The tax authorities had issued an assessment, where the income of A SRL had been adjusted by reference to Romanian transfer pricing provisions.
An appeal was filed by A SRL claiming annulment of the assessment. In the Bucharest Court of Appeal, the assessment was set aside in part.
An appeal was then filed by the tax authorities with the Supreme Court.
Judgement of Supreme Administrative Court
The Court found that the appeals were well founded and set aside, in part, the judgment under appeal.
“The choice of methods for determining transfer prices differs from one company to another, the appropriateness of applying any of the methods being influenced by the characteristics of the transactions analysed. Thus, the selection of a particular method depends on the existence of comparable transactions carried out between independent persons (so-called “uncontrolled transactions”) as well as other comparability factors as follows: the characteristics of the goods or services traded (e.g. the physical characteristics of the goods, the nature of the goods – tangible or intangible, etc.), the functions performed and the risks assumed by the parties to the transaction (e.g. production function, marketing, distribution, market risk, inventory risk or non-collection risk, etc.). ), the contractual terms of the respective transaction (e.g. payment terms, trade discounts, guarantees granted, etc.), the economic circumstances (e.g. market conditions where the respective goods are traded, etc.) and the business strategies implemented (e.g. market penetration schemes, etc.).
The selection of a particular method also depends on the completeness and accuracy of the information available and the purpose of using the method in question, i.e. for tax planning, documentation or to justify the market value of transactions already carried out. There may also be situations where it is appropriate to use more than one method to determine or test the market value of transfer prices charged.
Furthermore, in choosing a particular method, taxpayers who carry out transactions with related persons should take into account the provisions of domestic law relating to the hierarchy of methods as well as specific guidance on the applicability of certain methods to certain types of transactions.
It should be noted that none of these methods is in itself right or wrong given a given set of circumstances. Rather, it can be said that the choice of the most appropriate transfer pricing method is based on identifying that method which, in the circumstances of the transaction under consideration, provides the most appropriate measure or best estimate of a market value.
“Moreover, it is clear from a reading of the legal text itself that the tax authority’s ability to make adjustments is restrictive:
“…may adjust the amount of income (…) as necessary to reflect the market price”. However, a restrictive interpretation can only lead to the conclusion that the tax authority raises the income from its actual level to the level at which it meets the market price, never higher.
On the other hand, point 2.7. of the OECD Guidelines states that national tax authorities are prohibited from over-taxing companies that make a profit below the average. In other words, in line with the Tax Code approach, the Guidelines advocate for the tax base to be set within a range considered to be at the market level, explicitly prohibiting the setting of taxes at a level higher than the market minimum, such an approach being considered to be over-taxation.
In contrast, the text of Order 222/2008 explicitly states that the tax authority should raise the tax base not only to where it meets the market level, but to the median of the range.”
“As regards the appellants’ reliance on European Commission Decision 2018/859 in support of the legality of the adjustment to the median, the High Court notes that the decisions, although they do not have to be transposed into national law, are binding legal acts valid for one or more countries/companies/individuals. However, the party concerned must be notified and the decision takes effect upon receipt of the notification”
“In the light of the foregoing considerations, pursuant to Article 496 of the Code of Civil Procedure, in conjunction with the provisions of Article 20 of Law No 554/2004, the High Court will uphold the appeals brought by the defendants General Directorate for the Administration of Large Taxpayers and the Regional Directorate of Public Finance Timișoara, with the consequence of quashing in part the judgment under appeal in order to allow in part the action and annul in part Decision No 1034/72/25.02.2016 on the appeal and tax assessment Decision No. x/25.03.2015 issued by the defendants, in respect of the corporate income tax in the amount of RON 16,624,617 for the tax period 2006, 2008-2010, together with the related incidental expenses, since, following the increase in the taxable base for 2007, according to the considerations set out in this judgment, the additional corporate income tax owed by the applicant was in the amount of RON 413,666, together with the related incidental expenses.
At the same time, the order of measures no. 92.544/24.03.2015 shall be annulled in part with regard to the calculation of the corporate income tax for the subsequent tax periods and the recording in the accounts of the legal deductible reserves additionally established for the tax period for the years 2006, 2008-2010, maintaining the other provisions of the judgment under appeal, so that the cross-appeal lodged by the applicant against the same judgment shall be dismissed as unfounded.”
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Click here for other translationRomania vs A SRL March 9 2021 SC