In a recent case, the rational for the use of a same country procurement company was rejected by the auditors and then by the courts in Poland. The findings that independent forges paid less for steel directly purchased from unrelated mills, than the audited company paid to its related party procurement company, served as the basis for the adjustments to the transfer pricing between the companies.
What was not considered was the need for the procurement company. The company under audit was in poor financial condition. The tax authorities attributed this to the higher price paid to the procurement company for raw materials. While this appears quite logical at first blush, the forge was in poor shape prior to the use of the procurement company.
The adoption of the procurement company structure allowed for the procurement of steel for continuing operations as sellers were wary of the forge’s ability to pay, and the procurement company added an additional guarantee of payment. None of this was presented as part of the transfer pricing documentation supplied to the auditor as part of the audit process.
The case highlights the need for candor in the preparation of transfer pricing documentation and the need to be specific in the “why” of a transaction. Failure to educate the audience, the auditors and possibly the courts, as to the logic of a structure can be catastrophic at audit time.
To read more about Poland’s procurement transaction, click here.