Romania vs “Milk and Dairy” A. SA, September 2020, Supreme Court, Case No 4702/2020

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In regards of transfer pricing A. SA had two activities – production of dairy products and distribution of milk – that had been subject to an audit by the tax authorities which resulted in an assessment of additional taxable income.

The transfer pricing assessment had been upheld by the court of first instance and A. SA then filed an appeal to the Supreme Court.

In regards of production activities the main criticism by A. SA was that the tax authorities had replaced one market price with another price considered convenient by tax authorities, without legal basis, although the tax inspection accepted the list of companies and comparable transactions for all three sections of the file. The judge of the merits did not motivate his choice in law and supports the maintenance of the median according to the RIF, but does not specify how he reached this conclusion, the data for which the cost plus method is substituted and the legal grounds are not analysed.

In regards of distribution activities the criticism was that the forensic accountant reached the same conclusion as the company under review, but the court did not retain it, stating that it would require the tax authority to request a change in the transfer pricing file. The court also noted that the expert “commented lapidarily” in his analysis and in his conclusion. It considers that the court’s conclusion to rely strictly on the tax authority’s interpretation is erroneous, since the tax authority does not regularly carry out price analyses on affiliated companies in the geographical area in which the company is located. In practice, as long as the tax body cannot be suspected of having business ideas, it also follows that the tax body cannot correctly and consistently analyse pricing in an independent market as well as in a controlled market; in the present case, however, the method was chosen by the tax inspectorate with the intention of maximising the amounts set for additional payment, without taking into account, as it should have, the objective factors and the legal provisions applicable in the case, which were interpreted erroneously, without taking into account the principles of the OECD Guidelines.
The tax body has access to databases on transfer pricing practices within the ANAF central unit. In this respect, the query of the database by the tax authority is absolutely necessary in order to determine both the transfer pricing method and the prices charged, and not the arbitrary determination of a random method without any reasoning.

Judgement of Supreme Court

The Supreme Court dismissed the appeal of A. SA and upheld the decision of the court of first instance.

Excerpts
7.3.3.1. Production activity.
The main criticism on this aspect concerns the re-framing of all market prices in the comparison range with the median price.
The tax authority removed two companies from the comparison list which did not meet the independence criteria and calculated separately for each of the years under review at the median level resulting from this recalculation.
The first court held that the tax authority correctly referred to the median resulting from the comparison of the 4 companies that met the independence criteria and did not make an estimate in accordance with Article 3 of OPANAF No 222/2008, since formally, F. met the conditions to be used for the price comparison, but the median resulting from the analysis of the 6 companies is different from the one resulting from the removal from the comparison of the companies that did not meet the independence criteria, and the new C. pen. The new C.C. had been established in the abstract, ignoring the above calculation formula.
In accordance with Article 2 of Order No 222/2008 on the contents of the transfer pricing file:
“(1)The margin of comparison is the range of price or profit values for comparable transactions between comparable independent companies.
(2) For the determination of extreme values, the comparison margin shall be divided into 4 segments. The maximum and minimum segments represent the extreme results. For the purpose of determining the comparator range, the extreme results within the comparator range will not be used.
(3) If the transfer price consideration established by the taxpayer is not included in the comparison range, the competent tax authority shall establish the median value as the transfer price at market price. The median value shall be the value which is in the middle of the comparison range.
(4) If the median value cannot be identified, the arithmetic mean of the two middle values of the comparison range shall be taken.
(5) The benchmarking will consider territorial criteria in the following order: national, European Union, international.”
The tax authority justified the measure taken by the fact that the adjustment occurred in the case of years for which the indicator in question was found to be lower than the minimum limit of the quartile range, and that applying the calculation of the adjustment to the median of the quartile range is correct and logical, because just as the indicator in question can have values lower than the median, so it can also have values higher than the median.
The High Court finds that the first court applied the law correctly, validating the measure ordered by the tax authority. The applicant’s claim that the tax inspection team accepted the list of companies and comparable transactions for all three sections (concerning the activity of selling raw milk as a raw material, concerning the activity of producing dairy products and concerning the activity of distributing goods) cannot be upheld, so that it was not necessary to apply the median value for the transfer price at market price.
The acceptance referred to by the tax authority concerned only the fact that the transfer pricing file submitted to the tax inspection met the minimum requirements in terms of content (comparative lists, calculation of profit indicators for the companies included in those lists, information from the accounting records). Otherwise, a tax audit would be pointless if the actual handing over of the transfer pricing file led to the implicit acceptance as correct of all the information and conclusions contained in that file.
The inspection team cannot be held to have committed an abuse by reclassifying all the market prices in the comparison range with the median price, as long as this is the indication in the legal rule, and the appellant-claimant itself had done so, but in view of 6 companies considered independent of it.

