The Ukrainian Supreme Administrative Court (SAC) has remanded the transfer pricing case of stevedoring company Olympex to the appeals court, saying the court did not adequately investigate the tax authorities\u2019 arguments for excluding specific comparables.<\/p>\n
In its decision in Olympex Coupe International TOV v. State Tax Service, published August 14, the SAC said the appellate court should have analyzed all the circumstances that led it to conclude that not all the comparable companies presented by the taxpayer were appropriate under the transactional net margin method (TNMM) despite where the businesses were located. On remand, the appellate court will have to evaluate the tax authorities\u2019 objections to the plaintiff\u2019s georgraphic selection criterion, the SAC ruled.<\/p>\n
\u201cThe appeals court analyzed the facts of the case in a lot of detail, which is not necessarily typical for the second instance administrative courts. There, we often see a one-to-one adoption of the first instance court\u2019s reasoning,\u201d<\/em> Ivan Shynkarenko of KM Partners in Kyiv told Tax Notes August 17. \u201cBy remanding the case, the Supreme Administrative Court appears to assist the tax authorities in their burden of proof by giving them again an opportunity to better substantiate their case.\u201d<\/em><\/p>\n Olympex, a Ukrainian limited liability company, is part of the Ukrainian GNT group, which exports and stores agricultural products at its seaport terminals. The GNT group is embroiled in a bankruptcy battle over debt obligations with its U.S. creditors, Argentem Creek Partners and Innovatus Capital Partners.<\/p>\n In audit years 2014 and 2015, Olympex performed grain cargo transshipments with several group companies in the United Arab Emirates and the Dominican Republic. To justify its related-party pricing, Olympex submitted a transfer pricing report selecting the TNMM. The tax authorities accepted only three of the 16 companies chosen in a nine-step process by the taxpayer as comparables for 2014 and two of 14 companies for 2015.<\/p>\n Olympex\u2019s calculated profit level indicator in its larger sample was 7.42 percent in 2014 and 8.3 percent in 2015. The tax authorities\u2019 profitability range varied between 13.37 percent in 2014 and 44.39 percent in 2015. Based on those findings, the tax authorities assessed Olympex additional tax of UAH 12.75 million (about $340,000), saying the company\u2019s profitability numbers, as compared with the tax authorities\u2019 profit level indicators, did not comply with the arm\u2019s-length principle in article 39 of the Ukrainian Tax Code.<\/p>\n The taxpayer filed an appeal to the District Administrative Court of Odessa, asserting that the tax authorities did not sufficiently consider the size of its company when excluding specific comparables.<\/p>\n The tax authorities alleged that companies that do not operate in deep-sea ports like Odessa and Pivdennyi should be excluded from the list of comparables because only companies that operate in those ports can create cost advantages by loading large-tonnage vessels at the berth, resulting in lower freight rates with a simultaneous price increase for the transshipped product.<\/p>\n In June 2022 the Odessa court (Legal Proceeding No. P\/420\/19800\/21, Case No. 420\/19747\/21) stressed that the tax authorities must prove that the price established by the parties to the transshipment transactions was not arm\u2019s length. Based on that rule, it said, the audit report did not clearly show on what grounds the tax office accepted some medium-size companies in the sample while rejecting others, given that Olympex is considered to be a large company, as acknowledged by the tax authorities.<\/p>\n The court disagreed with the tax authorities\u2019 argument that geographical location should play a decisive role in the selection of comparable companies, noting that all the ports in the sample had the same accessible transport infrastructure. It therefore granted the taxpayer\u2019s appeal.<\/p>\n Appealing to the Fifth Administrative Court of Appeals, the State Tax Service claimed that the Odessa court disregarded the capacity indicators of regular ports for cargo handling, asserting that their technical characteristics and the types and sizes of ships that can enter the ports are completely different.<\/p>\n In December 2022 the appeals court (Legal Proceeding No. 854\/4738\/22) rejected that argument, saying all relevant ports provide the same services, the same access transport infrstructure and weighted average port depths, and similar transshipment grain rates.<\/p>\n However, the first instance court focused only on the number of employees without taking into account the size of the enterprises\u2019 fixed and intangible assets, the appeals court said. Thus, the Odessa court\u2019s conclusion that the tax authorities unjustifiably excluded some enterprises chosen by the plaintiff was erroneous because the assets at a company\u2019s disposal matter for comparability. However, the Odessa court\u2019s holding could still stand because the tax office should not have put weight on the port\u2019s geographical location, the appeals court held.<\/p>\n Both parties appealed to the SAC.<\/p>\n \u201cHad the tax authorities not appealed the second instance decision, the tax deficiency notice would have remained canceled, but the tax authorities would have had the opportunity to revisit the audit\u2019s conclusion based on the court\u2019s guidance and potentially issue a new assessment,\u201d<\/em> Shynkarenko noted.<\/p>\n The SAC (Legal Proceeding No. K\/900\/21261\/23) rejected the appeals court\u2019s approach of leaving the first instance court\u2019s holding unaltered but changing the reasoning. If the tax authorities provided sufficient arguments in accordance with Tax Code article 39.3.2.4, .3.2.5, and .3.2.6 for their profit level indicator and gave a meaningful explanation for their conclusion that geographical location makes a difference, the appeals court needs to weigh that aspect and investigate all other circumstances that could lead to a conclusive decision, the SAC said, remanding the case to the second instance court.<\/p>\n \u201cFrom my perspective, there can be a general merit in considering the geographic location of comparable companies,\u201d<\/em> Shynkarenko said. \u201cHowever, I don\u2019t think that reexamining this point should make a difference because the appeals court provided detailed arguments why the geographic location of the companies selected in this case did not substantiate the tax authorities\u2019 transfer pricing adjustment.\u201d<\/em><\/p>\n