Romania vs A. Romania S.R.L., April 2021, Supreme Administrative Court, Case No 2644/2021

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A. Romania S.R.L. had purchased services from A. Nederland BV and A. CZ Holding sro, and the costs of the services had been deducted for tax purposes. At issue was whether these services had actually been provided to the benefit of A. Romania S.R.L. and if so whether the costs were deductible under Romanian tax provisions.

According to the tax authorities it was not possible to identify the services actually provided, as the documentation provided was only general data on the types of services invoiced, such as: group services, taxes and contributions, other group services. No supporting documents had been submitted to show that the services were actually provided. Furthermore, according to Romanian tax provisions – paragraph 41 of H.G. no. 44/2004 – the costs of administration, management, control, consultancy or similar functions are borne by the parent company and no remuneration can be claimed for these activities from the affiliated persons, thus the expenses are not deductible for tax purposes. Hence an assessment was issued where deductions of the intra-group service costs had been denied.

The court of first instance set aside the tax assessment and concluded that without those services the applicant would not be able to operate in optimal parameters and would not be able to carry out its object of activity.

Judgement of Supreme Administrative Court

The Supreme Administrative Court set aside the decision issued by the court of first instance and decided in favor of the tax authorities.

“- A first criticism concerns aspects related to the non-deductibility of management, consultancy and similar services expenses, in the amount of RON 13,072,643, as well as the related VAT in the amount of RON 3,197,379.
The High Court holds that between the appellant-claimant and the companies A. Nederland BV and A. CZ Holding sro concluded service contracts for the provision of group services to A. S.R.L. (of Romania).
These contracts related to general management assistance, legal, tax, financial, accounting, HR support services, marketing, sales and purchasing services.
Since there is an affiliation relationship between these companies, according to the provisions of Articles 11 and 21 of the Tax Code and point 48 of H.G. no. 44/2004 approving the methodological rules for the application of the Tax Code, the necessity of the purchase of the services, their actual provision, must be proven, and the deductibility of expenses is only possible if services are additionally provided to the affiliated persons or if the price of the goods and the value of the services provided take into account the services and administrative costs.
Such expenses cannot be deducted by the Romanian subsidiary if the services would not have been used in the case of a self-employed person, and it is not sufficient simply to prove the existence of the services; the actual provision of the services must also be proved.
In other words, the services contracted with the two companies (in the Netherlands and the Czech Republic) must be in addition to the affiliation relationship.
The first court held that the services purchased from the two companies were provided and were necessary for the applicant, since it did not have support departments enabling it to carry out the specific activity.
The High Court holds that the deductibility of expenses for management, consultancy and similar services depends on the existence of supporting documents leading to the conclusion that the services provided are not group-wide services, since they are deducted centrally or regionally through the parent company on behalf of the group as a whole and are not invoiced to the other companies in the group.
These services have been highlighted in the documents on file as “group services”, without any supporting documents being submitted to show the nature of the service provided and whether they are in addition to those relating to the affiliation relationship.
The first court, certifying the conclusions of the forensic expert’s report, pointed out that, on page x, the expert had set out the contractual framework and the services to which the Netherlands and Czech companies were committed. The expert also, analysing all the categories of services purchased, showed that they were actually provided and were necessary for the company. The High Court notes from all the evidence in the file that, although the services were provided, it is not known whether they were in addition to those relating to the affiliation relationship, and it has not been shown in concrete terms, for example, with regard to the HR support services, in terms of coordinating personnel policies, remuneration and promotion of training programmes. With regard to marketing, sales and purchasing services, it is not clear from the attached documents what the name, brand, logo, etc. services consisted of. From the content of the expert report, it appears that reports, emails, plane tickets, bus tickets, etc. are listed, in the annexes to the report supporting documents, invoices, receipts, sales statements, activity reports, projects, extracts from manuals, etc. are presented, but all this does not lead to the conclusion that the services were provided in addition to the affiliation relationship, especially as they represent data of a general nature.
In conclusion, it is noted that the tax authorities were correct in finding that the expenditure on the abovementioned services was not deductible.
As regards the VAT relating to those services, in so far as they have not been identified by documents showing that they were provided for the benefit of taxable transactions, in accordance with Articles 145-1471 of the Tax Code, the right to deduct cannot be granted.

– The second criticism relates to the corporation tax on the adjustment of expenses following the reconsideration of the transfer pricing records for transactions with related parties.
It is apparent from the documents in the file that the applicant, in order to substantiate the methods of establishing the transfer prices charged between the group companies, chose the net margin method (for services) and the price comparison method (for goods).
The net margin method, according to the appellants-respondents, was not properly used because a comparison was not made between certain financial indicators of affiliated persons and the same indicators of independent persons operating in the same field of activity, but a cost plus was used applied to the total costs involved in the provision of services distributed to the group companies on the basis of predetermined allocation keys.
According to Article 11 of the Tax Code and the Methodological Rules, the net margin method also involves calculating the net margin of the profit obtained by a person from one or more transactions with related persons and estimating the margin on the basis of the level obtained by the same person in transactions with independent persons or on the basis of the margin obtained in comparable transactions carried out by independent persons.
The net margin method involves comparing certain indicators of related persons with the same indicators of independent persons operating in the same business.
Since the applicant infringed the above-mentioned legal provisions, the appellants-respondents were right to reconsider the records in order to reflect the market price of the services in accordance with Article 11 of the Tax Code.
With regard to the method chosen for goods, it is found that it was not properly used, since there was no offsetting of the price of the transactions, as required by the legal rules, point 25 of the Methodological Rules (method of price comparison), from which it follows that the tax authorities were lawful to reconsider the records in order to reflect the market price of the goods, in accordance with the provisions of Article 11 of the Tax Code.
In addition, it was held that the calculation method presented by the complainant did not include data related to transactions between independent partners, it was not possible to identify the company for which the indicator “net margin” was determined, and for goods a “cost plus” indicator was presented, which has a value of zero, without submitting the comparative analysis.
The companies chosen by the tax authorities for comparison have the same object of activity as the applicant, code CAEN 4669, and distribute similar products, and the ORBIS database used in this case selected the companies on the basis of their independence.
Thus, it is held that the conclusions reached in the expert’s report are not corroborated by the other documents attached to the file, the expert failed to demonstrate and did not retain the calculations carried out by the tax authorities, but repeated the calculation method carried out by the company, without taking into account that no supporting documents were submitted to assess the correctness of the use of the net margin indicator.
The expert also failed to take into account that the net margin used is a cost-plus applied to all costs and not the net margin which requires a comparison between certain financial indicators of affiliated persons and independent persons, as required by the above-mentioned legal provisions.
Thus, the expert’s conclusion that the tax authorities had practised double taxation cannot be taken into account by the administrative and tax court, as management, consultancy and similar expenses are not deductible for tax purposes and were taken into account after the adjustment was made, according to the sales profitability rate indicator.
In addition, the High Court finds that the expert’s report does not provide any justification for the conclusion that the prices between affiliated persons as compared to the prices between independent companies represent market prices, being a mere assertion unsupported by evidence.

…Consequently, the judgment under appeal is to be set aside and, on appeal, the applicant’s action is to be dismissed as unfounded.”

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