In the context of current changes in the obligations relating to the documentation of transactions between related entities, it is worth noting the emerging arrangements concerning the provisions already in force in previous years, as it is under these rules that current transfer pricing checks are carried out.
one of such judgments, which provide us with important guidance on the correct approach, is the NSA judgment of 20 June 2018 (II FSK 1665/16), in which the court assessed the activities carried out by the tax authorities in the control and assessment of income in one with taxpayers, focusing primarily on the principles of collecting and evaluating evidence for this purpose. In this judgment, the key 2 aspects:
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- the relevance of direct application of the OECD Guidelines;
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- how to select comparative data in the context of comparability criteria.
About first of the identified aspects, despite the previously developed approach allowing the application of OECD guidelines to properly interpret national transfer pricing rules, the issue of the admissibility of their direct application remains.
In the present case, the court first It questioned the need to apply the OECD guidelines, arguing that the transaction in question took place between domestic traders and therefore it was unfounded to seek guidance.
The NSA disagreed with this argument, indicating that transfer pricing regulations should be applied with extreme caution, as they introduce an exception to the principle of income fixing on the basis of a price agreed between counterparties and, consequently, the interpretation of those provisions should not be limited to their grammatical interpretation.
While the OECD Guidelines do not contain common law standards, they should be a "collection of good practices" and a reference point for choosing the correct interpretation direction.
The price estimation process for transactions between entities must not only be done by simple transfer of prices or margins between independent entities, without at the same time assessing the comparability of the terms of those transactions with the controlled transaction
In the context second the NSA stressed that the rules for carrying out transfer pricing controls should be further detailed to ensure that they are characterised by a more substantive approach and a reliable and multi-threaded analysis of the compliance of transaction conditions with the conditions that independent entities would determine.
In addition, the NSA pointed out that the process of estimating prices in transactions between entities cannot only be carried out through a simple transfer of prices or margins between independent entities, without at the same time assessing the comparability of the terms of these transactions with a controlled transaction, and that the tax penalty in the form of income estimates cannot be applied without proving the fact that the related entity's position to shift incomes and profits is used to reduce taxation.
In the present case, the tax authorities established the level of margin on the basis of a comparison of data received from entities operating in the same industry as the controlled one, to which the request was sent and which replied (it is also not irrelevant in this case that the data of the entities used for the analysis has been withheld, but this was not directly the subject of court decisions).
The Court of First Instance pointed out that the tax authorities of both instances had practically not addressed the issue of the comparability analysis.
In the opinion, however, the tax authority should carry out an analysis of the comparability in which it is necessary to demonstrate the reliability of the transactions compared, which is related to, inter alia, the functions, economic conditions or economic strategy of the Company consisting of the concept of the company, the establishment of a business model, maturity in the market or the use of aid measures to the extent that these characteristics may affect the market value of the transaction.
Moreover, the authority examining the factors of comparability is obliged to grade them in terms of the relevance of the case in question. In other words, the tax authority should look at both the company and the prevailing economic conditions in its analysis of comparability.
The judgment in question therefore leaves no doubt that the NSA, referring to the principles of transfer pricing control in the judgment, aims to ensure that the pricing of related parties is an activity of great care for the proper examination and understanding of the facts of the audited entity. From the point of view of entities dealing with price fixing in transactions between related entities, this is certainly not a landmark judgment, but it is an appropriate step towards ensuring high standards and professionalism on the part of the controlling.
Within the framework of these standards, the verification of transfer prices still remains a number of issues awaiting the development of an appropriate, harmonised approach, such as the question of the choice of the verification method, which is, in effect, the consequence of the indicated analysis of comparability, or the possibility of using data that does not allow the identification of operators.
However, as rightly stated in the statement of reasons for the judgment itself, this matter (the issue of transfer prices) has experienced few legal statements in recent years.
This judgment may therefore lead to further, in-depth consideration of this complex issue in the case law of the administrative courts, which will allow for the refinement and harmonisation of the processes carried out during transfer pricing checks.
Author:
Marcin Kołkowicz
Tax advisor, tax consultant at Russell Bedford Poland Sp. z o.o., graduate of the Administration, Management and Marketing of the Catholic University of Lublin named after John Paul II. The subject of tax law deals with from 2012. He gained experience in Lublin and in Warsaw tax advisory offices. Author and co-author of many tax publications, in particular for Tax and Tax Portal TaxFin.pl. In his career, he dealt with both direct and indirect taxation issues, with particular emphasis on VAT.