Expert opinions – highly effective tool for transfer pricing defence
The tax authorities have recently launched a systematic collection of information on related-party transactions. This is aimed at making audits of transfer pricing methodology (arm’s length prices charged to transactions with related parties) more efficient and extensive. In this respect, numerous questions arise as to how transfer prices should be defended and whether transfer pricing documentation in the form of an expert opinion provides more relevant and sufficient protection against current and planned substantial tax assessments. The procedure in defending transfer pricing before the tax authority is an exemption from the general principle under which all facts presented in a tax return must be substantiated by the taxpayer. The opposite applies to transfer prices, as is clear from the Tax Code and the established practice of the Supreme Administrative Court. The burden of proof for the existence of a difference between a price agreed between related parties and the price that would be agreed between independent parties in ordinary business relationships lies exclusively with the tax authority. These procedural rules have been clearly summarised in a recent judgment of the Supreme Administrative Court (File No. 7 Afs 86/2013). The tax authority should follow the rules in order to successfully challenge prices charged on related-party transactions, supported by transfer pricing documentation in the form of an expert opinion. In this judgment, the Supreme Administrative Court drew the following relevant conclusions:
- The interpretation of Section 23 (7) of the Income Taxes Act, which does not define a precise method for the tax authority to determine an arm’s length price within the context of functioning competition, must rely on the established practice of the courts.
- The tax authority notifies the taxpayer of the difference between the price applied by the taxpayer and the price identified by the tax authority. Then the taxpayer is offered a realistic opportunity to provide its statement on the difference and substantiate it satisfactorily. Only then is the tax authority entitled to assess whether the taxpayer’s burden of proof has been discharged and to conclude whether or not the difference has been satisfactorily substantiated.
- The tax authority must allow the taxpayer to express its opinion on the procedures, criteria and indicators applied by the tax authority in determining the arm’s length price. Therefore, it is inadmissible for the tax authority to merely inform the taxpayer of the arm’s length price, without producing any previous evidence that would allow the taxpayer to understand by what means of evidence this finding has been established by the tax authority and to express its opinion and propose evidence or different criteria.
- Satisfactory substantiation by the tax authority of the difference between the agreed price and the arm’s length price is not sufficient if made in a request of the tax authority not showing based on what documents, criteria or indicators the price has been determined and not containing the obligation to prove imposed on the taxpayer and due information in case of failure to discharge the obligation.
- Where transfer prices are substantiated with an expert opinion and the tax authority challenges the expert opinion, the expert must first be examined. If the tax authority continues to be in doubt regarding the expert opinion, an opposing opinion should be commissioned that would then be confronted with the taxpayer’s expert opinion. However, not even after that is the tax authority entitled to decide which expert opinion will be accepted as relevant. On the contrary, it must resolve any conflicts and discrepancies between the two expert opinions, particularly by examining the expert or both experts. If the discrepancies remain unresolved, another expert investigation or review expert opinion should take place.
- In tax proceedings, some means of evidence are privileged, mainly public instruments and expert opinions. Expert opinions enjoy the status of higher evidence because they usually certify highly specialised issues for which the tax authority or the administrative court does not have as extensive expertise to resolve as the expert or the expert institute active in the given field.