Category: Arm’s Length Principle

Transactions between related parties are referred to as “controlled” transactions, as distinct from “uncontrolled” transactions between independent companies.

The forces that regulate pricing of transactions between independent parties are known as “marked forces”. Independent parties can be assumed to operate in their own self-interest (“on an arm’s length basis”) in negotiating terms and conditions for transactions. Put in simple terms an independent seller would want to sell at the highest price and an independent buyer would want to buy at the lowest price – and the price agreed between the two independent parties would be determined in an equilibrium of these two opposite forces.

Absent regulation, pricing of controlled transactions within MNE Groups would be determined by forces that differs from those that govern pricing between independent parties – e.g. the overall group profit and taxation.

For these reasons regulation is needed. “Transfer pricing” is the general term used for regulation of pricing and terms in controlled transactions. In most countries transfer pricing is governed by the Arm’s length principle.

Transfer pricing regulations would allow for an adjustment  in the example above. The price of 90 set in the controlled transaction between related parties would be reduced to 80 based on the price agreed between independent parties under comparable circumstances.

The authoritative statement of the arm’s length principle is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries and on which most countries internal regulations are based.

Article 9 provides:

[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

By seeking to adjust profits in MNEs by reference to the conditions which would have obtained between independent enterprises in comparable transactions and comparable circumstances, the arm’s length principle follows the approach of treating the members of an MNE group as if they were operating as separate entities rather than as inseparable parts of a single unified group.

Transfer pricing does not necessarily involve tax avoidance, as the need to set such prices is a normal aspect of how MNEs must operate. Where the pricing does not accord with internationally applicable norms or with the arm’s length principle under domestic law, the tax administration may consider this to be “mis-pricing”, “incorrect pricing”, “unjustified pricing” or non-arm’s length pricing, and issues of tax avoidance and evasion may potentially arise.

Italy vs Cidiverte S.p.A., June 2023, Supreme Court, no 18206/2023

Italy vs Cidiverte S.p.A., June 2023, Supreme Court, no 18206/2023

Cidiverte S.p.A. is an Italian distributor of video-games. Following an audit, the tax authorities issued Cidiverte S.p.A an assessment of additional income resulting from a reduction of the pricing of costs it had paid to its Italian sister company. Appeals were filed by Cidiverte with the local and regional courts, but the objections were dismissed by reference to a previous judgement of the Supreme Court in href=”https://tpcases.com/italy-vs-take-two-interactive-italia-s-r-l-2012-supreme-court-no-119492012/”>Case no. 11949/2012 concerning disallowed costs in the same group. An appeal was then filed by Cidiverte with the Supreme Court. Judgement of the Court The Supreme Court set aside the decision of the regional court and refered the case back to the court, in a different composition, for further examinations. Excerpts “Therefore, without prejudice to the principles of law on the burden of proof set out in the Supreme Court’s judgment, the referring court should have examined the allegations of the parties in order to ascertain whether they had properly discharged their burden and, therefore, first of all, whether the tax authorities had attached and proved the validity of the transfer price adjustment, with reference to the discrepancy between the agreed consideration and the normal value of the goods or services exchanged, taking into account the taxpayer company’s specific objections.” “In the case at hand, the administration has recovered for taxation the costs carried by the invoice issued at the end of the financial year, considering the transaction to be elusive, and has recalculated the costs previously accounted for according to the ‘normal value’, determined in the average sale price, purged of the contested mark-up, applied by the English supplier, controlled by the same parent company, to its Italian sister company, during the tax year examined. There is therefore no question of proof of the existence and relevance of the costs, but only of their non-correspondence to market value.” “Therefore, in the present case, the referring court completely failed to examine the study produced by the taxpayer company and, therefore, did not ascertain whether, in relation to the concrete characteristics of the case before it, as emerged without dispute from the documents before it, the criterion for determining the normal value adopted by the tax authorities was correct, in the light of the taxpayer company’s circumstantial allegations, and whether or not those allegations required further proof.” Click here for English translation Click here for other translation ITAL_20230626_18206
Poland vs "V-Tobacco S.A.", May 2023, Administrative Court, Case No SA/Po 112/23

Poland vs “V-Tobacco S.A.”, May 2023, Administrative Court, Case No SA/Po 112/23

V. sp. z o.o. was part of the E group, in which the parent company was E. S.A.. V.’s principal activity was wholesale of tobacco products. The authority issued an assessment based on finding of irregularities consisting in the company’s overstatement, in its VAT purchase registers and tax returns for the periods indicated, of the net purchase value and input VAT resulting from invoices issued to it by: 1) L. sp. z o.o. and I. sp. z o.o. for marketing services for e-cigarettes, 2) E. S. sp. z o.o. for data processing services, 3) E. S. sp. z o.o. concerning re-invoicing of purchases incurred by E. S. sp. z o.o.. The tax authorities did not find that V. sp. z o.o. was entitled to reduce output tax by the input tax shown on the disputed invoices issued to it by: L. sp. z o.o. and I. sp. z o.o., relating to marketing services, and E. sp. z o.o., relating to data processing services and a re-invoicing of part of the purchases incurred by that entity. An appeal was filed by V. sp. z o.o. with the Administrative Court. Judgement of the Administrative Court. The Court dismissed the appeal of V. sp. z o.o.. Excerpts “The evidence gathered confirms that the services documented by the disputed invoices were not performed for the benefit of the company V., and are not related to its taxable activities within the meaning of Article 86(1) of the VAT Act. As demonstrated by the authorities, in the period from 15 July 2016 to 19 August 2016, when the marketing activities resulting from the invoices issued by L. sp. z o.o., consisting in the testing and sale of, inter alia, Iiquids, were carried out, the V. Company did not have commercial goods that could be offered for sale or distributed in the form of samples. The company made its first purchase in September 2016 and its first sale in October of that year. The activities carried out by I. sp. z o.o. and L. sp. z o.o. (according to the KRS, carrying on the business of selling tobacco products) did not concern the goods traded by V. as well as the company itself, which was not made visible in the materials submitted. Thus, the scope of the applicant’s business activity resulted from the role envisaged for it within the E. Capital Group. , which was the supply of commercial goods to the companies – E. and L. , in the quantities indicated by these entities. No other customers were sought. The increase in sales of the company V. in the following years, i.e. 2017-2018, referred to by the party – was the result of increased sales to the above-mentioned companies, which was established on the basis of data submitted by the taxpayer, supplemented by information resulting from JPK files and VAT-7 declarations submitted by V. (table no. […] of the decision of the authority of first instance – […]). As the authorities inferred, the applicant did not sell and was not intended to sell commercial goods (liquids) to customers other than E. and L. . Contrary to the party’s assertion, the marketing services resulting from the invoices issued by E. and L. , were not justified by the acquisition of new markets for V. sp. z o.o. as the company functioned as an internal distributor of goods, to the abovementioned entities. Its transactions during the period under review consisted of the purchase of flavoured oils and their sale to E. and L. , while the contested purchases were related to the sale of the entire range of tobacco products (including traditional cigarettes, tobacco) to various distributors and retail customers, as V. admitted in its objections to the protocol of examination of the tax books and in its appeal. Such transactions were not and were not to be carried out by the taxpayer. Therefore, the authorities correctly concluded that the marketing services documented by the invoices issued by the above-mentioned entities were not provided to the applicant and did not relate to its taxable activities within the meaning of Article 86(1) of the VAT Act. Company V. was not the actual recipient of the services in question. The Court assesses as correct the findings of the authorities concerning the invoices documenting the purchase by V. sp. z o.o. of data processing services from E. sp. z o.o., which were issued in connection with the contract concluded by these entities on 20 June 2016. […] The valuation of these services was based on the costs incurred by E. in the period from January 2016, plus a 5% margin. An analysis of the provisions of the contract in question for the provision of data processing services, does not confirm that the subject of the services provided to the applicant were activities such as: searching for suppliers and buyers of goods, assistance in establishing and maintaining business contacts, preparing goods for sale, promoting goods on the market. The contract provided for the support of E. sp. z o.o. for the company V. – in the area of financial and administrative management, i.e. supervision of the area of financial issues; reporting of business results, support of decision-making processes; management of financial resources; supervision of internal control procedures and risk management; introduction of accounting documents as required by the computer system; printing of accounting documents, preparation and maintenance of accounts related to payments; preparation of reports: fiscal, statistical, financial and other administrative activities as required by the principal; – handling personnel and occupational safety documentation, i.e. setting up and maintaining personal files of employees; carrying out recruitment processes; settling all obligations towards the Social Insurance Institution (ZUS), tax offices and others required by law; cooperation with labour offices in the area of refunding salaries of juvenile employees; drawing up necessary certificates, reports, statements, payrolls, holiday plans, referrals for medical examinations, etc.; sending payroll transfers; archiving personal documentation of dismissed employees; others not mentioned above, but related to personnel and occupational safety services. The

Brazil vs Janssen-Cilag Farmaceutica LTDA, May 2023, Superior Tribunal de Justiça (First Chamber), Case No AREsp 511.736/SP

Janssen-Cilag Farmaceutica LTDA filed a request for clarification with the Superior Tribunal de Justica concerning the sixt method – PRL60 – applied in Brazil in the years in question. Accordcing to the the company, there were no legal basis for applying the method. Judgement of the Supreme Court The Court dismissed the complaint. Excerpts “The appellant has failed to demonstrate any omission or contradiction in the judgment, which was expressed in a clear and reasoned manner with regard to the issues relevant to the resolution of the dispute. According to the case law of this Court, “the purpose of a motion for clarification is simply and solely to complete, clarify or correct an omitted, obscure or contradictory decision. They are not intended to adjust the decision to the understanding of the embattled party, nor to accept claims that reflect mere nonconformity, and even less to revisit an issue that has already been resolved” (EDcl no AgInt nos EAREsp n. 1.254.635/SP, rapporteur Minister Mauro Campbell Marques, Special Court, judged on April 12, 2022, DJe of April 22, 2022). This was stated in the judgment under appeal: In view of these findings, I initially took the position that IN 243/02 should be brought into line with the governing law, paying particular attention to the purposes of transfer pricing control. However, having studied the points made in Justice Gurgel de Faria’s opinion, I am convinced that, in fact, IN 243/02 went beyond what was allowed by the pure exegesis of article 18, II, of Law 9.430/96, as amended by Law 9.959/00. In fact, this normative act went beyond the mere interpretation of the rule by creating new concepts and metrics to be considered when calculating the parameter price, such as the share of imported goods in the cost of the good produced and the share of imported goods in the sale price of the good produced. Although the PRL60 methodology provided for in IN 243/02 was, in fact, more suitable for transfer pricing control (so much so that it was incorporated, with practically the same content, into Law 9.430/96 by Law 12.715/2012), it did not, at the time of the facts, find due support in the legal text then in force. There is therefore no need to speak of an omission, contradiction or obscurity in the judgment under appeal. In the present case, there is a clear absence of the defects provided for in art. 1.022 of the CPC, revealing, in truth, mere non-conformity on the part of the embattled party.” Click here for English Translation Click here for other translation EDARESP-511736-2023-05-17
Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 - 99

Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 – 99

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does not relate to the applicant’s contract manufacturing and has not demonstrated that it relates to any other activity, failing to identify any other specific activity relating to the allowance and the income generated from it. Nor is any such thing apparent from the applicant’s accounts, where the write-down of the impairment is booked in the area of contract manufacturing for a ‘related party’. The tax authorities and, consequently, the defendant, therefore, reached the lawful conclusion that the cost item of the asset impairment charge in the tax years under review was related to the applicant’s contract manufacturing activities and that there was therefore no objective reason for excluding it from the cost base when calculating the profitability indicator. The applicant did not incur any real expenditure either on the valuation difference or on the assets as such. It merely took over the assets from its predecessor and included the depreciation of the remaining assets in the calculation of its profitability, so that it acquired assets for which it would have had to pay the purchase price if it had bought them. There is no doubt that those assets generate income for the applicant and that, if sold, their residual value will be an expense and the sale itself will generate income. Therefore, the applicant’s argument that the amortisation of the valuation difference does not constitute, by its very nature, a real cost incurred in the transaction under assessment and is an exceptional item caused by the conversion carried out cannot be upheld. 52. The Regional Court agrees with the defendant’s views and considers it beyond doubt that the depreciation relates to the revaluation of assets whose transfer resulted from the project and was the substance of the spin-off and those assets are related to the contractual production. Thus, the revaluation of the assets was the result of the project and the difference in the revaluation of the assets and the subsequent depreciation of the revaluation of those assets could not have been influenced by the applicant. Nor did it determine its position as a manufacturer or that this activity was its only source of profit. The defendant’s view that the consequences of decisions taken by another company in the group cannot be passed on to the applicant and thereby reduce its profits by those items excluded from the cost base is lawful. In those circumstances, the costs in the form of depreciation on the difference in the revaluation of assets should be included in the calculation of the applicant’s profitability because of the relationship of that depreciation to assets related to the applicant’s production activities.” (…) “…The TNMM method was chosen as the profitability indicator and the net operating cost margin (NCPM) as the indicator. The resulting interquartile range, which the applicant considered to be market normal and to which it referred, was set between 2,14 % and 5,17 %. This analysis was accepted and relied upon by the tax authority, which concluded that the data obtained in the comparative analysis were sufficiently reliable and that the difference between the negotiated price and the normal price within the meaning of Article 23(7) of the ITA was demonstrated by the tax authority…. (…) 57. As is apparent from the foregoing, the defendant assumed that the sufficiently large sample of 56 comparable companies identified included companies with revalued assets. In the present case, the Benchmarking Analysis took into account a multi-year sample (2013 to 2015) of data on independent companies. The independent companies reflect the development of the market, whereby they register their assets in both historical and real valuation, acquire new technologies or technically upgrade their assets, etc. The defendant thus concludes that the data obtained in the Benchmarking Study is sufficiently reliable and that the difference between the agreed price and the normal price within the meaning of Art. § The tax administration fulfilled its burden of proof with regard to all the relevant facts (there is no dispute as to the proof of the transaction between the related parties) and by the Call for Evidence it shifted the burden of proof to the claimant, who did not satisfactorily prove the price difference in relation to the item of the write-down of the valuation difference, although it had sufficient time to do so. 58. The Regional Court agrees with the defendant’s conclusions thus expressed. The defendant has commented in detail on the comparative analysis submitted by the applicant and has given proper reasons why it considers it sufficiently reliable. The defendant has also dealt properly with the question of why it is necessary to determine a value at the mid-point between two extreme values in order to guarantee the best possible comparability, when it is appropriate to base the value on a mean trend in order to eliminate outliers or inaccuracies. The Regional Court was therefore unable to uphold the applicant’s plea that the defendant acted unlawfully by applying a profit margin at the level of the bottom quartile rather than at the level of the minimum resulting from the comparative analysis, that minimum being only 0.41 %. The applicant supports that argument by citing
Italy vs Autocentro Pavese S.R.L., April 2023, Supreme Court, Case No 10422/2023

Italy vs Autocentro Pavese S.R.L., April 2023, Supreme Court, Case No 10422/2023

Autocentro Pavese S.R.L., a company engaged in the purchase and sale of cars, had rented a showroom to another company with the same shareholding structure and director for a fee of only 5,000 euro per year. Following a tax audit an assessment of additional taxes was issued. The audit had resulted in several findings, one of which concerned the failure to issue invoices in accordance with market prices for renting of showrooms. The Court of Appeal upheld the assessment and an appeal was then lodged by Autocentro Pavese S.R.L. with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the judgement and dismissed the appeal of Autocentro Pavese S.R.L. “On the subject of the determination of business income, the deviation from the “normal value” of the transaction price pursuant to Article 9 of Presidential Decree No. 917 of 1986 may in fact be relevant, even for internal intra-group transactions, as a circumstantial element for the purpose of assessing the uneconomicity of the transactions from the standpoint of the lack of inherent nature of the excessive costs, or the possible (partial) concealment of the price in the case of excessively low profits. (Cass. Sec. 5 – , Judgment No. 16948 of 25/06/2019, Rv. 654388 – 02).” Click here for English translation Click here for other translation Italy vs Autocentro Pavese 10422-2023
Mauritius vs Innodis Ltd, February 2023, Supreme Court, Case No 2023 SCJ 73

Mauritius vs Innodis Ltd, February 2023, Supreme Court, Case No 2023 SCJ 73

Innodis granted loans to five wholly-owned subsidiaries between 2002 and 2004. The loans were unsecured, interest-free and had a grace period of one year. The subsidiaries to which the loans were granted were either start-up companies with no assets or companies in financial difficulties. The tax authorities (MRA) had carried out an assessment of the tax liability of Innodis Ltd in respect of the assessment years 2002 – 2003 and 2003 – 2004. In the course of the exercise, a number of items were added to the taxable income, including income from interest-free loans to subsidiaries and overseas passage allowances to eligible employees, which had been earmarked but not paid. The tax authorities were of the opinion that the grant of the interest-free loans was not on arm’s length terms in accordance with section 75 of the Income Tax Act 1995 (ITA) and was clearly preferential treatment of the subsidiaries. An assumed interest rate of 13% was applied to the loans, based on the market rate for loans made to Innodis for other purposes around the same time. Innodis Ltd appealed against the decision of the tax authorities to the Assessment Review Committee where all issues raised in the appeal were settled by agreement between the parties except those relating to the items of interest-free loans to subsidiaries and overseas passage allowances to employees. Innodis Ltd subsequently appealed to the Supreme Court. Judgement of the Supreme Court The Court dismissed the appeal of Innodis and upheld the decision of the Assessment Review Committee. Excerpt “With regard to the complaint of the appellant that the ARC wrongly accepted the application of “deemed interest” to assess the liability to tax as such notion has no legal basis, we note that the ARC clearly explained the expression “deemed interest” and its application. In that respect, the ARC observed that “deemed interest” is an expression commonly used in practice by the tax authorities and accountants to denote interest which a party should have claimed from another party if there had been no relationship between them. It also explained that the use of the expression of “deemed interest” was relevant since in the present case, in effect, the Appellant has been assessed on interest income, which it should have derived if it had been at arm’s length with its subsidiaries regarding the loans. It further observed that it is not correct to say that the assessment has no legal basis because it has always been the case for the MRA that this assessment is based on section 75 Income Tax Act 1995 and the term “deemed interest” was used in the heading to designate the nature of the amount assessed under section 75. We find no fault in the above reasoning of the ARC. As a matter of fact, we agree that, as found by the ARC, the assessment itself had a legal basis by virtue section 75, which empowers the Director General to do so if he is of the opinion that the transaction in question was not at “arm’s length.” Once this is done, it was necessary for the Director General to designate by an appropriate term the income that would have been derived if the transactions had been at “arm’s length.” Since the transactions targeted were loans, which in practice generate interests as income, there can be no wrong in designating the income that the applicant ought to have derived from them as “deemed interest”. Furthermore, as observed by the ARC, the concept of “deemed interest” is neither one invented by it or the respondent nor blatantly inappropriate since it is an expression used by the tax authorities and accountants to denote interest which a party should have claimed from another party if there had been no relationship between them. With regard to the application of the provisions under Part Vll of the Income Tax Act, particularly those under section 90, we note that in brushing aside the contentions of the appellant in that respect, the ARC made the following observations, with which we agree. Part VII concerns anti-avoidance provisions and section 90 relates to transactions designed to avoid liability to Income Tax. The MRA had decided to base its case on section 75 or the Income Tax Act as it was entitled to and to the extent that section 75 imposes on domestic companies an obligation to deal with subsidiaries at arm’s length, it is irrelevant whether section 90 could also have been applicable. It is therefore correct to say, as the ARC observed, that even if section 90 would have been applicable, it does not mean that the Director General was bound to apply section 90 or that section 75 was wrongly relied upon. Therefore, there is no substance in the appellant’s contention that the ARC was wrong to have discarded and failed to properly address its mind to the application of section 90 of the Income Tax Act 1995 and the arm’s length principle which is enunciated therein. For all the above reasons, the present appeal cannot succeed. We accordingly dismiss it with costs.” Click here for other translation Mauritius vs Innodis Ltd 2023 SCJ 73
Italy vs Arditi S.p.A., December 2022, Supreme Administrative Court, Case No 37437/2022

Italy vs Arditi S.p.A., December 2022, Supreme Administrative Court, Case No 37437/2022

Arditi S.p.A. is an Italian group in the lighting industry. It has a subsidiary in Hong Kong which in turn holds the shares in a Chinese subsidiary where products are manufactured. Following an audit the tax authorities held that the entities in Hong Kong and China had used the trademark owned by the Italian parent without paying royalties, and on the basis of the arm’s length principle a 5% royalty was added to the taxable income of Arditi S.p.A. Arditi appealed against this assessment alleging that it had never received any remuneration for the use of its trademark by the subsidiary, and in any case that the tax authorities had not determined the royalty in accordance with the arm’s length principle. The Court of first instance upheld the appeal of Arditi and set aside the assessment. An appeal was then filed by the tax authorities. The Court of Appeal set aside the decision of the Court of first instance finding the assessment issued by the tax authorities regarding royalties well-founded. An appeal was then filed by Arditi with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court dismissed the appeal of Arditi and upheld the decision of the Court of Appeal and thus the assessment of additional royalty income issued by the tax authorities. Excerpts “1.1. The plea is unfounded. In fact, it should be recalled that “On the subject of the determination of business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence of “transactions” between related companies at a price apparently lower than the normal price, while it is the taxpayer’s burden, by virtue of the principle of proximity of proof pursuant to art. 2697 of the Civil Code and on the subject of tax deductions, the onus is on the taxpayer to prove that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, thus not excluding the usability of other means of proof” (Cass. 19/05/2021, n. 13571). Now, the use of a trade mark must be presumed not to have a normal value of zero, which can also be expressed, as the judgment under appeal does, by the exceptionality of the relative gratuitousness. This places the onus on the taxpayer to prove that such gratuitousness corresponds to the normal value, that is, to the normality of the fact that such use takes place without consideration.” (…) “3. The third plea alleges failure to examine a decisive fact, in relation to Article 360(1)(5) of the Code of Civil Procedure, since the appeal judges failed to assess the circumstance that a large part of the production of the Chinese subsidiary was absorbed by the Italian parent company. 3.1. This plea is inadmissible, since with it the taxpayer tends to bring under this profile the examination of the exceptional nature of the gratuitousness of the use of the mark, held by the CTR. In fact, the latter was well aware of the null value of the consideration for the use of the trade mark, while the fact that the trade mark itself was the subject of co-use was expressly taken into consideration by the appellate court, and the fact that its transfer free of charge in any case corresponded to a ‘valid economic reason’, constitutes a mere deduction, whereas the failure to mention the circumstance that the majority of the Chinese company’s transactions were directed to another subsidiary (this time a Brazilian one), without entering into the merits of its relevance, constitutes at most an aspect concerning the assessment of a single element of the investigation, which cannot be denounced under the profile under examination (Cass. 24/06/2020, n. 12387).” Click here for English translation Click here for other translation Italy vs Arditi SPA 20221221 n37437
Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors. An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant mark-up of 11.11 per cent, while in direct sales to end customers it had applied a mark-up of 32 per cent and in sales to dealers a mark-up of 25 per cent, 22 per cent and 20 per cent in the various years, and pointed out that these prices were perfectly comparable, since the products were of the same type, under conditions of free competition and at the same marketing stage; pointed out that the resale price criterion also corroborated these results as well as the profit comparison method, finding that Prinoth, in the years from 2007 to 2011, had suffered losses of approximately €4 million while the subsidiaries had made profits of approximately €20 million, which was not consistent with the choices of an independent operator Finally, the Court did not accept Prinoth’s defence that, due to the particular nature of the products and the marketing methods used, the only appropriate method was the cost-plus method, which was accepted by the first judges but not accepted because it led to completely different results, due to the erroneous data used, because in the master files and local files made available by Prinoth, the costs not relating to production were arbitrarily allocated. These considerations led it to conclude that the company had not met its burden of proof.” Prinoth S.p.A then filed an appeal with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court found the reasoning of the regional court lacking and remanded the case back to the Court in a different composition. Excerpt “5. On the other hand, the second and third pleas, to be dealt with together, are well founded. In fact, the aforementioned ruling is entirely anapodic, failing to explain in any way the reasons why the numerous and unambiguous factual elements, represented by the taxpayer company and already relied on in the judgments at first instance, have no impact on the concrete possibility of referring to them for the purpose of identifying the normal value in accordance with the criterion of the price comparison method, being instead potentially capable of affecting the actual comparability of the transactions. The company had in fact deduced, in support of the unusability of the price comparison criterion, and on the basis of its own use of the different cost-plus criterion, that in the intra-group transfers Prinoth did not carry out all the marketing, sales and after-sales activities, as well as after-sales assistance, entrusted to the subsidiaries; and, secondly, that of the risks, that in the intra-group transfers the subsidiaries took upon themselves the risks of inventory, fluctuations in the costs of raw materials and interest rates. Well, the judge cannot, when examining the arguments of the parties or the facts of evidence, limit himself to stating the judgement in which their assessment consists, because this is the only “static” content of the complex motivational statement, but he must also engage, all the more so in a complex case, in the description of the cognitive process through which he passed from his situation of initial ignorance of the facts to the final situation constituted by the judgement, which represents the necessary “dynamic” content of the statement itself (Cass. 20/12/2018, no. 32980; Cass. 29/07/2016, no. 15964; Cass. 23/01/2006, no. 1236). And such an anapodic and generic statement also results in a violation of the OECD Guidelines that allow the application of the price comparison method only in the presence of effectively comparable transactions, otherwise the necessary adjustments must be made. And for the purposes of the comparability of transactions, as seen above, the functions performed by the undertakings and the allocation of risks between the contractual parties play a decisive role, together with the identity of the product, which are capable of affecting the price of the transaction. The second and third pleas must therefore be upheld.” Click here for English translation Click here for other translation Italy vs Prinoth SPA 20221213 2022 n 36275

