DISPUTE RESOLUTION DIRECTORATE REEXAMINATION SUB-DIRECTORATE REEXAMINATION DIVISION A2
Decision number: 3495
No. Address Postal address Postal Code Telephone
: 176 71 - Kallithea
: 213 1604553
THE HEAD OF THE DIRECTORATE FOR DISPUTE SETTLEMENT
Having regard to:
α. Article 63 of Law 4174/2013 (Government Gazette A΄ 170), as in force.
β. Article 10 of the D. ORG. A 1125859 EX 2020/23.10.2020 of the Decision of the Governor of the Hellenic Revenue Authority (Government Gazette B' 4738/26.10.2020) on the "Organization of the Independent Public Revenue Authority (Hellenic Revenue Authority)".
c. POL 1064/12.04.2017 Decision of the Governor of the Independent Public Revenue Authority.
δ. Article six, paragraph 4, of the 30/03/2020 Legislative Content Act (Government Gazette A' 75) as ratified by Law no. 4684/2020 (Government Gazette A' 86), as well as the Decree No. A 1049/2021 Decision of the Deputy Minister of Finance and the Governor of the Independent Public Revenue Authority (Government Gazette B' 984/12-03-2021).
2. POL 1069/4-3-2014 Circular of the General Secretariat of Public Revenue of the Ministry of Finance.
3. No. Decision of the Head of the Dispute Resolution Division, No. 3.3.
4. The appeal filed on 23/03/2021 and with the file number ............... by the company ..................................................................................., VAT number ....................., with registered office in ................ ..................................., street .............................................., against the decision of the Commission No.
........./2020 Final Act of Corrective Assessment of Income Tax for the tax year 2014 of the Head of the C.E.M.E.P..
5. The aforesaid act whose annulment is sought and the relevant Audit Report.
6. The views of the C.E.M.E.P.
7. The recommendation of the designated official of Section A2 as reflected in the draft decision.
On the appeal filed on 23/03/2021 under file number ............... by the company named ,
VAT number ......................., which was lodged in due time, and after examining and evaluating all the documents in the file and the grounds of the appeal, we conclude the following:
By means of Decision No. ........./2020 Final Act of Corrective Determination of Income Tax by the Head of the C.E.M.E.P., for the tax year 2014, income tax of 111,387.52 was imposed on the applicant, in addition to a fine of 55,693.76 for inaccuracy under article 58 of Law 4174/2013, for a total amount of 167,081.28.
The above act is based on the 30/11/2020 Partial Income Tax Audit Report of the C.E.M.E.E.P., which was issued pursuant to the audit order No. /2020 issued by the Head of the C.E.M.E.P..
According to the aforesaid Partial Income Tax Determination Audit Report, for the period 01/01/2014-31/12/2014, the following expenses were not recognized as deductible:
Account G/L Account description Amount ()
61 Third party fees and expenses 21,355.61
62 Third party benefits 122,586.34
63 Taxes and fees 14.816,47
64 Miscellaneous expenses 56.839,17
66 Depreciation of fixed assets 1,122.80
Adjustment for intra-group transactions 211,693.14
Of all the above accounting differences, the applicant, in the present appeal, challenges only the following:
- Account 62.98.998 (Other benefits for third parties): EUR 32 040,00
- Account 62.98.999 (Other benefits for third parties): EUR 83 034,00
- Adjustment for intra-group transactions: 211,693.14
By the present action, the applicant seeks the annulment of the above contested act, on the basis of the following pleas in law:
First plea in law: incorrect rejection of expenditure of EUR 32 040,00 relating to food vouchers for staff from the supermarket 'Supermarket'.
2nd plea in law: incorrect rejection of expenditure totalling EUR 83 034,00 relating to the applicant's participation in the cost of renovating its customers' shops.
Third plea in law: incorrect allocation by the audit of an amount due to understatement of intra-group transactions.
