CZECH REPUBLIC OF SUPREME ADMINISTRATIVE COURT | USA | Transfer pricing  | Relevant Cases in the field of international taxation

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(1)		The plaintiff, a joint-stock company, was resident of the Czech Republic. It was engaged, inter alia, in the sale of live freshwater fish and fish products;
(2)		During a tax audit, the Czech tax authorities alleged that the margin of plaintiff on sales made to a related party was approximately at 2% which was much lower than the margin of almost 12% to 60%, as the case may be, which it earned from sale to other independent parties;
(3)		The plaintiff argued that the price difference was reasonable, because:

(a)		Only residual stock was supplied to the related party;
(b)		Price levels in country of residence of the related party were generally lower than in any other country. In other words, the different market conditions were responsible for higher prices in transactions with unrelated parties;

(4)		The tax authorities applying the internal CUP method compared the unit prices of goods sold to the related parties and the prices charged by it from unrelated parties for similar sale. The tax authorities made an upward adjustment to the transfer prices in respect of difference calculated in above exercise;
(5)		The plaintiff argued that the CUP method was not applied correctly by the tax authorities, and that the upward adjustment of the transfer prices was not justified;
(6)		However, the tax authorities and the lower Court rejected the contention of plaintiff.

(1)		The Supreme Administrative Court held that target market conditions were irrelevant for the application of the comparable uncontrolled price (CUP) method;
(2)		The difference in price levels in the various markets and countries were not relevant for determination of the arm's length price;
(3)		The consideration had not to be given to the target market in setting the prices and the difference in margins generally had to be attributed to the distributor and not to the producer.
(4)		Therefore, the SAT upheld the transfer pricing adjustment.

 

JUDGMENT

 

Odsvondes i:

I.

[1] Tax Office in Trebon (hereinafter referred to as "tax"), the plaintiff assessed additional income tax legal persons for the period from 1 First 2006 to 30 9th 2008 in the amount of CZK 956,340 and at the same time he told to pay a penalty in the amount of CZK 191,268. Tax audit tax found that the applicant is engaged, inter alia, the sale of live freshwater fish and that the margin of their sales person (United company Kolter, Inc.) was much lower than when selling to other independent persons. For this reason, began to explore the merits of the difference between the agreed sale fish prices between the plaintiff on the one hand, and independent entities and the entity economically interconnected 1 Afs 101/2012 on the other hand. When the plaintiff applied tax assessment tax § 23 paragraph 7 of the Act No. 586/1992 Coll., the Income Tax Act.

[2] The applicant against an additional payment order appealed Financial Directorate in Czech Budejovice, however, dismissed the appeal.

[3] The applicant then challenged the defendant's action at the Regional Court in Czech Budejovice. Court judgment referred to in heading dismissed. He said that in the case it is questionable whether the purchase price agreed between the applicant and trading company as Kolter regarding Sales of fish was negotiated in market value as between independent parties. Married case does not dispute that the terms of § 23 paragraph 7 of the Income Tax Act is a person economically connected, since the applicant participated in the share capital assets and Kolter 39%.

[4] The Court emphasized that to determine the arm's length price is the most appropriate comparison method consisting of the appropriate sample entities carrying on business the same or at least similar conditions; tax calculation for elected bodies operating distributor same activity at the same time while collecting a sufficient number of subjects. Only after tax collected sufficient selected set of prices, approached the determination normal price. Comparing found that the prices agreed with the related party differed from the prices negotiated with independent parties. The court agreed with the defendant that considered the essential for finding the price at which the applicant fish traded, it is already redundant detection the price at which these persons as well as goods sold. It is therefore important that such persons further fish processed or is only supplied to stores. The point is, however, the denominator, that in all compared cases were distributors fish substantially identical volume.

[5] The tax on checks reveal that the amount of fish taken at selected distributors did not affect the price of the goods (eg subscriber Human purchased 4.8 tons of fish live carp squamous for 45.23 CZK per 1 kg, company Schultheiss GmbH bought 27 tv shown for 46.1 Kc/1kg. The claim that the company Kolter collects surplus fish and therefore it was charged a lower price, plaintiff has failed to show any evidence of discounting has been submitted or the administrative file does not imply in any way. With this assessment, the Regional Court agreed.

