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Large taxpayer in Ukraine won a court of 100 million UAH

Great business vs SFS, who's who?

At the end of last year, the appeal court came down on the side of one of the largest players in the metals and mining sector in its transfer pricing dispute with the Major Taxpayers' Office of the State Fiscal Service (SFS). The case has now progressed to the Supreme Court for a definitive ruling.

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During an audit of controlled transactions, the SFS imposed tax adjustments and penalties totalling UAH 97 million, having assessed the transactions using the comparable uncontrolled price method, based on external sources of information. In its rebuttal of the SFS’s position, the company asserted that the transactions were in line with the ‘arm's length’ principle, according to the transactional net margin method.  The company demonstrated the profitability of the transactions of the European trader from the resale prices of products acquired in the controlled transactions. Additionally, the company provided their own evidence to demonstrate the unreliability of prices gathered from open sources. The court of first instance recognised the company's arguments as relevant and resolved the dispute in favour of the taxpayer.

The Major Taxpayers' Office of the SFS filed an appeal, which was dismissed by the court. However, this judicial confrontation has not been ultimately concluded as the tax authorities have appealed to the Supreme Court for a cassation ruling. The case was returned without consideration, as the SFS had not paid the fees!

We await a definitive ruling.

More details:

Following a transfer pricing audit by the Major Taxpayers' Office of the SFS (the Defendant), one of the largest players in the metals and mining sector was assessed as liable for tax adjustments of UAH 64 million and penalties of UAH 33 million.

The company (the Plaintiff) initially transferred this payment to the state budget, but later brought a case to the administrative court, asserting that the tax notification-decision and associated penalties be revoked.

The court of first instance agreed with the Plaintiff and overturned the decision. The Defendant disagreed and filed an appeal.

The Defendant argued that the SFS’s actions were justified as the taxpayer had wrongly selected the transactional net margin method for determining its compliance with the conditions for controlled transactions for FY 2014-2015 using standard prices and the ‘arm's length’ principle. The Defendant insisted on the need to use the comparable uncontrolled price method as the method with a higher priority under Art. 39 of the Tax Code of Ukraine and to use prices published in the Bulletin of the Ministry of Revenue and Duties of Ukraine.

It is important to note that the  taxpayer had considered the possibility of applying the comparable uncontrolled price method, using commercial sources of data and concluded that the "Bulletin of the Ministry of Revenue and Duties of Ukraine" did not contain important and necessary information about contracting parties and their functions and risks, volumes and terms of supply, and other contractual terms that significantly affect pricing decisions. The lack of this information made it impossible to conclude that the conditions of the Plaintiff’s controlled transactions were comparable to transactions given in the bulletin. Consequently, the Plaintiff chose the transactional net margin method as the most relevant, according to which a non-resident trader was selected as the tested party due to the lower level of complexity of the trades, involving fewer functions, fewer assets and less risk.

Based on the arguments of the Plaintiff, the court concluded that the use of the transactional net margin method was legitimate, and that there were no violations of transfer pricing law.

The appeal court concluded that the decision made by the court of first instance was correct, and the demands of the tax authorities were illegitimate. The court dismissed the appeal by the Defendant. Additionally, the court recognised that the tax adjustments and penalties had been wrongly assessed and should be returned to the company in accordance with the tax legislation.

We should note that this judicial confrontation can not yet be considered complete. The Major Taxpayers' Office of the SFS has appealed to the Supreme Court for a cassation ruling. The case was returned to the Defendant at the end of January 2019, as the relevant court fees had not been paid!. No information on this case is currently available but we have in the past seen that the court is willing to extend deadlines for the SFS to submit cases for cassation rulings.

Keep in touch with KPMG for more on this and other important cases.

Oleksandr Halynskyi, Consultant, Transfer Pricing, KPMG in Ukraine

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