With regard to the 3rd plea in law raised in the appeal, as set out above, because in accordance with Article 50 of Law 4172/2013:
"1. Legal persons or legal entities when they carry out transactions, one or more, international or domestic, with related persons within the meaning of Article 2 of the Tax Code on economic or commercial terms different from those that would apply between unrelated persons (independent enterprises) or between related persons and third parties, any profits which, without these terms, would have been realised by the legal person or legal entity, but were not realised in the end due to the different terms (arms length principle)
2. The provisions of the preceding paragraph shall be applied and interpreted in accordance with the general principles and OECD guidelines on intra-group transactions. Because according to POL 1097/2014:
"... CHAPTER Z'
METHODS FOR DETERMINING THE PRICES OF INTRA-GROUP TRANSACTIONS
For the determination of the prices of intra-group transactions, the 'open market or free market or arm's length principle', as described in the first subparagraph of paragraph 1 of Article 50(1) of Law No. 4172/2013.
In order to determine the application of the above principle, account shall be taken, in accordance with par. 2 of Article 50 of the Tax Code, the "OECD Transfer Pricing Guidelines for Tax Administrations and Multinational Enterprises", as updated from time to time (last updated version 2010).
According to these guidelines, the methods are distinguished according to their function as follows:
α. The traditional or classical methods:
aa. The method of the comparable uncontrolled value, bb. The method of the resale price
c. The cost plus margin method.
β. In transactional methods that are based on profit (gross or net): aa. The net transaction margin method; and
bb. Profit sharing method.
Comparable transactions are those that are identical or similar in terms of their subject matter and other characteristics and where any differences in the specific terms and conditions cannot significantly affect the agreed price or the effect of such differences can be eliminated through appropriate adjustments.
Factors that determine and affect the comparability of transactions between related parties are:
a. the characteristics of the goods or services that are the subject of the transactions, such as:
- for tangible goods, physical product characteristics, quality, reliability, availability, sales volume,
- for intangible assets, the form of the transaction (sale or transfer of use), the type of intangible asset, the duration and extent of legal protection, the expected benefits from its use,
- for services, the nature and extent of services provided.
b. the significant economic functions, the risks assumed and the means (buildings, equipment, intangible assets, etc.) used, which are elements of the functional analysis included in the documentation file.
c. the contractual terms, i.e. the allocation of responsibilities, risks and benefits between the related undertakings (time limits, guarantee clauses in contracts, etc.).
d. the economic conditions of the comparable parties and their transactions (geographical location, purchasing power, competitiveness, market size, market size, production costs, labour costs, etc.).
e. specific strategies pursued by the undertaking (e.g. attempt to penetrate markets, develop new and innovative products, increase market share, etc.). Where transactions are carried out which cannot be separated from an economic point of view, they are examined as a whole, both in terms of comparative analysis and in terms of the application of the method for determining the price of intra-group transactions.
Because according to the OECD Guidelines (2010):
- para. 2.3: where the comparable uncontrolled price (CUP) method and another method of documentation can be applied in an equally reliable manner, the CUP method should be preferred.
- Para. 2.14: a non-controlled transaction is comparable to a controlled transaction for the purposes of applying the CUP method if one of two conditions is met:
o none of the differences (if any) between the transactions being compared or between the firms involved in those transactions could significantly affect the arm's length price,
o reasonably accurate adjustments can be made to eliminate the significant effects of such differences.
- Para. 2.16: where there are differences between controlled and non-controlled transactions or between entities entering into those transactions, it may be difficult to determine reasonably accurate adjustments to eliminate the effect on price. Difficulties that may arise in attempting to identify reasonably accurate adjustments should not directly preclude the possible application of the SMET method. [...] Every effort should be made to adjust the data so that it can be used appropriately in the SMET method.
- par. 3.28: suppose for example that a taxpayer that manufactures a particular product sells a significant (large) quantity to a foreign related party (foreign related company) and a small quantity of the same product to an independent party (independent company). In this case, the difference in the quantity of the sale may materially affect the comparability of the two transactions. Unless reasonably accurate adjustments can be made to eliminate this difference in comparability, the transaction between the taxpayer and the independent enterprise is unlikely to be a reliable comparator.
Because, as the relevant Audit Report shows, the applicant made sales of 3,700,929.00 to the associated company during the financial year in question
'........................................................', with a VAT registration number. ...........................
Since the applicant used the comparable uncontrolled price (CUP) method as the method of substantiating the above transaction.
Because the audit rejected the above method, preferring the cost plus method as the appropriate method.
Since the verification of the correct application of the arm's length principle using the cost plus method showed a difference of 211,693.14 (=3,700,929.00 * (20.55%-14.83%)), which was allocated as an accounting difference for the audited financial year.