[6] Similarly, the Court agreed with the conclusion, when the tax focused on the comparison prices to distributors whose business is focused on wholesale fish; was the distributors from Germany, Poland, Hungary and France. For this sample, it is clear that there is deviation between prices negotiated prices and customary to independent persons. Plaintiff administrator

The communication doubts about the difference in prices disproved.

[7] The documentary evidence submitted by the plaintiff to the court during the trial court said that they cannot be taken into account, it must be based on the situation that existed at the time of decision making administrative authority.

II.

[8] The claimant appealed against the judgment of the Regional Court of Appeal reasons in accordance with § 103 paragraph 1 point. a), b) and c) p R.Š. First recapitulated the tax and legal proceedings and stressed the tax administrator selected criteria determining the price agreed under the same or similar conditions did not lead to a reliable and objective conclusion. Vúvahu such differences should be taken into regions; should take into account the consistency of economic conditions in the European Union. Applicants 1 Afs 101 / 2012-32 continuation referred to the judgment of the Supreme Administrative Court ref. 6 and 75/2002 to 68 and pointed to the wrong Finally, the Regional Court, which rejected the opinions stated therein in the case apply.

[9] Kolter Trading Company OJSC subtracts from the plaintiff all the remaining fish He could not sell elsewhere, this company takes 50% residual production of carp scaly. The tax did not take into account the structure of samples buyers.

[10] If the court argues the samples by sampling and Human Schultheiss, GmbH, the amount of purchased goods does not affect the price, then this reasoning is wrong. Number purchased goods affects its cost, especially with regard to the composition of the structure Subscribed products. Customer Human subtracts from the plaintiff and other goods than scaly carp (Eg, a large proportion of semi-finished products from fish), while Schultheiss, GmbH draws exclusively live fish.

[11] The failure to perform a comparative analysis of the prices charged in supplies for the organization Slovak Fishing Union as evidence in tax proceedings, tax violated § 92 paragraph 2 Tax Code.

[12] Vprubehu the procedure was not properly established that the price agreed between the applicant and by Kolter SpA It was not normal and was thus in conflict with § 23 paragraph 7 of the Act on Income income.

[13] Finally, the applicant criticizes the district court, rejecting the suggested evidence and referred the case law of the Supreme Administrative Court. VNI court repeatedly stated that the trial Management is governed by the principle of full jurisdiction. It is therefore necessary that the evidence was already applied in administrative proceedings, and it is sufficient if they are offered to prove a claim to court. Designed by Thus, the Supreme Administrative Court of the contested judgment of the Regional Court returned the case to this court for further proceedings.

[14] The defendant in its statement to the cassation complaint referred to its response; the conclusions expressed here remained.

[15] The Supreme Administrative Court reviewed on the basis of cassation judgment under appeal in accordance with § 109 paragraph 3 and 4 P. R. S., bound by the scope and the reasons put forward by the complainant filed a cassation complaint and found no defects while alone in paragraph 4, to which would have to take account of official duties.

[16] cassation complaint is justified.

[17] The essence of cassation complaint is the answer to the dispute, whether the purchase price agreed between the plaintiff and its associated economic and trade companies Kolter regarding the sale of fish was negotiated in market value as the other independent entities and, if not, whether the applicant the difference in the prices sufficiently documented.

[18] In tax proceedings, the principle that it is the taxpayer who bears the burden of asserting in relation to their tax liability and burden of proof in relation to these their claims. This the issue of the Supreme Administrative Court has comprehensively dealt with in the judgment of 30 First 2008.1 Afs 101/2012 ref. 2 Afs 24/2007 - 119, published under No. 1572/2008 Sb. NSS and www.nssoud.cz. In some cases, however, this general rule does not apply and the burden of argument and burden of proof carries vice versa tax. That is certainly the case for application of § 23, paragraph 7, first sentence of the Act the Income Tax Act. The tax administrator may adjust the tax base made only if they are legal conditions for such a procedure.

