The tax authority conducted an inspection, where it found that PJSC Galnaftochim, when conducting business transactions with a non-resident related party, had to submit a report on controlled transactions.
PJSC Galnaftochim, disagreeing with the results of the audit, appealed to the court to cancel the tax assessment notice, as there were no grounds for submitting the relevant report. When paying interest to a non-resident for using a loan, PJSC Galnaftochim paid a tax of 2% of the total interest amount and believed that the transaction was not a controlled transaction within the meaning of the Tax Code of Ukraine.
The District Administrative Court upheld the claim of PJSC Galnaftochim in a ruling upheld by the Lviv Administrative Court of Appeal.
The courts proceeded from the fact that the legislator, when defining the criteria for classifying a business transaction as a controlled transaction, emphasises that such a transaction must affect the object of income taxation. At the same time, the business transaction under study on payment of interest for the use of credit funds does not meet this criterion, and therefore cannot be reflected in the accounts provided for accounting for profits, losses and financial results. This transaction reduces assets, as it inherently involves writing off funds in favour of the recipient, and also reduces interest payment obligations without affecting the financial result.
An appal was then filed by the tax authorities with the Supreme Court.
Judgment of the Supreme Court
The Supreme Court partially upheld the appeal, cancelled the decisions of the lower courts and remanded the case for a new trial to the court of first instance.
The determination of whether transactions are business transactions for transfer pricing purposes is based on their impact on the taxable profit reflected in the income tax return in accordance with the law.
For the purposes of transfer pricing, only those business transactions that affect or may affect the taxpayer’s profit, as well as certain types of income that are taxed separately from the profit for non-residents and taxpayers, are taken into account.
The courts should provide regulatory justification in their decisions for the conclusion that a transaction involving the repayment of interest on a loan cannot be recorded in the accounts used to record profits, losses and financial results, and that the transaction reduces receivebles and liabilities for interest payments without changing the financial result. The actual impact of the transaction on payment of interest on the use of the loan on the taxable profit reflected in the declaration cannot be left out of the study.
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