Bulgaria vs “Beltart Manufacturing”, May 2020, Supreme Administrative Court, Case No 5756

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“Beltart Manufacturing” is a Bulgarian toll-manufacturer of of clothing accessories – trouser belts etc. – and is a member of the German Beltart Group.

The remuneration for the manufactoring services provided to the group for 2013 and 2014 had been lower than for previous years. According to the company this was due to changes to the contractual and economic conditions and discounts.

Following an audit the tax authorities came to the conclusion that the remuneration for 2013 and 2014 should be increased to the same level as for the previous years.  According to the tax authorities, the additional income had been determined by application of the CUP method.

An appeal was filed by Beltart Manufacturing with the Administrative court, where the assessment was set aside. According to the court the tax authority had  not analyzed the economic situation for the period 2011 and 2012, and then for 2013 and 2014 in order to determine that the company’s profits. Since the tax authority has compared the remuneration of the services for a period different from the period under review, it could not be held that the same are identical for both the periods. The fact that there is no comparable market data makes it impossible to verify whether the terms of the transaction correspond to the terms of a comparable transaction between unrelated parties. In the absence of comparable date, there is no way to justify a deviation in the terms of the transaction.

An appeal was then filed by the tax authorities with the Supreme Administrative Court.

Judgement of the Supreme Administrative Court

The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case for further considerations.

“…On the merits, the applicant submits the following opinion: The allegations of the Director of the ‘ODOP Directorate’ – Varna that there are substantial breaches of the rules of court procedure in the annulment of the judgment are well-founded. The objection of the applicant that the evidence submitted was credited unilaterally by the court and was not discussed in totality with all the other evidence available in the case is also considered as justified. It is reasonably submitted that the provision of Article 116(4) of the Code of Civil Procedure has not been complied with. The market price was correctly determined by the revenue authorities in this case, whereas the conclusions to the contrary of the Administrative Court-Varna are incorrect and unlawful.
In the part rejecting the appeal, the judgment under appeal was correctly rendered in compliance with the rules of court procedure and in correct application of the substantive law. For that reason, the cassation appeal lodged by Beltart Ltd is unfounded and the judgment in that part must be upheld”

“The absence of a market analogue to determine the ‘market price’ cannot be the sole ground for annulment of the revision act. The Board of Appeal, as a court of substance, has to assess whether the company’s financial result has been correctly increased. That assessment also relates to the determination of the ‘market price’ of the service and the existence of a deviation therefrom. Ordinance No. H-9 of 14 August 2006 on the procedure and methods for the application of methods for determining market prices provides for several methods for determining the “market price” within the meaning of § 1, item 8 of the State Tax Code. Since in the present case, according to the first instance Chamber, the “market price” was incorrectly determined by the method of comparable uncontrolled prices and the method of increased value by the revenue authorities, the market value of the service should have been determined in the judicial phase of the proceedings in order to make an assessment as to the absence or not of tax evasion.

The expert evidence heard is incomplete in that it shows that the market price of the service in the course of the audit proceedings was not actually determined by the comparable uncontrolled prices method and the incremental value method as alleged by the revenue authorities. However, the expert also did not determine the market price according to any of the methods of Regulation No H-9/2006. In the course of the court proceedings, no “market price” of the invoiced services within the meaning of §1, item 8 of the RA of the Tax Code was established. It was the court’s duty to determine the market price and to assess whether, in view of that price, an evasion of taxation under Article 15 and Article 16 of the Income Tax Act had been established which justified the increase in the company’s financial accounting result. This has not been done and in paragraph 1 of the decision it is formally held that in the absence of a basis for comparison the RA is unlawful”

“Although part of the reasoning of the judgment is correct, the judgment must be set aside in its entirety on the basis of the substantive breaches of the rules of court. The restatement of the company’s financial result relates to the determination of the taxable amount for 2013 and 2014, which must be carried out on the retrial of the case, taking into account all the prerequisites for the increase in the SFR set out in the audit certificate. In order to correctly establish the tax base on which to determine the corporate tax liabilities of the audited entity for 2013 and 2014, the court should clarify the issues of the “market price” of the service provided, determine whether there is an evasion of taxation within the meaning of Articles 15 and 16 of the Income Tax Act; assess whether for any of the years the company is making a loss and, accordingly, determine the amount of advance payments for the period and any interest thereon under Article 89 of the Income Tax Act. Lastly, having determined the tax base, it should, after hearing an expert opinion, determine the interest payable on the unpaid public debts under Article 175(1) of the Tax Code.”

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