[19] These provisions standardize that "if different prices negotiated between related parties from the prices that would be made between independent persons in ordinary business relations under the same or similar conditions, and if this difference is sufficiently documented, adjusted tax basis of tax payer difference found ... ".

[20] First of all, therefore, it must be shown that it is connected within the meaning cited provisions, namely that it is a person connected economically, personally or otherwise functionally equivalent economic union or personnel. However, this is not the case issue.

[21] To assess whether the tax treatment of the tax base in respect fulfillment of given § 23 paragraph 7 of the Income Tax Act, the court relied on the following propositions and solutions.

[22] In the event that it is established that it is connected within the meaning of that provision, the tax is to demonstrate that different prices agreed between the parties from the price would be made between independent persons in ordinary business relations under the same or similar conditions. This means that in order to make a comparison of the tax, must determine both price agreed mezispojenými persons and also the normal price (compared to the average price, the reference price) for which comparable commodity trading by persons independent.

[23] A necessary (but not sufficient) condition for adjustment of the tax base is the existence of the difference between prices. The tax therefore in relation to this distinction bears the burden of argument and burden of proof. Determining the actual price usually will not be difficult, since it is a fact decide for determining the tax base and usually referred to in the accounts or other records required surveyed persons or actual taxpayer.

[24] For the detection of "customary" prices controller must be able to bear the burden of asserting the burden of proof in relation to all the relevant aspects. The usual price may tax determine and generally so, comparing the prices actually achieved the same or similar commodities between real existing independent bodies. However, it can determine, in particular, the absence or unavailability of data on these prices, just as a hypothetical estimate leaning a logical and rational consideration and economic experience. As noted by the Supreme administrative Court in the judgment of 27 First 2011 ref. 7 Afs 74/2010 - Is 81) The - reference (normal) price is basically prices generated by simulation based on considerations such as price should a situation identical to that of the United persons such persons have agreed not to be connected and have to be with each ordinary business relationships.

[25] If the tax administrator determines the reference price on the basis of the actually achieved prices for identical or similar commodities between real existing independent bodies must carefully examine the extent to which these prices were achieved under the same or similar conditions, for which the price negotiated associated persons, and if these conditions are different, make the appropriate correction the reference price. The burden of proof tax also applies to determine the circumstances in which negotiated cost associated persons. Also, if the tax reference price determined on the basis of data the prices actually achieved the same or similar commodities between real existing independent bodies, which usually leads to the finding of an interval as follows achieved specific prices (eg, price per piece delivered product from 100 to 120 CZK), for the purposes of determining the difference between the prices come from a range of prices in the evidence-fixed intervalu1 Afs 101 / 2012-33 continuation (See the judgment of the Supreme Administrative Court on 31 3rd, 2009 Ref. 8 Afs 80/2007 - 105, published under No. 1852/2009 Sb. NSS).

[26] Although the tax has recognized that the contracting parties to the legal action are related persons and that the negotiated price differs from the reference price, that can carry the burden of argument and burden of proof applicable to all these facts, it does not it can make no further adjustment of the tax base. Whoever has to be adjusted tax basis, namely still need to get a space (time and material) so that the measured difference between the prices sufficiently (See also Case NSS ref. 7 Afs 74/2010 - 85) and also to explain the evidence.

[27] In this phase bears the burden of argument and burden of proof, unlike other conditions for adjusting the tax according to § 23 paragraph 7 of the first sentence of the law on income tax, tax again entity. He must allege and prove special and customary market conditions are elusive, yet economically rational reasons for which the price was between him and a related party agreed different from the reference price. It is now subject to tax in order to create a tax administrator Identification and justification of the price difference showed. Holds the taxpayer the burden, treatment tax base by the tax out of the question.