Germany vs “Import GmbH”, October 2022, FG München, Case No 14 K 588/20

The customs value declared by “Import GmbH” of the goods imported from related parties X, Y and Z was in dispute. In the course of a customs audit, the customs office (Hauptzollamt, HZA) found that Y had invoiced “Import GmbH” for subsequent debit amounts of EUR (…) for 2015, EUR (…) for 2016 and EUR (…) for 2017. These were based on a Distribution Agreement of (…) concluded between “Import GmbH” and Y, according to which “Import GmbH” undertook to purchase products from the latter and to sell them in the defined distribution area. With the 1st Supplementary Agreement of (…), supplies from affiliated companies of the group company were also included in this agreement and thus, inter alia, also the supplies from Z. With the second supplementary agreement of the same date, it was stipulated that “Import GmbH” should receive an “agreed margin” which was described as customary for third parties. According to the agreement, the margin resulted from the rolling three-year average of the arm’s length ranges, which were determined on the basis of database analyses for returns on sales of comparable companies. For the period at issue here, the database analysis determined an arm’s length range for returns on sales and Y determined a margin of 1.93% from this range, which was within the arm’s length range for returns on sales of comparable companies. In fact, “Import GmbH” achieved returns on sales of 23.24% (2014/2015), 26.24% (2015/2016) and 28.49% (2016/2017) by reselling the products in the (…) business unit. During the year, “Import GmbH” received invoices for the delivered goods, which had already been reduced in advance by a calculated deduction from the list price, namely the so-called “agreed margin”. “Import GmbH” declared these transfer prices paid during the year as the basis for determining the customs value in the customs declarations. Since the double-digit returns on sales actually achieved in the business years 2015 to 2017 were considerably higher than the agreed margin and thus, in the opinion of the customs office, not at arm’s length, “Import GmbH” was charged subsequent debit amounts of EUR (…) to EUR (…) (…). According to the customs office, the unusually high profits were only possible because the transfer prices during the year had been calculated too low. The returns on sales achieved had been adjusted within the group to the margin of 1.93%, so that the aforementioned subsequent debit amounts had been determined on this basis and charged to “Import GmbH” with debit notes or paid by the latter. On the basis of the facts established, the customs office came to the conclusion that the customs values originally declared during the year had to be increased by correction factors (1.34 for the years 2014 and 2015 and 1.44 for the years 2016 and 2017) in order to determine the correct customs value for the import goods. It therefore subsequently assessed a higher duty of EUR (…) (based on a correction factor of 3.88) for the goods imported in November and December 2014 by import duty notice of 26 October 2017, which it reduced to EUR (…) (based on a correction factor of 1.34) in the opposition decision of 4 February 2020 following “Import GmbH”‘s objection. An appeal was filed by “Import GmbH”. Judgement of the Finanzgericht The Court upheld the appeal of “Import GmbH”. Excerpts “52 If the customs value is determined using the closing method, as the HZA assumes on the basis of the connection and the existing price influence, the time of importation must in principle also be taken into account with regard to the other appropriate methods to be used, according to the opinion of the BFH in the above-mentioned ruling of 17 May 2022 (marginal no. 45). 53. It follows from this, according to the BFH in its judgment of 17 May 2022 (marginal no. 49), that the dictum of the BFH of 17 May 2022 is not applicable. 49), that the dictum of the ECJ, according to which the CC does not permit the customs value to be based on an agreed transaction value that is composed partly of an amount initially invoiced and declared and partly of a lump-sum adjustment after the end of the accounting period, without it being possible to say whether this adjustment will be upward or downward at the end of the accounting period, is also decisive for the determination of the customs value according to the final method pursuant to Article 31 CC. 54. If it was not clear at the time of the customs declaration whether an adjustment would have to be made at all at the end of the accounting period and whether, if this was the case, it would have to be made upwards or downwards, then the value of the goods determined in this way – or actually still to be determined after the end of the accounting period – at the time of the customs declaration was not relevant within the meaning of Article 8(3) of the Convention on the Implementation of Article VII of the General Agreement on Tariffs and Trade. VII of the General Agreement on Tariffs and Trade of 1994. 55. The burden of proof in the case of subsequent recovery lies with the HZA. The latter must explain and, if necessary, prove that or to what extent duties have been assessed too low. If this proof cannot be provided, a subsequent levy is excluded. 56. On the basis of these legal principles, the conditions for the subsequent levy based on Article 101 or Article 105 (2) and (3) of the CCC are not met in the present case. The HZA did not prove that the customs debt paid by the applicant had to be assessed higher at the time of the acceptance of the respective customs declaration. 57. The parties initially determined the customs value on the basis of the prices invoiced to the applicant during the year in accordance with Article 29 CC/CCC using the transaction value method.
Germany vs "H-Customs GmbH", May 2022, Bundesfinanzhof, Case No VII R 2/19

Germany vs “H-Customs GmbH”, May 2022, Bundesfinanzhof, Case No VII R 2/19

H-Customs GmbH – the applicant and appellant – is a subsidiary of H, Japan. In the period at issue, from 17 October 2009 to 30 September 2010, H-Customs GmbH imported more than 1,000 consignments of various goods from H, which it had cleared for free circulation under customs and tax law at the defendant HZA (Hauptzollamt – German Customs Authorities). H-Customs GmbH declared the prices invoiced to it by H Japan as the customs value. Some of the imported articles were duty-free; for the articles that were not duty-free, the HZA imposed customs duties of between 1.4 % and 6.7 % by means of import duty notices. In 2012, H-Customs GmbH applied to the HZA for a refund of customs duties for the goods imported during the period at issue in the total amount of… €. It referred to an Advance Pricing Agreement (APA) concluded between it and H for transactions in the tax field and stated that the adjustments to the transfer prices carried out on the basis of the APA had not been taken into account when declaring the goods for customs clearance and that it was now doing so. The APA had already been concluded in 2009 as part of a mutual agreement procedure under the agreement between the Federal Republic of Germany and Japan for the avoidance of double taxation with regard to taxes on income and certain other taxes. The Federal Central Tax Office and the local Tax Office had approved the APA. The customs authorities had not been involved. The APA covered the sale of end products and components from H Japan to H-Customs GmbH as well as other business transactions related to the trade in goods. On the basis of the APA, transfer prices were determined for certain business transactions. In the process, H initially invoiced H-Customs GmbH a certain amount for each of the goods it supplied. The sum of these amounts was reviewed after the end of the business year and, if necessary, corrected in favour of or to the detriment of H-Customs GmbH. In this way it was to be ensured that the transfer prices stood up to an arm’s length comparison. For this purpose, the German and Japanese authorities involved chose the so-called residual profit split method at the request of H-Customs GmbH and with reference to point 3.19 of the transfer pricing principles of the Organisation for Economic Cooperation and Development. According to this method, the combined profit of H-Customs GmbH and H Japan from the audited intra-group transactions was split in two stages. In a first stage, each party was first allocated a sufficient profit to achieve a minimum return. As a starting point, the returns on sales routinely achieved by comparable companies with similar operating profiles were used. In order to calculate the routine profit to be allocated, the full cost mark-up was used as profit indicators for H and the return on sales for the applicant. After apportioning the routine profit, in a second step the remaining residual profit was apportioned proportionally according to the profit apportionment factors. After determining the routine profit and the residual profit, the target range of the applicant’s return on sales (operating margin) was set. If the applicant’s actual profit was outside the target range, the profit was adjusted to the upper or lower limit of the target range and credits or debits were made to the applicant. H-Customs GmbH’s return on sales was below the target range set out in the APA. For this reason, H-Customs GmbH and H Japan adjusted the transfer prices after the end of the accounting period for 2009/2010 by way of a credit note in the amount of … €. The report of the Main Customs Office Cologne, Federal Customs Valuation Office, to which the Fiscal Court (Finanzgericht, FG) refers in the contested judgment, states that the amount had been allocated to various product groups on the basis of an allocation key; there had been no explanation of the individual product groups. The apportionment formula applied had been specified by H; the applicant was not aware of the basis on which H had determined this apportionment formula. H-Customs GmbH had calculated the duty to be refunded in its view by reducing the sum of all original customs values by the amount of the adjustment from the APA and then applying an average duty rate of 1.02% rounded up to the original or the adjusted customs value. The refund amount sought by the applicant resulted from the difference between the two values determined in this way. H-Customs GmbH did not allocate the adjustment amount to the individual imported goods. In its decision of 4 June 2014, the German Customs Authorities rejected the refund application on the grounds that the method chosen by the applicant in the form of a global correction of the total price was not compatible with Article 29(1) of the Customs Code in conjunction with Article 144 of the Implementing Regulation. Article 144 of the Customs Code Implementing Regulation (CCIP). Due to the fact that the amount of the adjustment was not broken down by product, it was ultimately not possible to clarify and prove to which specific import goods the adjustment exactly related and in what amount it was to be made for them. By decision of 2 July 2015, the German Customs Authorities rejected H-Customs GmbH’s objection as unfounded. An appeal was then filed by H-Customs GmbH with the Tax Court. In a judgement issued in 2019 the appeal was dismissed and the assessment of the German Customs Authorities upheld. An appeal was then filed with the Bundesfinanzhof Judgement of the Bundesfinanzhof The Court dismissed the appeal as unfounded and upheld the decision of the Tax Court. Excerpts “The contested decision by which the HZA refused to refund the import duties sought by the plaintiff is lawful (§ 101 sentence 1 FGO). The applicant is not entitled to a refund of part of the duty it paid under the first
Italy vs Vincenzo Zucchi Spa, May 2022, Supreme Court, Cases No 13718/2022

Italy vs Vincenzo Zucchi Spa, May 2022, Supreme Court, Cases No 13718/2022

Vincenzo Zucchi spa is an Italian company that operates in the textile sector. Following an audit an assessment was issued related to various controlled transaktions – deductions for bad debt, deductions for costs, lack of income on a loan, income from sale of goods to foreign subsidiaries, cost of goods and services purchased from subsidiaries in non EU countries, costs of employees VAT etc. The adjustment was partially upheld and partially dismissed by the Court of Appeal. An appeal and cross appeal was then filed with the Supreme Court by the tax authorities and Vincenzo Zucchi. Among the objections in the cross appeal filed by Vincenzo Zucchi was a claim stating that transfer pricing rules were not applicable in the case since the group was using global tax consolidation. Judgement of the Supreme Court The Supreme Court upheld the second plea in the main appeal (undue deduction of costs charged by the subsidiary Basitalia Leasing S.p.A.), rejecting all the other pleas in the main appeal and the cross-appeal. The judgment under appeal was set aside in relation to the upheld plea, and referred back to the CTR for reconsideration and also for the costs of these proceedings. In regards to the second plea in the appeal on deduction of costs based on an unauthenticated private contract “The tax appeal court based its decision on the point in question essentially on the use of a document that was unquestionably unregistered, therefore devoid of a certain date, and not even signed by the taxpayer company. As regards the first aspect, it is clear that Article 2704, paragraph 1, of the Italian Civil Code has been infringed, since it is documentary evidence that cannot be relied upon by the tax office precisely because of the lack of the “certainty” requirements provided for by such legislative provision (see Section 5, Sentence no. 7636 of 31 March 2006, Rv. 588675 – 01). In addition, the failure of the taxpayer company to sign the contract also makes the correlative contractual obligation uncertain and, in the final analysis, invalidates the judgment of the Lombardy Regional Tax Court in so far as it entails a misapplication of Article 109(1) of Presidential Decree 917/1985, with particular regard to the “certainty/determinability” of the negative income component in question.” In regards to the plea in the cross appeal on global tax consolidation “It is rather evident that these are autonomous legal provisions, which in their literalness do not contain direct elements of connection/coordination. This leads to the systematic hermeneutical solution that, in the case of intra-group sales of goods or services, taxation at “normal value” is not affected by the establishment of the so-called unified tax group, or, even better, that the unification of the income statement of the companies belonging to a group opting for the (global) consolidation, according to the logic of the algebraic sum of individual corporate income, is based on the prior – autonomous determination of the same according to the general rules. Moreover, investigating the rationale of the domestic rules on transfer pricing, this Court has repeatedly ruled, with a clearly prevailing orientation, that it should not be found in anti-avoidance purposes, but in those of preventing distortion of free competition and preserving the tax power of the EU member states (ex pluribus, in this sense, see Cass., 1232/2021, 16948/2019, 9673/2018, 18392/2015).” “Concluding on the decision points under examination, it is appropriate to formulate the following principle of law: “The rules on transfer pricing under Article 11O, paragraph 7, in relation to Article 9, paragraph 3, Presidential Decree 917/1986 and the “global tax consolidation” under 130, ss., Presidential Decree 917/1986 are distinct and autonomous, so that they do not interfere with each other and must be applied separately, since the effects of the option for group taxation are limited by the specific provision of Article 131 of the same TU.” Click here for English translation Click here for other translation Italy_20220502_Case no 13718
Poland vs M.P. sp. z o.o., March 2022, Administrative Court, Case No I SA/Bd 30/22

Poland vs M.P. sp. z o.o., March 2022, Administrative Court, Case No I SA/Bd 30/22

The Administrative Court found that a voluntary redemption of shares was not a controlled transaction covered by arm’s length provisions. A redemption is a corporation’s repurchase of all or a portion of the shares held by a shareholder at an amount not in excess of the amount stated in the articles or calculated according to a formula stated in the articles. A redemption of shares can only take place between a company and its shareholders. Hence, terms and pricing of the transaction cannot be determined based on unrelated transactions. The purpose of the redemption of shares is not to modify the amount of income achieved by the related parties by applying a non-arm’s length price. Click here for English Translation Click here for other translation Poland case I SA_Bd 30_22 - Wyrok WSA w Bydgoszczy z 2022-03-22
Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

By judgment of 13 March 2020, the Provincial Administrative Court upheld the complaint filed by K.O. and revoked a decision issued by the tax authorities on the determination of the amount of the tax liability resulting from a transfer of shares between K.O. and a related party in 2016. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that Provincial Administrative Court incorrectly had concluded that the nominal value of shares taken up by a taxpayer is not subject to market mechanisms and, therefore, the authority should not question the revenue thus generated. According to the tax authorities the taxpayer effected a transaction with a related entity of which it was the owner and determined without justification a contribution in-kind disproportionately high in relation to the shares acquired in the related entity, while the authority, taking these circumstances into account, determined a comparable uncontrolled price that the taxpayer would have obtained in exchange for the transfer of shares in I. to an unrelated entity, verifying the proportion of the distribution of the value of the non-cash contribution in line with the purpose and function of the transfer pricing provisions Judgement of the Supreme Administrative Court The court dismissed the appeal of the tax authorities and upheld the decision of the Administrative Court. Excerpts “The taxable income in the case of taking up shares in a company in exchange for a contribution in kind in 2016 was the nominal value of such shares and not their market value, determined in any way. The court of first instance rightly emphasises that the nominal value cannot be verified. This view is also confirmed by the established judicature of the Supreme Administrative Court, which may be exemplified by the judgments of this Court: of 19 April 2006, ref. no. II FSK 558/05; of 8 December 2009, ref. no. II FSK 1149/08; of 22 May 2013, ref. no. II FSK 1838/11, or the judgments quoted above concerning the issue of application of provisions on transfer prices, which is already disputed in the case.” … “If a share is taken up at a price higher than its nominal value, the surplus of the share subscription price over its nominal value is transferred to the supplementary capital. There is no doubt that in a limited-liability company reserve capital may also be created (this follows from the wording of Article 233 § 1), but the wording of Article 154 § 3 determines that at the moment of covering the share the agio must be transferred to the reserve capital, and only secondarily may it be transferred (pursuant to a separate resolution of the shareholders’ meeting) to the reserve capital in whole or in part. The share premium is permissible irrespective of whether the shares are covered by a contribution in kind or by a cash contribution. There are no legal and accounting counter-indications that a certain part of the value of the in-kind contribution made to the company should be allocated not to the share capital, but to the supplementary or reserve capital.” … “The Supreme Administrative Court sitting in judgment does not share the view expressed in the appealed judgment that in the absence of legal definitions of transfer pricing concepts, one should refer to colloquial language. The institution of transfer pricing is primarily applicable to cross-border relations. It is subject to international regulations, its application results in the necessity of adjusting income of each party to the transaction, belonging to different tax jurisdictions. Reference in previous case-law, including in the judgment under appeal, to the dictionary meaning of the Polish language and equating the concept of a ‘transaction’ with an ‘agreement’ is unsupported by the interpretation of the transfer pricing provisions. That institution applies mainly to cross-border transactions within multinational enterprises. It is permissible to refer to the meaning of colloquial language in the course of an interpretation, but only if the meaning of the words used by the legislator cannot be deduced either from legal language or from legalese. In addition, given the international character of transfer pricing, the terms related to it should be understood universally.” “The parity (proportion) of the distribution of the value of the in-kind contribution to the company’s capitals is therefore neither a financial result nor a financial indicator within the meaning of the above concepts.” … “In summary, in the opinion of the Supreme Administrative Court, the subject of transactions between related parties covered by transfer pricing in 2016 could be: tangible and intangible goods, tangible and intangible services (including financial services), joint ventures, restructuring activities as described in Chapter 5a of the Regulation of the Minister of Finance of 2009. The division of the in-kind contribution made by a natural person into the capital of the company did not constitute the subject of the transaction within the meaning of the transfer pricing regulations.” Click here for English Translation Click here for other translation II FSK 1544_20 - Wyrok NSA z 2022-02-11
Poland vs A. Sp. z o. o., February 2022, Supreme Administrative Court, Case No II FSK 1475/19

Poland vs A. Sp. z o. o., February 2022, Supreme Administrative Court, Case No II FSK 1475/19

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. In March 2019 the Administrative Court dismissed the complaint of A. Sp. z o.o. and sided with the tax authorities. An appeal was then filed by the company with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The court dismissed the appeal and upheld the decision of the Administrative Court. Guidance on the understanding of the notion of “transaction”, was published by Polish Ministry of Finance in December 2021. Click here for English Translation Click here for other translation II FSK 1475_19 - Wyrok NSA z 2022-02-03
Belgium, December 2021, Constitutional Court, Case No 184/2021

Belgium, December 2021, Constitutional Court, Case No 184/2021

By a notice of December 2020, the Court of Appeal of Brussels referred the following question for a preliminary ruling by the Constitutional Court : “ Does article 207, second paragraph, ITC (1992), as it applies, read together with article 79 ITC (1992), in the interpretation that it also applies to abnormal or gratuitous advantages obtained by a Belgian company from a foreign company, violate articles 10, 11 and 172 of the Constitution? “. The Belgian company “D.W.B.”, of which Y.S. and R.W. were the managers, was set up on 4 October 2006 by the Dutch company “W.”. On 25 October 2006, the latter also set up the Dutch company “D.W.” On 9 November 2006, bv “W.” sold its shareholdings in a number of subsidiaries of the D.W. group to its subsidiary nv ” D.W. “. It was agreed that 20 % of the selling price would be contributed by e.g. “W.” to the capital of the latter and that 80 % would be converted into a five-year interest-bearing loan between e.g. “W.” and “D.W.”. On 16 March 2007 the capital of “D.W.B.” was increased. This increase in capital was achieved by a contribution in kind by “W.”. of its claim against nv “D.W.” by virtue of the aforementioned loan. The contribution of the claim was partly booked in the account “Kapital” and partly on the account “Issuance premiums”, which were not available. On 17 March 2007, “W.” sold all its shares in ” D.W.B. ” to the “D.W.” On 31 August 2009, “D.W.B.” was put into liquidation and the liquidation was completed. Y.S. and R.W. were the liquidators. Pursuant to the loan agreement, the interest from “D.W.” to “D.W.B.” was not to be paid until 8 November 2011. In accordance with the accounting principle of accrual, according to which costs and revenues must be allocated to the period to which they relate, “D.W.B.” added the annual interest, due by the ” D.W. ” on 31 December 2007, 31 December 2008 and 31 August 2009, to its profit and loss account and to its amounts receivable after more than one year in its accounts on 31 December 2007, 31 December 2008 and 31 August 2009. It declared the amounts of interest in its returns for the assessment years 2008, 2009 and 2009 special, in which it then applied the deduction for risk capital (code 103). The tax administration rejected the aforementioned deductions for risk capital with application of Article 207(2) of the Income Tax Code 1992 (hereinafter: CIR 1992), as applicable for the assessment years 2008 and 2009. According to the administration, the capital on which “D.W.B.” wanted to make the deduction for risk capital comes from a transaction obtained under abnormal circumstances and which is not justified by economic objectives, but only by tax objectives. A tax increase of 10 pct. was applied. Y.S. and R.W. lodged an administrative appeal against that decision, but it was rejected by the regional director. Thereupon, Y.S. and R.W. filed a claim with the Dutch-speaking Court of First Instance in Brussels. By judgment of 18 November 2014, the Court dismissed the claim as unfounded. Y.S. and R.W. subsequently lodged an appeal with the Court of Appeal of Brussels. The court ruled that the interest on the intra-group loan was at arm’s length and that the contribution in kind to “D.W.B.” constituted a transaction with an actual quid pro quo, but that it was acquired in the context of transactions which cannot be explained by reference to economic objectives, but only by reference to the fiscal purpose of the deduction for risk capital. However, Y.S. and R.W. argue that the application of Article 207(2) (now Article 207(7)) of the CIR 1992 to the benefits obtained from a foreign company is contrary to the constitutional principle of equality. The Court of Appeal of Brussels therefore decided to raise of its own motion the above question. Judgement of the Constitutional Court The Constitutionals Court’s answer to the question is that “Article 207 of the Income Tax Code 1992, read in conjunction with Article 79 of that Code, as applicable for the assessment years 2008 and 2009, does not violate Articles 10, 11 and 172 of the Constitution.” Click Here for English Translation Click here for other translation Belgium Arrest van het Grondwettelijk Hof 161221 184-2021
Poland vs R.B.P. (P.) Sp. z o.o.., August 2021, Supreme Administrative Court, Case No II FSK 3830/18

Poland vs R.B.P. (P.) Sp. z o.o.., August 2021, Supreme Administrative Court, Case No II FSK 3830/18

The company is a producer of household chemicals and belongs to the R. B. (“the Group”), which is active in the manufacture and sale of consumer products in the home, health and hygiene products industry. The Company has entered into supply agreements for the goods it produces with Group companies. On the basis of the agreements, the Applicant sells goods produced by it to entities of the Group indicated by R. A. h. Companies and to R.B. [E.] B.V. The remuneration of the Polish company was determined based on a target margin – and if the profits were below or above the target margin, an invoice was issued subtracting or adding income to arrive at the target income. The tax authorities held that the quarterly “Transfer Pricing-adjustment” was not a transfer in regards of VAT. The company then filed a request for a individual interpretation (binding ruling), which was rejected by the authorities. A complaint was filed by the company to the Court of first instance, where the decision of the tax authorities was set aside. The tax authorities then filed an appeal to the Supreme Administrative Court. The tax authorities requested that the appealed decision be reversed in its entirety, that the Company’s complaint be examined and dismissed, or alternatively, in the event that the merits of the case are not sufficiently clarified, hthat the appealed decision be reversed in its entirety and the case be referred back to the Court of First Instance for re-examination. Judgement of the Supreme Administrative Court The Court decided in favour of the tax payer. “In the Company’s view, the issue requiring interpretation referred only to the question of the moment of making the correction, and not to the correctness of the adopted model for correcting income. Therefore, the Court of First Instance rightly pointed out that the prerequisites referred to in Article 165a of the Tax Code relating to the lack of possibility to institute proceedings were not exhausted in the case because the phrase “proceedings may not be instigated” used in Article 165a § 1 of the Tax Code should be referred to the C In view of this, the allegation of a violation of Article 145 § 1 (1) (c) of P.p.s.a. in conjunction with Article 165a § 1 and in conjunction with Article 14h and 14b § 1 of the Code of Civil Procedure should be deemed unjustified. ” … As already indicated above, the mechanism of “profitability” adjustment is in the case under consideration an assumption of factual nature and as such does not require the interpretation authority to confirm the correctness of its application by the Company.” ” Click here for English Translation Click here for other translation Poland-Supreme-Court-II-FSK-3830_18-Wyrok-NSA-z-2021-08-12
France vs SA Compagnie Gervais Danone, June 2021, CAA, Case No. 19VE03151

France vs SA Compagnie Gervais Danone, June 2021, CAA, Case No. 19VE03151

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the administrative court. In a decision of 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed to Administrative Court of Appeal by the tax authorities. Judgement of the Court The Administrative Court of Appeal decided in favor of the tax authorities and annulled the decision of the administrative court. Excerpts from the Judgement “Firstly, it appears from the investigation that SA Compagnie Gervais Danone entered in its accounts for the financial year ending in 2011 a subsidy recorded under the name “loss compensation Danone Tikvesli”, paid to its Turkish subsidiary facing financial difficulties characterised by a negative net position of almost 40 million euros as at 31 December 2010, a deficit situation incompatible with Turkish regulations. The deductibility of this aid was allowed, in proportion to the 22.58% stake held by SA Compagnie Gervais Danone in this company. In view of the relationship of dependence between the applicant company and its beneficiary subsidiary, it is for SA Compagnie Gervais Danone to justify the existence of the consideration it received in return. In order to justify its commercial interest in taking over the whole of the subsidy intended to compensate for its subsidiary’s losses, Compagnie Gervais Danone argues that it was imperative for it to remain present on the Turkish dairy products market, a strategically important market with strong development potential, in order to preserve the brand’s international reputation, and that it expected to receive royalties from its subsidiary in a context of strong growth. However, the 77.48% majority shareholder, Danone Hayat Icecek, a company incorporated under Turkish law and wholly owned by Holding Internationale de boisson, the bridgehead company of the Danone group’s ‘water’ division, had an equal financial interest in preserving the brand’s reputation, so that this reason does not justify the fact that the cost of refinancing Danone Tikvesli had to be borne exclusively by SA Compagnie Gervais Danone. Although the applicant company relies on the strategic importance of the Turkish dairy products market, having regard to Turkish eating habits, its population growth, the country’s GDP growth rate and its exports to the Middle East, the extracts from two press articles from 2011 and 2015 and the undated table of figures which it produces in support of that claim do not make it possible to take the alleged growth prospects as established. Moreover, these general considerations are contradicted, as the administration argues, by the results of the exploitation by Danone Tikvesli of its exclusive licence contract for the production and distribution of Groupe Danone branded dairy products, since it is common ground that SA Compagnie Gervais Danone, which had not received any royalties from its subsidiary since the acquisition of the latter in 1998, did not benefit from any financial spin-off from this licensing agreement until 2017, the royalties received since 2017, which in any case are subsequent to the years of taxation, being moreover, as the court noted, out of all proportion to the subsidy of more than 39 million euros paid in 2011. In these circumstances, the tax authorities must be considered as providing evidence that, as the expected consideration was not such as to justify the commercial interest of SA Compagnie Gervais Danone in granting this aid to Danone Tikvesli, this subsidy constituted, for the fraction exceeding its shareholding, an abnormal act of management constituting a transfer of profits abroad within the meaning of Article 57 of the General Tax Code.” “It follows from the foregoing that the Minister for the Economy, Finance and Recovery is entitled to maintain that it was wrongly that, by the contested judgment, the Montreuil Administrative Court discharged SA Compagnie Gervais Danone from the taxes in dispute. It is therefore appropriate to annul the judgment and to make SA Gervais Danone liable for these taxes.” Click here for English translation Click here for other translation France vs Danone June 2021 Case No 19ve03151
Arm's Length Principle
Uganda vs Bondo Tea Estates Ltd. March 2021, Tax Appeals Tribunal, Case no. 65 of 2018

