During the trial in the case of large Russian taxpayer PJSC Uralkali against the Federal Tax Service of Russia, the court accepted position of the fiscal authority. The court recognized inconsistency of the taxpayer’s approach to applying transactional net margin method for confirmation of the market level of prices in controlled transactions, as well as the lack of reasoning on non-application of comparable uncontrolled price method.
In 2016, the Federal Tax Service of Russia inspected whether controlled transactions connected to export of potassium chloride to Uralkali’s related entity Uralkali Trading SA, which subsequently sold such goods to third parties are in compliance with the arm’s length principle. As the result of the audit, Russian tax authority concluded that prices in transactions were set at an artificially low level, which resulted in decision, according to which the taxpayer was charged with additional tax liabilities in the amount of 980 million rubles and a fine of 3 million rubles. Uralkali appealed the decision of the Federal Tax Service of Russia in court. Initially, the court of first instance accepted the taxpayer's position, recognizing results of the audit as invalid, but in the process of court trial performed by subsequent authorities, the court proceeded to a more detailed examination of circumstances of the case and in December 2018 the case was resolved in favor of the tax authority.
In particular, the court found that the taxpayer applied the transactional net margin method, which was lied in comparison of operating margin gained by Uralkali Trading SA with the profitability level of independent companies involved in trade of mineral fertilizers. At the same time, the court conducted a detailed analysis of the activities of companies, which were selected by the taxpayer, and concluded that they do not meet the criteria of comparability prescribed by provisions of the Tax Code of the Russian Federation.
In addition, the court also considered that the choice of the transactional net margin method was unreasoned since the taxpayer could not provide the court with confirmation of financial data of Uralkali Trading SA, which was used to calculate operating margin.
At the same time, the court also emphasized on the fact that transfer pricing documentation provided by the taxpayer lacks substantiation of non-application of methods which have higher priority within the framework of Russian legislation, in particular, the comparable uncontrolled price method. At the same time, representatives of the Federal Tax Service of Russia insisted on the possibility of applying this method by comparing taxpayer’s prices with potassium chloride quotes, which are published by the information and price agency Argus Media.
Having considered the arguments presented by the parties, the court decided that, subject to the necessary adjustments, the quotes of the agency Argus Media could be used within the framework of the comparable uncontrolled price method, thereby supporting the position of the fiscal authority.
Thus, the court emphasized the necessity of proper justification of the transfer pricing method choice, as well as the possibility of applying price quotes provided by price agencies in commodity transactions.
This experience of Russian taxpayer will be relevant for Ukrainian companies, which apply a similar scheme for product sales while conducting controlled transactions with commodities.
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