Tax inspection findings at a company with the activity “Manufacture of paper and board”

S.C. X S.A., whose object of activity is “Manufacture of paper and paperboard”, CAEN code 1712.

Period audited: 01.01.2017-31.12.2020.

The main findings of the tax inspection authorities  were:

  • The weaknesses identified in the way corporate income tax was determined were based on the following findings:
  • The purchase price for certain batches of goods purchased from an affiliated taxpayer and therefore the write-off price for these goods was much higher due to a clerical error, i.e. the purchase price was set in foreign currency (euro) and not in lei. As a result, the control authorities took into account for the determination of the taxable profit and corporate income tax for 2017 the additional difference of x lei recorded by S.C. X S.A. in October 2022 through account 117 “Retained earnings”;
  • For the year 2017, the tax inspection authorities established a capital indebtedness ratio of 3.94, higher than 3, so interest expenses and exchange rate differences on loans, non-deductible from a tax point of view, were established in the amount of x lei;
  • erroneous calculation of the taxable profit for 2017 in the amount of x lei, which resulted in an unjustified increase of x lei in income tax;
  • Erroneous calculation, in the sense of increasing it, of the taxable profit for 2017 by the amount of x lei, which led to an unjustified increase in the corporate income tax by the amount of x lei;
  • Reduction of the corporate income tax for 2018 in the amount of x lei as a result of the inclusion in the category of fully tax-deductible expenses of interest and exchange rate differences carried forward from 2017 in the amount of x lei and the reduction of sponsorship expenses which were deducted from the corporate income tax due in the amount of x lei;
  • In the fiscal years 2019 and 2020, the tax inspection authorities found that the verified economic agent sold part of the goods, after granting commercial discounts, below their purchase price, thus, the loss generated exclusively from the transactions in which the purchase value of the goods was higher than their sale value, being x lei.

The tax inspection authorities also found the following:

  • The audited company carried out only trading activity and the paper heating installation received by the company in December 2017 was made available to S.C. X Grup S.A. (affiliated company) free of charge and no deduction was granted for depreciation expenses;
  • The surplus depreciation expenses related to the revaluation of tangible fixed assets were not taken into account in determining the taxable profit for 2019 as an income item;
  • In October 2022, S.C. X S.A. recorded in the credit of account 117 “Retained earnings” the amount of x lei representing the recovery of environmental protection expenses recorded in April 2020, expenses which, according to the supporting documents submitted, were the responsibility of S.C. X Grup S.A. (affiliated person);
  • C. X S.A. did not proceed to the fiscal adjustment of the expenses related to the goods purchased from S.C. X Grup S.A. (affiliated company), situation caused by the fact that the price discounts received by the verified economic agent from S.C. X Grup S.A. as a component of the purchase price were very small in relation to the price discounts that S.C. X S.A. grants to final customers.

Under these circumstances, S.C. X S.A. recorded for the years 2019 and 2020, in terms of the operating result, even after making the corrections in October 2022 mentioned above, a loss, so that the rate of return on sales recalculated after making the corrections was outside the interquartile range presented by the verified company in the transfer pricing file.

As a result, the tax inspection authorities  proceeded to adjust the operating expenses in order to obtain a return on sales at the level of the centred market trend, which led to the establishment of non-deductible expenses from a tax point of view in the amount of x lei.

In conclusion, as a result of the tax inspection, additional liabilities were established in the total amount of x lei, representing income tax, and the tax loss was reduced by x lei.

Source: ANAF