Uganda vs Bondo Tea Estates Ltd. March 2021, Tax Appeals Tribunal, Case no. 65 of 2018

In this ruling Bondo Tea Estates Ltd. challenged an adjustment made by the tax authorities to the price at which green leaf tea was supplied by the applicant to Kijura Tea Company Limited, a related party. The ruling also concerns disallowance of an assessed loss of Shs. 220,985,115. Bondo Tea Estates Ltd. is an out grower of tea which it supplies to an associated company, Kijura Tea Company Limited. In 2018, the tax authorities conducted an audit for FY 2016/2017 which purportedly revealed that the company had under declared its sales (price of 320 compared to range of 500-700) and that it had unreconciled retained earnings and current liabilities. On that basis the tax authorities adjusted the price of the related party transactions and issued an assessment of Shs. 544,409,110 of which Shs. 174,409,650 was principal income tax, Shs. 348,819,302 penalty and Shs. 20,929,158 interest. Bondo Tea Estates Ltd. did not agree with the assessment and filed an appeal with the Tax Appeals Tribunal where the following issues were set down for determination. Whether there was under-declaration of sales by the applicant to the respondent for the financial year ending 31stMarch 2017? Whether the average price adjustment by the respondent is in conformity with the law? Whether there was loss incurred by the applicant for the year ending 31stMarch, 2017 which was not recognized by the respondent? What remedies are available to the parties? Judgement of the Tax Appeals Tribunal The tribunal allowed the appeal of Bondo Tea Estates Ltd. and set aside the assessment issued by the tax authorities in regards of transfer pricing. Excerpt “The question the Tribunal has to ask itself, was the price set by the applicant and its associate, Kijura Tea Company limited, one that could be considered as one between unrelated parties?   In order to understand whether the applicant’s price to Kijura Tea Company was at arm’s length one has to ask how was the price set? The minutes of a tea stakeholders meeting of 7th January 2015 at Toro Club, Fort Portal, exhibit A5 show that it was attended by representatives of all the major green leaf buyers, namely; Mpanga Growers Tea Factory, Kijura Tea Company, Mabale Growers Tea Factory, Rusekere Growers Tea Factory and others. The meeting agreed to reduce the price of green leaf from the current Shs. 350 per kg to Shs, 280 per kg with effect from 16th January 2016 due to the fall in prices at the auction market. The meeting also reduced transport cost from Shs. 100 to Shs. 80 per kg of green leaf. The meeting resolved that stakeholders using the services of transporters should ensure that the prices offered to farmers did not exceed Shs. 280 per kg. By April 2016, 14 months after the price was fixed by the tea factories, the applicant was selling Shs. 320 per kilogram, an increment of Shs. 40. The price of the applicant was above the price set by the different stakeholders. It would have been a different matter if the price was below that set by the stakeholders. One cannot say the applicant’s price to Kijura Tea Company was not at arm’s length.   Further the applicant contended that its price did not include transport charges which varied from where the out growers came from. The applicant contended that the respondent did not state whether the Shs. 500 per kilogram paid to out growers included transport costs. The field report the respondent conducted was on 12th September 2018. The income tax period in issue is April 2016 to March 2017. The prices of tea is not static. One cannot use the price of tea in September 2018 to ascertain the price from April 2016 to March 2017. The prices at the auction market in September 2018 may have increased.  The said inspection report is not signed. Furthermore it does not disclose which unrelated companies and their officials the respondent interacted with. No sale invoices of unrelated companies are attached. Further, the interview was not representative of the local green leaf market, only five out growers were interviewed. The minutes of the stakeholders show that there are more than 5 tea factories in the Toro tea growing region which rely on hundreds of individual out growers for their supply of green leaf. The respondent’s representatives ought to have interviewed out growers selling green leaf to Kijura Tea Company to establish what price they were charging. The representatives only interviewed out growers selling their green leaf to Rusekere Growers Tea Company, McLeod Russell Uganda Limited and Mabale Growers Tea Factory Limited. This would enable establish if the differences between the applicant’s sale price and that of other out growers were not due to distortions arising from factors like transport costs or the quality of green leaf. The report does not state the locations of fields of the five to determine the distance between their fields and the tea factories. The report does not show whether the out growers incurred additional expenses such as transport. The respondent’s failure to take these factors into account substantially affect the credibility of the field inspection report. From the evidence before us, we have failed to find sufficient justification for the adjustment by the respondent of the applicant’s sales price. We accordingly find that there was no under-declaration by the applicant of its sales of green leaf to Kijura Tea Company limited for the financial year 2016/2017. We also find that the average price adjustment by the respondent was, for the above reasons, not in conformity with the law.” Click here for other translation Uganda vs Kijura Tea Company Limited ITAT Case no 65 of 2018
Norway vs New Wave Norway AS, March 2021, Court of Appeal, Case No LB-2020-10664

Norway vs New Wave Norway AS, March 2021, Court of Appeal, Case No LB-2020-10664

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”). Both the payment of royalties and the purchase fee are further regulated in the group’s transfer pricing document. Following an audit, the Customs Directorate added the payment of concept fee to the price of the acquired products for customs purposes. Decision of the Court The Court of Appeal ruled that the Customs Directorate’s decision on determining the customs value for the import of clothing and gift items was invalid. There was no basis for including a paid “concept fee” in the customs value. The condition of payment of concept fee had no connection to the sellers of the goods, but sprang from the buyer’s own internal organization. Click here for translation Borgarting lagmannsrett - Dom_ LB-2020-10664

Indonesia vs PT Nanindah Mutiara Shipyard Ltd, December 2020 Supreme Court, Case No. 4446/B/PK/Pjk/2020

PT Nanindah Mutiara Shipyard Ltd reported losses for FY 2013. The tax authorities issued an assessment where the income of the company was increased by a substantial amount referring to applicable transfer pricing regulations. Nanindah Mutiara Shipyard Ltd filed a complaint with the Tax Court, but the Tax Court upheld the assessment. An application for judicial review was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favor of Nanindah Mutiara Shipyard Ltd. The Tax Court had erred in assessing facts, data, evidence and application of the law. The decision of the Tax Court was canceled and the petition for judicial review was granted. Losses reported by Nanindah Mutiara Shipyard Ltd were not due to non-arm’s length pricing, but rather exceptional circumstances that occurred at the local company in the years following 2010. Excerpts: ” … a. that the reasons for the Petitioner’s petition for judicial review in the a quo case are positive corrections to Business Circulation amounting to Rp45,920,139,538.00; which the Panel of Judges of the Tax Court maintains can be justified, because after examining and re-examining the arguments put forward in the Memorandum of Review by the Petitioner for Judicial Review in connection with the Counter Memorandum of Review, it can invalidate the facts and weaken the evidence revealed in the trial. as well as legal considerations of the Tax Court Panel of Judges, because in the a quo case in the form of substances that have been examined, decided and tried by the Tax Court Judges there are errors in assessing facts, data, evidence and application of the law as well as real mistakes in it, so that the Supreme Court of Justice canceled the a quo Tax Court decision and tried again with the legal considerations below, because in casu it is related to the evidentiary value that prioritizes the principle of material truth and based on the principle of substance over the form which has fulfilled the Ne Bis Vexari Rule principle as which has required that all administrative actions must be based on applicable laws and regulations. Whereas therefore the object of the dispute is in the form of a positive correction of Business Circulation amounting to Rp.45,920,139,538.00;which have been considered based on facts, evidence and application of the law and decided with the conclusion that the Panel of Judges maintains that there are factual errors and legal errors, so that the Supreme Court of Justice overturned the a quo decision and retrial with the consideration that due to in casu, the relationship with a special relationship, there are indications that the indicator of the current level of profit of the Appellant for the Review Applicant for the 2013 Fiscal Year which is below the normal profit range of similar companies, is not due to the existence of transfer pricing or pricing for transactions between parties that have a special relationship, but due to the impact of riots, causing extraordinary costs and companies not operating at full capacity. Thus, the Transfer Pricing Documentation of the present Appellant for the Review of the Appellant for the 2013 Fiscal Year, thus causing the loss suffered by the current Appellant of the Appeal for the Review of the 2013 Fiscal Year is the effect of extraordinary events in 2010 namely riots. at the shipyard in one of the companies belonging to the business group which is located adjacent to the shipyard of the present Appellant of the Applicant for Judicial Review. Besides that, The Panel of Supreme Court Justices is of the opinion that the decrease in income received by the Appellant now, the Petitioner for Review for the Fiscal Year after the riots, is due to the decline in new shipbuilding projects and the cancellation of orders that have caused ongoing shipbuilding projects to be neglected. decisive factors include the decline in new shipbuilding projects. Whereas on the basis of a state of chaos, it is considered as an extraordinary situation (force majeure) or a state of coercion (overmacht) which will directly result in the assessment of legal obligations on the fulfillment of tax obligations not being in the expected level of position, b. whereas therefore, the reasons for the Petitioner’s application for judicial review can be justified and sufficiently based on law because the arguments submitted are decisive opinions and therefore deserve to be granted and because there is a decision of the Tax Court which clearly contradicts the prevailing laws and regulations. applies as stipulated in Article 91 letter e of Law Number 14 of 2002 concerning the Tax Court and related laws, so that the accrued tax is recalculated into overpayment of Rp3,818,166,381.00; with the following details: …based on the above considerations, according to the Supreme Court, there are sufficient reasons to grant the petition for review;” Click here for translation putusan_4446_b_pk_pjk_2020_20210918
Arm's Length Principle

Spain vs JACOBS DOUWE EGBERTS ES, SLU., November 2020, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 – ECLI:EN:TS:2020:3730

At issue in this case was whether or not it is possible to regularize transactions between companies by directly applying art. 9.1 of DTA between Spain and French, without resorting to the transfer pricing methods provided for in local Spanish TP legislation. Application of article 9 and taxing according to local tax legislation is often a question of determining the arm’s length price. But sometimes other rules will apply regardless of the value – for instance anti avoidance legislation where the question is not the price but rather the justification and substance of the transaction. In the present case the arm’s length price of the relevant transaction was not discussed, but rather whether or not transaction of shares had sufficient economic substance to qualify for application of Spanish provisions for tax depreciation of the shares in question. The National Court understood that the share acquisition lacked substance and only had a tax avoidance purpose. It could not be understood that the appellant company has undergone a actual depreciation of its shares to the extent necessary to make a tax deduction. Judgement of the supreme Court The Supreme Court dismissed the appeal and upheld the decision of the National Court. The court pointed out that the regularization of transactions between Spanish and French companies, through the application of art. 9.1 in the DTA, can be carried out without the need to resort to the methods provided for in local legislation for determining the arm’s length value of transactions between related parties. Excerpts “IV.- What has just been stated are the abstract terms of the regulation contained in the aforementioned Article 9.1; and this shows that its individualisation or practical application to some singular facts will raise two different problems. The first will be to determine whether the specific commercial or financial transactions concluded between these two legal persons, Spanish and French, have an explanation that justifies them according to the legal or economic logic that is present in this type of relationship. The second problem will have to be tackled once the first one just mentioned has been positively resolved, or when it has not been raised; and it will consist of quantifying the tax scope of the singular commercial or financial operation whose justification has been recognised or accepted. V.- The above shows that the application of this Article 9.1 Tax Treaty must be accompanied by the application of internal rules; and these may be constituted by Article 16 of the TR/LISOC or by other different internal rules, for the reasons expressed below. Thus, Article 10 TR/LISOC shall be applied when, without questioning the justification of the transactions concluded between entities or persons that deserve to be considered as “associated enterprises”, only the quantification or the value, in market terms, of the object or price of these transactions is in dispute. But other internal rules will have to be applied when what is disputed with regard to these transactions is not the amount of their object but the justification of the legal transaction that materialises them, because this externalises a single purpose of fiscal avoidance and is not justified by circumstances or facts that reveal its legal or economic logic. And these rules, as the Abogado del Estado argues in his opposition to the cassation, may be embodied by those which regulate the powers recognised by the LGT 2003 to the Administration in order to achieve a correct application of the tax rules, such as those relating to assessment, the conflict in the application of the tax rule and simulation (Articles 13, 15 and 16 of that legal text). VI.- The answer which, on the basis of what has just been set out, must be given to the question of objective appeal, defined by the order which agreed the admission of the present appeal, must be that expressed below. That the regularisation of transactions between Spanish and French companies, by means of the application of Article 9.1 of the Agreement between the Kingdom of Spain and the French Republic for the avoidance of double taxation and the prevention of evasion and avoidance of fiscal fraud in the field of income tax and wealth tax of 10 October 1995, can be carried out without the need to resort to the methods provided for determining the market value in related transactions and to the procedure established for that purpose in the internal regulations. ELEVENTH – Decision on the claims raised in the appeal. I.- The application of the above criterion to the controversy tried and decided by the judgment under appeal leads to the conclusion that the infringements alleged in the appeal are not to be assessed. This is for the following reasons. The main question at issue was not the amount or quantification of the transactions which resulted in the acquisition by the appellant SARA LEE SOUTHERN EUROPE SL (SLSE) of shares in SLBA Italia. It was the other: whether or not the acquisition of those shares was sufficiently justified to be considered plausible and valid for making the allocations which had been deducted for the depreciation of securities of SARA LEE BRANDED APPAREL, SRL. The tax authorities and the judgment under appeal, as is clear from the foregoing, understood that this acquisition lacked justification and only had a tax avoidance purpose, because this was the result of the situation of economic losses that characterised the investee company in the years preceding the acquisition. They invoked Article 9.1 of the DTA to point out that, in those circumstances of economic losses, the parameter of comparability with normal or usual transactions between independent companies, which that article establishes in order to accept that a related-party transaction actually existed, could not be assessed in the transactions in question. And they reached the final conclusion that, in those particular circumstances, it cannot be understood that the appellant company has undergone a depreciation of its shares to the extent necessary to make a deduction based on those shares.” Click here for English translation Click here

Tanzania vs Atlas Copco Tanzania Ltd., August 2020, Court of Appeal, Case No 167 of 2019, TZCA 317

Atlas Copco Tanzania Ltd. is part of Atlas Copco Group, a conglomerate of multinational companies headquartered in Sweden. The group produces and sell compressors, vacuum solutions, generators, pumps, power tools etc. Apart from supplying generators in Tanzania on its own, Atlas Tanzania sold generators as an agent of its sister companies which had no presence in the country. For the latter type of sales, known as “indent sales”, Atlas Tanzania earned a commission. Being oblivious that the commission income attracted Value Added Tax (“VAT”), Atlas Tanzania did not file any VAT returns on indent sales until its external auditors, KPMG, informed it of the requirement. By then, Atlas Tanzania had posted in its sales ledgers commission income amounting to TZS. 134,413,682,281.00 for FY 2007 and 2008. Atlas Tanzania then accounted for VAT on the commission for the years 2007 and 2008 amounting to TZS. 5,692,574,000.00, which was paid through the VAT returns filed in 2009. This amount was much smaller than the sum of TZS. 13,413,682,281.00 originally booked in the sales ledgers for the two Fiscal Years. This was due to the fact, that Atlas Tanzania had reduced the amount on the ground that there was an overstatement of the commission by TZS.7,721,108,281.00, which was then corrected through an accounting reversal based on ordinary accounting practices. The tax authorities did not agree with the alleged overstatement and issued a notice of additional assessment for the sum of TZS. 2,118,115,834.00 representing the outstanding VAT plus interest. On appeal, the assessment issued by the tax authorities was upheld by the Appeals board and Tax Tribunal. Atlas Copco Tanzania Ltd. then appealed the decision to the Court of Appeal. Judgement of Court of Appeal The Court dismissed the appeal of Atlas Tanzania. “We would thus conclude that the present appeal presents no question of law but matters of fact that do not merit the attention of the Court in terms of section 25 (2) of the TRAA.” Click here for translation atlas-copco-tanzania-ltd-vs-tra-civ-app-no-167-2019
Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-A

Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-A

A / S Norske Shell runs petroleum activities on the Norwegian continental shelf. By the judgment of the Court of Appeal in 2019, it had been decided that there was a basis for a discretionary tax assessment pursuant to section 13-1 of the Tax Act, based on the fact that costs for research and development in Norway should have been distributed among the other group members. According to section 13-1 third paragraph of the Norwegian Tax Act the Norwegian the arms length provisions must take into account OECD’s Transfer pricing guidelines. And according to the Court of Appeal the Petroleum Tax Appeals Board had correctly concluded – based on the fact – that this was a cost contribution arrangement. Hence the income determination then had to be in accordance with what follows from the OECD guidelines for such arrangements (TPG Chapter VIII). The question before the Supreme Court was whether this additional income assessment should also include the part of the costs charged to A/S Norske Shell’s license partners in recovery projects on the Norwegian continental shelf. The Supreme Court concluded that the tax assessment should not include R&D costs charged to A/S Norske Shell’s license partners on the Norwegian continental shelf. Click here for translation Norges Høyesterett - Dom HR-2020-1130-A
Bulgaria vs "Beltart Manufacturing", May 2020, Supreme Administrative Court, Case No 5756

Bulgaria vs “Beltart Manufacturing”, May 2020, Supreme Administrative Court, Case No 5756

“Beltart Manufacturing” is a Bulgarian toll-manufacturer of of clothing accessories – trouser belts etc. – and is a member of the German Beltart Group. The remuneration for the manufactoring services provided to the group for 2013 and 2014 had been lower than for previous years. According to the company this was due to changes to the contractual and economic conditions and discounts. Following an audit the tax authorities came to the conclusion that the remuneration for 2013 and 2014 should be increased to the same level as for the previous years.  According to the tax authorities, the additional income had been determined by application of the CUP method. An appeal was filed by Beltart Manufacturing with the Administrative court, where the assessment was set aside. According to the court the tax authority had  not analyzed the economic situation for the period 2011 and 2012, and then for 2013 and 2014 in order to determine that the company’s profits. Since the tax authority has compared the remuneration of the services for a period different from the period under review, it could not be held that the same are identical for both the periods. The fact that there is no comparable market data makes it impossible to verify whether the terms of the transaction correspond to the terms of a comparable transaction between unrelated parties. In the absence of comparable date, there is no way to justify a deviation in the terms of the transaction. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case for further considerations. Excerpts “…On the merits, the applicant submits the following opinion: The allegations of the Director of the ‘ODOP Directorate’ – Varna that there are substantial breaches of the rules of court procedure in the annulment of the judgment are well-founded. The objection of the applicant that the evidence submitted was credited unilaterally by the court and was not discussed in totality with all the other evidence available in the case is also considered as justified. It is reasonably submitted that the provision of Article 116(4) of the Code of Civil Procedure has not been complied with. The market price was correctly determined by the revenue authorities in this case, whereas the conclusions to the contrary of the Administrative Court-Varna are incorrect and unlawful. In the part rejecting the appeal, the judgment under appeal was correctly rendered in compliance with the rules of court procedure and in correct application of the substantive law. For that reason, the cassation appeal lodged by Beltart Ltd is unfounded and the judgment in that part must be upheld” “The absence of a market analogue to determine the ‘market price’ cannot be the sole ground for annulment of the revision act. The Board of Appeal, as a court of substance, has to assess whether the company’s financial result has been correctly increased. That assessment also relates to the determination of the ‘market price’ of the service and the existence of a deviation therefrom. Ordinance No. H-9 of 14 August 2006 on the procedure and methods for the application of methods for determining market prices provides for several methods for determining the “market price” within the meaning of § 1, item 8 of the State Tax Code. Since in the present case, according to the first instance Chamber, the “market price” was incorrectly determined by the method of comparable uncontrolled prices and the method of increased value by the revenue authorities, the market value of the service should have been determined in the judicial phase of the proceedings in order to make an assessment as to the absence or not of tax evasion. The expert evidence heard is incomplete in that it shows that the market price of the service in the course of the audit proceedings was not actually determined by the comparable uncontrolled prices method and the incremental value method as alleged by the revenue authorities. However, the expert also did not determine the market price according to any of the methods of Regulation No H-9/2006. In the course of the court proceedings, no “market price” of the invoiced services within the meaning of §1, item 8 of the RA of the Tax Code was established. It was the court’s duty to determine the market price and to assess whether, in view of that price, an evasion of taxation under Article 15 and Article 16 of the Income Tax Act had been established which justified the increase in the company’s financial accounting result. This has not been done and in paragraph 1 of the decision it is formally held that in the absence of a basis for comparison the RA is unlawful” “Although part of the reasoning of the judgment is correct, the judgment must be set aside in its entirety on the basis of the substantive breaches of the rules of court. The restatement of the company’s financial result relates to the determination of the taxable amount for 2013 and 2014, which must be carried out on the retrial of the case, taking into account all the prerequisites for the increase in the SFR set out in the audit certificate. In order to correctly establish the tax base on which to determine the corporate tax liabilities of the audited entity for 2013 and 2014, the court should clarify the issues of the “market price” of the service provided, determine whether there is an evasion of taxation within the meaning of Articles 15 and 16 of the Income Tax Act; assess whether for any of the years the company is making a loss and, accordingly, determine the amount of advance payments for the period and any interest thereon under Article 89 of the Income Tax Act. Lastly, having determined the tax base, it should, after hearing an expert opinion, determine the interest payable on the unpaid public debts under Article 175(1) of the Tax Code.”
India vs Gulbrandsen Chemicals Ltd., February 2020, High Court, Case No 751 of 2019

India vs Gulbrandsen Chemicals Ltd., February 2020, High Court, Case No 751 of 2019

Gulbrandsen Chemicals manufactures chemicals for industrial customers in the petrochemical and pharmaceutical industry. The Indian Subsidiary, Gulbrandsen India also sold these products to its affiliated enterprises, namely Gulbrandsen Chemicals Inc, USA, and Gulbrandsen EU Limited. In regards of the controlled transactions, the tax authorities noticed that Gulbrandsen India had shifted from use of the internal CUP method to pricing based on the Transactional Net Margin Method (TNMM). The tax authorities were of the view that, given the facts of the case, the internal CUP was the most appropriate method. It was noted that Gulbrandsen India had sold 40% of its products to the associated enterprises, and earned a margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the prior year and earning margin of PBIT/Cost at 3.26%. Following a decision of the Tax Tribunal, where the assessment of the tax authorities was set aside, the tax authorities filed an appeal with the High Court, Judgement of the Court The High Court dismissed the appeal of the tax authorities and upheld the decision of the Tax Tribunal. Excerpt “The Tribunal has taken into consideration the voluminous documentary evidence on record for the purpose of coming to the conclusion of adoption of TNMM by the assessee as the Most Appropriate Method of arriving at ALP.” “In the overall view of the matter, we are convinced that the decision of the Tribunal is correct and requires no interference and no question of law much less any substantial question of law can be said to have arisen from the impugned order of the Tribunal. In the result, these appeals fail and are hereby dismissed, with no order as to costs.” India vs Gulbrandsen 2020
Poland vs A. Sp. z o.o., March 2019, Administrative Court, Case No  I SA/Rz 1178/18

Poland vs A. Sp. z o.o., March 2019, Administrative Court, Case No I SA/Rz 1178/18

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. Judgement of the Administrative Court The court dismsissed the appeal of A. Sp. z o.o. and sided with the tax authorities. Excerpt “The essence of the dispute in this respect boils down to the understanding of the notion of transaction used in this provision to define the actions the performance of which is to result in the necessity to draw up tax documentation. The provisions of ustawa p.d.o.p. do not contain a legal definition of this notion, therefore, the basis for interpretation of its meaning must be a colloquial understanding of the word transaction. However, basing such an interpretation solely on lexical definitions is doomed to failure because both the interpreter himself, as well as the applicant, basing themselves on linguistic definitions contained in dictionaries, came to completely different conclusions from the point of view of interpretation. One of them concluded that a transaction is a legal act concluded in connection with a party’s business activity in the performance of which at least one payment is made (based on the Internet Dictionary of the Polish Language http://sjp.pl), while the applicant, relying on another dictionary https://sjp.pwn.pl), argued that the word transaction covers only an agreement for the purchase and sale of goods and services. Therefore, resolving the merits of the case based solely on dictionary concepts does not give sufficiently satisfactory results. n such a situation one should refer to a purposeful interpretation, referring to the reasons for introducing this regulation, as well as to the goal the legislator intended to achieve through its introduction. In this respect, it should be pointed out that the provisions on the obligation to prepare tax documentation in the case of civil law transactions between related entities were introduced in order to ensure transparency of such activities, in particular to ensure that such activities are conducted on market principles. The purpose of introducing such a regulation convinces the court to accept as correct a broad definition of the word transaction. Such a definition ensures transparency of actions by related entities. There are no grounds for assuming that the legislator intended to achieve this only with respect to purchase and sale agreements, leaving the entire wide range of possible legal actions between related entities outside these regulations. Such an understanding of this provision is also an implementation of the guarantee function of the tax law, allowing related entities to obtain adequate protection in the event of disclosure of their actions. Therefore, in the court’s opinion, the interpreting authority did not violate the law by stating that the applicant’s position in this respect, in which it assumes that the notion of transaction means only and exclusively sale and purchase agreements, is incorrect. In this respect, the court of first instance fully agrees with the view of the Supreme Administrative Court expressed in the judgment of 8 March 2016 in case II FSK 4000/13, which stated that on the grounds of Article 9a(1) and (2) of the Act, the term “transaction” is synonymous with the term “agreement”. (ONSAiWSA 2017/3/52). In the same judgment, this Court considered as transactions within the meaning of Article 9a(1) of the P.C.P. making a contribution-in-kind to a capital company in the form of shares or stocks, the purchase (acquisition) of shares or taking up shares in increased share capital in exchange for a cash contribution. Cash-pooling agreements were also recognised as agreements exhausting the notion of transaction indicated in Article 9(1) of the APS (e.g. judgment of the Supreme Administrative Court of 8 January 2019 II FSK 121/17) or taking up by a bank in exchange for a cash contribution of shares issued upon the establishment of a mortgage bank and subsequent increases in the share capital of a mortgage bank (judgment of the WSA in Gliwice of 25 April 2018 I SA/Gl 314/18). Thus, the court jurisprudence in this respect adopts a broad understanding of the notion of transaction, not limiting it only to a sale-purchase agreement. Taking into account all the elements indicated above, the court held that the authority did not infringe the law by assuming that the notion of transaction referred to in Article 9a(1) of the A.P.C. also includes a legal transaction such as the one described in the application, which is subject to the granting of a surety free of charge to the applicant under a loan agreement. The interpreter’s position does not violate the law either, to the extent in which he stated that the obligation to prepare tax

