Purchased IT services from a transfer pricing perspective

In a transfer pricing case, the Supreme Administrative Court (SAC) opined on the role of comparative analysis in evidentiary proceedings. The court, among other things, accepted the technique of assessing the adequacy of costs by comparing the total amount of purchased intra-group services with a taxpayer’s turnover.

In its judgement 5 Afs 341/2017-48, the Supreme Administrative Court (SAC) dealt with supporting the arm’s-length price of IT services purchased by a taxpayer to operate an e-shop. The tax administrator focused on reviewing the arm’s-length ratio of the IT service costs of comparable entities to their sales; based on this criterion, the tax administrator determined a difference in the prices of services applied by the taxpayer. The taxpayer argued that the tax administrator did not deal with the prices, e.g. hourly rates, but with the cost-to-sales ratio, where the comparability of conditions must be carefully reviewed; the taxpayer also argued that all circumstances of the case had not been taken into account, namely the contractual conditions, business strategies, and economic circumstances. The regional court had agreed with this. The tax administrator then filed a cassation complaint to the SAC.

In a rather extensive reasoning of its judgement, the SAC analysed the individual factors of comparability: properties of assets and services, functions performed, contractual conditions, economic circumstances, and business strategies. The SAC concluded that the tax administrator had erred in comparing business strategies, as this assessed the taxpayer as an established enterprise, while not carrying out any such assessment of circumstances for the comparable entities. The SAC thus found the tax administrator’s cassation complaint unfounded.

As to the assessment of costs itself, the SAC commented that “when assessing external services comprising the administration and maintenance of an IT environment used for e-commerce, it is not relevant in which specific goods the comparable entities are trading, as, according to the complainant, websites and e-shops are managed using the same methods and processes as in the case in question…” The court thus found the tax administrator’s reasoning based on comparing the total costs to the company’s turnover logical and conclusive.

In the light of the above, it is advisable not to underestimate the role of comparative analysis as the main pillar of evidentiary proceedings in supporting transfer prices.

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