Our tax litigation team has successfully defended before the Dispute Resolution Committee, on behalf of a major consumer electronics company, the deductibility of warranty costs incurred by the company in the context of the warranty it provides to customers for its products sold. The successful outcome has led to the annulment of the respective multi-million income tax assessment the company was burdened with.
The tax auditors had considered that the warranty costs incurred by the company (a Limited Risk Distributor) did not meet the tax deductibility conditions (set by art. 22 of the Income Tax Code), since these expenses were not recharged to the associated manufacturing entity of the group.
The Dispute Resolution Committee, with its groundbreaking decision, not only did it follow a correct interpretation of the deductibility conditions, but it also confirmed important aspects of transfer pricing rules.
As regards the deductibility conditions, the Committee ruled that the expenses were performed to the interest of the company and in the context of its regular business transactions, since they contributed to a better customer service, to the satisfaction of clients and accordingly to the smooth operation of the business, taking also into account that the company has a legal obligation to grant warranty for the goods sold.
On the TP aspect, the Committee states that the recharge of warranty costs to the associated manufacturing entity is a separate issue from the treatment of the expenses themselves and should be exclusively examined under the applicable TP provisions. In this respect, the intercompany transactions of the company had been audited by the Tax Authorities and were found to be in line with the arm’s length principle.
Furthermore, the recharge of the warranty cost constitutes an element for the determination of the net margin of the Greek company. Therefore, even if the warranty costs did not actually burden the manufacturing entity of the Group, the net margin of the Greek company was still within the acceptable interquartile range.