[28] The administrative file of the Supreme Administrative Court found that the defendant chose to compare prices and finding customary prices on the market (market distributors of fish - specifically live carp squamous Class I) sample traders also traded with the plaintiff, but were not economically interlinked. The tax came from the finding that the plaintiff is the exclusive dealer live fish in the group acts as the exclusive distributor. Approximately 75% of production fish is exported to European countries (Slovakia, Austria, Germany, France, Italy, Hungary, Poland), the remaining output is applied to the domestic market.

[29] Examining the arm's length principle was introduced into Czech legislation in 1996 just referred to § 23 paragraph 7 of the Income Tax Act. Subject to examination by the OECD Transfer Pricing (from 1995) are transaction management, valuation and allocation of profit from them arising between associated enterprises. The basis for the application of the arm's length principle is to perform the comparative analysis, it is necessary to find a comparable controlled transactions independent transaction.

[30] The traditional transaction methods are further classified into direct and indirect methods. Among the direct methods include a method comparable independent. This method can be applied if which can be examined to find the controlled transaction independent transaction that is comparable. As for a number of the transactions carried out between related parties there is a similar independent transaction, you can not always apply the direct method and it is necessary to use some of indirect methods.

[31] To determine the comparability of prices used in the case now under consideration the tax method "Comparable prices", the CUP method (comparable uncontrolled price method). It is the preferred comparison method that is used for transactions where it is fully comparable (Identical) product - commonly traded commodity, which examined the firm sells both related businesses and independent businesses. An essential element is that the identity salable product or goods.

[32] Analyzed the structure of tax administration plaintiff customers - distributors who controlled in the same period sourced goods, found that in the same amount realized the plaintiff company's sales Schultheiss GmbH (Germany), Raymond Bihl + Cie (France) TEHAG (Hungary), Human Inh. Paulus - Fischgrosshandlung (Germany), Györ "Elora" 1 Afs 101/2012 HALÁSZATI TZS (Hungary). He found that the volume of transactions realized between the applicant and by Kolter SpA approaching the most by Schultheiss GmbH (Germany). The tax and selected six independent entities from taking the plaintiff completely identical product the reporting periods. The result was the finding of price intervals in which ranged agreed price for an identical product kg collected in the period from independent customers and compared to the price agreed with the person-dependent and Kolter.

[33] The applicant's claim that the agreed price with Kolter and the very low price level in the Slovak Republic, the defendant argued quite comparable price level for example, in Hungary, where three were selected distributors in comparative sample. In addition, price level in each country is not important, the important thing is the amount of agreement between the different prices independent persons for whom these buyers from the plaintiff purchased the product (therefore irrelevant is, at what price and then sold on the market). With this conclusion, the Supreme Administrative Court aligned. Moreover, comparing the cost and revenue accounts of such persons the tax found that in the audited period, the gross margin was the plaintiff in the sale of fish associated entity - Kolter, Inc. significantly lower (1.71%) than in selling another independent customer Schultheiss, GmbHP (11.62%); margin of Kolter SpA on the contrary, the realized transactions products delivered to the plaintiff 59% (and these findings support the conclusion the defendant, that person linked with the plaintiff went commercial advantage, although this finding did not use the tax as evidence but became the initial reason for the search, whether any differences in negotiated prices exist).

[34] If the plaintiff both in the application and in cassation complaint reiterates that the variance structure samples can not be compared as the company KOTLER a company Schultheiss, GmbHP and society Human and Schultheiss, GmbHP and was therefore elected inadequate sample traders, then this argument neprisvedcil court. On the contrary, the defendant and the county court clearly explained that the company Schultheiss, GmbHP and Kolter as purchased by the plaintiff almost identical the amount of fish in this respect were comparable and therefore no longer applicable, with such other products (now nesrovnávanými) companies also traded.

[35] The Court agreed with the denial of the need for comparing economic conditions of the market, as defendant considered important precisely determine the selling price of goods to customers. For what Prices are further these customers or products sold already examined the view is not relevant. It is certainly conceivable that the economically weaker market segment, (The Independent) will have a continuing business activities such profits as if they were on the market, the more efficient and proficiently. Subsequent economic behavior of individuals does not affect the selected sample distributors that the plaintiff purchased a comparable volume of goods and does not affect the account and the findings of the tax arrived in determining comparability of the sales price. The tax administrator selected comparative method (CUP) does not even take this information into account.

