To support its transfer pricing, SK MTS, s.r.o. submitted documentation that included a benchmark study, asserting that its pricing fell within the full range.
Upon review, the tax authorities found that 9 out of the 10 companies included in the benchmark were not truly independent. Consequently, the authorities conducted their own benchmarking study and determined that the pricing of SK MTS, s.r.o.’s controlled transactions fell outside the interquartile range. They therefore adjusted the pricing to the median and issued an assessment.
SK MTS, s.r.o. appealed the assessment to the Administrative Court.
Judgment of the Court
The Administrative Court dismissed the appeal and upheld the assessment issued by the tax authorities.
Excerpts
“22. Given that the companies compared by the plaintiffs did not meet the condition of independence and the plaintiff did not submit transfer documentation for 2019 to the tax administrator or prepare a comparability analysis, the tax administrator prepared such an analysis himself, and this procedure cannot be criticised. When preparing the analysis, the tax administrator (i) selected from publicly available sources comparable entities that carried out the same activity (road freight transport), were not economically, personally or otherwise linked, were established before 2014 and had a comparable turnover and a similar number of employees in the year under review; (ii) selected from the financial statements of the selected companies the data necessary to calculate the profitability of income from economic activities, which the taxpayer chose as an indicator, and (iii) calculated the profitability in % for selected entities that can be considered comparable. The average profitability was calculated at 2.83% from the data on the profitability of these companies. For the sake of completeness, it should be noted that the tax administrator did not have detailed data on the selected entities, as it relied only on data from publicly available and published financial statements for 2019, and therefore referred to point 3.62 of the OECD Guidelines, which states that: “In determining this point within a range that contains relatively similar and highly reliable results, it could be argued that any point within that range is consistent with the arm’s length principle. If some comparability deficiencies still remain, as indicated in paragraph 3.57, it may be appropriate to use a mid-range indicator (e.g. median, arithmetic or weighted average, etc., depending on the specific characteristics of the data set) to determine this point in order to minimise the risk of error due to unknown or unquantifiable residual comparability deficiencies.” With regard to the use of the median, the administrative court states that the OECD guidelines recommend using the median in order to minimise errors due to persistent unknown or unquantifiable comparability flaws. The administrative court must agree with the tax administrator’s argument that independent companies were selected in an effort to find the most comparable companies possible, but that the median is used precisely in order to eliminate unknown comparability impairments, i.e. those that could occur despite all efforts made in the selection process. In general, it should be noted that the selection of independent comparable companies involves a huge number of risks that cannot be captured by the comparability adjustments used. The Administrative Court is of the opinion that the fact that the tax administrator accepted certain companies as comparable does not mean that the selected companies perform exactly the same functions and bear exactly the same risks as the applicant. The Administrative Court finds that the tax administrator took into account, from the available sources, the specific characteristics and conditions relevant to the calculation of an independent business relationship and correctly applied to the calculation of the adjustment of the economic result the profit margin of comparable independent entities, which is 2.07%, the most common median value. On this basis, the difference between the prices in mutual business relations between foreign entities and the prices used between independent entities in comparable business relations constitutes an item to be added to the economic result. In view of the above, the administrative court states that the use of the median was correct, appropriate and lawful, and therefore all the objections raised in this regard are unfounded.”
[…]
“24. The Administrative Court points out that, on the basis of the evidence taken, the tax authority established the facts correctly and in accordance with the Tax Code. After examining the defendant’s administrative file, the Administrative Court came to the same conclusion that the tax authorities, in their decisions, thoroughly and extensively described the facts established, the evidence obtained by the tax administrator in the course of the tax audit and the assessment procedure, and also properly assessed and dealt with all the objections raised by the applicant. These conclusions, together with the correct citation of the relevant legal provisions, provide sufficient legal grounds for the contested decision of the defendant. The administrative court agreed with them in their entirety, considering the legal assessment of the case by the defendant to be correct.”
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