Russia vs Uralkaliy PAO, July 2017, Moscow Arbitration Court, Case No. A40-29025/17-75-227

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A Russian company, Uralkaliy PAO, sold potassium chloride to a related trading company in Switzerland , Uralkali Trading SA.

Following an audit, the Russian tax authority concluded that Uralkaliy PAO had set the prices at an artificially low level. A decision was therefore issued, ordering the taxpayer to pay an additional tax of 980 million roubles and a penalty of 3 million roubles.

Uralkaly PAO had used the transactional net margin method (TNMM). The reasons given for not using the CUP method was that no publicly accessible sources of information on comparable transactions between independent parties existed. The range of return on sales for 2012 under the TNMM was 1.83% – 5.59%, while Uralkali Trading SA’s actual profit margin was 1.81%.

The court supported the taxpayer’s choice of pricing method (TNMM), and since the Swiss trader’s actual profit margin did not exceed the upper limit of the range, it was concluded that the controlled transactions were priced at arm’s length. 

The court rejected the tax authority’s position that Uralkali Trading SA had purchased products at an artificially low price from Uralkaliy PAO and resold them at a large mark-up.

The court also identified significant flaws in the tax authority’s application of the CUP method.

  • Had the Swiss trader, Uralkali Trading SA, used the prices sugested by the tax authorities it would not have been able to cover even “direct business costs” and thus been loss-making.
  • The tax authority had wrongfully compared the taxpayer’s prices in transactions with Uralkali Trading SA with that same taxpayer’s prices after the addition of another trader’s margin.
  • The data published by the Argus price reporting agency had been used without properly analysing the transactions on which the price quotations were based and without adjusting for significant differences in comparability factors – volumes, period , and payment terms.

For these reasons, the tax authority’s decision was ruled invalid.


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