Greece: Court ruling on the selection of transfer pricing method

In a recent ruling, the Administrative Court of Piraeus dealt with a transfer pricing audit case. The client, who was represented at court by KARAKITIS TAX & LAW, is a full-fledged distributor. It has been purchasing the products from affiliates and distributed them, as wholesaler, in the market.

In the absence of internal comparables, the company applied the transactional net margin method (“TNMM”) and resorted to the use of external database of publicly available financial accounts of european companies for benchmarking the appropriateness of its operating profit margin.

The tax audit authorities took the view that the company should have applied the resale price method. As a consequence, they tested its gross margin against the interquartile range of gross margins of the set of comparables derived  from the same database version and concluded that it fell short, thereby readjusting its taxable profits.

At first, in a preliminary ruling, the court ordered the tax administration to supplement, within a specific time frame set, the analysis of its tax audit report by filing a new one in which it was required to explain how it concluded that: (i) the functions performed by the companies included in its set of comparables are comparable with the functions performed by the company, (ii) there are no differences in the accounting practices that these companies follow regarding the items included above and below the gross margin line, and (iii) where they are found not to be comparable, to reliably quantify such differences and make the appropriate comparability adjustments.

In its new tax audit report, the tax administration sufficed to explain that the set of companies which it relied on for testing the arm’s length character of the gross margin of the audited company comprised companies which according to their internet site information presented trade descriptions that are similar with the scope of activity of the company.

As a result, the court held that the tax administration failed to provide appropriate explanations for the rejection of the TNMM and accepted the appeal of the company for the annulment of the tax audit assessment.

With its ruling, the court, in contrast to the appeal directorate of the tax administration, which in the specific case had taken the view in favor of a far reaching priority of the traditional transfer pricing methods over the transactional profit methods, placed emphasis on the comparability analysis for deriving which transfer pricing method can most reliably be applied in the specific case; thereby aligning with the OECD transfer pricing guidelines, which are incorporated in the transfer pricing provision of the domestic law.

Since the ruling was recently appealed by the Greek State it is not yet irrevocable.