[36] The Supreme Administrative Court here also points out that the selection criteria for assessment "Customary" prices are correct reasoning, in its decision of 11 Second 2004, Ref. 7 A 72/2001 - 53; published on www.nssoud.cz whose legal conclusions there expressed are applicable to now consideration, the Supreme Administrative Court concluded that "if the legal standard is intended mechanism for determining the arm's length price, and its destination is called administrative authority is required to determine the arm's length price treated with special attention and the amount determined on the basis of objective criteria and in such a way that the conclusions of the administrative body led to a reliable judgment and could be a way of determining the actual amount of the usual price review. [...] Involved in the selection criteria, and determine which of the criteria has the authority to determine usual price into account, the Supreme Administrative Court to selection criteria and leaves the administrative authority [...]. "Out of step with the reasoning set out the administrative rules, court her respects and does not replace jisvojí úvahou.1 Afs 101 / 2012-34 continuation.

[37] The first question is whether the tax discharged the burden of proof in finding the difference between prices negotiated with independent parties and related party economically highest value Administrative Court for logically administrations answered. The described recap (and content administrative file), it is clear that the tax have found a correlation method (whose requirements filled) on the selected sample interval Dealer prices that have been negotiated with independent parties in normal business relations for the existence of identical or similar conditions, enumerated difference between the agreed prices between related party and other independent traders the relevant market, the plaintiff met stakto difference observed negotiated prices with the person dependent.

[38] It remains to be the second of the issues that is reliable evidence of reasonableness observed difference in the prices agreed between the parties. We were able to explain to the applicants and also reliably demonstrate why for that difference in price negotiation proceeded, not the manager given space to increase the tax base difference compared to the tax base of the plaintiff alleged in the tax return.

[39] The tax actually gave the plaintiff a space for explanation, resp. reliable evidence this difference (call of 8 12th 2010, no. 278527/10/077540301189).

[40] At the request of the applicant responded to administration of 21 12, 2010, the difference in observed prices, however, failed to provide reliable, plaintiff does not claim that the tax determined difference in prices reliably documented.

[41] If the applicant alleges that the price of products sold and negotiated with Kolter OJSC was lower than other customers because the company collects and such fish would otherwise not for sale in other markets, then this statement is by no means the plaintiff failed to prove (Furthermore, as the defendant and the court). The administrative file, there was no evidence that would have been sold this company or inferior fish was sold goods sjakoukoliv discount. At this point, the court concluded that the reasonableness of the price difference, observed between the tax different vendors on one side and Kolter on the other hand, the applicants failed to substantiate.

[42] The Court also rejects the legitimacy of the applicant's objection that the tax court should also take into account conclusions drawn from the judgment of the Supreme Administrative Court of 13 10th 2004 ref. 6A75/2002 - 68, since under the applicant's belief was the same case. This view, however, does not share the Court of Cassation. Vcitovaném judgment, the Court held that the tax could be used to study the method of controlled transactions "comparable prices" (CUP) because did not find the identical product in the relevant market, but used the comparative method "costs plus "(+ COST). With this method, the total cost associated with the production and sale of performance, adjusted for a reasonable gross margin (profit margin). Total cost so are costs incurred by the contractor in connection with a product that delivers relative buyers (another company), including the addition of adequate premiums to cover reasonable profit with regard to the functions performed and the market conditions. This method must be analyzed differences between controlled and uncontrolled transactions that have an impact on the amount of surcharges to determine which treatment is required in the premium independent transaction done. Conclusions on the comparability of the margins of various foreign markets reflect the results identified the selected comparative method. It is for the use of different methods for detection of subordination transaction (in the case now under consideration, the amount of margin on individual markets did not examine) cannot be conclusions of this judgment apply to the case now posuzovanou.1 Afs 101/2012

[43] Recent plaintiff's complaint is that the procedure the court refused to take into account if the documentary evidence presented in court. Jimi was going plaintiff to prove different price levels in the various markets in which these markets can sell goods to customers complainant. The applicant argues that, because the law certificated principle of full jurisdiction, the court could not obtain evidence to reject same time, the claimant should submit before the administrative authorities.

