Authorities must also exercise diligence while preparing benchmarking analyses

When preparing benchmarking analyses in the course of audits, tax authorities should perform them as diligently as is expected of taxpayers. Such conclusions follow from the ruling of the Supreme Administrative Court of 29 June 2022 (II FSK 3050/19)[1]. It dismissed the cassation appeal of the Director of the National Revenue Information and took the taxpayer’s side in the dispute. The ruling – although issued on the basis of the legal status that is no longer in force – features conclusions that are also relevant under the current provisions.

Facts of the case

In this case, the taxpayer (a company investing in the commercial real estate sector) took out three loans from a related entity. Most were intended to finance the construction of a shopping center. All three loan agreements have a fixed interest rate of 9%. The company had transfer pricing documentation in place along with a benchmarking analysis.

What was the dispute about?

The authority challenged the interest rate applied by the taxpayer claiming the Company-compiled benchmarking analysis was incorrect – it did not take into account the geographical criterion. Therefore, the inspectors narrowed down the sample of loans selected in the benchmark only to those granted in Europe, which significantly narrowed the sample. The authorities also asked several Polish banks to provide information on the interest rates on investment loans granted by these banks. In the inquiry, the authority specified only some of the criteria that it arbitrarily considered important. The tax office also referred to banking statistics published by the NBP regarding loans granted. As a result, the inspectors concluded that the interest rate of 9% applied by the Company is not arm’s length – it should be 3.667%.

The company disagreed with the authority’s decision and appealed against it to the Regional Administrative Court, which supported the taxpayer’s position (III SA/Wa 1777/18)[2]. The court of first instance highlighted that the authorities – when preparing a benchmarking analysis – should do so on the basis of the same provisions that apply to taxpayers. In order to be able to challenge the applied transfer prices, inspectors must conduct a full and regulations-compliant benchmarking analysis.

When preparing the transfer pricing analysis, the authorities did not take into account the purpose of granting the loan (building a shopping center) or its amount. In the inquiries to the banks, the capital value range was EUR 2 million-EUR 115 million, while the total value of loans received was EUR 115 million. The authority also ignored other important factors, including funding risks. The court also accused the inspectors of inconsistency in the application of the comparability criteria and the failure to adequately describe these criteria.

The Director of the Tax Administration Chamber (IAS) disagreed with the first instance court decision and submitted a cassation complaint to the Supreme Administrative Court. The latter upheld the position of the Regional Administrative Court and dismissed the complaint. This means that the company won the dispute.

What does it mean for taxpayers?

A carefully prepared benchmarking analysis – taking into account all the items provided for by the provisions of the CIT Act and ordinances – raises the taxpayers’ safety. When preparing transfer pricing analyzes for the purposes of proceedings, authorities often make simplifications which take revenge on them in the course of proceedings before administrative courts.

If the taxpayer has received an unfavorable tax decision regarding the transfer pricing applied, you might want to look at the methodology of the benchmark prepared by the authority. Courts often listen to the arguments of taxpayers who challenge the analyses the controlling authorities rely on.

[1] https://orzeczenia.nsa.gov.pl/doc/E4E3D4A485

[2] https://orzeczenia.nsa.gov.pl/doc/03CE442D25