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SAC on determining reference price

In assessing transfer prices, the Supreme Administrative Court (SAC) emphasised that it is necessary to distinguish between a hypothetical estimate supported by logical and rational reasoning and economic experience on the one hand, and a hypothetical possibility to obtain the desired commodity (or service) for that reference price on the other.

In the context of transfer pricing, tax administration considers advertising services to be a risky area and focuses on them in tax inspections. A case recently closed (8 Afs 189/2020-127) involved a taxpayer who rented advertising space at several football stadiums and a golf course in 2013 and 2014. The services were provided by three advertising agencies. The total amount of the supply by far exceeded the purchase prices that the advertising agencies had themselves contracted directly with the sports clubs.

In the tax administrator’s opinion, the taxpayer was an (otherwise) related party to the advertising agencies and had entered into the relationship primarily for the purpose of reducing the tax base. The tax administrator supported this conclusion by arguing that they had ascertained a significant difference between the purchase price of advertising charged by the sports clubs, and the contractual price charged by the advertising agencies; the tax administrator therefore assessed additional tax on the difference between the reference price corresponding to the prices charged by the sports clubs and the price contracted with the advertising agencies.

The taxpayer defended themselves by arguing that they had no real chance to obtain the advertising space from the sports clubs because the clubs had long-term contracts with agencies. The price contracted with the agencies was thus, logically, up to several times higher than the price of renting the advertising space directly from the sports clubs. The taxpayer further argued that the advertising agencies also provided related services (VIP rooms, etc.). In the taxpayer’s opinion, only the prices for the advertising space offered by the agencies should be regarded as comparable prices, not the rental prices charged by the sports clubs.

The Regional Court in Ostrava agreed with the taxpayer. In the court’s opinion, the tax administrator did not prove that the taxpayer had a real and not just hypothetical possibility to contract the required advertising directly with the relevant club, as the advertising space had already been contracted by the agencies. The tax authority thus did not determine the transfer price correctly.

The Appellate Financial Directorate filed a cassation complaint against the judgment, arguing that the existence of a realistic possibility was irrelevant to the correct determination of the reference price, as it was essentially a price simulation.

The Supreme Administrative Court dismissed the cassation complaint, explaining that it was not possible to set such a reference price that the taxpayer could only achieve hypothetically, not actually, and that it was not possible to use a price ‘out of nowhere’. A hypothetical estimate must be supported by logical and rational reasoning and by economic experience. Otherwise, there would only be a hypothetical market where the reference price would only be a 'hypothetical possibility' and would not fulfil a comparative function.

To conclude: the tax administrator should always assess whether the taxpayer could have actually obtained the supply at the reference price.