European Commission vs Belgium and Ireland, February 2019, General Court Case No 62016TJ0131

In 2016, the Commission requested that Belgium reclaim around €700 million from multinational corporations in what the Commission found to be illegal state aid provided under the Belgian “excess profit” tax scheme. The tax scheme allowed selected multinational corporations to exempt “excess profits” from the tax base when calculating corporate tax in Belgium. The European Court of Justice concludes that the Commission erroneously considered that the Belgian excess profit system constituted an aid scheme and orders that decision must be annulled in its entirety, in as much as it is based on the erroneous conclusion concerning the existence of such a scheme. For state aid to constitute an ‘aid scheme’, it must be awarded without requiring “further implementing measures.” According to court, “the Belgian tax authorities had a margin of discretion over all of the essential elements of the exemption system in question.” Belgium could influence the amount and the conditions under which the exemption was granted, which precludes the existence of an aid scheme. For an aid scheme to exist EU regulation also requires, beneficiaries are defined “in a general and abstract manner” and the aid is awarded for an infinite period of time. This was not the case in the Belgian “excess profit” tax scheme. Click here for translation Judgement-of-the-General-Court-State-Aid-Belgium-Ireland-Magnetrol-International-case-no-62016TJ0131
India vs L.G. Electronic India Pvt. Ltd., January 2019, TAX APPELLATE TRIBUNAL, Case No. ITA No. 6253/DEL/2012

India vs L.G. Electronic India Pvt. Ltd., January 2019, TAX APPELLATE TRIBUNAL, Case No. ITA No. 6253/DEL/2012

LG Electronic India has incurred advertisement and AMP expenses aggregating to Rs.6,89,60,79,670/- for the purpose of its business. The tax authorities undertook benchmarking analysis of AMP expenses incurred by LG Electronic India applying bright line test by comparing ratio of AMP expenses to sale of LG Electronic India with that of the comparable companies and holding that any expenditure in excess of the bright line was for promotion of the brand/trade name owned by the AE, which needed to be suitably compensated by the AE. By applying bright line test, the tax authorities compared AMP expenditure incurred by LG Electronic India as percentage of total turnover at 8.01% with average AMP expenditure of 4.93% of comparable companies. Since AMP expenses incurred by LG Electronic India  as percentage of sales was more than similar percentage for comparable companies, LG Electronic India had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The tax authorities also made an adjustment to the royalty rate paid to the parent for use of IP. Finally tax deductions for costs of intra-group services had been disallowed. The decision of the INCOME TAX APPELLATE TRIBUNAL In regards to the AMP expences the court states: “we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an international transaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted.” In regards to the royalty rate the court states: “we direct the TPO to determine the Arm’s Length royalty @ 4.05%” In regards to intra group services the court states: “we are of the opinion that once the assessee has satisfied the TNMM method i.e. the operating margins of the assessee are higher than those of the comparable companies [as mentioned elsewhere], no separate adjustment is warranted.” India vs L.G. Electronics
Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case No SKM2018.627.HR and SKM2018.635.HR

Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case No SKM2018.627.HR and SKM2018.635.HR

These two triel cases concerned the calculation of the basis for tax depreciation (value of assets) in a number of Danish Water utility companies which had been established in the years 2006 – 2010 in connection with a public separation of water supply and wastewater utility activities. The valuation of the assets would form the basis for the water utility companies’ tax depreciation. The transfer was controlled and subject to Danish arm’s length provisions. The Supreme Court found that the calculation method (DCF) used by the Danish Tax Agency did not provide a suitable basis for calculating the tax value of the transferred assets. The Court stated that for water supply and wastewater treatment it is true that the companies are legaly obligated to provide these facilities and that the governmental regulation of the activity – the “rest in itself” principle – means that no income can be earned on the activities. However, the decisive factor is the value of these assets for the water utility companies – not the fact that no income could be earned on the activity. The Supreme Court found that a method by which the regulatory value is calculated as an average of the written down value and the acquisition value (the so-called POLKA value) was a reasonable approach to value of the assets under the arm’s length provisions. The Supreme Court did not have the basis to determine the POLKA value and the cases was returned to the Tax Agency for consideration. The district court had come to another conclusion. Case 27/2018 Click here for translation Water supply I Case 28/2018 Click here for translation Water supply II
Germany vs B GmbH, October 2018, Bundesfinanzhof, Case No I R 78/16

Germany vs B GmbH, October 2018, Bundesfinanzhof, Case No I R 78/16

The tax office responsible for B-AG informed the B GmbH in a letter dated 14 October 2009 that it intended to hold B GmbH liable for B-AG’s corporation tax debts pursuant to section 73 of the German Fiscal Code (AO). By way of an actual agreement, a proportionate liability amount for the corporation tax 2000 of B-AG i.L. of … € was agreed. A corresponding liability notice was issued on 17 June 2010. In its annual financial statements as at 31 December 2009, B GmbH formed a provision in the amount of … € due to the impending liability claim in accordance with § 73 AO. In its corporation tax return for the year in dispute (2009), it expressly pointed out that it considered the liability debts to be deductible under § 73 AO because they were not taxes within the meaning of § 10 No. 2 of the Corporation Tax Act (KStG). Following an audit, the tax authorities added the deferred amount back to B GmbH’s profit off-balance sheet in accordance with section 10 no. 2 KStG and amended the 2009 corporation tax assessment accordingly. An appeal was filed by B GmbH. Judgement of the BFH The BFH stated that expenses of a controlled company due to a liability claim for corporate tax debts of the controlling company pursuant to section 73 AO do not fall under the deduction prohibition of section 10 no. 2 KStG. They are to be qualified as vGA (hidden distribution of profits). Excerpts “17. a) In the case of a corporation, a vGA within the meaning of § 8 para. 3 sentence 2 KStG is to be understood as a reduction in assets (prevented increase in assets), which is caused by the corporate relationship, affects the amount of the difference pursuant to § 4 para. 1 sentence 1 EStG in conjunction with § 8 para. 1 KStG. § Section 8 (1) KStG (for trade tax in conjunction with Section 7 GewStG) and has no connection to an open distribution. For the majority of the cases decided, the senate has assumed that the inducement is due to the corporate relationship if the corporation grants its shareholder a pecuniary advantage which it would not have granted to a non-shareholder if it had exercised the diligence of a prudent and conscientious manager (constant case law of the senate, since the judgement of 16 March 1967 I 261/63, BFHE 89, 208, BStBl III 1967, 626). In addition, the transaction must be suitable to trigger an income for the beneficiary shareholder within the meaning of § 20, para. 1, no. 1, sentence 2 EStG (constant case law, e.g. Senate judgements of 7 August 2002 I R 2/02, BFHE 200, 197, BStBl II 2004, 131; of 8 September 2010 I R 6/09, BFHE 231, 75, BStBl II 2013, 186).” “20. aa) The prerequisite for a vGA is that the asset reduction is caused by the corporate relationship. The lower court correctly points out that the standard of the conduct of a prudent and conscientious manager of the corporation within the scope of the test of inducement merely serves to specify the main cases of application of § 8 para. 3 sentence 2 KStG, but other circumstances are not excluded from the scope of application of the vGA from the outset. As a result, when examining the inducement by the corporate relationship, the general dogmatics of the inducement principle must be applied (in this sense Weber, Ubg 2017, 206); according to established case law, it is sufficient for the facts of the vGA that the reduction in assets is partly caused by the corporate relationship (e.g. Senate rulings of 17 December 2017, p. 1). e.g. Senate judgements of 23 July 2003 I R 80/02, BFHE 203, 114, BStBl II 2003, 926; of 27 April 2005 I R 75/04, BFHE 210, 108, BStBl II 2005, 702; of 20 August 2008 I R 19/07, BFHE 222, 494, BStBl II 2011, 60). 21. bb) In the present case, the latter is to be seen in the fact that the plaintiff concluded a profit and loss transfer agreement with B-AG, which led to the establishment of the tax group relationship and thus also to the assumption of the liability risk under § 73 AO. The conclusion of a profit and loss transfer agreement with the controlling shareholder is always prompted by the corporate relationship. A prudent and conscientious manager of a corporation would not oblige the company vis-à-vis a third party outside the company to transfer its entire profit to the third party and, in addition, to assume the risk of being liable for the third party’s tax debts. The assumption of such an obligation by the controlled company can economically only be explained by the overriding group interest and consequently stems from the corporate relationship.” Click here for English translation Click here for other translation BFH-Urteil-I-R-78-16
Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi. The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length. However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines. Eastern Produce Limited complained to the High Court and argued that: “The decision and proceeding by MRA to use OECD (Organisation for Economic Cooperation and Development) guidelines whilst performing transfer pricing analysis and as a basis for effecting amendments to tax assessments was illegal. CONSIDERATIONS OF THE COURT, EXCERPS “With regard to transfer pricing in 2014, the law was contained in Section 127A. Section 127A provides as follows:“where a person who is not resident in Malawi carries on business with a person resident in Malawi and the course of such business is so arranged that it produces to the person residentin Malawi either no profits or less than profits which might be expected from that he had been no such relationship, then the profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons“. “Section 127A of the Taxation Act is not a stand-alone provision. The Taxation (Transfer Pricing) Regulations, 2009 guide the application of Section 127A of the Taxation Act on transfer pricing issues in Malawi.” “The methods shall be applied in determining the price payable for goods and services in transactions between related enterprises for the purposes of Section 127A of the Act; and A person shall apply the method most appropriate for his enterprise, having regard to the nature of the transaction, or class of transaction, or class of related persons or function performed by such persons in relation to the transaction.” “…there is no dispute between the applicant and the respondent that the law on transfer pricing issues in Malawi was governed by Section 127A and the Taxation (Transfer Pricing) Regulations, 2009, as cited above. This legal position was even accepted and confirmed by the deponent in crossexamination. What this means is that any transfer pricing issues arising from controlled transactions between related enterprises, as is the case at hand, was to be resolved by the Act and the Regulations, and not OECD Guidelines.” “In its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010 edition, page 206), the OECD states that there are two main issues in the analysis of transfer pricing for intra group services (which the Agreement purports)….’ The deponent in cross-examination admitted that Section 127A has to be applied together with the 2009 Regulations. The deponent admitted that the Guidelines are sometimes used as an interpretation tool/aid.” “I have to mention that, looking at ET 2, ET4 and ET6, it is very clear that the respondent did not make any reference to the Transfer Pricing Regulations, 2009. Instead, the respondent placed much emphasis on the OECD Guidelines as cited above. I am even at pains to note that the respondent did not even use the OECD Guidelines as an interpretation tool to the local Transfer Pricing Regulations. ET2, ET4 and ET6 are not showing that the OECD Guidelines were only used as an interpretation aid. Any person reading these exhibits will definitely conclude that the respondent applied the law contained in the OECD Guidelines.” “The use of these Guidelines at the expense of the Transfer Pricing Regulations, 2009 is illegal.” “The other issuel have to resolve is the rejection and its aftermath of the method used by the applicant. There is no dispute that the transaction involved herein is a controlled transaction. There is therefore no dispute that it involves transfer pricing issues. Definitely, the transfer price that was to be set between the applicant and its parent company was to be based on the arm’s length principle as per Section 127A of the Taxation Act read together with Taxation (Transfer Pricing) Regulations, 2009.” “Section 6(2) of the Transfer Pricing Regulations, 2009 have placed the burden of choosing a Transfer Pricing method on the taxpayer. In the present case, that burden was with the applicant. Again, Section 7 of the Regulations provides for documentation that may be required by the Commissioner General where a taxpayer has applied a transfer price. In the present case, it was submitted by the deponent that they rejected the transfer price set by the applicant and disallowed the commission on humanitarian grounds. In the first place, let me state that enterprises are under an obligation to keep documentation that assist them in arriving at appropriate transfer price basing on the arm’s length principle. This information may as well be requested by the Commissioner General to assist in assessing whether the correct analysis was done before arriving at an appropriate transfer price as provided for in Section 7 of the Transfer Pricing Regulations, 2009. I am of the considered view that where a taxpayer fails to provide such information, the Commissioner General is indeed at liberty to reject the transfer price or method used by the taxpayer. It is my humble view that though the Regulations places the burden on the taxpayer to choose a method, after the Commissioner General has rejected the method, the Commissioner General has to arrive at an appropriate method to be used.” THE JUDGEMENT The court ordered the applicant [company] within the next 14 days, to submit to the respondent all the necessary documentation pursuant to Section 7 of the Regulations, 2009 for the respondent [tax administration] to undertake a comprehensive analysis of the transfer pricing issues and arrive at an appropriate transfer price method. The respondent to communicate its decision after 21 days of its receipt of such documentation. Thereafter, the respondent to communicate the correct tax payable by the applicant. An order similar to certiorari quashing the notice of amended assessment for
Poland vs "Blueberry Factory" Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory on sales of blueberries (2.56%) did not cover the costs of consumption of materials and energy, third party services, depreciation and other costs, which resulted in a loss for 2012. (PLN 218,838.03), and losses for 2011 and 2013. The application of excessive fruit purchase prices from the Company’s shareholders (4 persons running fruit farms and 1 farm owner), with family, personal and capital ties, also resulted in the Blueberry Factory taking out 6 loans from it’s shareholders for the total amount of PLN 877,697.70. in 2012. The average gross margin of the Blueberry Factory when selling goods (blueberries) in 2012 was 2.2%. Meanwhile, unrelated entities, selected in the course of the proceedings, which were involved in the purchase and sale of blueberries, having the relevant certificates necessary to sell fruit abroad, had gross margins ranging from 3.5% to 21.87%. The tax authorities held that the average gross margin in comparable transactions was 11.35% and PLN 2.27 per kilogram. The tax authorities determined the Blueberry Factory’s corporate income tax liability for 2012 at PLN 22,114, instead of the declared loss (PLN 218,838.03). The Court of first instance agreed with the tax authorities that there were capital, personal and family ties between these entities. In the opinion of the court, all the conditions referred to in Art. 11.1 of the Polish Act on Public Offering, which authorises the determination of the income and tax payable by way of estimation, had been fulfilled. The Court also considered the pricing method used by the authorities – resale prices – to be appropriate. The comparability analysis took into account both the type and quality of fruit traded (the fact of holding certificates). The average margin applied by independent entities was calculated. In estimating the cost of blueberry fruit purchased by the Company, favourable assumptions were made, as the basis for the estimation was the margins applied by entities (fruit producer groups) which purchased blueberry fruit, holding only the G-certificate and applying the lowest margins among the surveyed entities. The comparability analysis also took into account, among others, such factors as the certificates held, type of recipients of the goods (domestic and foreign), type of entity, production process, technologies used, type and time of transactions. The Court also deemed it appropriate that DUKS issued a provision under Art. 179.1 of the Polish Corporate Governance Act, which excluded information on entities conducting business competitive to the Company. The Blueberry Factory filed a complaint against the decision. The Supreme Administrative Court considered that the appeal was justified and therefore had to be granted. The gist of the dispute in the case at hand is to assess whether, in fact, the procedure for estimating income [Article 11 of the Act] was carried out correctly, as claimed by the authority and accepted by the Court of First Instance, or, as the applicant argues in cassation – with a breach of the provisions of the Act and the Regulation – which is linked to the authority’s analysis of the comparability of transactions. “All this allows us to conclude that, although the OECD Transfer Pricing Guidelines do not contain standards of generally applicable law (Article 87(1) of the Polish Constitution), when interpreting the provisions governing the prerequisites for the use of transfer pricing and the general conditions for determining income by means of estimation (Article 11(1) to (3) of the Act), the indications of those guidelines should be taken into account as a kind of “set of good practices” and a point of reference for choosing the right interpretative direction.” “In the light of the above, contrary to what the WSA suggested, the aforementioned guidelines will be relevant to the assessment of the assessment method used by the authority and, in particular, of its implementation.” The Court of first instance did not sufficiently consider the proceedings conducted by the authorities – in particular with regard to the comparability analysis. It was principally assumed that the Company’s business model was the basis for its market strategy – which in its opinion was to generate losses in order to maximise profits of its shareholders. At the same time, despite arguments consistently raised by a party in the course of proceedings, the court did not address issues regarding comparability factors. First of all, the key issue in this case, namely that the party has the status of an agricultural producer group. This, in turn, raises other relevant issues: – the specific nature of the entity, the principles and essence of the group’s operation, the scope of the objectives it should pursue, the strategy of producer groups – the use of aid measures, the issue and importance of the Recognition Plan, the issue of the group’s market strategy during the recognition period. The Supreme Administrative Court referred the case back to the Court of first instance for reconsideration. Poland II FSK 1665-16 en Poland II FSK 1665-16
Brazil vs Eli Lilly, April 2018, CARF Case No 1302-002-725F

Brazil vs Eli Lilly, April 2018, CARF Case No 1302-002-725F

This case concerns imports from related companies and use of the RPM method. Click here for translation Brazil vs Eli Lilly 11 april 2018 CARF Case No 1302-002-725F
Costa Rica vs Corrugados del Guarco S.A., March 2018, Supreme Court, Case No 13-002632-1027-CA

Costa Rica vs Corrugados del Guarco S.A., March 2018, Supreme Court, Case No 13-002632-1027-CA

Corrugados del Guarco S.A. had declared losses on controlled transactions for FY 2003, 2004 and 2005 as export prices for these transactions had been set below cost and without profit margin, and also different from the price charged for that product to other independent or unrelated companies, in favour of its related company Envases Nicaragüenses S.A. According to the Corrugados del Guarco S.A. the reason why the prices of these controlled transactions had been set low was that unfair competition had made it necessary to use a commercial strategy of selling at preferential prices to the group company in Nicaragua. The tax authorities issued an assessment whereby the prices of the controlled transactions were adjusted in accordance with the arm’s length principle. Furthermore a fine was issued to the company for gross negligence. Judgement of the Supreme Court The Court dismissed the appeal of Corrugados del Guarco S.A. Excerpts from the Judgement “…Finally, and in relation to transfer pricing, on which the plaintiff argues reservation of law, it is necessary to indicate that guideline 20-03, called “Fiscal Treatment of Transfer Pricing, according to Normal Market Value”, issued by the Director General of Taxation on June 10, 2003, refers to the rules of the Organisation for Economic Co-operation and Development (hereinafter OECD), for the setting of prices between related companies. This international organisation is dedicated to contributing to the peaceful and harmonious development of relations between peoples, with an emphasis on collaboration in the global economy. In this regard, the Constitutional Chamber explained the content of the aforementioned body of norms as follows: “The guideline in question is based on the assumption that if these operations have some kind of artificial manipulation, and this is detrimental to the tax authorities, it allows the application of articles 8 and 12 of the Code of Tax Rules and Procedures to establish that certain transactions correspond to a market value as if they had been established between independent persons or entities that compete freely. Although there are different methodologies, to conclude that a price corresponds to a certain reality or not, the problem before the Chamber is an issue closely linked to one that arises for any operator of law that must apply rules that seek to compensate forms of abuse of law or that do not correspond to an economic reality to avoid tax liabilities” (Ruling 2012-4940 of 15 hours 37 minutes of 18 April 2012). The aforementioned court also added, on the constitutionality of the rule “our country does not need to be a member of that body to make use of certain rules or practices that contain a high degree of consensus, especially if, as in the case at hand, articles 15 and 16 of the General Law on Public Administration establish the limits to discretion, even in the absence of a law, which is precisely what is happening in the present case. This Court agrees with the Attorney General’s Office and the Minister of Finance that these are rules with a high degree of subjection to science and technique, as in the case of the general principles of accounting, where a law would not be necessary to reach a technical consensus. In this sense, those methods or techniques make it possible to arrive at a result that is as close to reality as possible, without it being necessary for them to be formally incorporated into the legal system” (ibidem). The above shows that the principle of legal reservation is not violated in the application of OECD transfer pricing methods, such as those analysed here. V.- As a second allegation, it was argued that the financial penalty was imposed without previously following a sanctioning procedure, since it only faced a determinative one.“ ” In the opinion of this Court, the arguments of the appellant also fail to break this aspect of the judgement. The court took for granted that with intent, the plaintiff sold at prices below cost and that she used an agreement with another private individual to defraud the tax authorities, therefore it cannot be indicated in this court that she did not qualify the conduct, establishing that even article 71 of the Code of Tax Rules and Procedures, allows the sanction when it has acted with intent or mere negligence, that is to say, by negligence. The law seeks to ensure that the self-assessments, on which the country’s entire tax system is based, are made seriously and carefully, and therefore penalises fraud and negligence in the self-assessment with 25 percent of what has not been paid to the Treasury. This procedure is necessarily linked to the assessment procedure, where it is defined whether what was declared and paid by the taxpayer is in accordance with the legal system and this is clearly stated by the sentencing body, which also refers that the sanctioning procedure was carried out in the terms established by the said numeral 150 CNPT and that the right of defence was guaranteed by giving the taxpayer a hearing and resolving his appeals.” Click here for English translation Click here for other translation Costa-Rica-vs-Corrugados-del-Guarco-2018-Corte-Suprema-de-Justicia
Arm's Length Principle
Spain vs EPSON IBÉRICA S.A.U., Feb 2018, High Court, Case No 314/2016

Spain vs EPSON IBÉRICA S.A.U., Feb 2018, High Court, Case No 314/2016

EPSON IBÉRICA S.A.U. had deducted the full employee pension costs of a CEO that had worked both for the HQ in the Netherlands and the local Spanish Company. The tax authorities issued an assessment where 90% of the pension costs had been disallowed in regards to the taxable income in Spain. The disallowed percentage of the costs was based on the CEO’s salary allocation between Netherlands (90%) and Spain (10%), cf. the agreement entered between the parties. EPSON IBÉRICA S.A.U. brought the assessment to the Courts. Judgement of the Court The High Court dismissed the appeal of EPSON IBÉRICA S.A.U. and decided in favour of the tax authorities. Excerpt “…this Chamber shares and endorses the detailed reasoning of the TEAC starting from a fundamental fact, that if the contract of 25 June 2004, firmado between Mr. Humberto and Sek, by which the latter was appointed as Riji of Epson, Chairman of Epson Europe BV and President of Epson Ibérica, S.A.U. and of Epson Portugal Informática, S.A., established a distribution of 90% and 10% to be paid by Epson Europe BV and Epson Ibérica SAU, respectively, in order to satisfy the bonus to Mr Hiji, in line with the time worked by Mr Hiji for each of the companies, it is logical that that same proportion should be maintained in respect of the other EUR 2.2 million, as a result of the ‘Your Retirement Package’ and not, as the applicant claims, that that amount should be paid in full by the present appellant. The fact that Mr Humberto had devoted his whole life to the present appellant, before it was called Epson Ibérica, SAU and was absorbed by the multinational group Epson, it was called Tradeteck, is not an obstacle to the inclusion obtained, on the basis not only, as the Inspectorate states, ‘that what he worked until 1986 he would already have received’, but also that it is not congruent with what happened after 2002, the date on which Mr Humberto was appointed President of Epson Europe. BV, a situation or cause from which the contract of 29 June 2004, referred to above, arose. The reasoning of the claim, despite the argumentative effort of the governing document, cannot be admitted, without the invocation of the transfer prices referred to therein being relevant for the resolution of the issue at hand. As regards the impossibility of the bilateral adjustment, we refer to the contested decision. In definitive, the plea must be rejected.” Click here for English Translation Click here for other translation SP vs EPSON SAN_1065_2018
Zimbabwe vs CF (Pvt), January 2018, High Court, Case No HH 99-18

Zimbabwe vs CF (Pvt), January 2018, High Court, Case No HH 99-18

CF (Pvt) Ltd’s main business was import, distribution and marketing of motor vehicles and spare parts of a specified brand. Following an audit CF had been issued a tax assessment related to the transfer pricing and VAT – import prices, management fees, audit costs etc. Judgement of the High Court The High Court issued a decision predominantly in favor of the tax authorities. In its judgement, the court stated that either the general deduction provision under section 15 (2) or section 24 or section 98 of the Income Tax Act could be employed to deal with transfer pricing matters. Excerpts: “It seems to me that the unsupported persistent assertions maintained by the appellant even after the concession of 14 November 2014 were indicative of both corporate moral dishonesty and a lack of good faith. I therefore find that the appellant through the mind of its management evinced the intention to evade the payment of the correct amount of tax as contemplated by s 46 (6) of the Income Tax Act by claiming the deduction of management fees paid to the intermediary, who was not entitled to such fees. The Court or the Commissioner have no option but to impose a 100% penalty. The penalty imposed by the Commissioner is accordingly confirmed.” “It seems to me that the Commissioner may very well have been justified in invoking the provisions of s 24 of the Income Tax Act by the acts of commission and omission of the appellant in respect of both management fees and goods in transit at the time he did. However, in accordance with the provisions of s 65 (12) of the Income Tax Act I did not find the claim of the Commissioner unreasonable even in respect of the interest issue that the Commissioner conceded at the eleventh hour or the grounds of appeal frivolous. I will therefore make no order of costs against either party other than that each party is to bear its own costs. Disposal Accordingly, it is ordered that: 1. The amended assessments number 20211442 for the year ending 31 December 2009, 20211443 for the year ending 31 December 2010, 202211446 for the year ending 31 December 2011 and 20211448 for the year ending 31 December 2012 that were issued against the appellant by the respondent on 27 June 2014 are hereby set aside. 2. The Commissioner is directed to issue further amended assessments against the appellant in respect of each year of assessment in compliance with this judgment and in doing so shall: a. Add back to income 7% interest on the cost of services rendered by the appellant for the consignment stock in transit to Zambia, Malawi and Tanzania in the sum of US$2 240 for 2009, US$ 2 505.87 for 2010, US$ 2 198.13 for 2011 and US$3 273.20 for 2012 tax years, respectively. b. Add back to income management fees that were deducted by the appellant in each year in the sum of US$130 000 for 2009, US$140 000 for 2010, US$ 256 629 for 2011 and US$ 140 000 for 2012 tax year, respectively. c. Bring to income the provisions for leave pay in the sum of US$10 000 for 2009, US$ 9 960 for 2010, US$2 049 for 2011 and US$ 491 for 2012 tax year. d. Bring to income provisions for audit fees in the sum of US$ 10 199.17 for 2009, US$12 372 for 2010, US$10 575 for 2011 and US$ 1 260 for the 2012 tax year, respectively. e. Discharge the notional interest he sought to impose on loans and advances made to ADI and GS, respectively. 3. The appellant is to pay 100% additional tax on management fees, 4. The appellant shall pay additional penalties of 10% in respect of leave pay and audit fee provisions. 5. The tax amnesty application is dismissed. 6. Each party shall bear its own costs.” Click here for other translation 2018-zwhhc-99
Norway vs. Exxonmobil Production Norway Inc., January 2018, Lagsmanret no LB-2016-160306

