Lithuania vs „Vaistingoji melisa“, May 2018, Supreme Administrative Court, Case No A-676-602/2018

Posted on | By Courts of Lithuania
Category: Burden of Proof, Comparability Analysis | Tag: , , , ,
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The tax authority had reduced Vaistingoji melisa’s deductions for rental payments to its shareholder, which, in its view, exceeded the rental payment at arm’s length.

Vaistingoji melisa filed a complaint with the Tax Disputes Commission which in 2016 dismissed the complaint and upheld the decision of the tax authority. An appeal was then filed with the court, which upheld the decision of the Tax Disputes Commission. Finally, an appeal was filed with the Supreme Administrative Court.

Judgment of the Court.

The Supreme Administrative Court overturned the decision of the first instance court and remitted the assessment for reconsideration.

According to the Court, the tax authority had failed to determine the arm’s length price of the property and to provide sufficient justification for its assessment.

Excerpt in English
“56. As already mentioned above, the applicant rented premises from associated persons for the operation of pharmacies. Paragraph 11.2 of the Requirements for pharmacy premises and equipment approved by Order No V-7 of the Minister of Health of the Republic of Lithuania of 7 January 2003 (wording in force from 1 January 2012 to 1 May 2014) stipulates that a pharmacy outbuilding must be located only on the ground floor of a building, except for pharmacies established in health care institutions. The market surveys of UAB Ober-haus show, inter alia, a range of rental prices for commercial premises in Panevėžys in the centre (ground floor), the centre (other floors) and other districts. Therefore, the tax administration should have based its calculations on the rental prices of the commercial premises in the centre (ground floor), which are higher than the rental prices of other premises. However, as can be seen from page 6 of the inspection report, this was not done, resulting in incorrect calculations. It should be noted that the Court agrees with the reasoning of the Commission and the Court of First Instance that the applicant has not identified any other factors (other than the one discussed above) relating to the requirements for the pharmacy premises and their fitting-out which may have an impact on the rental price.
57. In the light of the foregoing, the Chamber of Judges annuls the decisions of the Court of First Instance, the Commission and the Inland Revenue and refers the tax dispute to the defendant for a fresh examination of the decision of the Panevėžys Inland Revenue Authority. When re-examining the tax dispute, the tax administrator should also assess the information certificates No 16-NK09-29 and No 16-NK09-30 of 4 October 2016 on the lease price of the property, in a concise form, submitted by the applicant to the court of first instance by UAB Capital vertinimas (vol. I., item 134159).
58. The tax authorities wrongly emphasise the burden of proof on the applicant alone to prove that the pricing of transactions with associated persons complies with the arm’s length principle. There is no doubt that a taxpayer, in fulfilling its obligations to declare and pay tax under the law, must have evidence to prove that it has properly discharged that obligation. However, there is also no doubt that the tax administration, when establishing that the taxpayer has not properly fulfilled its obligations to declare and pay the tax in accordance with the law and when establishing the tax arrears by an administrative decision, must duly substantiate its decision with evidence (Article 67 of the ITA). It follows from these general obligations of the taxpayer and the tax administration that in the present case the tax administration was obliged to duly substantiate its decision, although, as stated by the tax administration, the burden of proof under the Rules rests solely on the taxpayer.
59. The Rules establish the taxpayer’s obligation to have documentation of a controlled transaction (documentation showing whether the taxpayer has followed the arm’s length principle in determining the prices of transactions with associated persons) and to submit it to the tax administration. If the tax authority determines that the pricing of transactions between associated persons does not comply with the arm’s length principle, the prices shall be adjusted, the company’s taxable income shall be recalculated, and additional taxes shall be charged. In checking and assessing whether the pricing of transactions between selected companies and associated persons complies with the arm’s length principle, the tax administration must follow the same legislation and guidance on pricing of transactions between associated persons. Therefore, in the present case, the taxpayer’s burden of proof arising from the Rules should not be the sole focus of the present case, since the tax authorities must also follow these rules when taking a decision on the basis of Article 40 of the Corporate Income Tax Law, i.e. when making an adjustment of the value of transactions or economic transactions and a recharacterisation of the income or payments. In the latter case, the tax administration is obliged to carry out the evidentiary process in accordance with all the requirements of the Rules and other legal acts when taking a decision.”

 

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