''In the business of delivering results...''

No Tricks means No Treats for the Government

Thursday, December 6, 2018

No Tricks means No Treats for the Government: Court of Appeal annuls an € 84.500.000 fine for alleged “smuggling”, ruling that no transfer pricing violation and no “tricks” negate a finding of “smuggling” through artificially lowering wholesale prices and a Ministerial Decision requiring the “benefit” from lower wholesale prices to be passed on downstream to consumers is illegal.

Athens Court of Appeal, Judgment No. 4352/2018.

The Plaintiff, a motor vehicle wholesale national sales company, was accused of smuggling through artificially lowering prices by violation of transfer pricing rules allegedly to avoid a Government hike on import tariffs and various related taxes. Following an audit carried out by the Economic Crime Persecutory Agency  which allegedly found transfer pricing violations, the Customs Authority of Athens (CAA) issued an Act imposing € 84.500.000  in back taxes, fines and penalties on the Plaintiff and, severally and jointly, on members of management, whose assets were frozen and who were also criminally prosecuted. The grounds for this “blitzkrieg”  were that violation of transfer pricing rules (an income tax violation) consists a “trick” to legalize lower wholesale prices for the purpose of tax and tariff avoidance and hence the administrative violation and felony of “smuggling”. Further the CAA examined the retail prices listed in Plaintiff’s price catalogues prior to, during and after the wholesale price reductions and based on a Ministerial Decision that the benefit from wholesale price reductions should be passed on to the consumers and a finding that retail prices remained largely unchanged, the CAA concluded that the price reductions were implemented solely with the intention of paying reduced tariffs and taxes. These elements in combination with the (unremarkable) observation that the reduction of the fees owed to CAA due to the reduction of the vehicles’ wholesale price resulted in additional revenue and profit for the Plaintiff were deemed sufficient by the CAA for identifying an offence of smuggling.

On appeal brought by Plainitiff, the Athens Administrative Court of Appeal annulled the CAA’s Act and ordered the Hellenic Republic to return € 84.500.000 in fines, penalties and taxes. To reach its decision the Court examined the allegations of transfer pricing, concluded that the wholesale prices had been reduced in accordance with the transfer pricing laws and regulations, that the lower wholesale prices had been properly pre-announced to the Customs Authority, all invoices and payments corresponded to such prices and hence there was no evidence of trickery. In addition, the Court examined the Ministerial Decision which imposed an obligation to pass on to consumers the ”benefit”  from lower wholesale prices, interpreted it to mean that the lower taxes corresponding to the lower wholesale prices, not the price differential, had to be passed on to the consumer and concluded that the introduction of this obligation through a provision of the Ministerial Decision lacked authorization absent the necessary legislative scope for such an obligation and that in actual fact the lower taxes had been passed on. The scope of the Customs law provision on which the Ministerial Decision was based provided only for the issuance of a Joint Ministerial Decision limited to procedural matters only and did not authorize the introduction of a substantive element of the notion of smuggling.

Consequently the Administrative Court of Appeals annulled in its totality the CAA’s Act and ordered that the Hellenic Republic reimburses Plaintiff in full plus lawful interest and legal costs.

Gregory Pelecanos, Senior Partner, Ballas, Pelecanos & Associates LPC, argued for Plaintiff.