Norway vs. Exxonmobil Production Norway Inc., January 2018, Lagsmanret no LB-2016-160306

An assessment was issued by the Norwegian tax authorities for years 2009 2010 and 2011 concerning the interest on a loan between Exxonmobil Production Norway Inc. (EPNI) as the lender and Exxon Mobile Delaware Holdings Inc. (EMDHI) as the borrower. Both EPNI and EMDHI are subsidiaries in the Exxon Group, where the parent company is domiciled in the United States. The loan agreement between EPNI and EMDHI was entered into in 2009. The loan had a drawing facility of NOK 20 billion. The agreed maturity was 2019, and the interest rate was fixed at 3 months NIBOR plus a margin of 30 basis points. The agreement also contained provisions on quarterly interest rate regulation and a interest adjustment clause allowing the lender to adjust the interest rate on changes in the borrower’s creditworthiness. The dispute concerns the margin of 30 basis points and the importance of the adjustment clause, also referred to as the step-up clause. The Oil Tax office and the Appeals Board for Oil Tax found that the agreed interest rate was not at arm’s length and taxable income for the three relevant years was increased by a total of NOK 95 525 000. EPNI filed an appeal to Oslo District Court. In 2016 the District Court ruled in favor of the tax authorities. EPNI then filed an appeal to the National Court of Appeal. The National Court of Appeal concluded that the interest payments had not been at arm’s length and dismissed the appeal. In the decision, reference is made to the Norwegian Supreme Court decision in the Statoil Angola case from 2007. Click here for translation Norway vs Exxonmobil jan 2018 LB-2016-160306
Europe vs Hamamatsu, Dec 2017, European Court of Justice, Case No C-529-16

Europe vs Hamamatsu, Dec 2017, European Court of Justice, Case No C-529-16

The case concerns the effect of transfer pricing year-end adjustments on VAT – the relationship between transfer pricing and the valuation of goods for customs (VAT) purposes (Hamamatsu case C-529/16). Hamamatsu Photonics Deutschland GmbH (Hamamatsu) is a German subsidiary of the Japanese company Hamamatsu, and it acts as a distributor of optical devices purchased from the parent company. The transfer pricing policy of the group, which is covered by an Advanced Pricing Agreement (APA) with the German Tax Authorities, provides that the consideration paid by Hamamatsu to purchase the goods sold allows Hamamatsu Photonics a target profit. Hamamatsu accounted for an operating margin below the threshold agreed upon in the APA. The Japanese parent company consequently carried out a downward adjustment to allow the achievement of the target profitability by its German subsidiary. Hamamatsu filed a refund claim for the higher customs duties paid on the price that was declared to customs at the time of importation. Customs, at that stage, did not seem to have challenged the carrying of adjustments but refused the refund claim, arguing that no allocation of the adjustment to the individual imported goods was made. The Finanzgericht München handling the case i Germany refered the following questions to the Court of Justice for a preliminary ruling: . (1) Do the provisions of Article 28 et seq. of [the Customs Code] permit an agreed transfer price, which is composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, using an allocation key, regardless of whether a subsequent debit charge or credit is made to the declarant at the end of the accounting period? (2) If so: May the customs value be reviewed and/or determined using simplified approaches where the effects of subsequent transfer pricing adjustments (both upward and downward) can be recognised?’ The CJEU Ruling According to CJEU jurisprudence, the transaction method is the primary criterion for customs valuation, and it only should be derogated if the price actually paid or payable for the goods cannot be determined. Customs value must thus reflect the real economic value of an imported good and take into account all of the elements of that good that have economic value. Thus, the transaction value may have to be adjusted where necessary in order to avoid an arbitrary or fictitious customs value. However, a subsequent adjustment of transaction value is limited to specific cases such as, for instance, the presence of defected or damaged goods. The court ruled as follows: (1) “…in the version in force, the Customs Code does not impose any obligation on importer companies to apply for adjustment of the transaction value where it is adjusted subsequently upwards and it does not contain any provision enabling the customs authorities to safeguard against the risk that those undertakings only apply for downward adjustments. The Customs Code, in the version in force, does not allow account to be taken of a subsequent adjustment of the transaction value, such as that at issue in the main proceedings. Therefore, Articles 28 to 31 of the Customs Code, in the version in force, must be interpreted as meaning that they do not permit an agreed transaction value, composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down.” (2) “As the second question expressly applies only if the first question is answered in the affirmative, there is no need to answer it.” Europe vs Hamamatsu 20 Dec 2017 European Court of Justice No C-529-16

France vs Office Depot, December 2017, CE, Case No. 387975

Re-invoicing to a Office Depot France, by the controlling US company Office Depot Inc, of a part of the cost of an audit service, as it related to the internal control procedures of the French company. Office Depot France was audited for the period from 28 December 2003 to 31 December 2005, after which the administration notified it of a VAT reminder and a withholding tax on the re-invoicing by the US company Office Depot Inc. of a portion of the cost of an audit service relating to its own internal control procedures. The cost was not necessary for the operation of Office Depot France and thus not deductible. The charge in question corresponded to an indirect transfer of profits abroad. Click here for translation France vs Office Depot_13_12_2017_387975_Inédit_au_recueil_Lebon
Italy vs Veneto Banca, July 2017, Regional Tax Court, Case No 2691/2017

Italy vs Veneto Banca, July 2017, Regional Tax Court, Case No 2691/2017

In 2014, the tax authorities issued the Italien Bank a notice of assessment with which it reclaimed for taxation IRAP for 2009 part of the interest expense paid by the bank to a company incorporated under Irish law, belonging to the same group which, according to the tax authorities, it also controlled. In particular, the tax authorities noted that the spread on the bond was two points higher than the normal market spread. The Bank appealed the assessment, arguing that there was no subjective requirement, because at the time of the issue of the debenture loan it had not yet become part of the group of which the company that had subscribed to the loan belonged. It also pleaded that the assessment was unlawful because it applied a provision, Article 11(7) TUIR, provided for IRES purposes, the extension of which to IRAP purposes was provided for by Article 1(281) of Law 147/13, a provision, however, of an innovative nature, the retroactivity of which was considered to be in conflict with the Community principles of legitimate expectations and with Articles 23, 41, 42 and 53 of the Italian Constitution. Decision of the Court The Court dismissed the appeal and decided in favor of the tax authorities. Click her for English translation Click here for other translation Ctr-Puglia-2691_07_2017_ok
US-vs-Analog-Devices-Subsidiaries-Nov-22-2016-United-State-Tax-Court-147-TC-no-15

US-vs-Analog-Devices-Subsidiaries-Nov-22-2016-United-State-Tax-Court-147-TC-no-15

In this case the US Tax Court held that a closing agreement did not result in retroactive indebtedness. Analog Devices Corp. repatriated cash dividends from a foreign subsidiary and claimed an 85% dividends received deduction for FY 2005, cf. US regs § 965. No related party indebtedness was reported by the company which would have limited the deduction available. During the audit of Analog Devises Corp. the IRS claimed that a 2 pct. royalty from the subsidiary should be increased to 6% for FY 2001-2005. This was accepted and Analog Devises Corp. entered into a closing agreement with the IRS. The US Tax Court held that the closing agreement concerning accounts receivable, cf. the increased royalty, was not related party indebtedness for the purposes of § 965. US vs Analog Devices & Subsidiaries, Nov 22 2016, United State Tax Court 147 TC no 15
Australia vs. Tech Mahindra Limited, September 2016, Federal Court, Case no. 2016 ATC 20-582

Australia vs. Tech Mahindra Limited, September 2016, Federal Court, Case no. 2016 ATC 20-582

This  case is about the interpretation of Article 7 (the business profits rule) and Article 12 (the royalties provision) of the Agreement between the Government of Australia and the Government of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. The issue was misuse of the provision in article 12 about cross-border royalties and article 7 about business profits. The case was brought before the Supreme Court, where special leave to appeal was refused 10 March 2017. Australia-vs-TECH-MAHINDRA-LIMITED-September-2016-Federal-Court-case-no-2016-ATC-20-582
US vs. Boston Scientific Corporation, July 2016

US vs. Boston Scientific Corporation, July 2016

Boston Scientific Corporation entered into a Stipulation of Settled Issues with the IRS that is intended to resolve all disputes related to transfer pricing issues for Guidant Corporation’s 2001 through 2006 tax years and Boston Scientific’s 2006 and 2007 tax years. The Stipulation of Settled Issues is contingent upon the IRS Office of Appeals applying the same basis of settlement to all transfer pricing issues for Boston Scientific’s 2008 through 2010 tax years. If finalized, the settlement would resolve substantially all aspects of the controversy, and Boston Scientific would make net tax payments to the IRS of approximately $275 million. US-vs.-Boston-Scientific-Corp
Arm's Length Principle
Sweden vs. Nobel Biocare Holding AB, HFD 2016 ref. 45

Sweden vs. Nobel Biocare Holding AB, HFD 2016 ref. 45

In January 2003, a Swedish company, Nobel Biocare Holding AB, entered into three loan agreements with its Swiss parent company. The loans had 15, 25 and 30 maturity respectively, with terms of amortization and with a variable interest rate corresponding to Stibor plus an interest rate margin of 1.75 percent points for one of the loans and 1.5 percent points for the other two loans. The same day the parent company transfered the loans to a sister company domiciled in the Netherlands Antilles. In June 2008 new loan agreements was signed. The new agreements lacked maturity and amortization and interest rates were stated in accordance with the Group’s monthly fixed interest rates. Amortization continued to take place in accordance with the provisions of the 2003 agreement, and the only actual change in relation to those agreements consisted in raising the interest rates by 2.5 percent points. These loans were transferred to a Swiss sister company. The Swedish Tax administration denied tax deductions corresponding to the difference between the interest rates in 2003 and 2008 respectively, with the support of the so-called correction rule (arm’s length rule) in Chapter 14 Section 19 of the Income Tax Act (1999: 1229). The question before the HFD Court was whether the correction rule could be applied when a contract with a certain condition was replaced by an agreement with a worse conditions – Were an audit according to the correction rule limited to referring only to the interest rate terms of the 2008 agreement or were there any reason to take into account the existence and content of the agreements that had previously been concluded between the parties? The Court stated that a prerequisite for applying the correction rule is that the company’s earnings have been lowered as a result of terms being agreed which differ from what would have been agreed between independent parties. It is thus the effect of the earnings that must be assessed and not how a single income or expense item has been affected. According to the Court, it was not only the new interest rate in the 2008 agreement that should be used as the basis for the audit, but all af the terms agreed by the parties. Of particular importance was the fact that the company accepted an increased interest rate without compensation, even though the 2003 agreement did not contain any such obligation for the company. The Court considered that an independent party had not acted in that way. The Court concluded that the correction rule could be applied when a contract with a certain condition was replaced by an agreement with a worse conditions. Such an interpretation of the correction rule was considered compatible with the OECD Guidelines. Click here for translation Sweden-vs-Nobel-Biocare-Holding-AG-HFD-june-2016-ref-45
Netherlands vs X BV, June 2016, Supreme Court, Case No 2016:1031 (14/05100)

Netherlands vs X BV, June 2016, Supreme Court, Case No 2016:1031 (14/05100)

In 1996, X BV acquired the right to commercially exploit an intangible asset (Z) for a period of 15 years for $ 63.5 million. X BV then entered a franchise agreements with group companies for the use of Z, including a Spanish PE of Y BV. According to the franchise agreement Y BV paid X BV a fee. According to X, in the calculation of the loss carry forward in Spain the franchise fee should not be fully attributed to the PE in Spain due to existing rules on internal roaylties. X states that the loss carry forward amounts to € 13.1 million. The tax authorities increases the loss carry forward with the fee paid to X, for the use of Z by the Spanish PE. According to the tax authorities, the loss carry forward is € 16.1 million. The District Court finds that no amount needs to be taken of the fees that Y BV paid to X BV for the use of Z by the Spannish PE. However, the court finds that financing costs have to be taken into account. The District Court sets the total loss carry forward from Spanish PE to € 14 million. The Supreme Court ruled that the calculation of the District court was not correct. According to the Supreme Court the starting point must be the actual amount paid for the use of Z in Spanish market at the time. It must then be determined which part of the purchase price can be attributed to the use of Z on the Spanish market. Furthermore, the Supreme Court finds that the District Court was right not to take into the fees owed by the Spanish PE to X. The Supreme Court refered the case back to the District Court. Case No 2016:1031 Click here for translation ECLI_NL_HR_2016_1031 Click here for translation ECLI_NL_PHR_2015_818
Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

The Italien company had qualified a funding arrangement in an amount of Lira 500 billion classified by the parties as a non-interest-bearing contribution reserved for a future capital increase. Judgement of the Supreme Court The Italian Supreme Court found that intra-group financing agreements are subject to transfer pricing legislation and that non-interest-bearing financing is generally not consistent with the arm’s-length principle. The court remanded the case to the lower court for further consideration. “”In conclusion, with regard to appeal r.g. no. 12882/2008, the first plea should be upheld, the second absorbed, and the third and fourth declared inadmissible; the judgment under appeal should be set aside in relation to the upheld plea and the case referred to another section of the Regional Tax Commission of Lombardy, which will comply with the principle of law set out in paragraph 3.5…” In regards to the non-interest-bearing financing the Court states in paragraph 3.5: “35… It follows that the valuation “at arm’s length” is irrespective of the original ability of the transaction to generate income and, therefore, of any negotiated obligation of the parties relating to the payment of the consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2). In fact, it is a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its conformity with these (cf, on the criteria for determining normal value, Court of Cassation no. 9709 of 2015): therefore, the qualification of the non-interest-bearing financing, possibly made by the parties (on whom the relevant burden of proof is incumbent, given the normally onerous nature of the loan agreement, pursuant to article 1815 of the Italian Civil Code), proves to be irrelevant, as it is in itself incapable of excluding the application of the criterion of valuation based on normal value. It should be added that it would be clearly unreasonable, and a source of conduct easily aimed at evading the legislation in question, to consider that the administration can exercise this power of adjustment in the case of transactions with a consideration lower than the normal value and even derisory, while it is precluded from doing so in the case of no consideration.” Click her for English translation Click here for other translation Italy Supreme-Court-15-April-2016-No.-7493.pdf
France vs Société Lifestand vivre debout, 15 April 2016, CE

France vs Société Lifestand vivre debout, 15 April 2016, CE

In the case of Société Lifestand vivre debout, the Court considered that there was economic control in a situation where the rent for Swiss premises used by a Swiss entity was paid by a French company. The functions related to the activity of the Swiss company were actually performed by the French company. The French manager managed the Swiss company. Consequently, the transactions conducted between these two entities needed to comply with transfer pricing rules. Click here for other translation Société Lifestand vivre debout _15_04_2016_CE no 372097
Arm's Length Principle
Sweden vs. taxpayer april 2016, Swedish Supreme Administrative Court, HFD 2016 ref. 23

Sweden vs. taxpayer april 2016, Swedish Supreme Administrative Court, HFD 2016 ref. 23

The Swedish Supreme Administrative Court makes it clear that OECD guidelines can be used for interpreting Swedish domestic legislation in cases where the domestic legislation is based on OECD guidance and principles. It is also concluded, that the fact that an agreement is given a certain legal term does not mean that the Court is bound by that classification. It is the substance of the agreement – based on the facts and circumstances – that matters. Click here for translation Sweden-vs-Corp-HFD-2016-ref.-23
France vs. Sté Amycel France, 16 March 2016, CE, No 372372),

France vs. Sté Amycel France, 16 March 2016, CE, No 372372),

In Sté Amycel France the Court held that the Tax Administration must use an “appropriate” comparable when making transfer pricing adjustments. The French company was selling goods to both group companies and unrelated final customers. The tax administration had used a transaction with the third party customers as an internal comparable. However, as the related companies were acting as distributors, the comparison with the pricing applied to a third party customers was considered inappropriate for the purposes of assessing an arm’s length dealing. The court found that the pricing difference actually reflected the fact that the contractual relationship in the two situations was not comparable. Click here for other translation France vs Amycel France _16_03_2016_CE no 372372
US vs. Guidant Corporation. February 2016

US vs. Guidant Corporation. February 2016

The U.S. Tax Court held in favor of the Commissioner of Internal Revenue, stating that neither Internal Revenue Code §482 nor the regulations thereunder require the Respondent to always determine the separate taxable income of each controlled taxpayer in a consolidated group contemporaneously with the making of the resulting adjustments. The Tax Court further held that §482 and the regulations thereunder allow the Respondent to aggregate one or more related transactions instead of making specific adjustments with respect to each type of transaction. US-vs.-Guidant-Corporation-and-Subsidiares-v.-Commissioner-of-Internal-Revenue

US v Coca-Cola, December 2015. US Tax Court

The Coca-Cola Company submitted a petition to the U.S. Tax Court, requesting a redetermination of the deficiencies in Federal income tax for the years ended December 31, 2007, 2008 and 2009, as set forth by the Commissioner of Internal Revenue in a Notice of Deficiency dated September 15, 2015. The total amount in dispute is over $3.3 billion for the 3-year period. Major issues in the dispute include the method used to allocate profit to seven foreign subsidiaries, which use licensed trademarks and formulas to carry out the manufacture and sale of beverage concentrates in markets outside of the United States, as well as the application of correlative adjustments for foreign tax credits. The Coca-Cola Company claims that it used the same allocation method that had been reviewed and approved by the Internal Revenue Service during audits of tax years from 1996 through 2006, the same that was established in a Closing Agreement with respect to the 1987 through 1995 tax years, entered into in 1996, following a transfer pricing audit of tax years 1987 through 1989.
France vs Sodirep Textiles SA-NV , November 2015, Conseil d'État, Case No 370974 (ECLI:FR:CESSR:2015:370974.20151109)

France vs Sodirep Textiles SA-NV , November 2015, Conseil d’État, Case No 370974 (ECLI:FR:CESSR:2015:370974.20151109)

In this decision, the Conseil d’État confirms that Article 57 of the General Tax Code is applicable to any company taxable in France, including a French branch of a foreign company. Under Article 57, where the tax authorities establish the existence of a relationship of dependence and a practice falling within its scope, the presumption of an indirect transfer of profits can only be effectively rebutted by the company liable to tax in France if it proves that the advantages granted by it were justified by the receipt of a benefit. Excerpts “….4. Considering, firstly, that if the applicant company mentions supplier debts of its branch towards the head office, such debts, in normal relations between independent companies, do not generate interest, so that this circumstance has no bearing on the absence of interest stipulations on the advances granted to the head office; 5. Considering, secondly, that under the first paragraph of Article 57 of the General Tax Code, applicable to corporation tax by virtue of Article 209 of the same code: “For the purposes of determining the income tax due by companies which are dependent on or which have control over companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts (…)”; that these provisions institute the principle of the taxable income of companies located outside France. )”; that these provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within their provisions, a presumption of indirect transfer of profits which can only be usefully combated by the company liable to tax in France if it provides proof that the advantages it has granted were justified by the obtaining of compensation; that, on the one hand, these provisions are applicable to any company taxable in France, including a French branch of a company whose registered office is abroad, without the circumstance that the branch does not have legal personality being an obstacle to this; that, on the other hand, the advantages granted by a company taxable in France to a company located outside France in the form of interest-free loans constitute one of the means of indirect transfer of profits abroad; The tax authorities may therefore reinstate in the results of a permanent establishment, taxable in France, the interest which was not invoiced because of the recording of advances granted to the head office located outside France, provided that these advances do not correspond to after-tax profits and that the company does not establish the existence of counterparts for the development of the activity of the French branch; 6. Considering that, in its accounting records drawn up for the purposes of its taxation in France, the permanent establishment of Sodirep Textiles SA-NV recorded advances of funds granted to the Belgian headquarters of this company; that it follows from the above that, in the circumstances of the case, the administration is justified in reintegrating, in the taxable results in France of this permanent establishment, the interest which should have remunerated the advances of funds thus granted, insofar as the absence of invoicing of this interest constitutes an indirect transfer of profits within the meaning of Article 57 of the general tax code, in the absence of proof provided by the applicant company that the advantages in question had at least equivalent counterparts for its branch; 7. Considering, thirdly, that Article 5(4) of the Franco-Belgian Tax Convention of 10 March 1964 stipulates, in the version applicable to the facts of the case: “Where an enterprise carried on by a resident of one of the two Contracting States is dependent on or has control over an enterprise carried on by a resident of the other Contracting State, (…) and where one of these enterprises is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) ) and one of those enterprises grants or imposes conditions to the other enterprise which differ from those which would normally be accorded to effectively independent enterprises, any profits which would normally have accrued to one of those enterprises but which have thereby been transferred, directly or indirectly, to the other enterprise may be included in the taxable profits of the first enterprise. In that event, double taxation of the profits so transferred shall be avoided in accordance with the spirit of the Convention and the competent authorities of the Contracting States shall agree, if necessary, on the amount of the profits transferred. ” ; 8. Considering that the permanent establishment operated in France by the company Sodirep Textiles SA-NV is, as has been said, a branch without legal personality under the control of this Belgian company; that in the light of the above-mentioned provisions, the profits transferred by the branch to the Belgian company may be taxed in France if the branch has granted the head office interest-free cash advances under conditions different from those which would normally be made to genuinely independent enterprises; that there is no need, in order to interpret these provisions, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the provisions in question;…” Click here for English translation Click here for other translation Sodirep Textiles SA-NV November 2015 Conseil d'État Case No 370974
Sweden vs Nordea Nordic Baltic AB,  October 2015, Administrative Court of Appeal, Case No 4811-14, 4813–4817-14

Sweden vs Nordea Nordic Baltic AB, October 2015, Administrative Court of Appeal, Case No 4811-14, 4813–4817-14

Nordea Nordic Baltic AB was the manager of funds and a central distributor in Sweden of certain funds registered in Luxembourg. The company entered into a new distribution agreement that replaced two previous agreements. According to this new agreement, the remuneration to the company was lower than under the previous agreement. The company considered that the compensation under the old agreements had been too high which therefore compensated for (set-off) the lower compensation received according to the new agreement. The Court of Appeal stated that the set-off principle must be applied with caution. A basic precondition should be that these are transactions that have arisen within the framework of the same contractual relationship. It did not matter if the company was overcompensated by another party to the agreement. Any overcompensation in previous years from the same contracting party could also not be taken into account as it was the result of a different pricing strategy within the framework of another contract. For internal set-offs to be considered they must be related to transactions between the same contracting parties and covered by the same pricing strategy within the same agreement. Click here for translation Stockholm KR 4811-14 Dom 2015-10-29
Italy vs SAME DEUTZ FAHR ITALIA s.p.a, July 2015, Supreme Court, no 15282

Italy vs SAME DEUTZ FAHR ITALIA s.p.a, July 2015, Supreme Court, no 15282

This case is about methods applicable for determination of “normal value” in transactions between related companies; the Comparable Uncontrolled Price method (CUP). Click here for English translation Click here for other translation Italy Supreme-Court-21st-July-2015-n.-15282
US vs. BMC Software. March 2015

US vs. BMC Software. March 2015

The United States Court of Appeals for the Fifth Circuit issued its ruling on the case of BMC Software, Inc. v. Commissioner of Internal Revenue. The case discussed issues relating to § 965 regarding repatriation of dividends and § 482. Following an audit, BMC had entered into a Closing Agreement, making primary and secondary adjustments to its transfer pricing arrangements. The Commissioner argued that the secondary adjustment affected BMC’s application of § 965. The court ruled in favor of BMC, reversing the tax court’s previous ruling. US-vs-BMC-Appeal-from-a-Decision-of-the-U.S.-Tax-Court
Arm's Length Principle
Switzerland vs. Corp, Jan. 2015, Case No. 2C_1082-2013, 2C_1083-2013

