Court supported the controlling authority’s decision regarding legality of increase in the corporate income tax liability

Press service of the State Tax Service of Ukraine, published 31 July 2024 at 09:41 Chapter: News

Cassation court supported the controlling authority’s regarding legality of adopted tax notification-decision, which increased amount of the plaintiff's monetary liability from the corporate income tax payment.

Supreme Court supported position of tax authority regarding essence of the "arm’s length" principle in tax legislation, which is built on the logic of "at the time of operation", therefore, for the transfer pricing purposes, price must be determined on the date of controlled operation (date of transfer of product ownership) and not on the date of conclusion of foreign economic contract. Correct interpretation of Sub-paragraph 39.3.3.3 Sub-paragraph 39.3.3 Paragraph 39.3 Article 39 of the Tax Code of Ukraine (hereinafter – Code) consists in comparing price of controlled operation with price (price range) of comparable uncontrolled operation and is carried out on the basis of available information as of the date closest to the day of controlled operation, which is determined depending on the specific conditions, since change in structure of the plaintiff's assets and liabilities occurred precisely at the moment of transfer of product ownership. That is, the plaintiff mistakenly equates the date of determining price (signing contract) with the date of controlled operation, since the Code does not identify such categories, in particular, Sub-paragraph 39.3.3.3 of Sub-paragraph 39.3.3 Paragraph 39.3 Article 39 of the Code provides that comparing price of controlled operation with price (price range) of comparable uncontrolled operations is carried out on the basis of available information on the date closest to the day of controlled operation.

Courts of appeals and cassation instances agreed with the defendant’s argumentations that regime of individual licensing does not establish pricing in foreign economic operations, but establishes certain prohibitions, restrictions or regimes of conducting foreign economic operations with permission of the state and cannot be considered a source of information for setting prices of controlled operations based on the "arm's length" principle". Therefore, the plaintiff unjustifiably used one-time individual license as a source for establishing compliance of prices of the controlled operation with the "arm's length" principle.

Given the plaintiff's selective approach to constructing price ranges and characteristics of operations listed in the factual report that fall under determination of the controlled operations, the controlling authority did not reasonably apply prices of operations given in the "factographic reference" to construct market range of prices of comparable operations.

Based on the calculation results, the controlling authority established underestimation of prices for individual deliveries in controlled operations, namely: prices are lower than the minimum cost of market price range.

Therefore, the Cassation administrative court as a part of the Supreme Court on 09.07.2024 in case № 160/3387/22 dismissed the plaintiff's cassation appeal; decision of the Third administrative court of appeal as of 16.03.2023 was left unchanged.