Landmark case-law: softer penalties for transfer prices incorrectly set by companies receiving investment incentives
The Supreme Administrative Court (SAC) has issued a ground-breaking judgment for companies drawing investment incentives under older schemes. The court confirmed that the failure to meet the condition not to increase the tax base for calculating tax relief by related-party transactions should not lead to a complete loss of investment incentives but just to a reduction of the tax relief claimed.
The Income Tax Act (ITA) as effective until 30 April 2015 contained a provision under which taxpayers receiving investment incentives who failed to comply with the condition not to increase the base for calculating the tax relief by related-party transactions in a manner not compliant with the economic principles of normal business relations shall lose the entitlement to the relief. The taxpayers were obliged to file additional tax returns for all taxable periods in which they had claimed the tax relief.
The harshness of this condition was mitigated by an amendment to the Income Tax Act effective from 1 May 2015, to the effect that the entitlement to tax relief in the taxable period in which the condition was not observed shall be reduced. The amount of the reduction shall be the product of the tax rate (19% corporate income tax rate) and the part of the change in the tax base that arose from the incorrectly set transfer prices between related parties.
The transitional provisions of the amendment then stipulated that the mitigating consequences of non-compliance would also apply to proceedings concerning investment incentives initiated before the amendment’s effective date. However, the transitional provisions did not address whether they should also be applied to cases where the condition was breached before 1 May 2015.
The SAC has now answered this question, stating that since the transitional provisions do not contain any special rules for individual investment incentive schemes, even breaches of the condition not to increase the base for calculating the tax relief by transactions effected between related parties in the periods prior to the amendment's effective date shall be governed by the amended law. Consequently, the failure to meet the condition will have the effect of reducing the tax relief claimed, rather than losing the investment incentives altogether as per the original wording of the law.