Switzerland vs. Corp, Jan. 2015, Case No. 2C_1082-2013, 2C_1083-2013

In this case, the Swiss Court elaborates on application of the arm’s length principel, transfer pricing methods, OECD TPG, and the burden of proof in Switzerland. Excerp in English (unofficial translation) “5.1. The question of whether there is a disproportion between the service provided by the company and the compensation it provides is determined by comparison with what has been agreed between independent persons (“Drittvergleich”): the question is whether the benefit would have been granted, to the same extent, to a third party outside the company, or to check whether the “arm’s length” was respected. This method makes it possible to identify the market value of the property transferred or the service rendered, with which the counter-benefit actually required must be compared. 5.2. Where there is a free market, the prices charged therein are decisive and allow an effective comparison with those applied in the transaction examined. If there is no free market, but transactions with the same characteristics have been concluded with a third party or between third parties, the price at issue must be compared with that which has been carried out in those transactions. This method corresponds to the comparable free market price method as set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010 edition, see especially § 2.13). ss, hereinafter: Principles). In order for this method to be applicable, the transaction with a third party or between third parties must be similar to the transaction examined (Locher, op.cit., 103 ad art 58 DBG), that is to say having been concluded in circumstances comparable to this one. The concept of ” comparable transaction ” is not easy to define. The relevance of the comparison with transactions concluded with third parties assumes that the relevant economic circumstances of these transactions are similar to those of the transaction examined. The comparability of the transactions is determined by their nature and the totality of the circumstances of the case. If the relevant economic conditions differ from those of the transaction under review, adjustments must be made to erase the effects of these differences. However, it can not be ruled out that a comparable transaction was not concluded at market price. The formation of the price can indeed be influenced by several elements, such as market conditions, contractual conditions (for example, the existence of secondary benefits, the quantity of goods sold, terms of payment), the commercial strategy pursued by this third party purchaser or the economic functions of the parties. Nevertheless, the price charged in a comparable transaction is presumed to correspond to the market price; in case of dispute, proof to the contrary lies with the company. In the absence of a comparable transaction, the examination of the arm’s length principle is then based on a hypothetical value determined by other methods, such as the cost-plus method or, in the context of transactions such as the distribution of goods, the resale price.” Click here for translation Swiss case law 2C_1082-2013, 2C_1083-2013
Germany vs C-GmbH, December 2014, Bundesfinanzhof, Case No I R 23/13

Germany vs C-GmbH, December 2014, Bundesfinanzhof, Case No I R 23/13

C-GmbH was the sole shareholder of I-GmbH. In 2000, I-GmbH, together with another company, set up a US company for the development of the US market, H-Inc., in which the I-GmbH held 60 per cent of the shares. H-Inc. received equity from the two shareholders and also received a bank loan of approx. $ 1.5 million (USD), which the shareholders secured through guarantees. As of December 31, 2003, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. 950,000 USD. On June 30 , 2004,  I-GmbH became the sole shareholder of H-Inc. Then the bank put the H-Inc. granted loans due. Since H-Inc. was not able to serve the bank loan, C-GmbH paid the bank. As of December 31, 2004, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. $ 450,000 , which at December 31 , 2005 amounted to approx. $ 1.6 million, as at 31 December 2006 $ 2.5 million and at December 31, 2007 USD 3.5 million. During the years 2004 to 2007, the I-GmbH granted its US subsidiary 5% interest-bearing, unsecured loans of € 261,756.22 (2004), € 1,103,140 (2005), € 158,553.39 (2006) and € 75,000 (2007) resulting from the liquidity of future profits of H-Inc. should be repaid. Loan receivables were subject to individual value adjustments already in the respective year of their commitment (2004: € 261,052, 2005: € 1,103,140, ​​2006: € 158,000, 2007: € 75,000). In judgment of 17 December 2014, the German Tax Court stated, with reference to its judgment of 11 October 2012, IR 75/11, that the treaty principle of “dealing At arm’s length ” have a blocking effect on the so-called special conditions. The relevant test according to Article 9 (1) of the DTC-USA 1989, which corresponds in substance to Article 9 (1) of the OECD Model Agreement, could only include those circumstances that have an effect on agreed prices. The concept of agreed conditions in Article 9 (1) of the OECD-Model Agreement should, in principle, include everything which is the subject of commercial and financial relations and therefore the subject of contractual exchange between affiliated undertakings, so that both the price and all other terms and conditions should be included. Following these decisions, on 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment. According to the decree the principles of the above decisions are not to be applied beyond the decided individual cases. Se also the later decision from the German Tax Court I R 29/14. Click here for English translation Click here for other translation I R 23-13

Ecuador vs JFC Ecuador S.A., November 2014, National Court, Case No. 488-2012

JFC Ecuador is active in coordination and logistic operations for the transfer of Ecuadorian fruit to related parties in the Russian JFC Group. Following an audit the tax authorities issued an assessment where the prices of these transactions had been determined based on quoted prices issued by the authorities in the SOPISCO NEWS database. However, according to JFC Ecuador, SOPISCO NEWS does not correspond to a publicly available international trade exchange or price database. On the contrary, it is a bulletin that lists quotations that involve price estimates, established through unidentified sources. The price quotations listed by SOPISCO NEWS correspond to prices that the bulletin presumes were agreed upon by companies that have carried out the management and marketing and sales for the placement of the product, while JFC Ecuador did not carry out such activities. Judgment of the Court The Court concludes that the use of the SOPISCO NEWS database by the Tax Administration, as it is an internationally recognized source of price information used by international organizations as a source of information, is appropriate depending on the method applied. In conclusion, this Chamber considers that the Tax Administration acted in accordance with its determining power as set forth in Article 68 of the Tax Code and Article 23 of the Internal Tax Regime Law, and that its acts are subject to the presumption of legitimacy and enforceability as set forth in Article 82 of the same law…”. Click here for English Translation Click here for other translation 488-2012
Switzerland vs. X, Oct. 2013, Federal Supreme Court, Case No. 2C_644-2013

Switzerland vs. X, Oct. 2013, Federal Supreme Court, Case No. 2C_644-2013

X was the principal shareholder and Chairman in the Insurance Agency, Y AG. In 2003, the company went bankrupt, with the bankruptcy proceedings suspended for lack of assets and the company was removed from the commercial register in September 2003. On 12 March 2007, the tax administration initiated a subsequent taxation proceedings against X concerning monetary benefits which it was supposed to have received from Y AG in the years 1997 to 2000. On 2 May 2012, the tax administration imposed an additional tax in the amount of CHF 39’056.20 including default interest. The appeal against this decision was rejected by the Tax Appeals Commission. Before the Federal Supreme Court, X appealed the decision. Excerp from the Federal Supreme Court ruling: “3.1 According to Art. 20 para. 1 lit.c DBG Income from movable assets, in particular dividends, profit shares, liquidation surpluses and non-cash benefits arising from participations of all kinds. In the relevant economic view, this includes all payments, transfers, credits, clearings or other services that can be measured and measured in cash Holders of social participation rights under any title on the basis of that holding receive from the Company and which do not constitute repayment of the existing capital. Specifically, so-called hidden profit distributions within the meaning of Art. 58 para. 1 lit. b DBG, ie contributions by the Company, which are not offset by any or no sufficient consideration by the Shareholder and which would not have been provided to a third party not involved in the Company or only to a significantly lesser extent. This is to be determined by a third-party comparison (the so-called “dealing at arm’s length” principle), in which all concrete circumstances of the concluded transaction must be taken into account. Non-cash benefits include a waiver of earnings for the benefit of the shareholder or a related party, which results in a corresponding reduction in the profit reported in the income statement. Such income waivers exist when the Company waives all or part of the income due to it for the benefit of the shareholder or related parties or if they do not provide the consideration which the Company would require from a non-participating third party. 3.2 In the area of non-cash benefits, the basic rule is that the tax authority bears the burden of proof for tax-increasing and increasing facts, whereas the taxable person is the one who repeals or reduces the tax. In particular, the authority is responsible for proving that the company has rendered a service and that it has no or no reasonable consideration in return. If the authority has established such a mismatch between performance and consideration, it is for the taxable person to rebut the presumption founded on it. If it fails to do so, it will bear the consequences of lack of evidence. It should also be noted that the taxpayer is obliged to cooperate in the mixed assessment system. Anyone making payments that are neither accounted for nor documented is to bear the consequences of such evidential proof, ie his payments are regarded as monetary benefits.” The Federal Supreme Court rules that the appeal was unfounded and therefore dismissed. Click here for translation Swiss case law 2C_644-2013

Norway vs VingCard Elsafe AS, 2012,Oslo Tingrett 29 November 2010 – VingCard Elsafe AS (Utv 2010 s 1690)

VingCard / Elsafe had entered into a distribution agreement with related party AAH Inc. The agreement governed the internal price setting so that AAH Inc was guaranteed an annual net margin of between 1% and 5%. The interval was later changed to 1.1% – 2.9% in line with the conclusions in the internal price study. In question was the use of the Transactional Net Margin Method (TNMM) method in connection with pricing. Judgement of the Court The court pointed out that the US distributor company was left with a limited profit which reflected the company’s role in the transaction, and that it should be possible for group companies to enter into such an a agreement. A transfer pricing model which grants guaranteed return to a foreign distributor (return on sales method with a range) as well as true-up payments including year-end adjustments of the income of the distributor, could be accepted from a Norwegian tax perspective. Click here for translation Norway vs Vingcard 2012 SC
Arm's Length Principle
Spain vs. Bicc Cables Energía Comunicaciones S.A., July 2012, Supreme Court, Case No. 3779/2009

Spain vs. Bicc Cables Energía Comunicaciones S.A., July 2012, Supreme Court, Case No. 3779/2009

In May 1997, BICC CABLES ENERGÍA COMUNICACIONES, S.A. acquired 177 class B shares in BICC USA Inc. (BUSA) for USD 175 million. The par value of each share was one dollar. The acquisition price of the shares was set on the basis of an Arthur Andersen Report which stated that the fair market value of BUSA was USD 423 million. BUSA was the holding company of four investee companies, so the valuation was made in relation to each of the groups of investee companies. The shares acquired by BICC CABLES were Class B shares, with a fixed annual dividend of 4.5% of the total investment. This dividend was paid, at BUSA’s discretion and in accordance with the agreements entered into between the parties, either in cash or by delivery of shares in the Class B company. The acquisition was financed by (1) Ptas. 3,450,000,000,000 charged to the unrestricted reserves account of BICC CABLES and (2) 22,000,000,000 pesetas through a loan granted by an English bank at an interest rate of 6.03%. As a result of the acquisition, BICC CABLES received a shareholding percentage of 15%, which was much lower than what would correspond to the cost of the shares (175 million US dollars) in relation to the value estimated by the auditing company (423 million US dollars). In 1998, BUSA delivered 32 Class A shares to BICC CABLES as a dividend, valued at 1,321,546,634 pesetas. In 1999, no dividend was paid to the company. In June 1999, BICC CABLES repaid part of the loan early (Ptas. 3,600,000,000). Furthermore, in November 1999, BICC OVERSEAS INVESTMENTS Ltd. (BOIL) acquired the BUSA shares owned by BICC CABLES and, at the same time, subrogates itself to the part of the loan which had not been repaid. The shareholding structure of BICC CABLES was as follows: (1) BICC OVERSEAS INVESTMENTS Ltd. (BOIL), a <>, holds 615,000 shares (43.69% of the capital), 2) BICC CEAT CAVI SRL (BICC Plc.), the parent company of the group, holds 226,451 shares (19.05%), and (3) BANCO SANTANDER holds 500,000 non-voting shares (35.5%). In February 2000 SANTANDER sold its shares to BICC Plc. In 1997, BICC CABLES considered Ptas. 899,129,800 as tax deductible financial expenses arising from the loan. In 1998, the expenses linked to the loan Ptas. 1,326,600,000 were deducted from the taxable income. Dividend received this year (the 32 BUSA class A shares valued at Ptas. 1,321,546,634), was not included in the profit and loss account. The company claimed that income corresponding to the dividend would be accounted for when the shares were sold. In 1999, financial expenses related to the loan Ptas. 489,099,461 were considered deductible. In 2000, the partial repayment of the loan and the loss on the transfer of the shares to BOIL were accounted for, despite the fact that they corresponded to two transactions carried out in 1999″. On this bagground a tax assessment was issued by the tax authorities, in which the tax effects (deductions and losses) of the above transactions were disregarded. This assessment was appealed to the Court by BICC. The court of first instance dismissed the appeal and decided in favour of the tax authorities. Judgement of the Supreme Court The Supreme Court likewise found that the transaction would not have been agreed by independent parties and thus not had been in accordance with the arm’s length principle. Excerpts from the case “The application to the case of the provision in question does not appear to be conditional, contrary to what is claimed in the application, on the classification of the transaction in question as <> or <>. If the absence of free will on the part of the taxpayer is established, if it can be stated that the activity in question was exclusively determined by the link between the companies and if it is clearly inferred – from the evidence – that the same transaction would not have been carried out by independent companies, the competent tax authorities may make the appropriate adjustments, including, in this case, the annulment of any tax effect that might derive from the transaction in question.” “it can be concluded, in agreement with the contested decisions, that the transaction resulted in BICC USA Inc. (BUSA) obtained substantial financial resources without the incorporation of shareholders from outside the group; furthermore, it gave rise to costs for the Spanish entity, which obtained no advantage or profit whatsoever, but only losses. It can easily be concluded that the operation was decided and imposed by the group’s parent company in order to increase the resources of its American subsidiary and that, in any event, in view of the above data, such an operation would not have been carried out by an independent company.” “In any case, it is clear that the Administration has made use of the anti-avoidance rules contained in article nine of the Double Taxation Convention, which constitutes our domestic law.” Click here for English translation Click here for other translation Spain-vs-Bicc-Cables-July-2012-Supreme-Court
Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

In this case the Italien company, T. S.r.l. is entirely controlled by H. S.A., registered in Switzerland, and is part of the American multinational group T., being its only branch in Italy for the exclusive marketing of its software products (games for personal computers, play station, etc.). T. S.r.l. imports these products through T. Ltd (which is also part of the same multinational group and controlled by the same parent company), which is registered in the United Kingdom and is the sole supplier of the products that are marketed by the Italian branch. On 31st October 2004 (the last day of the financial year), T. S.r.l. posted an invoice that the British company T. Ltd had issued on that date for £ 947,456. This accounts document referred to “Price adjustment to product sold during FY 2003/2004”, and charges the Italian company with adjustment increases to previously applied prices relative to certain software products the company had purchased during the aforesaid financial year. The Inland Revenue challenged the operation claiming it was evasive, and addressed to reducing the taxable profit of the Italian company by the abusive use of transfer pricing. To back up these claims the Inland Revenue emphasised that: • the operation was carried out on the last day of the financial year; • it involved posting an invoice for the adjustment increases to previously applied prices by the English supplier company; • the prices differ from the average purchase price for the same products by T. S.r.l.. Supreme Court established that: “(…)the application of transfer pricing regulations does not fight the concealment of the price, which is a form of evasion, but the manoeuvres that affect an evident price, allowing the surreptitious transfer of profits from one country to another, which has a tangible effect on the applicable tax regime. Therefore, given these essential requirements it must be considered that this regulation constitutes – according to the more widespread interpretation in case law in this court – an anti-avoidance provision (…)”. The infringement of an anti-avoidance provision means that the burden of proof for recourse to this premise of fact, in principle is the responsibility of the Inland Revenue office that intends carrying out the controls. Therefore, the Supreme Court felt that: “(…) when determining company income, or rather, the problem of sharing the intra-group costs, the question of pertinence must be considered as well as the existence of the declared costs further to charging for a service or asset transfer to the subsidiary from the holding, or another company that is controlled by the same company (…). The burden for demonstrating the existence and pertinence of these negative income items, and, as in the case in question, it concerns costs derived from services or assets loaned or transferred by a foreign holding to an Italian subsidiary, each element that enables the inland revenue to verify the arm’s length value of the relative costs – further to the so-called principle of sphere of influence– can only be the responsibility of the taxpayer”. Transfer pricing legislation is included among the anti-avoidance dispositions, as it is addressed to fight the transfer of income from one country to another by “manipulating” the intra-group costs. Consequently, the burden of proof that there are the premises of fact of evasion lies, mainly, with the Inland Revenue, which should prove the grounds for the adjustment, or the deviation from the applied cost with respect to the arm’s length value. However, as the sharing of intra-group costs also involves the matter of whether the costs exist and are pertinent, the burden of proof of the costs to the company’s business lies with the taxpayer according to the Supreme Court. The Italien Supreme Court have drawn a distinction between cases regarding income and cases regarding expenses. In cases regarding income the burden of proof lies with the tax authorities. In cases regarding costs, the burden of proof lies with the taxpayer. Click here for English translation Click here for other translation Italy-vs-Take-Two-Interactive-Italia-srl-2012
Costa Rica vs Polymer S. A., June 2012, Supreme Court, Case No 11-010227-0007-CO

Costa Rica vs Polymer S. A., June 2012, Supreme Court, Case No 11-010227-0007-CO

Polymer S.A. had been issued an assessment of taxable income based on the arm’s length principle. In the assessment the tax authorities had based the adjustment on the guidance provided in the OECD TPG. Polymer S.A. was of the opinion that this was unconstitutional since the OECD TPG had not been implemented by law and Costa Rica was not an OECD member country. Judgement of the Supreme Court The Court dismissed the appeal of Polymer S.A. Excerpts from the Judgement “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility that other – better – techniques may be admitted. What is important is that the contested Interpretative Guideline does not aim to eliminate multiple other scenarios arising from different forms of business organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt a certain technique or several techniques to regulate a certain behaviour of companies, or recognise legal practices to reduce taxes, it is possible to admit that if there are clashes with tax law and reality, in the absence of a law, it is ultimately up to the judge to decide on the correct application of the technical rules. Thus, in the absence of any particular legislation, this fact does not prevent the parties in conflict from presenting their arguments, producing evidence and demonstrating the need to apply other criteria that allow for the non-application of the technical rule that adopts the guideline in question, or of another possible method, a situation that evidently makes the discussion a matter of ordinary legality. For all of the above reasons, the action must be dismissed, as indeed it is. A., the contested Guideline interprets Articles 8 and 12 of the Code of Tax Rules and Procedures, disregarding the legal forms to assess the true economic intention of the parties. It allows to assess transactions between related entities, where transfer prices exist, and to make the respective income tax adjustments. It does not aim to eliminate other multiple scenarios arising from different forms of business organisation, but rather targets transfer pricing between related companies. Moreover, our country does not need to be a member of the Organisation for Economic Co-operation and Development (OECD) to make use of certain rules or practices that contain a high degree of consensus, under the provisions of articles 15 and 16 of the General Law of Public Administration that establish the limits to discretion, even in the absence of law. By virtue of the foregoing, and there being no reasons to justify a change of criterion, it is considered that the contested Directive does not infringe the principles of the reservation of law, regulatory power and legal certainty, and therefore the action is rejected on the merits.“ Click here for English translation Click here for other translation Costa Rica June 2012 Sentencia nº 08739 de Sala Constitucional de la Corte Suprema de Justicia
Arm's Length Principle
Switzerland vs. Corp, Juli 2012, Federal Supreme Court, Case No. 2C_834-2011, 2C_836-2011

Switzerland vs. Corp, Juli 2012, Federal Supreme Court, Case No. 2C_834-2011, 2C_836-2011

In this ruling, the Swiss Federal Supreme Court comments on the application of the arm’s length principel and the burden of proff in Switzerland. “Services, which have their legal basis in the investment relationship, are to be offset against the taxable income of the company to the extent that they would otherwise not be granted to a third party under the same circumstances or not to the same extent and would not constitute a capital repayment. This rule of the so-called third-party comparison (or the principle of “dealing at arm’s length”) therefore requires that even legal transactions with equity holders or between Group companies be conducted on the same terms as would be agreed with external third parties on competitive and market conditions.” “Swiss Law – with the exception of individual provisions – does not have any actual group law and treats each company as a legally independent entity with its own bodies which have to transact the business in the interest of the company and not in that of the group, other companies or the controlling shareholder. Legal transactions between such companies are therefore to be conducted on the same terms as they would be agreed with external third parties. In particular, the Executive Committee (or the controlling shareholder) is not allowed to distribute the profits made by the various companies freely to these companies>… ” “In the area of non-cash benefits, the basic rule is that the tax authority bears the burden of proof of tax-increasing and increasing facts, whereas the taxable company bears the burden of all that the tax abolishes or reduces. In particular, the authority is responsible for proving that the company has rendered a service and that it has no or on reasonable consideration in return. If the authority has demonstrated such a mismatch between performance and consideration, it is for the taxable company to rebut the presumption. If the company can not do that, it bears the consequences of the lack of evidence. This applies in particular if it makes payments that are neither accounted for nor documented…” Furthermore, the Federal Supreme Court disallows transfer of tax losses where the absorbed subsidiary is an empty shell. The question addressed is whether the subsidiary, at the time of its absorption, was still engaged in active contract R&D. Only if this this was the case, the deduction of losses at the level of the absorbing parent company was permissible. Click here for translation Swiss case law 2C_834-2011, 2C_836-2011
France vs. Microsoft, Feb 2012, CCA, No 10VE00752

France vs. Microsoft, Feb 2012, CCA, No 10VE00752

In the Microsoft case, the distribution activity of a French subsidiary of an American group was transferred to its Irish sister company. The French subsidiary was then converted into a sales agent of the Irish subsidiary. The Commission rate earned by the French subsidiary was reduced from 25% to 18%. The French tax authorities, taking into account the previous 25% commission rate, considered that it should not have been reduced and reinstated the corresponding income into the French company’s taxable income. To support their position, the French tax authorities conducted a benchmarking study. However, the Court of Appeals ruled that the mere fact that the commission rate has been reduced does not demonstrate the transfer of profits abroad. Moreover, the Court confirmed that the transfer of profits abroad was not proved due to the irrelevance of the methods used and of the comparables found by the French tax authorities. The companies were not suitable for comparison because they were not in the same market as Microsoft France and that some of them were not independent companies. Click here for translation France vs Microsoft 2012
Canada vs Alberta Printed Circuits Ltd., April 2011, Tax Court of Canada, Case No 2011 TCC 232

Canada vs Alberta Printed Circuits Ltd., April 2011, Tax Court of Canada, Case No 2011 TCC 232

Alberta Printed Circuits Ltd (APC, the taxpayer) was a Canadian manufacturer of custom prototype circuit boards. The manufacturing process was initially manual and later automated. In 1996, a Barbados company, APCI Inc.,  was formed via a complex ownership structure. The Barbados company provided services to Alberta Printed Circuits Ltd. by performing setup functions, software and website development, and maintenance services. APCI charged the appellant a fixed fee for the setup services and a square-inch fee for non-setup services. Alberta Printed Circuits Ltd charged the same fee for the same services to third-party customers. The tax authorities asserted that the Alberta Printed Circuits Ltd overpaid APCI $3.4 million because the terms and conditions of the agreements differed from those that would have been entered at arm’s length. Alberta Printed Circuits Ltd provided evidence of internal comparable transactions and transfer prices were determined by the comparable uncontrolled price (CUP) method. The court held that the price paid to APCI for the setup fees was arm’s length. It allowed the appeal for those amounts but found that the appellant failed to establish that it did not overpay for the non-setup services. The court disagreed with the CRA’s application of the transactional net margin method. The TCC judge instead accepted the hierarchy of methods established in the 1995 OECD guidelines, which shows a preference for traditional transaction methods and cites the CUP method as providing the highest degree of comparability. Thus, the court preferred the appellant’s internal comparable transactions. Case No 2011 TCC 232 Canada vs Alberta Printed Circuits 2011
France vs. SOCIETE SOUTIRAN ET COMPAGNIE, March 2011, Supreme Tax Court, Case nr. 342099

France vs. SOCIETE SOUTIRAN ET COMPAGNIE, March 2011, Supreme Tax Court, Case nr. 342099

The French Supreme Tax Court has ruled on 2 March 2011 that the transfer pricing legislation is in conformity with the French Constitution. “The plea of SOCIÉTÉ SOUTIRAN ET COMPAGNIE, that the article 57 of code general of the taxes infringing the rights and freedoms guaranteed by the Constitution must be regarded as not serious” Click here for translation 20110302 Conseil d_+ëtat N-¦ 342099
Czech Republic vs. Corp. February 2011, Supreme Administrative Court, Afs 19/2010-125

Czech Republic vs. Corp. February 2011, Supreme Administrative Court, Afs 19/2010-125

A Czech company (the lessor) owned real estate and rented it to independent parties. An Austrian related company provided management and consulting services to the lessor The service fees significantly increased each year, although the income of the Czech company and the number of lease contracts were constant in the examined yearsThe tax authorities required that the taxpayer prove the actual provision of the services and their relationship to taxable income. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period.The legal question was: the scope of the burden of proof that rests with the taxpayer with respect to services received from related partyThe court ruled that: the taxpayer was obliged to prove the relationship of the expensed service fees to its taxable income. Tangible evidence of the provided services, including reports, correspondence and confirmation of business trips should be provided by the tax payer in order to prove the actual provision of the services. This case confirms the strong position of tax authorities when challenging the transfer prices of services. If the taxpayer does not meet the benefit test (proving that the services were actually rendered and incurred in relation to its taxable income), the entire service expense is non-deductible. Link to full original text: www.nssoud.cz

India vs Glaxo Smithkline Asia (P) LTD, October 2010, India’s Supreme Court, Case No 18121/2007

The key question in this case was whether Glaxo Smithkline Asia (P) LTD and it’s service provider [GSKCH] are related companies within the meaning of Section 40A(2) of the Income Tax Act? If the answer to the question is in the affirmative, then the next question on the merits which arose for determination was whether the allocation of cross-charges by Glaxo Smithkline Asia (P) LTD was the correct test applied by the assessee? In other words, whether the allocation of cross-charges should be allowed or disallowed by the tax authorities? Held by the Supreme Court The Court was of the view that as far as this case was concerned, there was no need to interfere as the entire exercise was revenue neutral. Therefore, the special leave petition filed by the tax authorities was dismissed. Excerpts – “The main issue which needs to be addressed is, whether Transfer Pricing Regulations should be limited to cross-border transactions or whether the Transfer Pricing Regulations be extended to domestic transactions? In the case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage – [i] If one of the related Companies is loss making and the other is profit making and profit is shifted to the loss making concern; and [ii] If there are different rates for two related units [on account of different status, area based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of tax arbitrage. For example, sale of goods or services from non-SEZ area [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less profit taxable and non-taxable division will have a higher profit exemption. (…) We are informed that the matter has been examined by CBDT and it is of the view that amendments would be required to the provisions of the Act if such Transfer Pricing Regulations are required to be applied to domestic transactions between related parties under Section 40A(2) of the Act. (…) In order to reduce litigation, we are of the view that certain provisions of the Act, like Section 40A(2) and Section 80IA(10), need to be amended empowering the Assessing Officer to make adjustments to the income declared by the assessee having regard to the fair market value of the transactions between the related parties. The Assessing Officer may thereafter apply any of the generally accepted methods of determination of arm’s length price, including the methods provided under Transfer Pricing Regulations. (…) Normally, this Court does not make recommendations or suggestions. However, as stated above, in order to reduce litigation occurring in complicated matters, we are of the view that the question of amendment, as indicated above, may require consideration expeditiously by the Ministry of Finance.” Click here for translation India vs glaxo_smithkline_transfer_pricing SC 26 October 2010 NW
Arm's Length Principle
Czech Republic vs. DATON technology, spol. s.r.o., August 2010, Supreme Administrative Court , Case No 2 Afs 53/2010 – 63

