On 23 May 2016 the Commercial Court of the North Caucasus Region delivered a ruling in the case of Bonduelle-Kuban LLC (the “Company”), No. А32-8522/2015, in which the court upheld the judgments of the lower courts and supported the position of the tax authority, denying the Company the right to deduct expenses to pay for intragroup services for profit tax purposes.
The issue of deducting expenses for intragroup services has been relevant for many years now, and the court practice on this issue is quite varied. That being said, the number of disputes lost by taxpayers is quite high, especially in a situation involving calculation of remuneration according to the cost+ system (the “pioneers” in such disputes have been companies of the BAT group which also used this system to calculate the cost of services).
In this case the court agreed with the tax authority that the Company was unable to document its expenses to pay for the following services of the group’s foreign companies:
- Services for general and financial administration, and information system services, including services for control over accounting and fiscal standards, contacts with the financial controller, outside auditor and regulation of billing.
- Consulting and support services, services in logistics and quality control, including assistance and support in controlling compliance with quality standards, assistance in optimizing logistics processes when importing goods; human resources management services.
During an audit the Company provided the tax authority not only with services agreements and certificates of delivery and acceptance, but also (a) work schedules for the companies’ employees, (b) documents confirming that the Company’s employees and employees of contracting parties under specific contracts had been sent on business trips (i.e., the relevant orders, business travel authorizations, business travel duty assignments and reports, etc.), and other supporting documents.
Having analyzed the documents submitted by the Company, the court decided that they do not confirm that services were provided and do not give information on costing of the services, since:
- It is impossible to determine from the certificates of services rendered which services were provided by the Company's contracting parties and in what amount: specifically which services were provided and by whom; the actual amount and nature of the work done; there is no information about pricing and costing, or timing for types of specific services rendered;
- A simple listing of services in the certificates in accordance with the agreement does not prove the economic justification and basis for the expenses for tax accounting purposes, if at the same time there are no documents disclosing the actual content of the results of those services.
- The documents provided are non-specific and there are no references to services agreements concluded by the Company.
- Work schedules and information about foreign specialists’ travel in themselves cannot confirm that services were rendered, if they do not contain information about the work/services performed by those specialists under concluded agreements.
The court’s position in this case evidences that this topic continues to be relevant and that the tax authorities continue to have an interest in taxpayers’ deduction of expenses to pay for intragroup services. The tax authorities’ chances of getting support from the court increased considerably if the taxpayer is unable to provide full and detailed information about the nature/type, amount and cost of services acquired, including documents (information) disclosing information about how the cost of each type of service is calculated. The cases of JUNGHEINRICH Lift Truck LLC (No. А40-147132/14), RUSPETRO LLC (No. А40-103445/14) and IDAVANG LLC (No. А52-2025/2014) are telling examples of unfavorable court decisions for taxpayers on a similar issue. So, it is particularly important for taxpayers to work carefully with supporting documents for such agreements, and this often determines taxpayers’ success in a dispute.
Based on their considerable relevant experience of advising, contractual and court work, the lawyers of Dentons’ Tax practice are prepared to analyze tax risks related to documenting a company’s expenses under intragroup services agreements, and to provide the necessary assistance in devising a system of records that confirm not only that services were actually rendered, but also show how they are priced. Having a correct system of documentation in place will make it possible to considerably decrease the risk of claims from the tax authorities and improve a company’s chances of defending its position in the event of a dispute.