Statement on arm's length prices scrutinised by PAC – important judgment on transfer pricing

The company applied for an advance tax ruling on intra-group payments. The company sold finished goods to associated enterprises. It offered preferential sales prices – sometimes even below the production cost – to some customers and in respect of some goods. To escape being accused of understating the taxable base, the company recognised additional revenue at arm’s length level, that is, in the amount of the difference between the standard sales price and the preferential price offered to the selected customers. That revenue was taxed and the tax amount was paid on time.

The company argued that such a treatment of the transaction for tax purposes is enough to issue a statement confirming the arm's length nature of the transactions, which is a part of the transfer pricing report. The company believed that a taxpayer should be able to recognise income in the correct, i.e. arm’s length, amount. The company also argued that since Article 11t(2b) of the CIT Act allowed submitting such a statement in the case of partially charged supplies – as long as the buyer recognised the revenue – this is the same situation in which the supplier recognises the revenue and should not be treated differently. 

The Provincial Administrative Court (PAC) upheld the Head of NRIS’s position. In its statement of reasons the court explained that the literal interpretation of Article 11t(2)(7) of the CIT Act suggested that the provision created a legal fiction and applied only to specific situations, i.e. transactions in which the taxpayer receives free-of-charge or partially charged supplies. As a consequence, the fact that the company recognises additional (arm's length) revenue does not allow it to issue a statement that transfer prices described in its Local File are set on terms that independent enterprises would agree.

The PAC in Gliwice has confirmed that even if a taxpayer recognises arm’s length revenue, this does not automatically mean that he may confirm arm’s length pricing in the TP statement incorporated into the TPR form. What counts is not just the effect but also the transaction terms.

This is an important message to all corporate groups and associated enterprises – they should check if the documentation and statements are true to the facts.

We recommend increased caution in dealings with associated enterprises. If you need support in transfer pricing analysis or the TPR form, contact us​ – we at Rödl & Partner approach every client individually. We not only review existing documentation but also assist our clients in drawing up new and documentation compliant with the applicable laws.