate whether there was a “relationship” between the companies that carried out the audited and liquidated acts, for which reason it was reasoned about the elements provided by the precept to define whether there were operations carried out by related entities and, if so, whether the values charged by Maderas Anchile to Itochu Corporation were equivalent to those that in similar operations would be agreed between independent companies. Twelfth: That in the preceding grounds it has been described how the judges were convinced that these were not related companies, so that the challenge of the Internal Revenue Service was not founded, in fact and in law, because the assumptions for the application of article 38 of the Income Tax Law were not met. Thirteenth: That without prejudice to this, although unnecessary, the judgement also declared that the price was not influenced by the alleged relationship between the contracting companies, since the price stipulated in the audited operations corresponded to those that could be legitimately fixed by independent companies, a conclusion that arose from the inaccuracies of the Service, reflected in the liquidations, when assessing the transfer price. Fourteenth: That in the situation described above, it is not possible to see how the infringements of the rules that the appeal points out could occur, since neither the “relationship” nor the fixing of a transfer price lower than that of the same market developed by independent companies has been declared, which arose from the application of the rule of article 132, paragraph 14 of the Tax Code, a precept that has not been denounced as having been transgressed. Fifteenth: That in this way, the factual conclusions reached by the first instance judge, which the second instance judges adopted, appear to be in accordance with the merits of the proceedings and cannot be altered in cassation if it has not been demonstrated that the laws regulating evidence have been violated in order to establish the facts that were decisive to accept the claims in the case.” Click here for English translation Click here for other translation ...