Deloitte wins a precedent-setting tax dispute in the Supreme Court
Tax authorities cannot accrue income from the use of trademarks on a free of charge basis.
At the end of September, the Supreme Court of Ukraine handed down its ruling in a dispute where Deloitte represented the client’s interests.
One of the largest retailers of clothing, footwear, and accessories purchased goods from a non-resident parent company under its trademark. The Ukrainian company did not pay royalties for the use of its founder’s TM in accordance with the group’s internal policy. The tax authorities recognized it as an understatement of income for the free of charge use of TM and accrued additional income of 4% of the company’s revenue.
A joint team of lawyers and tax advisers of Deloitte Ukraine composed of Dmytro Pavlenko, Andriy Polischuk, Mykhailo Koliadintsev and Roman Makarchuk supported the dispute in the courts of all instances and proved that the approach adopted by the tax authorities was inappropriate.
Among other key points, the court has confirmed that:
- The Tax Code and accounting standards do not provide for the accrual of income from the free of charge use of trademarks
- The approach adopted by the tax authorities to measuring such income, in particular to applying the valuation standards, was unreasonable
Andriy Polischuk, Tax and Legal Director at Deloitte Ukraine, noted that determination of the amount of payment for the use of intangible assets is relevant for many manufacturing and trading companies. The decision on the cost of using the TM depends on the company’s business model, the specifics of a particular business, and it requires a detailed analysis in terms of transfer pricing.
According to Andriy Polischuk, the court has once again supported the right of the parties to the transaction to determine the value of business transactions independently, as well as the need for a more detailed study of applicable legislation and actual circumstances of the case by tax authorities during the tax audits.
Commenting on the grounds for the claim satisfaction Dmytro Pavlenko, Partner and Head of Tax practice at Deloitte Ukraine added that another important conclusion of the court is that any tax information available in the tax authorities’ databases is for information purposes only and is not a proper evidence in a court case.