Selected Case Law in Transfer Pricing

Introduction to the Issue

Transfer pricing issues are a dynamically developing area, and it could be said that its legal regulation is insufficient and ambiguous, which is also reflected in different views from the perspective of the tax administrator and the taxpayer. In practice, this often results in additional tax assessments for the taxpayer and subsequent court disputes. For this article, we will focus on different perspectives regarding the transfer method used, legal binding of transfer pricing guidelines (hereinafter "guidelines"), and burden of proof.

Regional Court in Bratislava Judgment - IKEA Industry Slovakia

The Regional Court in Bratislava, by its judgment filed under case number 1S/231/2016, rejected the lawsuit of IKEA Industry Slovakia (hereinafter "plaintiff") against the Financial Directorate of the Slovak Republic (hereinafter "defendant"). The defendant conducted a tax control at the plaintiff's premises, based on which additional tax was assessed. The reason for the tax assessment was the finding that the comparable uncontrolled price method used by the plaintiff should not have been applied, as the plaintiff could not demonstrate a sufficient sample of comparable independent transactions, products, and their prices, thus failing to meet the product comparability condition, economic circumstances, contractual conditions, functions, and risks. The defendant, given that the sample was not proven, used the transactional net margin method, resulting in a tax deficiency for the plaintiff. They substantiated their conclusions by applying relevant income tax law provisions, supporting them with the guidelines.

Plaintiff's Arguments

On the other hand, the plaintiff objected that completely comparable conditions cannot be achieved given different production volumes, varying production conditions, and other factors such as subsidies. They also objected that the guidelines are ineffective in the Slovak Republic, have no binding character as they were not published in the Collection of Laws of the Slovak Republic, and that it is the tax administrator's obligation to prove that the plaintiff's used prices are inconsistent with arm's length prices.

Court Decision

In its decision, the court stated that if the plaintiff used the comparable uncontrolled price method, they must be able to prove a sample of comparable independent transactions. At the same time, it accepted the guidelines as a generally recognized supplementary interpretative tool to generally binding legal regulation. According to the court, the burden of proof lies with the plaintiff, who is obliged to prove all facts that affect the correct determination of tax.

Legal Binding Nature of OECD Guidelines

Regarding the guidelines, we classify them as so-called soft law. Despite being the most comprehensive document regulating transfer pricing issues, they have no legal binding force. Their function is rather recommendatory. The guidelines are an interpretative tool for Article 9 of the OECD Model Tax Convention on the Avoidance of Double Taxation. They may have significance as a supporting tool in argumentation for methodological-application questions of transfer methodology selection and taxpayer policy on one side and for tax control purposes on the other. However, within the Slovak legal system, we cannot consider them even as an interpretative tool for legal provisions of transfer pricing for transactions governed by Slovak law. Therefore, in our opinion, the guidelines have no binding character in the Slovak legal system.

Burden of Proof in Transfer Pricing

Several decisions of the Supreme Court of the Slovak Republic exist on the burden of proof issue from the perspective of the entity bearing it. In judgment case no. 5Sžf/97/2009, the court states that the plaintiff as a tax entity does not have to prove their claim stated in various tax documents, submissions, and returns, unless the opposite occurs, i.e., if the tax administrator during tax control or in tax proceedings does not present clear findings to the tax entity proving doubts about their claims.

In another decision under case no. 2Sžf/8/2016, the court draws attention that the tax entity's burden of proof is not absolute. On one hand, it should be remembered that evidence is led by the tax administrator, and on the other hand, consideration should also be given to which facts the tax entity itself is obliged to prove.

Conclusion

Based on the above, it could be concluded that it is the tax entity's obligation to prove all facts that influenced their determined tax amount and the method by which they arrived at it. This requirement is not met if the taxpayer's documentation does not provide a clear answer to their transfer pricing policy. However, it is natural that the tax administrator may have questions and may request additional information from the taxpayer. In this case, it is the taxpayer's obligation to answer these questions and supplement the information.