Judgment summary
The Supreme Administrative Court of the Slovak Republic dismissed the applicant's cassation complaint against a judgment of the Regional Court in Bratislava, which had itself dismissed the applicant's action against a tax reassessment for the 2011 tax period (paras 3-4).
The tax administrator had assessed a tax difference of EUR 1,837,565.62 in corporation tax, excluding EUR 3,383,000 in claimed management and technical service costs invoiced by Valeo Securite Habitacle, S.A.S. as unproven, and separately adjusting the applicant's transfer pricing profit margin from 0.91% to 5.23% (OMTC), increasing the tax base by EUR 6,288,398 (para 1).
The Court of Cassation found all grounds of appeal unfounded, including those concerning the burden of proof for the disputed invoices, alleged procedural irregularities in witness examinations, refusal of a power of attorney, the applicant's functional characterisation as a dependent person, and the adequacy of the lower court's reasoning (paras 11-35). The cassation complaint was dismissed and no costs were awarded to either party (paras 36-38).
Background
The applicant, Minebea Access Solutions Slovakia s. r. o. (formerly U-Shin Slovakia s. r. o.), is a manufacturing plant belonging to the Valeo group, focused on the design, manufacture and marketing of automotive components, including cab and trunk door locking systems, door locks, keys and door handles (para 4).
During the 2011 tax period, three invoices totalling EUR 3,383,000 were booked to account No 518965 from the supplier Valeo Securite Habitacle, S.A.S., referring to a contract for management and technical services by Product Group signed in December 2011 (paras 1, 4, 13).
The tax administrator, in Decision No 101406817/2018 of 23 July 2018, excluded this amount from tax costs under Section 2(i) and Article 21(1) of the Income Tax Act, considering the services unproven, and separately adjusted the applicant's profit margin under Article 17(5) and the methodology of Article 18 of the Income Tax Act from 0.91% to 5.23% (median of comparable companies' operating cost margins for 2009-2011), increasing the tax base by EUR 6,288,398 (para 1).
The defendant, the Financial Directorate of the Slovak Republic, upheld this decision on 21 November 2018 (para 2). The Regional Court in Bratislava dismissed the applicant's subsequent action as unfounded (para 4).
Core dispute
The dispute concerned whether the applicant had discharged its burden of proof, under Article 24(1) of the Tax Code, that the management and technical services underlying the three disputed invoices were actually supplied and constituted valid tax expenditure under Article 19 of the Income Tax Act.
A further dispute concerned the applicant's functional and risk profile within the Valeo group, namely whether it was a dependent person or contract manufacturer with limited functions, as found by the tax authorities, or an independent full-fledged manufacturer, as argued by the applicant, and whether the resulting transfer pricing adjustment of the operating margin on total operating costs (OMTC) from 0.91% to 5.23% under Article 17(5) and Section 18 of the Income Tax Act was lawful.
The applicant also raised procedural objections, including that it had not been permitted to put all prepared questions to two witnesses (Ms V. and Mr L.), that a power of attorney for representation by Deloitte Tax Ltd had been unlawfully refused, and that the lower court had failed to address all its arguments adequately.
Court findings
The Court of Cassation confirmed that the burden of proof for the disputed invoices lay with the applicant under Article 24(1) of the Tax Code, and that the tax authorities were not required to prove the services had not occurred, only to dispute the credibility, truth or completeness of the applicant's evidence (paras 11, 14).
The court noted that the invoices only generally described 'management and technical services' with reference to a contract dated December 2011, that earlier lower-value invoices from the same supplier had been cancelled by credit notes, and that it was implausible the parties had operated for the whole of 2011 under a written contract only finalised in December of that year (paras 12-13). It concluded the applicant had not proven what specific services, to what extent and when, were actually supplied (para 14-15).
On the witness objections, the court found the applicant's representative had been present and permitted to ask questions of both witnesses, had signed the minutes without reservation in one case, and had not specified what further questions it wished to ask or why they were material (paras 16-21). No procedural irregularity affecting lawfulness was found.
On the power of attorney, the court held that a power of attorney expressly linked in writing to the tax audit (completed 9 June 2017) did not extend to subsequent proceedings, and the tax administrator was not obliged to look behind its wording (paras 22-23).
On the functional analysis, the court agreed with the lower court's finding, based on factors including lack of independence in strategic decision-making, dependence on group know-how, absence of a separate sales department, and joint business planning, that the applicant met the definition of a dependent person under Section 2(n)(2) of the Income Tax Act (paras 24-26). The tax authorities' application of the OECD Transfer Pricing Guidelines methodology under Article 18(1) of the Tax Code, and the reasoning given for both the dependency finding and the chosen adjustment methodology, was found adequate and within the limits of administrative discretion under Article 27(2) of the SSP (paras 27-29).
The court also found the administrative court's reasoning sufficiently addressed the applicant's factual and legal arguments, in line with Article 139(2) of the CST (paras 33-35).
Outcome
The cassation complaint was dismissed as unfounded pursuant to Article 461 of the Civil Procedure Code (para 36).
Neither party was awarded reimbursement of costs of the cassation proceedings; the applicant was unsuccessful, and although the defendant succeeded, it was a public authority for which no exceptional reasons for a costs award were found (paras 37-38).
The judgment records that no further appeal is admissible.
Tp method highlighted
The tax administrator determined the applicant's arm's length profit margin using the operating margin on total operating costs (OMTC) methodology under Article 17(5) and Section 18 of the Income Tax Act, applying OECD transfer pricing methodology as referenced in Article 18(1) of the Tax Code and the OECD Transfer Pricing Directive for Multinational Enterprises and Tax Administration (para 27).
The applicant's achieved OMTC of 0.91% was found to fall outside the range of independent comparable operating margins. The tax administrator instead applied a margin of 5.23%, calculated as the median of the operating cost margins of comparable companies selected by the applicant for the years 2009 to 2011, resulting in an increase to the applicant's tax base of EUR 6,288,398 (para 1).
Major issues / areas of contention
- Whether the applicant discharged its burden of proof under Article 24(1) of the Tax Code that services underlying three disputed invoices totalling EUR 3,383,000 were actually supplied.
- Whether the applicant qualified as a dependent person and contract manufacturer with limited functions within the Valeo group, or as an independent full-fledged manufacturer.
- Whether the tax administrator's transfer pricing adjustment of the operating margin on total operating costs (OMTC) from 0.91% to 5.23% under Article 17(5) and Section 18 of the Income Tax Act was lawfully reasoned.
- Whether the tax administrator unlawfully prevented the applicant from putting prepared questions to witnesses Ms V. and Mr L.
- Whether the tax administrator unlawfully refused to recognise a power of attorney granted to Deloitte Tax Ltd for representation after completion of the tax audit.
- Whether the administrative court gave adequate reasons and addressed all of the applicant's arguments.