Ukraine: Supreme Court decides in favor of tax administration in Rivneazot case

published on 21. January 2020

In October 2019 Ukrainian Supreme Court rendered a final decision in the dispute between State Tax Service of Ukraine and Rivneazot Private Joint Stock Company, one of Ukraine’s largest producers of ammonium nitrate fertilizers. With the total amount of tax assessment notices of about UAH 1.7 billion, this is one of the largest transfer pricing disputes in Ukraine resolved by Supreme Court since enactment of transfer pricing regulations in 2013.

This dispute arose after the transfer pricing audit of Rivneazot conducted by State Tax Service in 2017. In the course of the audit, the tax authority analyzed Rivneazot’s controlled transactions involving:

1. purchase of natural gas from Ostchem Holding Limited, a related Cyprus company,
2. sale of calcium ammonium nitrate and ammonium nitrate fertilizers to NF Trading AG, a related Swiss company, and
3. sale of anhydrous ammonia to NF Trading AG.

Rivneazot applied the following transfer pricing methods to the above transactions:

1. purchase of natural gas – comparable uncontrolled price (CUP) method using the transactions of Ostchem Holding Limited with other two Ukrainian companies as comparable transactions;
2. sale of calcium ammonium nitrate and ammonium nitrate fertilizers – transactional net margin method (TNMM) with NF Trading AG as the tested party; and
3. sale of anhydrous ammonia – TNMM with NF Trading AG as the tested party.  

The State Tax Service disagreed with the above transfer pricing analysis and came to following conclusions:

1. purchase of natural gas – Rivneazot could not use the CUP method due to lack of sufficiently reliable information on comparable transactions. The transactions of Ostchem Holding Limited with other two Ukrainian companies were not comparable due to much lower volumes. Furthermore, because these transactions were also treated as controlled transactions for these two Ukrainian companies, it would be contrary to the principles of transfer pricing analysis to accept these transactions as comparable transactions;
2. sale of calcium ammonium nitrate and ammonium nitrate fertilizers – Rivneazot could apply the TNMM to this transaction, however, with Rivneazot, but not NF Trading AG as the tested party. In view of the tax authority, NF Trading AG could not be selected as the tested party due to lack of publicly available information on the activities and financial results of NF Trading AG which did not allow to determine the net margin of the analyzed transactions;
3. sale of anhydrous ammonia – CUP method instead TNMM should have been used, as sufficiently reliable information on prices in comparable export transactions was readily available in various sources of trading information. In these circumstances, the CUP method had priority over the TNMM.

Based on the above arguments, the tax authority adjusted the income and expenses of Rivneazot which resulted in the decrease of tax loss carryforward for the total amount of about UAH 1.6 billion, and in the corporate tax assessment of about UAH 0.06 billion.

Rivneazot prevailed in the court of first instance. However, the decision of the court of first instance was overruled by the Eights Appellate Administrative Court. Supreme Court agreed with the arguments of the State Tax Service and upheld the decision of the appellate court.