Greece vs “Tin Cup Ltd”, November 2022, Tax Court, Case No 3743/2022

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Following an audit of “Tin Cup Ltd” for FY 2016 and 2017 an assessment was issued by the tax authorities regarding excessive amounts of waste materials and pricing of intra-group transactions.

On the issue of excessive amounts of waste materials, tax deductions was denied by the authorities as the costs was not considered to have been held in the interest of the company, i.e. it did not take place with the purpose of increasing “Tin Cup Ltd” income.

On the second issue, the tax authorities found that the most appropriate method for the transactions in question (sales to a related party) was the CUP method. Applying the CUP to the controlled transactions (instead of the TNMM) resulted in additional income of approximately 392.000 EUR in total for FY 2016 and 2017.

A complaint was filed by “Tin Cup Ltd” with the Dispute Resolution Board.

Decision of the Board

The Board upheld the assessment of the tax authorities both in regards of denied deductions of costs related to excessive waste materials and in regards of the transfer pricing adjustment.


Issue of excessive waste materials

“The applicant further submits that the audit is not entitled to disallow the excess consumption for tax purposes, since it is a real amount, which can only be considered to be in the interest of the undertaking, since the processing of the raw material results in the products to be sold.
Since, however, the applicant’s above individual allegation is well-founded only to the extent that the purchases of raw and auxiliary materials are made within reasonable and expected limits and taking as a reference technical specifications and the data of common experience. Because in the present case, the products for which a difference was calculated show overruns of consumptions from 8,43% to 53,96% in excess of the normal consumption according to the accounting records.
Because as it follows from the relevant Audit Report, the audit established with full and clear arguments that the excessive consumption of raw and auxiliary materials, which affected the cost of sales and the net results, did not take place in the interest of the company, i.e. it did not take place with the purpose of increasing its income and therefore, the condition of para. (a’) of Article 22 of Law 4172/2013.
The applicant’s claim is therefore rejected as unfounded.”

Issue of transfer pricing

“…Because, as is clear from the relevant Audit Report (pp. 28-35), the audit provides full and sufficient reasons for the rejection of the applicant’s documentation, namely:
· the sample of external comparables selected by the applicant concerns EU-28 countries, whereas the transaction at issue is between two Greek undertakings and the geographical area is a factor which materially affects the comparability of the transactions.
· the audit preferred the comparable uncontrolled price (CUP) method, not only because it is the preferred traditional method in accordance with the above provisions, but also because it found that internal comparables with independent/unrelated companies existed.
· the transactional net margin method (TNMM) has the disadvantage that the net profits taken into account are affected by factors not related to intra-group transactions, such as extraordinary income and expenses, thus reducing its reliability (OECD Guidelines 2017, para. 2.70 and 2.72). Indeed, in the present case, specifically in the 2016 tax year, the applicant incurred extraordinary expenses of €1.5 million, with the result that the net profit margin ratio is approximately half of what it would have been without them.
Because the applicant also claims that there is a comparability deficit in the sample of the audit, since the way and time of payment of the sales invoices differs. In particular, unlike other independent/unrelated customers, which have open balances for a significant period of time, the related company………..normally advances 50 % of the annual turnover from the previous year.
Since, however, because of this preferential method of collection, the applicant incurs significant amounts of interest payable to the abovementioned affiliated company, amounting to:
· 2016: 200.121,00 €
· 2017: 103.000,00 €,
transaction which has also been documented and contributes to the elimination of any difference in comparability.
Since the methodology and the conclusion of the audit, as reflected in the relevant Audit Report, are hereby found to be valid, acceptable and fully justified.
The applicant’s claim is therefore rejected as unfounded.

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