Because the auditee claims, inter alia, that the audit completely erroneously and unjustifiably rejected the comparable uncontrolled price (CUP) method, which is the most preferable method under the OECD Guidelines.
Because according to Article 28, para. 2 of Law 4174/2013, "The Tax Administration shall issue the final act of corrective tax assessment within one month from the date of receipt of the taxpayer's views or, in case the taxpayer does not submit his views, the expiry of the deadline specified in paragraph 1. The final tax assessment notice shall be issued on the basis of an audit report drawn up by the Tax Administration. The audit report shall contain a detailed and reasoned account of the facts, data and provisions taken into account by the Tax Administration in determining the tax. The final tax assessment notice together with the audit report shall be communicated to the taxpayer.
Because according to Article 64 of Law 4174/2013 "The Tax Administration has the obligation to provide clear, specific and sufficient reasons for the legal basis, facts and circumstances that justify the issuance of the tax assessment act and the tax assessment".
Because the provisions of Article 17 §§§1,2 of the Code of Administrative Procedure (Law 2690/1999) entitled 'Reasons' set out the following: "1. The individual administrative act must contain a statement of reasons, which must include a statement of the existence of the legal requirements for its issuance. 2. The statement of reasons must be clear, specific, adequate and must be apparent from the information on the file, unless it is expressly provided by law that it must be contained in the body of the act'. It follows from the combination of the above provisions that the audit report, which constitutes the statement of reasons for the act imposing the tax, must be clear, specific and sufficient. The purpose of the statement of reasons is to enable both the taxpayer and the Court of Justice to verify whether the administrative act was adopted for the benefit of the taxpayer and whether it complies with or is in conformity with the rules of law which define the framework of legality (cf. Epaminondas Spiliotopoulos, Administrative Law Manual, § 5.Reasons for the administrative act).
According to case law, the complete vagueness of the Audit Report is equivalent to its non-existence (see CoE 565/2008, 2054/1995).
Because, as is clear from the relevant Audit Report (pp. 48-49), in this particular case, the audit rejected the method of the comparable uncontrolled price (CUP), without indicating whether it was possible to maintain this method but with reasonable adjustments.
Since in view of the above, the Final Income Tax Adjustment Act No. ............./2020 of the Head of the C.E.M.E.P., for the tax year 2014 is held to be formally defective and therefore void.
Because according to Article 63, para. 6 of Law 4174/2013, 'The tax authority whose act is annulled for formal deficiencies shall issue a new act in accordance with the decision of the Internal Review Service'.
Because according to Article 36 of Law 4174/2013:
"1. The Tax Administration may issue an administrative, estimated or corrective tax assessment act within five (5) years from the end of the year in which the deadline for filing a return expires.
In cases where several declarations are required for a particular tax, the act referred to in the previous subparagraph may be issued within five (5) years of the end of the year in which the deadline for submitting the last declaration expires.
2. The period referred to in paragraph 1 shall be extended in the following cases:
(c) if an appeal, legal action, remedy or remedy is brought, for a period of one year after the decision on the appeal or the final judgment has been given, and only in respect of the matter to which it relates.
Because in view of the above, the Controller may issue a new instrument within a period of one (1) year from the date of this order:
- Confirming whether there is an opportunity to verify that the arms length principle is properly followed through the comparable uncontrolled price (CUP) method but with reasonable adjustments; and
- using the cost plus method only when there are reasons why the above adjustments cannot be made.
The applicant's claim is therefore accepted.
As regards the 1st and 2nd pleas in law raised above in the appeal
Since the examination of the third plea in law raised in the present appeal shows that the contested act is defective in form, it is not necessary to examine the first and second pleas in law.
The action brought by the company with the name of ,
with registration number ........................., against the decision of the Commission No. ........./2020 Final Act of Corrective Determination of Income Tax for the tax year 2014 of the Head of the C.E.M.E.P., in accordance with the aforementioned reasoning.
Final tax liability of the applicant - amount assessed on the basis of this decision:
We instruct the competent authority to notify the debtor of this decision in accordance with the legal procedure.
The Clerk of the Administrative Support Department
BY ORDER OF THE HEAD OF THE DISPUTE RESOLUTION DIVISION
THE HEAD OF THE SUB-DIRECTORATE FOR REVIEW
A m e n d m e n t : This decision may be appealed to the competent administrative courts within thirty (30) days of its notification.