Distribution activity.
For the distribution activity, the complainant used the net margin method for comparison (considering that it did not have sufficient data to calculate the gross margin), calculating a financial indicator R0S which for the reference period ranged from 4.59% to 24.78% and had a weighted average value of 15.16%. The values reported by the company in the transfer pricing file coincide exactly with those calculated by the forensic expert and are both on an annual basis and as a weighted average above the median level established in relation to the 4 independent companies that formed the basis of comparison.
The different conclusions reached by the tax authority on the one hand and the applicant company and the expert on the other relate to the amount of expenses associated with the distribution activity for 2 of the 6 years audited, 2010 and 2011, in which the company and the expert enter under the heading ‘other operating costs’ the amount of 173. 555 RON and 181.653 RON respectively, while in annex 3.2.3 to the RIF, the tax authority records expenses of this type in the amount of 9.535.963 RON and 9.887.547 RON respectively, all these expenses corresponding to account sheets 611 – 628, i.e. exactly the accounts of expenses generated by the sale.
On this issue, which was also the subject of objections to the expert’s report accepted by the court, the expert held that he “took into account the data entered in the RIF, in so far as they related to objective No 8 formulated by the claimant and accepted by the court”, and further considered that the tax authority’s acceptance of the transfer pricing file also meant acceptance of the data and calculations entered therein.
The first instance overruled the expert’s retention on the ground that it would either require the tax authority to request clarifications and amendments to the transfer pricing file until that file corresponded perfectly to the tax authority’s own business ideas – and the tax authority should not be suspected of having business ideas – or, if the transfer pricing file did not correspond in terms of its substance, the tax authority would have to make a full assessment of those highly complex relationships between related companies, which cannot have been the legislature’s intention.
In fact, the tax authority checks the transfer pricing file prior to the preparation of the RIF from an overall, predominantly formal perspective, and may for example request the use of another method of comparison without having to analyse the calculation of the indicators, income or expenses, which will be examined once the file has been accepted as the basis for the verification of transfer prices between related companies. This must be the meaning resulting from the interpretation of Art. 11 para. (2) of the Tax Code and the Methodological Rules thereto as well as the provisions of the OECD Guidelines 2009 edition.
The High Court also agrees with this understanding, noting already in the previous paragraph that the acceptance referred to by the tax authority concerned only the fact that the transfer pricing file submitted to the tax inspection met the minimum requirements in terms of content (comparative lists, calculation of profit indicators for the companies included in these lists, information from the accounting records). Otherwise, a tax audit would be pointless if the actual handing over of the transfer pricing file led to the implicit acceptance as correct of all the information and conclusions contained in that file.
On the other hand, the manner in which the evidence is assessed is a question of correctness which cannot be subject to re-evaluation by the court of appeal, and the party can only raise issues of illegality in relation to the administration of that evidence. However, the appellant has not indicated why the court’s conclusion not to take into account the findings of the forensic expert’s report is unlawful.
Consequently, finding that the first instance correctly upheld the tax authority’s thesis, which considered as general selling expenses those set out in Annex 3.2.3 to the RIF, the High Court holds that that ground for annulment is unfounded.

 

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Jurisprudence4702-2020

TP-Guidelines

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