Russia vs Ashin Steel Trading House, February 2019, Court of Appeal, Case No. A76-19287/2018

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Category: Services and Fees, Tax Avoidance Schemes, Transfer Pricing Methods | Tag: , , , , ,
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A group company, PI, purportedly provided management services to the Ashin Steel Trading House.

During the audit for FY 2013-2015 the tax authority came to the conclusions that Ashin Steel Trading House and the PI had “deliberately created a management relationship scheme so that service providers are listed on the staff of an entrepreneur who pays tax on the ONS with the object of taxation “income””. Significant sums of money was transferred to PIs in the form of payments for the provision of management services for their subsequent withdrawal and to the accounts of an individual (from the accounts of the PI), which allowed the Company to minimize tax revenues.

The tax authority recalculated the Company’s expenses for the management services, using a combination of transfer pricing methods – cost plus and comparable profitability.

The Decision of the Court of Appeal:

The CUP method has priority, but in cases where it is not subject to application, the tax authority has the right to use one of the other methods:
“Thus, the provisions of Article 105.7 of the Russian National Assembly do not establish the mandatory consistent application of methods for determining the market price of goods established by subparagraphs 2-5 paragraphs 1 of Article 105.7 of the Russian Federation, in the event that the method of comparable market prices cannot be applied. The tax authority in this case is entitled to choose from any remaining methods, as well as their « combination.”

Due to the specifics of the PI’s activities, it was not possible to apply the CUP method, so instead the tax authorities had used a combination of methods. On this issue the Court stated: “the method used by the tax authority to determine costs is not contrary to tax law“.

The court also referred to the industry-based performance measures summarized by the Federal Tax Service: The profitability of similar activities in 2013-2015 is significantly lower than the indicators used by the tax authority, in connection with which the court correctly stated that the measures applied by the tax authority do not violate the rights of the taxpayer.

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