Supreme Court confirms validity of additional charges on transfer pricing issues

The Supreme Court upheld the position of the controlling authority regarding the taxpayer's conduct of controlled transactions (hereinafter referred to as "CTs") in 2016 for the export of urea grade B at reduced prices that did not comply with the arm's length principle.

The Supreme Court agreed with the chosen controlling authority to establish compliance of the terms of the CCT with the arm's length principle, namely the information and analytical publication "Commodity Monitor. Ukraine" published by Derzhzovnishinform, which published prices prevailing on the commodity market and formed the price range based on the data of actual transactions. Thus, it was established that the published prices for the export of urea grade B have a higher level of comparability to the terms of the CBA compared to other sources of information identified by the taxpayer.

The supervisory authority substantiated the groundlessness of the taxpayer's use of other sources of information as not meeting the requirements of subparagraph 39.5.3 of the TCU, in particular, it noted that the individual licensing regime establishes certain prohibitions and restrictions, but does not establish pricing in foreign economic operations.

The Supreme Court agreed with the conclusions of the supervisory authority regarding the impossibility of applying information on commodity exchanges, as stated in the Resolution of the Cabinet of Ministers of Ukraine dated 08.09.2016 No. 616 "On Approval of the List of Commodities Quoted on the Stock Exchange and World Commodity Exchanges for Establishing the Compliance of the Conditions of Controlled Transactions with the Arm's Length Principle", as the exchange conducts transactions with derivative financial instruments (futures), rather than concludes agreements for the supply of real goods, while futures contracts are usually closed by making mutual settlements between the parties after the expiration of the contract or by concluding a reverse transaction by one of the parties before the expiration of the contract.

Also, based on the market volatility and the requirements of subparagraph 39.3.3.3 of the TCU, the supervisory authority reasonably compared the prices of the FC with the price range of the information source on the date closest to the date of the FC, which occurred at the time of transfer of ownership of the goods.

Taking into account the above, the Supreme Court confirmed the validity of the conclusions of the supervisory authority set out in the audit report on the violation of Article 39 of the Code by the plaintiff, as a result, the taxpayer paid a monetary obligation to the budget in the amount of UAH 13.9 million.