In 2010 the tax authorities issued an assessment, in the part concerning a service contract entered by X EOOD with a related party.
In regards of the service contract, the tax authority established that some of the services were actually performed as X EOOD did not have the necessary staff and resources to perform them. The dispute was related to management services allegedly performed by the related party.
An appeal was filed by X EOOD
The Administrative Court referred to the provision of Article 16(2)(4) of the Income Tax Act, according to which the payment of remuneration or benefits for services without those services having actually been rendered is also regarded as an evasion of taxation, and therefore held that the complaint in that part was unfounded.
An appeal was then filed with the Supreme Administrative Court
Judgement of the Supreme Administrative Court
The Supreme Administrative Court upheld the decision of the Administrative Court and decided in favour of the tax authorities.
Excerpts
“As correctly held by the AAC, the Transfer Pricing Report annexed to the case establishes the existence of management services, but there is no evidence of their performance, accordingly, they are included in Table 14of the groups of services and the corresponding mark-ups, as well as in the following Annex 1 concerning the cost centres and allocation keys. In this respect, the argument in the appeal that the services in question are included under code 7415 is unfounded, as is the footnote concerning the specification of the services.
The court’s finding that there was no evidence as to what the services consisted of and what the value of the services was by line item and type of service as set out in Schedule 1 to the contract is correct. In this respect, the argument in the appeal relating to the fact that the services are carried out on a daily basis and cannot be set out in writing is unfounded.
Pursuant to Article 16(2) of the Income Tax Act, the payment of remuneration or benefits for services without their having actually been rendered is deemed to be an evasion of taxation. In the present case, the service is rendered, therefore the result of the service must be certified to the recipient, or evidence of the use of the service must be provided, i.e. the actual existence of the result of the service is required, taking into account the application of the accounting principle of comparability between income and expenses, pursuant to Article 4(1)(4) of the Accounting Act. Pursuant to that provision, expenditure incurred in connection with a transaction or activity is recorded in the financial result in the period in which the enterprise derives benefit from it, and revenue is recorded in the period in which the expenditure incurred in obtaining it is recognised. Therefore, when analysing individual services, a check should be made as to whether the particular supplier has recorded revenue in relation to the service performed and whether a counterpart cost has been recorded that is comparable to the revenue and what it represents (material, labour, subcontractor costs, etc.). On the other hand, it is necessary to check whether the cost has been recorded in the accounts of the recipient of the supplier, that is to say, whether the latter has recorded a cost in relation to the specific supply and whether there is revenue recorded which is comparable to that cost.
The onus is on the TPO to certify that it benefits from the result of a service rendered. In this case, no evidence has been produced to establish that the management services were actually performed. It is apparent from the conclusion of the SSE admitted in the case that the cost base includes several main categories of expenditure: staff salaries, travel and accommodation, external service costs, administrative expenses, metier costs and other costs. According to the expert’s review of the management services cost sheet for 2007, it was found that the costs under the cost centre ‘board of directors’, according to the annexed extracts and invoices, were: costs for auxiliary materials – office, security, rent, consultancy services, salaries and social security contributions, travel. Expenditure under the cost centre ‘General cost centre services’ is presented by type, the more significant of which are: ancillary supplies-fuel, property costs, telephone services, consultancy services, provision costs.
These costs were rightly held by the AAC not to relate to management services, since it was not established what the nature of the specific services under Annex 1 to the contract was, how and by what specific actions the types of services referred to in the 16 points of Annex 1 were carried out, and thus it was not made clear what resources were required to carry them out. It cannot be reasonably inferred from the existence of a written contract alone that the specific management services have been performed and that there is an inherent cost of security, rent, consultancy services, salary and social security contributions, travel, etc., which are the subject matter of the expenditure recorded but not recognised for tax purposes. There is no merit in the appellant’s arguments relating to the determination of the costs on the basis of a transfer pricing report and that, in determining the remuneration, the expert’s conclusion shows that the parties acted on terms which should also apply between unrelated parties. The subject-matter of the dispute in the case is not the amount of the remuneration for management services, but the type of expenses invoiced by the company, which are not related to the services agreed in Annex 1 to the contract, due to the lack of evidence of their actual performance, given the nature of the same and their agreement in general terms, without further specifics. Thus, under item 1 of Annex 1 to the contract, the scope of the service is ‘company development strategy’. There is no evidence as to what the specific service consisted of, what actions were taken and how the development strategy of [company] was changed and, accordingly, what revenue was accounted for in relation to the costs incurred for that service. On the same basis, it cannot be accepted that the other services covered by Annex 1 to the contract between the parties were performed.”
Click here for English Translation
Click here for other translation
Решение №6788