[44] The case law of the Supreme Administrative Court on the matter has been expressed. Vrozsudku of 21 6th 2006 ref. 1 As 42/2005 - 62 The Court stated that "the legal conclusion of the court that it cannot make evidence proposed by the applicant in the application, if the design has suggested prosecutor in the course of administrative proceedings is contrary to the principle of full jurisdiction ". These conclusions apply fully in all types of proceedings, where it applies the principle of inquiry, therefore, where the administrative authority to itself, the and for sure put the facts on which will then base its findings on.

[45] A different situation may be, in proceedings where the contrary, the burden of proof borne by the Participant such proceedings and administrative authority assesses whether the party kidnapped and it is from this state it is the authority's conclusions. Typical management, transferring substantially burden burden on participants is driving revenue, which in many respects is based on the principle investigation (see for example the judgment of the Supreme Administrative Court of 9 2nd, 2005, ref. 1 Afs 54/2004 - 125 or of 31 5th 2011 ref. 5 Afs 70/2010 - 93). The state also took into account the judgment of the Court of Cassation of 21 6th 2006 ref. 1 As 42/2005 - 62, which stated that "in reviewing the decision of the tax administration the court must, in any case find a reasonable balance, taking into account both the principle of full jurisdiction decision of the administrative court on the one hand and, secondly, to prevent flagrant obstruction of the taxpayer on the other hand. For proof newly designed only in proceedings before the regional court is therefore necessary to take usually if (1) the court convincingly justifies their redundancy design and (2) the evidence could not be proposed in appeal proceedings, and eg. Therefore, the Board decision (or the grounds on which it is based) Did the taxpayer objectively surprising, or that such a procedure is burdened with major defects (eg not allowed to submit evidence tendered, the financial institution refused to accept them, etc.. "

[46] Conclusions of the Regional Court in case now under consideration is not only correct in that regard, If in the judgment expressly stated that the applicant produces evidence cannot be taken into account as fundamentally based on the situation that existed at the time of the administrative decision-making authority, only in this way can assess the accuracy or defective nature of the procedure and its decisions. On the other hand, the plaintiff offered the only evidence he intended to demonstrate different price levels in different markets, for which can in these markets to sell goods. This claim, however, the circuit court clearly explained and described (p. 7, 8 and 9 above), it does not matter at what cost in different markets further sold goods supplied by the applicant to individual distributors, but it certainly is not only for what Price plaintiff sold the one hand, identical goods to their customers, who formed a group of economically independent of the applicant and the other person dependent (Kolter as). This means that the text of the judgment in the court explained why it considers the situation to be sufficiently proven, in this situation incorrect reasoning of the Court of inability to perform evidence does not therefore affect the legality of the judgment.

[47] For the reasons stated above, therefore, the Supreme Administrative Court fully agrees with the conclusions the defendant and the court that the complainant was not satisfied the burden of proof in relation to the evidence of reason differences in prices and therefore he was completely in accordance with the tax law in question additionally assessed tax years. The defendant and the court described why and what evidence came out, and why consider that the complainant prove his claim regarding the tax base and tax corporate tax year 2007 neprokázal.1 Afs 101 / 2012-35 continuation.

[48] In view of the above, the Supreme Administrative Court came to the conclusion that the cassation complaint is not reasonable, and therefore rejected it (§ 110 paragraph 1 s.r.s.). The Court found no defect to which they would be obliged to take account of its own motion (§ 109, paragraph 4 CAJ).

[49] The replacement costs were determined in accordance with § 60 paragraph 1 in conjunction to § 120 sec R.Š. The complainant, who was not in this trial success, not their replacement law. Defendant any costs in excess of the normal administrative activities avoided and therefore he did not pay the costs awarded.