New, extremely important case law has recently emerged in the area of transfer pricing. It includes two judgments of the Supreme Administrative Court (SAC): one dated 9 June 2022 in case no. I SA/Go 103/22 and the other dated 29 June 2022 in case no. II FSK 3050/19.

In both cases, the tax authorities challenged the pricing of certain intercompany transactions on the basis that it caused an understatement of the taxable amount. The authorities questioned the taxpayers’ transfer pricing analyses, contesting both their adopted criteria and transfer pricing methods.

Consequently, the authorities decided to make their own transfer pricing analyses for the transactions. In one of the cases the taxman additionally decided to change the transfer pricing method from cost plus to transactional net margin method.

The authorities’ analyses yielded results that were widely different from those obtained by the taxpayers, and allowed the authorities to impute additional income for the taxpayers.

The taxpayers did not agree with the authorities’ findings and appealed their decisions to administrative courts.

The courts found a number of errors in tax authorities’ transfer pricing analyses. In particular, it was observed that whoever conducts a comparability analysis must complete its individual stages and determine relevant comparability factors. The analysis cannot be limited merely to the results of the “thought process” itself.

In case II FSK 3050/19, SAC held that the tax authority made the following errors in its transfer pricing analysis:

  • did not analyse information on the taxpayer, its business environment, and its functions, assets and risks related to the transaction;
  • adopted wrong criteria when collecting information on comparable transactions;
  • insufficiently argued its decision to challenge the taxpayer’s transfer pricing analysis;
  • was inconsistent in its application of selection criteria.

And in case I SA/Go 103/22, SAC found the following errors in authority’s transfer pricing analysis:

  • imputed additional income based on arithmetic mean of the median instead of the interquartile range;
  • adopted a wrong income level to be imputed as it imputed 100% of taxpayer’s income whereas only 95% of its income was generated by transactions with related parties.

In both cases the courts held it was the taxpayers that were right, and agreed that tax authorities’ transfer pricing analyses were wrong. This shows that it can be a huge challenge to prepare a transfer pricing analysis that complies with a number of guidelines while remaining hard to contest.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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