Czech Republic vs. DATON technology, spol. s.r.o., August 2010, Supreme Administrative Court , Case No 2 Afs 53/2010 – 63

The tax authorities had increased the amount of the tax due to a change in the calculation of interest on loans granted by DATON technology to its partners (managing directors). At issue was whether the amount of the normal interest on loans granted by DATON technology to its managing directors should be determined on the basis of a fixed interest rate for the entire period of the loan or whether changes in the interest rate should be taken into account when calculating the interest as a monetary benefit – income from employment. Judgement of the Court The Supreme Administrative Court did not find that the pleaded ground of appeal was met and therefore dismissed the appeal. In failing to take account of changes in interest rates in 1998, the year for which it imposed the tax, when calculating the interest on the interest-free loan granted by the applicant (in its capacity as ’employer’) to the managing directors (in their capacity as ’employees’), the applicant acted contrary to established administrative practice. Excerpts “However, equal treatment in terms of uniform administrative practice must be maintained in relation to taxpayers. The key to resolving the question of whether the amount of interest normally payable on loans granted by the taxpayer to its managing directors should be fixed at the date on which the loan was granted or whether changes in the interest rate over time should be taken into account in calculating the interest is precisely that administrative practice. As already indicated above, an administrative practice is an activity which is generally accepted and followed, its permanence depending on the frequency and duration of its use. It is possible to deviate from an established administrative practice ‘in principle only in the future, for rational reasons and for all cases which are affected by the administrative authority’s practice’ (cited from the judgment of the Supreme Administrative Court of 28 April 2005, No 2 Ans 1/2005-55). Thus, although the statutory provision allows for a dual interpretation (both approaches are defensible), what is decisive in the present case is that there is an established administrative practice which is not contra legem. [24] At the same time, the Supreme Administrative Court also considered the objection of the complainant as an administrative authority that the tax administrators in similar cases acted identically throughout the territory of the Czech Republic. This objection would imply that, despite the existence of a methodology, the tax administrators are governed by different rules, i.e. In particular, the phrase: ‘This calculation shall be carried out at least once per tax period for the purposes of taxation.’).” “The tax authorities must apply a level playing field in relation to taxpayers. If taxpayers can have a legitimate expectation of a certain administrative practice on the basis of generally available information (about the tax authorities’ internal procedures), it is not possible to reasonably argue that the tax authorities have changed their administrative practice without actually demonstrating that that practice meets the required criteria (see paragraph 18); those criteria may in principle also include the criterion of publication in the sense of the objective possibility for taxpayers to learn about that administrative practice. [28] In so far as the complainant considers that the reference to the Ministry of Finance’s methodological guidelines does not apply to it, since ‘the tax administrator in the present case is in a different position from the employer in granting employee loans’, this is not a relevant argument. As stated above, the administrative authorities are obliged to follow the methodological guidelines in their practice. The determination of the method of calculating interest for income tax purposes in a methodological guideline is a guideline for a uniform approach, in particular by the administrative authorities (tax administrations). In addition, the tax subjects (here employers) are assured that if they follow these rules, the tax authorities should not reproach them for incorrect practice in the event of an audit. [29] However, the Supreme Administrative Court agrees with the complainant’s objection concerning the irrelevance of the applicant’s argument that the Czech National Bank reduced interest rates in 1998. In so far as that bank did not at all grant loans similar to the loan granted by the applicant to the managing directors, it is not possible to include that bank in the group of financial institutions granting such loans (similar in time and place) on the basis of which the complainant calculated the normal interest rate. If, during 1998, the Czech National Bank reduced interest rates, that does not mean that the individual financial institutions which behave in a market-oriented manner must also have reduced their interest rates.” As regards the binding nature of the Guidelines, the Supreme Administrative Court has expressed itself as follows: “The Supreme Administrative Court has already dealt with the nature of methodological guidelines and the binding nature of administrative practice of administrative authorities in several of its decisions, on the basis of which it is possible to define binding administrative practice briefly by means of 1. the criterion of legality – it must be exclusively a practice (action or inaction) which is established in accordance with the law, or created on the basis of the authority conferred by law, while it must not interfere with the legally guaranteed rights of private persons, and 2. predictability – the practice is generally accepted and followed by the relevant administrative authorities, one can legitimately expect the same practice in similar cases. 2-Afs-53-2010-–-63 ENG Click here for English Translation Click here for other translation 2 Afs 53-2010 – 63
Spain vs X SL, June 2009, TEAC, Case No Rec. 656/2007

Spain vs X SL, June 2009, TEAC, Case No Rec. 656/2007

A holding company of an international Group was established in Spain and in it and in the Group’s operating entity, which was made dependent on it and with which it was fiscally consolidated, intra group loans were requested, for the acquisition of shares in other Group companies, which were mere asset relocations without any economic or business substance, with the sole objective of reducing taxation in Spain: Both in the Spanish holding company and in the operating entity, financial expenses were deducted as a result of that indebtedness, which lead to a drastic reduction in profits in the operating company and losses in the holding company, with the final result that this income remains untaxed. On this background an assessment was issued by the tax authorities where the financial expenses were disallowed under Spanish “fraud by law” provisions. As stated in Article 6.4 of the Civil Code: “Acts carried out under the protection of the text of a rule which pursue a result prohibited by the legal system, or contrary to it, shall be considered to have been carried out in fraud of law and shall not prevent the due application of the rule which it was sought to circumvent“. This, transferred to the tax sphere, is equivalent to the text of Article 24 of the LGT, in the wording given by Law 25/1995, of 20 July 1995 (applicable to the case in question), which states: “In order to avoid tax evasion, it shall be understood that there is no extension of the taxable event when tax is levied on events, acts or legal transactions carried out for the purpose of avoiding payment of the tax, under the cover of the text of rules issued for a different purpose, provided that they produce a result equivalent to that derived from the taxable event. Fraud of tax law must be declared in special proceedings in which the interested party is heard. 2. Events, acts or legal transactions carried out in fraudulent evasion of tax law shall not prevent the application of the evaded tax rule nor shall they give rise to the tax advantages that were intended to be obtained through them. 3. In the settlements made as a result of the tax evasion case, the tax rule that has been evaded shall be applied and the corresponding late payment interest shall be paid, without the imposition of penalties for these purposes alone“. Decision of the TEAC The TEAC confirmed the existence of fraud by law and upheld the assessment. All the actions are legal and real; there is no simulation, but from the set of all the circumstances, without proof that there is a substance and economic business reality, it is concluded that it is a simple exchange of shares within the Group, with the sole purpose of generating the financial expenses in the Spanish entities of the Group, all of which is declared in fraud of law, and the situation is regularised by not admitting the financial expenses involved. There are no international tax reasons for the alleged fraud of law (application of DTAs, infringement of Community Law, etc.) as the application of the concept of fraud of law should have been applied in the same way in the case of a Group with a national parent company and article 24 of the LGT, the provision from which the application of fraud of law derives, does not contain any distinction or restriction depending on whether residents or non-residents are involved. The rules on related-party transactions or transfer pricing do not apply, as it is not disputed that the transactions were carried out at market value; indeed, it is acknowledged that this was the case. It is from the set of circumstances analysed that the existence of fraud by law can be concluded. If it were possible to correct it through the mere application of a specific rule (either related-party transactions or thin capitalisation, etc.) we would no longer be dealing with a case of fraud by law. Click here for English translation Click here for other translation Spain vs X SL Rec 656-2007
UK vs. DSG Retail (Dixon case), Tax Tribunal, Case No. UKFT 31

UK vs. DSG Retail (Dixon case), Tax Tribunal, Case No. UKFT 31

This case concerns the sale of extended warranties to third-party customers of Dixons, a large retail chain in the UK selling white goods and home electrical products. The DSG group captive (re)insurer in the Isle of Man (DISL) insured these extended warranties for DSG’s UK customers. Until 1997 this was structured via a third-party insurer (Cornhill) that reinsured 95% on to DISL. From 1997 onwards the warranties were offered as service contracts that were 100% insured by DISL. The dispute concerned the level of sales commissions and profit commissions received by DSG. The Tax Tribunal rejected the taxpayer’s contentions that the transfer pricing legislation did not apply to the particular series of transactions (under ICTA 88 Section 770 and Schedule 28AA) – essentially the phrases ‘facility’ (Section 770) and ‘provision’ (Schedule 28AA) were interpreted broadly so that there was something to price between DSG and DISL, despite the insertion of a third party and the absence of a recognised transaction between DSG and the other parties involved. The Tax Tribunal also rejected potentially comparable contracts that the taxpayer had used to benchmark sales commissions on similar contracts on the basis that the commission rate depended on profitability, which itself depended on the different level of loss ratios expected in relation to the products covered. A much more robust looking comparable provider of extended warranty cover offered as a benchmark for the market return on capital of DISL was also rejected owing to its differing relative bargaining power compared to DISL. This third-party re-insurer was considered to be a powerful brand providing extended ‘off-the-shelf’ warranty cover through disparate distributors – the tribunal noted that DSG had a strong brand, powerful point of sales advantage through access to customers in their shops and could easily have sourced the basic insurance provided by DISL elsewhere. The overall finding of the Tax Tribunal was that, to the extent that ‘super profits’ were available, these should be distributed between the parties according to the ability of each party to protect itself from normal competitive forces and each party’s bargaining power. The Tax Tribunal noted in this context that DISL was entirely reliant on DSG for its business. According to the facts of this case, the super profits were deemed to arise because of DSG’s point-of-sale advantage as the largest retailer of domestic electrical goods in the UK and also DSG’s past claims data. DISL was considered to possess only routine actuarial know-how and adequate capital, both of which DSG could find for itself. As a result, the tribunal thought that a profit-split approach was the most appropriate, whereby DISL was entitled to a market return on capital, with residual profit over and above this amount being returned to DSG via a profit commission. This decision offers valuable insights into consideration of the level of comparability demanded to support the use of comparable uncontrolled prices; Selection of the appropriate ‘tested party’ in seeking to benchmark a transaction; The importance of bargaining power; Approval of profit split as the most appropriate methodology; That a captive insurer that is underwriting ‘simple’ risks, particularly where the loss ratios are relatively stable and predictable, and that does not possess significant intangibles or other negotiating power, should not expect to earn more than a market return to its economic capital. UK-vs.-DSG-Retail-and-others-DIXON
Czech Republic vs. B.p., s.r.o., June 2007, Supreme Administrative Court , Case No 8 Afs 152/2005 – 72

Czech Republic vs. B.p., s.r.o., June 2007, Supreme Administrative Court , Case No 8 Afs 152/2005 – 72

The subject-matter of the dispute was the exclusion of the rent for lease of machinery and equipment. It referred to the lease and sublease agreements for non-residential premises, machinery and equipment with the companies B.p., s.r.o. and M.-T., s.r.o., by which the parties agreed that the objects of the lease agreements would be used free of charge for a certain period of time – during the trial period. Bp s.r.o. disputed the use of transfer prices in accordance with the arm’s length principle and the question of the tenant’s payment behaviour. It argued economic aspects – the possibility of making a real profit over a longer period of time. According to the taxpayer the tax authority should have examined the possibility of obtaining a total profit for the taxpayer over a five-year period and not simply applied ‘the most ideal course of market economics (i.e. the business partners are always solvent and the market situation is optimal)’. It also supplemented the application with a profit forecast, from which it concluded that ‘from a long-term profitability point of view, it was therefore worthwhile to support the related parties during the transitional period’. According to the tax authorities, although the procedures and methods set out in the OECD Directive are not directly enshrined in domestic tax law (nor is there a direct reference to the OECD Directive), the binding nature of the OECD Directive in the interpretation of arm’s length under double taxation treaties derives from the Vienna Convention on the Law of Treaties, Article 31 of which contains rules of interpretation. In this respect, the OECD Directive is an interpretative document on double taxation treaties. Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities. Excerpt “In addition to the above, the Supreme Administrative Court notes that the above-mentioned guidelines (Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations) are part of the OECD Declaration of 21 June 1976 on International Investment and Multinational Enterprises (available, for example, at www.oecd.org) , which is only a recommendation by governments to multinational companies; it is therefore not a legal regulation (soft law). With regard to the objection to the application of section 23(7) of the Income Tax Act, it should be noted that the complainant does not dispute that the rent is subject to that tax in accordance with sections 18(1) and 22(1)(e) and (g)(5) of the Income Tax Act, nor does it dispute the court’s conclusion that the parties were personally and economically linked, nor the notion of consideration in rental and sublease agreements. In other words, the complainant does not refute the legal conclusions of the court and the tax authorities, which formed the basis for the application of Article 23(7) of the Tax Code. of the Act. The conceptual features of the contracts concluded by the complainant are precisely the aforementioned consideration. Therefore, the dispute as to whether a ‘foreign’ entity would have been willing to conclude a contract on the same terms, including the argumentation of economic aspects, is inappropriate. Hypothetical circumstances (relating, moreover, to third parties), which have no direct connection with the grounds on which the Regional Court based its decision, cannot lead to the conclusion that the appeal is well-founded. The objection concerning the need to take account of the applicant’s costs of further renting of premises, machinery and equipment is not admissible under Article 104(4) of the Code of Civil Procedure, since the applicant did not raise it in the proceedings before the Regional Court whose decision is under review, nor does it claim that it could not have done so. Therefore, the Court could not deal with that objection. For the reasons set out above, the Supreme Administrative Court concludes that the complainant’s cassation complaint is unfounded and therefore dismisses it…” Click here for English Translation Click here for other translation 8-Afs-152-2005-–-72
Arm's Length Principle
Norway vs. Statoil Angola, 2007, Supreme Court, No. RT 2007-1025

Norway vs. Statoil Angola, 2007, Supreme Court, No. RT 2007-1025

Two inter-company loans were provided to Statoil Angola by it’s Norwegian parent company, Statoil Norway ASA, and a Belgian sister company, Statoil Belgium (SCC). Statoil Angola only had the financial capacity to borrow an amount equal to the loan from Statoil Belgium. Hence, no interest was paid on the loan from Statoil Norway. The tax authorities divided Statoil Angola’s borrowing capacity between the two loans and imputed interest payments on part of the loan from Statoil Norway in an assessment for the years 2000 and 2001. The Supreme Court, in a split 3/2 decision, found that Statoil’s allocation of the full borrowing capacity of Statoil Angola to the loan from the sister company in Belgium was based on commercial reasoning and in accordance with the arm’s length principle. The Court majority argued that Statoil Norway – unlike Statoil Belgium – had a 100% ownership of Statoil Angola, and the lack of interest income would therefore be compensated by an increased value of it’s equity holding in Statoil Angola. Click here for translation Norway vs. Statoil Angola, 2007, HRD RT 2007 - 1025
Austria vs G.Wien, April 2007, Unabhängiger Finanzsenat, Case No GZ. RV/4687-W/02

Austria vs G.Wien, April 2007, Unabhängiger Finanzsenat, Case No GZ. RV/4687-W/02

G.Wien was originally a branch office of the German company G.Hamburg, which was active in the field of weighing technology. In 1999, this branch office was retroactively transferred to the company G.Wien, a wholly-owned subsidiary of G.Hamburg, which was founded in 1999. Since the beginning of its activities (as a branch office in 1998), G.Wien had employed three employees whose task had been to acquire customers for the purchase of various industrial scales. After the orders had been forwarded to the German parent company, the German parent company had prepared the quotation, confirmed the order, delivered the goods and invoiced the customers directly. The central warehouse was located in Hamburg, only small components for possible services were temporarily stored in Vienna. All costs for advertising, trade fairs etc. were borne by G.Hamburg. The assembly of the scales supplied and the service and repair work to be carried out were carried out by G.Wien. This work was also invoiced directly by G.Hamburg to the Austrian customers. The resulting turnover tax was paid in Austria. All wage and salary expenses, the ancillary wage costs for the employees as well as the administrative costs (rent, office, telephone expenses, etc.) were initially borne by G.Wien, but were remunerated by the parent company from 1998 onwards, taking into account a 5% profit mark-up. The actual mark-up was 9.6% in 1999 and 4.3% in 2000. In the tax authorities view, the activities of G.Wien had exclusively covered the provision of services and not the production of material goods. G.Wien had had no influence whatsoever on the setting of the sales prices of the scales or the setting of the prices for services in Austria by the German parent company. The documents submitted by G.Hamburg were not to be used for the calculation and determination of the surcharge of 5%, as G.Hamburg had included both the proceeds from the sale of the industrial scales and the manufacturing costs incurred in the calculations. The activities of G.Wien had exclusively extended to the provision of services, so that a profit mark-up in the range of 5% – 15%, which is customary in the service sector in Austria, had to be calculated. The tax authorities therefore applied an arm’s length profit mark-up of 10% to the expenses in the profit and loss account as at 31 December 1999 and 31 December 2000. G.Wien filed an appeal against both assessments. Judgement of the Court The Court decided mostly in favour of the tax authorities. In general, it can be assumed that the arm’s length principle requires a profit mark-up to be applied. The mark-up on services must be decided separately in each individual case. In Austria a range between 5% and 15% can be used as a guide for the profit mark-up for services of a routine nature. However, this lower and upper limit does not show a “bandwidth” in the sense that every point in the range leads to a equally reliable arm’s length price. Whether arm’s length calls for a mark-up rate that tends towards the floor or ceiling of the range, must be assessed according to the circumstances of the individual case. Excerpts “… However, in this case the cost situation of the Austrian G.Wien is to be assessed as special and not directly comparable with third parties. The salary costs, which represent a part of the total costs, result from the contractual obligations to the staff taken over from the P. group with the partial operation since 1998. Although the salary costs, which are to be judged as excessive, were accepted when the sub-operation was taken over and with a view to the desired expansion of the market share, it cannot be assumed from a business management point of view that these costs, which are not usual in the industry, can be included without further ado when calculating a profit mark-up for price negotiations with a third party. In order to arrive at a comparable cost basis, the annual personnel costs are not used in full for the determination of the basis for the transfer prices due to the fact that the operating conditions have been the same since 1998, taking into account the arguments put forward on this issue in the appeal proceedings concerning the 1998 corporation tax. The procedure applied with regard to the assessment of the 1998 corporation tax is also judged to be appropriate for the years 1999 and 2000. I.e. the special situation with regard to salary costs is taken into account insofar as salary costs are only taken into account in an estimated amount of about 2/3 when determining the total costs to be used as a basis for the profit surcharge. As in the Bp procedure, a mark-up rate of 10% is applied to the total costs adapted in this form for the years 1999 and 2000. Any difference resulting from this calculation in relation to the previous on-charging of G.Wien will be added to the assessment bases for corporation tax with an effect on the result. …” Click here for English translation Click here for other translation UFS 6-4-2007, RV-4687-W-02
Arm's Length Principle
Kenya vs Unilever Kenya Ltd, October 2005, High Court of Kenya, Case no. 753 of 2003

Kenya vs Unilever Kenya Ltd, October 2005, High Court of Kenya, Case no. 753 of 2003

Unilever Kenya Limited (UKL) is engaged in the manufacture and sale of various household goods including foods, detergents and personal care items. UKL is a part of the world-wide Unilever group of companies. Unilever plc., a company incorporated in the United Kingdom has a very substantial shareholding in the UKL. UKL and Unilever Uganda Limited (UUL) are related companies. In august 1995 UKL and UUL entered into a contract whereby UKL was to manufacture on behalf of UUL and to supply to UUL such products as UUL required in accordance with orders issued by UUL. UKL supplied such products to UUL during the years 1995 and 1996.  UKL manufactured and sold goods to the Kenyan domestic market and export market, to customers not related to UKL. The prices charged by UKL for identical goods in domestic export sales were different from those charged by it for local domestic sales. The prices charged by UKL to UUL differed from both the above sales and were lower than those charged in domestic sales and domestic export sales for identical goods. In other words, UKL charged lower prices to UUL then it charged its domestic buyers and importers not related to UKL. The Commissioner of Income Tax raised assessments against UKL in respect of the years 1995 and 1996, in respect of sales made by UKL to UUL on the basis that UKL’s sales to UUL were not at arm’s length. The Commissioner of Income Tax in raising such an assessment relied on Section 18 (3) of the Act which reads:- “18(3) where a non-resident person carries on business with a related resident person and the course of that business is so arranged that it produces to the resident person either no profits or less than ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arms length”. However, the important and relevant words in the said sub-section are: “The course of that business is so arranged that it produces to the resident person either no profits or less than ordinary profits which might be expected to accrue from that business if there had been no such relationship……....” Hence the most important issue that arises for determination is whether or not the course of business between UKL and UUL was so arranged as to produce less profits. The Commissioner of Income Tax found that as a result of special relationship between UKL and UUL the transactions between them resulted in less taxable profits to UKL. The sale of products by UKL to UUL at a price lower than the comparable prices charged to Kenyan buyers or to outside Kenya importers represents a transfer price and hence the difference becomes subject to taxation on the basis of sales at arms length prices. Unilever Kenya Limited statet that the term “transfer pricing” describes the process by which related or connected entities set the process at which they transfer goods or services between each other and that the term “transfer pricing” therefore is simply a reference to the price at which related parties transfer goods and services to each other. The company puts forward a further argument to the effect that the prices charged by UKL to UUL are nothing but “discounted prices”. At the time no guidelines on how companies were to comply with Transfer Pricing (TP) requirements had been issued in Kenya:- UKL argues that in the absence of specific guidelines having been issued by Kenya Revenue Authority under section 18(3) of the Act the determination of these principles ought to be made in accordance with international best practice as represented by the OECD Transfer Pricing guidelines for Multinational Enterprises and Tax Administration Guidelines (The OECD Guidelines). The tax administration having applied the CUP method ought to have considered whether the average price charged by UKL in Domestic Sales is a ‘Comparable Uncontrolled Price’ to that charged by UKL in the UUL sales for the purposes of section 18(3) of the Act and whether the average price charged by UKL in Domestic Export Sales is a Comparable Uncontrolled Price to that charged by UKL in the UUL sales for the purposes of section 18(3) of the Act.The tax administation has made no adjustments to reflect the material effects of differences between Domestic Sales and UUL Sales which would materially affect the price in the open market and has made no allowances for the cost of marketing goods in Kenya with all resultant overheads as opposed to selling goods directly to UUL for UUL to market the goods in Uganda, at its (UUL’s) costs. The tax administration disaggres with the methods suggested by UKL in arriving at arm’s length principle including references to foreign law and OECD principles etc as not applicable or even worthy of consideration as section 18(3) of our Act does not allow such references. THE JUDGEMENT The court noticed that the very lengthy submissions made by UKL on guidelines adopted by other countries have been ignored by the tax administration on the basis that these simply do not apply to Kenya. Now, these guidelines do not form the laws of the countries in question. They are simply “guidelines”, guiding the world of business, that is business enterprises and the taxing authorities of those countries in arriving at proper Transfer Pricing principles for the purposes of computation of income tax. The court is, unable to accept the argument that in view of the alleged clear wording of section 18(3) of the Act, no guidelines are necessary here in Kenya. That is rather simplistic, and devoid of logic. Section 18(3) of the Act has used words “and the course of that business is so arranged that …”. The sub-section implies that the business so arranged must be such as to show less income to enable the tax authorities to challenge
Portugal vs "A Const S.A.", May 2005, CONSTITUTIONAL COURT, Case No 271/05

Portugal vs “A Const S.A.”, May 2005, CONSTITUTIONAL COURT, Case No 271/05

A Const S.A. filed an appeal with the Central Administrative Court against a corrections made by the Tax Administration for FY 1990 under application of the arm’s length principle (contained in article 57 of the CIRC in Portugal). The Central Administrative Court dismissed the appeal. An appeal was then filed against this decision to the Supreme Administrative Court. By Judgment of 4 February 2004, the appeal was also dismissed at this instance. Dissatisfied with that decision A Const S.A. filed an appeal with the Constitutional Court. Grounds for the appeal was stated as follows “In compliance with the provisions of nº 2 of art. 75-A of the LTC it is moreover expressly stated that the present appeal is based on the concrete review of the constitutionality of art. 57 of the CIRC (in the wording in force on the date of the facts of the case, applicable in casu) taking into account its applicability in the contested decision: a. either because it is a blank provision, containing vague and imprecise concepts, without any definition of criteria of positive law for its concretisation, its application being based on the arbitrary filling by the Tax Authorities of indeterminate general clauses, which violates the constitutional principles and rules of tax legality (art. 106, no. 2, CRP, in the wording in force at the time of the facts of the case, applicable in casu), certainty, legal security and confidence (art. 2 of the CRP); b. because the contested decision, in its interpretation and application of the aforementioned rule (Article 57 of the CIRC) violated the constitutional principles of certainty, legal security, confidence, good faith, equality and impartiality enshrined in Articles 2, 13, 266(1) and (2) of the Constitution.” Decision of Constitutional Court The Court dismissed the appeal of “A Const S.A.” and concluded that the rule contained in no. 1 of article 57 of the Corporate Tax Code, in the original wording, in force at the time of the facts of the case, was not unconstitutional. Excerpts “… In fact, although the delimitation of the assumptions for the application of that regulation depends on a judgment of interpretation and valuation of elements of a technical nature – existence of “special relationships” and a deviation from “normal” prices – and the use of maximum of experience, it does not appear that, as stated in the aforementioned judgment n.º 233/94, “from the constitutional imposition contained in the principle of tax legality, it follows that such presuppositions for the application of the contested regulations legally established are shown to be insufficiently densified, taking into account the specificities of the tax field, where often, and in the exercise of control powers, if will have to resort to indeterminate legal concepts and the contribution of elements of a technical nature to base the decisions of the Administration in the pursuit of the public interest expressed in the correct taxation of economic agents ”. In fact, in this case, the individual knows, in view of the normative postulate, that not every situation will justify the realization of the necessary corrections to determine the taxable profit: this will only happen when we are faced with situations that, terms of the law, whether arising from the existence of special relationships of dependence , causing distortion in relation to market prices and having a direct influence on the determination of that profit. Furthermore, since the criterion adopted by the legislator is objectively related to the market, the administration is left tax, which is responsible for determining the taxable amount under the terms of article 57 of the CIRC, linked to the establishment of the arm’s length price, and this criterion does not include subjective assessments. And if it is true that the questioned rule, similarly to what also happens in other legal systems, does not materialize the valuation criterion that will govern the determination of the arm’s length price, the fact is that the reference to the prices established between independent entities it ends up establishing the objective limits within which such a criterion can be set. In fact, this is what the new transfer pricing regulation – Article 58 of the CIRC- came to clarify, bringing a greater degree of certainty, security and, above all, greater efficiency to the action of the tax administration. However, this does not imply that, previously, article 57, no. 1, of the CIRC did not have sufficient density for taxable persons to determine the presuppositions for the performance of the Administration and for the Courts to proceed with the control of the adequacy and proportionality of the administrative activity. Therefore, it must be concluded that the questioned rule allows the taxable person to fully know and control which quantitative expression of the tax fact is taken into account. It contains a sufficient normative density that conditions administrative activity and binds the administration to the verification of its application assumptions, allowing that the courts can syndicate the administrative decision that this norm makes application. In addition, article 80 of the Tax Procedure Code in force at the time of the facts of the case, which already contained additional requirements for reasons (currently included in article 77, paragraph 3, of the General Tax Law) for cases in which the Administration proceeds to carry out corrections motivated by the existence of special relationships, ends up reinforcing the guarantees that the principle of legality, namely in its dimension of tax typicality, postulates. … Pursued from the knowledge of the appeal, by a decision passed in the meantime, the assessment of the unconstitutionality of the contested decision, for violation of the ” constitutional principles, certainty, legal certainty, trust, good faith, equality and impartiality, enshrined in arts. 2, 13, 266, nº 1, nº 2, of the Constitution”, the appellant, who, in the application for filing an appeal to this Court, had invoked the violation, by the questioned rule – art. 57, no. 1, of the CIRC , in the wording in force at the time of the facts of the case -, of the principles of certainty, legal certainty and trust (art. to this same rule the violation of “constitutional principles of taxation of real income,
Portugal vs "ALP S.A.", May 2005, CONSTITUTIONAL COURT, Case No 252/2005

Portugal vs “ALP S.A.”, May 2005, CONSTITUTIONAL COURT, Case No 252/2005

ALP S.A. filed an appeal with the Central Administrative Court against a corrections made by the Tax Administration for FY 1992 under application of the arm’s length principle (contained in article 57 of the CIRC in Portugal). The Central Administrative Court dismissed the appeal. An appeal was then filed against this decision to the Supreme Administrative Court. By Judgment of 6 June 2001, the appeal was also dismissed at this instance. Dissatisfied with that decision ALP S.A. filed an appeal with the Constitutional Court. ALP S.A grounds for the appeal was: By virtue of the Principle of Tax Legality, the rules of incidence must be predetermined in their content, and the elements that comprise it must be formulated in a precise and determined manner. Determining the content of the levy tax rule excludes the use of undetermined concepts, as well as certain normative concepts, whose application to the specific case is based on subjective or personal assessment of the enforcement body, under penalty of postponing legal certainty. According to Nuno Sá Gomes, in Manual of Tax Law, Vol. II, 2000, p. 39, “… In turn, it is said that we are facing an absolute reservation of the law when it is established, as among us, that the formal law must contain not only the foundation of the administration’s conduct, but also the criteria for decisions in concrete cases. , not giving rise to any discretion or availability of a tax type by the tax administration ”. In the specific case, the corrections made result from the application of art. 57.º, no. 1, of the CIRC and the understanding by the tax administration agent of the existence of special relationships between the taxpayer and another person as a result of that legal precept. However, “special relationships” and “relationships that establish conditions different from those agreed between different persons” are vague, undetermined concepts that give the tax administration discretionary powers to correct the taxable amount. However, this is not a matter of technical discretion, as the law does not call for its application to non-legal or artistic or professional scientific knowledge, but to the appreciation of established relationships, whether the profit presented is different from normal and how the actual amount on which the correction was based is quantified. It is the ordinary law – art. 103, nos. 2 and 3, and art. 268 of the CRP – which must establish the parameters in which this activity is regulated under penalty of unconstitutionality. And these criteria do not exist nor are they established by law, so the great breadth and indeterminacy of the content of those concepts allow the enforcement agency to include any and all gains in the norm, thus sacrificing legal certainty!!! Thus, the rule of art. 57.º, no. 1, of the CIRC, being formulated in vague and imprecise terms, using pure normative concepts, without any concreteness and determination, it is a materially unconstitutional norm for breach of the principle of legality and tax typicality. According to Nuno Sá Gomes, ob. cit., p. 193 “…the aforementioned art. 57.º does not clarify what is to be understood by special relationships, only touching on the criterion of dependence, therefore, it seems that there are special relationships whenever the entities in question are dependent on each other”. Hence, from the outset, a broad indeterminacy that amounts to attributing to the tax administration the discretionary power to decide when there is a special relationship of dependence, which, as we said, is unconstitutional. The fact that the tax law does not define what is to be understood by SPECIAL RELATIONS and the vague, elastic nature of this concept leads us to conclude that the formula used, right there, violates art. 106, no. 2 of the CRP, which requires that “the law determines… the incidence”. Thus, while the tax legislation does not set out the following criteria, it must be considered that art. 57 of the CIRC is unconstitutional, as it gives the Tax Administration discretionary powers to correct the taxable matter. Therefore, the norm of paragraph 1 of art. 57 of the CIRC be declared unconstitutional!” Decision of Constitutional Court The Court dismissed the appeal of ALP S.A. Following a thorough description of the provisions forming the basis for application of the arm’s length principle in other countries, the Court concluded that the  “arm’s length principle” as implemented in Portugal in art. 57 of the CIRC was not unconstitutional. Excerpts “… Thus, in the specific case, taking into account the above considerations, it will have to be concluded that the union norm not only presents a sufficient normative density – in terms of containing, in its formulation, a sufficient significant aptitude, capable of cutting a framework of administrative action legally presupposed and conditioned -, as it allows the courts to syndicate the goodness and correctness of administrative judgment. In other words, it can be said that the legally outlined framework does not allow the determination of the practical-normative meaning of the precept, materialized in its application, as a result of the consideration of the problem, to be carried out outside the legal command set out in the norm, as a result , therefore, of a freedom of administrative action that is judicially indiscriminate. On the contrary, the rule does not reflect any juridical-political option of the legislator for the granting of discretionary powers, it also refers the administrative decision to the (linked) verification of the application assumptions from the consideration of the concrete legal problems, being able, therefore, in this measure, the tax courts assess the verification of the assumptions of administrative action and determine, in the face of a specific problem, We can thus conclude, in summary, that we are dealing, in this case, with undetermined concepts whose content does not demand the attribution of any constitutive power to the tax administration in terms of determining the taxable amount, since only that objective meaning that results from directly from tax law. This, contrary to what happened in the rule indicated by Judgment no. of taxation. On the other hand, the tax administration is now only recognized with a competence of
Philippines vs Avon Products MFG., INC., January 2005, Tax Court, CTA CASE No. 5908

Philippines vs Avon Products MFG., INC., January 2005, Tax Court, CTA CASE No. 5908

Avon Products exported products to related parties at lower price than charged when sold domestically. The tax authorities issued an assessment where the export prices had been adjusted. Judgement of the Tax Court The Court decided in favour of Avon Products. According to the court the initial burden to prove that the pricing of inter-company transactions complies with the arm’s-length principle lies with the taxpayer. However, once sufficient proof is provided, the burden shifts, and the revenue authority must then prove that the adjustment is sufficiently supported. Before the court Avon argued that the export and domestic markets were two different markets. The export market was very competitive while the domestic market was a captured market due to an exclusive Supply Agreement with AVON Cosmetics, Inc. Avon also argued that export sales maximized the productivity level which in turn lowers unit cost of production as the fixed overhead was spread over a larger number of product units. Excerpts: “This Court finds petitioner’s evidence sufficient to establish its position that the prices of its export sales may be lower than its local sales, taking into account respondent’s lack of evidence to support his assertion. ” CTA_2D_CV_05908_D_2005JAN20_ASS
Korea vs Corp May 2004, Case No 2003중3619

Korea vs Corp May 2004, Case No 2003중3619

In this case a Korean company was providing services (sales agent, equipment installation and maintenance service) to a foreign related party and remunerated on a cost plus basis. The remuneration had been calculated as cost plus 5-8 % based on six comparable domestic service providers. The Judgement If there is a significant difference between the tested company and the companies used as comparables, such as the function of the business activities, the conditions of the contract, the risks involved in the transaction, the type and characteristics of the goods or service, the change in the market, and the availability of the materials used, the comparability standard is not met. Click here for English translation 2003중3619
Colombia vs. Corp, Aug. 2003, The Constitutional Court, Case No. C-690-03

Colombia vs. Corp, Aug. 2003, The Constitutional Court, Case No. C-690-03

The Constitutional Court of Colombia rules as follows: “Article 260-6. Low tax Jurisdictions. Unless proven otherwise, it is presumed that transactions between residents or domiciled in Colombia and residents or domiciled in countries or jurisdictions of lower taxation in the matter of income tax, are transactions between economic related parties or related parties in which the prices and amounts of the considerations are not agreed according to those that would have used independent parties in comparable operations. For the purposes of this article, taxpayers of income tax and complementary taxpayers who carry out the transactions referred to in the preceding paragraph shall comply with the obligations set forth in Articles 260-4 and 260-8 of the Tax Statute. Low Tax jurisdictions are those that are indicated by the Organization for Economic Cooperation and Development, OECD or the National Government .” (…) “Article 260-9. Interpretation. For the interpretation of the provisions of this chapter, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the Council of the Organization for Economic Cooperation and Development, OECD, will apply to the extent that they are congruent with the provisions of the Tax Statute“. Click here for translation Columbia C-690-03
Arm's Length Principle
US vs. Boing Co. March 2003, Supreme Court of Appeals

US vs. Boing Co. March 2003, Supreme Court of Appeals

Boeing appealed and IRS ruling that it had improperly applied the combined taxable income (CTI) method of transfer pricing by including research and development costs that did not pertain directly to the income in question. The U.S. Supreme Court upheld the IRS position, affirming the Court of Appeals decision in favor if the IRS. US-Boeing_decision_03042003
US vs Seagate Technology, December 2000, United States Tax Court

US vs Seagate Technology, December 2000, United States Tax Court

The IRS ruled that Seagate should have included the cost of employee stock options in the net revenue calculation associated with its cost-sharing agreement with its foreign subsidiaries. Seagate appealed the ruling on the grounds that the IRS was not aware of actual arm’s length circumstances relating to the employee stock option compensation. In this case, the United States Tax Court found in favor of the IRS. US-Seagate_decision_12222000
France Lindt & Sprungli, December 2002, CE No 97BX01746

France Lindt & Sprungli, December 2002, CE No 97BX01746

In the case of Lindt & Sprungli, the Court approved the position taken by the FTA, even though the FTA did not support its position by reference to independent comparable data. The FTA based the case on facts and circumstances. Click here for translation Lindt & Sprungli, caa
Arm's Length Principle
France vs. SA Rocadis, September 2001, CE

France vs. SA Rocadis, September 2001, CE

In the Rocadis case the French taxpayer argued that a related Japanese company was not a routine distributor, but a co-entrepreneur. The court however considered that evidence for such as statement was not provided, and the transfer pricing adjustment was upheld by the court. Click here for translation France vs Rocadis sep 2001
Poland vs K.J.S. Polska Sp. z o., April 1999, Supreme Court, Case No III RN 184/98

Poland vs K.J.S. Polska Sp. z o., April 1999, Supreme Court, Case No III RN 184/98

Judgement on application of the Polish arm’s length provisions in Article 11 of the Corporate Income Tax Act. Excerpts from the Supreme Court Judgement “The provisions of Articles 11(3) and 11(4) of the Corporate Income Tax Act do not introduce a requirement for the tax authority to prove the fault (collusion) of the seller and the buyer of goods consisting in deliberate under- or overpricing in order to achieve favourable tax consequences. The extraordinary revision’s suggestions that the establishment of the relationship referred to in Article 11(4) of that law, without the simultaneous establishment of intentional conduct, is insufficient for the application of assessed prices to the contractor, as they are contrary to the linguistic (basic) interpretation of that provision, are erroneous. Also, the claim in the extraordinary revision that it is up to the court to prove that the relationship set out in sections 11(3) and 11(4) of the said law influenced the determination of lower prices is not justified. This allegation demonstrates an erroneous understanding of the role of the court. Evidence is presented by the parties to the trial and the court evaluates it. The court does not prove anything, but only assesses the credibility of the evidence taken at the request of the parties or exceptionally ex officio. The procedural rules have not been violated either (and certainly no gross violation of them can be alleged). The Supreme Administrative Court adequately explained the facts (Articles 7 and 77 § 1 of the Code of Administrative Procedure in conjunction with Article 59 of the Act on the Supreme Administrative Court) without violating the principle of free – but not arbitrary – assessment of evidence (Article 80 of the Code of Administrative Procedure in conjunction with Article 59 of the Act on the Supreme Administrative Court). It has not been demonstrated by the applicant that there were economic grounds for applying in the transactions between it and “O.” significantly lower prices than to other counterparties of “O.”. There was no successful challenge in the extraordinary revision to the view taken in the contested judgment that, in relation to the applicant, “O.” determined prices with the assumption of a profit of approximately 5%, while with regard to other customers a profit of several tens of percent was assumed, reaching up to nearly 80%. Courts – as well as administrative authorities – assess evidence according to the principles of life experience. These principles indicate that sufficient evidence regarding the circumstances constituting the basis for the application of Article 11(3) and (4) of the Corporate Income Tax Act is the use by “O.” significantly lower profit rates, and also – and perhaps above all – the application of this practice to the future purchaser of the “O.” company, and, moreover, that both entities had two of the same persons on the board of directors. “ Click here for English Translation Click here for other translation Poland Case no III RN 184-98 SC
US vs Union Carbide, June 1998

US vs Union Carbide, June 1998

Union Carbide challenged and IRS ruling regarding its commission expenses, but the United States Tax Court granted the IRS’ cross-motion for partial summary judgement, ruling that the calculation was made correctly and that the temporary regulations on which basis the IRS had acted were valid. US-UnionCarbide_decision_06151998
Arm's Length Principle
US vs. National Semiconductor, May 1994, United States Tax Court

US vs. National Semiconductor, May 1994, United States Tax Court

National Semiconductor appealed an IRS ruling pertaining the allocation of income from its Asian subsidiaries. In this decision, the United States Tax Court upheld the IRS ruling. US-NatlSemi_decision_05021994
US vs. Dow, January 1993, US Court of Appeals

US vs. Dow, January 1993, US Court of Appeals

Dow Corning appealed an IRS ruling on the argument that the Treasury Regulations on which the IRS ruling was based were invalid. In this decision, the US Court of Appeals for the Federal Circuit upheld the US Claims Court’s summary judgement ruling in favor of the IRS. US-DowCorning_decision_02242993
Arm's Length Principle

US vs Proctor & Gamble Co, April1992, Court of Appeal (6th Cir.), Case No 961 F.2d 1255

Proctor & Gamble is engaged in the business of manufacturing and marketing of consumer and industrial products. Proctor & Gamble operates through domestic (US) and foreign subsidiaries and affiliates. Proctor & Gamble owned all the stock of Procter & Gamble A.G. (AG), a Swiss corporation. AG was engaged in marketing Proctor & Gamble’s products, generally in countries in which Proctor & Gamble did not have a marketing subsidiary or affiliate. Proctor & Gamble and AG were parties to a License and Service Agreement, known as a package fee agreement, under which AG paid royalties to Proctor & Gamble for the nonexclusive use by AG and its subsidiaries of Proctor & Gamble’s patents, trademarks, tradenames, knowledge, research and assistance in manufacturing, general administration, finance, buying, marketing and distribution. The royalties payable to Proctor & Gamble were based primarily on the net sales of Proctor & Gamble’s products by AG and its subsidiaries. AG entered into agreements similar to package fee agreements with its subsidiaries. In 1967, Proctor & Gamble made preparations to organize a wholly-owned subsidiary in Spain to manufacture and sell its products in that country. Spanish laws in effect at that time closely regulated foreign investment in Spanish companies. The Spanish Law of Monetary Crimes of November 24, 1938, in effect through 1979, regulated payments from Spanish entities to residents of foreign countries. This law required governmental authorization prior to payment of pesetas to residents of foreign countries. Making such payments without governmental authorization constituted a crime. Decree 16/1959 provided that if investment of foreign capital in a Spanish company was deemed economically preferential to Spain, a Spanish company could transfer in pesetas “the benefits obtained by the foreign capital.” Proctor & Gamble requested authorization to organize Proctor & Gamble Espana S.A. (Espana) and to own, either directly or through a wholly-owned subsidiary, 100 percent of the capital stock of Espana. Proctor & Gamble stated that its 100 percent ownership of Espana would allow Espana immediate access to additional foreign investment, and that Proctor & Gamble was in the best position to bear the risk associated with the mass production of consumer products. Proctor & Gamble also indicated that 100 percent ownership would allow Proctor & Gamble to preserve the confidentiality of its technology. As part of its application, Proctor & Gamble estimated annual requirements for pesetas for the first five years of Espana’s existence. Among the items listed was an annual amount of 7,425,000 pesetas for royalty and technical assistance payments. Under Spanish regulations, prior authorization of the Spanish Council of Ministers was required in order for foreign ownership of the capital of a Spanish corporation to exceed fifty percent. The Spanish government approved Proctor & Gamble’s application for 100 percent ownership in Espana by a letter dated January 27, 1968. The letter expressly stated that Espana could not, however, pay any amounts for royalties or technical assistance. For reasons that are unclear in the record, it was determined that AG, rather than Proctor & Gamble, would hold 100 percent interest in Espana. From 1969 through 1979, Espana filed several applications with the Spanish government seeking to increase its capital from the amount originally approved. The first such application was approved in 1970. The letter granting the increase in capital again stated that Espana “will not pay any amount whatsoever in the concept of fees, patents, royalties and/or technical assistance to the investing firm or to any of its affiliates, unless with the approval of the Administration.” All future applications for capital increases that were approved contained the same prohibition. In 1973, the Spanish government issued Decree 2343/1973, which governed technology agreements between Spanish entities and foreign entities. In order to obtain permission to transfer currency abroad under a technology agreement, the agreement had to be recorded with the Spanish Ministry of Industry. Under the rules for recording technology agreements, when a foreign entity assigning the technology held more than 50 percent of the Spanish entity’s capital, a request for registration of a technology agreement was to be looked upon unfavorably. In cases where foreign investment in the Spanish entity was less than 50 percent, authorization for payment of royalties could be obtained. In 1976, the Spanish government issued Decree 3099/1976, which was designed to promote foreign investment. Foreign investment greater than 50 percent of capital in Spanish entities was generally permitted, but was conditioned upon the Spanish company making no payments to the foreign investor, its subsidiaries or its affiliates for the transfer of technology. Espana did not pay a package fee for royalties or technology to AG during the years at issue. Espana received permission on three occasions to pay Proctor & Gamble for specific engineering services contracts. The Spanish Foreign Investments Office clarified that payment for these contracts was not within the general prohibition against royalties and technical assistance payments. Espana never sought formal relief from the Spanish government from the prohibition against package fees. In 1985, consistent with its membership in the European Economic Community, in Decree 1042/1985 Spain liberalized its system of authorization of foreign investment. In light of these changes, Espana filed an application for removal of the prohibition against royalty payments. This application was approved, as was Espana’s application to pay package fees retroactive to July 1, 1987. Espana first paid a dividend to AG during the fiscal year ended June 30, 1987. The Commissioner determined that a royalty of two percent of Espana’s net sales should be allocated to AG as royalty payments under section 482 for 1978 and 1979 in order to reflect AG’s income. The Commissioner increased AG’s income by $1,232,653 in 1978 and by $1,795,005 in 1979 and issued Proctor & Gamble a notice of deficiency.1 Proctor & Gamble filed a petition in the Tax Court seeking review of the deficiencies. The Tax Court held that the Commissioner’s allocation of income was unwarranted and that there was no deficiency. The court concluded that allocation of income under section 482 was not proper in this case because Spanish
France vs Ford, March 1992, Supreme Administrative Court, Case No 87947

France vs Ford, March 1992, Supreme Administrative Court, Case No 87947

The court determined that a transaction must be valued based on facts known (or facts that could/should have reasonably been known) at the time of the contract. Use of hindsight is not permitted. Click here for English translation Click here for other translation France vs Ford France 4mars 1992 no 87947
Arm's Length Principle
Sweden vs Svenske Shell AB, October 1991, Supreme Administrative Court, Case no RÅ 1991 ref. 107

Sweden vs Svenske Shell AB, October 1991, Supreme Administrative Court, Case no RÅ 1991 ref. 107

Svenske Shell AB imported crude oil from its UK sister company SIPC over a five-year period. Imports included the purchase and shipping of crude oil to the port of Gothenburg i Sweden from different parts of the world. The price of the oil was based on a framework agreement entered into between the parties, while the freight was calculated based on templates with no direct connection to the actual individual transport. The tax authorities considered that the pricing in both parts was incorrect and therefore partially refused deduction of the costs of oil imports. The assessment (and the later judgement of the Supreme Administrative Court) was based on the wording of the former Swedish “arm’s length” provision dating back to 1965. Decision of Court The Court did not consider that a price deviation has been sufficiently established where the applied price of only a single transaction deviates from the market price. Applying such a narrow view on price comparisons in general lacks support in the preparatory work, nor can it be justified in the light of the purpose of the legislation, which is to prevent unauthorized transfers of profits abroad. Where the controlled parties have continuous business transactions with each other, it is more aligned with the purpose of the legislation to focus on the more long-term effects of the bases and methods of pricing applied during the period under review. This means that “overprices” and “underprices” that have occurred within the same tax year should normally be offset against each other. According to the Court, it is therefore often necessary to make an overall assessment of the Swedish and foreign company’s business transactions with each other. The Court also concluded that it is sometimes possible to deviate from the principle of separate tax year’s when applying the arm’s length provisions. A pricing system that in a longer perspective is fully acceptable from an arm’s point of view can lead to overcharging in one year and undercharging in another year. It can also lead to costs in the form of premiums for a number of years leading to higher incomes or losses at a later stage. For a period of three years, Swedish Shell had applied one and the same business strategy with regard to its oil purchases. The strategy was considered justified for business reasons, which meant that the results during two of the tax years were taken into account in the assessment of the results in the third year. The price method used in the case was the market price method (CUP). This method was chosen as no material had been presented that could form the basis for using any of the other methods. The price test and choice of method had to be made in the light of the information available on the price conditions in the crude oil and freight markets. The Court stated that a market comparison presupposed that the contractual conditions and the market situation could be established. The sale of crude oil from SIPC to Svenska Shell had taken place on CIF terms (cost, insurance and freight) in the sense that SIPC had been responsible for shipping and insurance of the oil sold. It could have been worthwhile, the Court held, to base the arm’s length test on a comparison between that total price and the CIF prices which occurred in similar transactions on the market between independent parties. However, there was no investigation of such CIF prices and in fact it was the case that SIPC’s and Svenska Shell’s contractual relations in significant parts had no direct equivalent on the market during the relevant time period. Even though the sale of crude oil had taken place on CIF terms, the contractual relationship between Svenska Shell and SIPC had contained separate agreements on the pricing of crude oil and shipping. As a result of these agreements, prices of oil were more similar to FOB (free on board) prices and the prices of freight could be linked to standards that directly or indirectly reflected market prices. A separate price comparison of oil and shipping was therefore possible. According to the Court, there were also other reasons for making such a separate assessment of the prices, since the fundamental problems that arose during the arm’s length examination in the two areas differed in significant respects. Swedish Shell claimed that SIPC had the function of an independent trader and therefore took out a certain trading margin on crude oil sales. The Swedish Tax Agency claimed that SIPC was only a group-wide service body and therefore not entitled to any profit margin at all. However, the Swedish Tax Agency accepted a certain remuneration for the services provided by SIPC. The Court found that SIPC had borne certain risks in its purchasing and sales activities and that these risks were such that a certain trading profit was justified. To assess the trading margin when pricing crude oil, different types of list prices were used as a comparison. Some of these list prices contained a certain trading margin that amounted to different levels. The Court found that it was not possible to determine any general levels for the size of the trading margin based on the material. An acceptable margin therefore had to be estimated in the individual case. The Court did not find it clear that the trading margin taken by SIPC on crude oil exceeded the level that would have been agreed between independent parties. When it came to the pricing of crude oil, different price types were used based on price quotations in different markets. The Court assessed the extent to which the different price types could be used for purpose of pricing the controlled transaction. One of the price types used was the US list prices. These were average prices that the US tax authorities produced as comparative prices for one year at a time. The list consisted of a large number of sales worldwide. The Court found that these list prices were based on a
US vs. Computervision. April 1991

US vs. Computervision. April 1991

Computervision used a domestic international sales corporation (DISC) for export sales of its products and included those transaction costs in its combined taxable income (CTI) calculation. In this decision, the US Tax court upheld the IRS ruling to disallow inclusion of export promotion expenses in the calculation of taxable net income. US-Computervision_decision_04161991
Arm's Length Principle
France vs Reynolds Tobacco, Nov 1990, Administrative Court of Appeal, Case N° 89PA01172

France vs Reynolds Tobacco, Nov 1990, Administrative Court of Appeal, Case N° 89PA01172

In Reynolds Tobacco, the 2%-3% commission received was considered arm’s-length, even though competitors received 8% for providing similar services. The services provided by the French company were sufficiently different, and this justified the lower commission rate charged. Excerpt from the Judgement “...by virtue of a contract concluded between the two companies on 14 December 1976, Reynolds Tobacco France covers, on behalf of its parent company, the administrative costs entailed by its representation in France in return for a commission of 2 to 3% of the amount of sales; that by maintaining that companies with a similar or comparable activity are remunerated by a commission of the order of 8% without establishing that this rate remunerates services of the same nature, the administration does not provide proof of the transfer of profits that it alleges; that neither the fact that Reynolds Tobacco France considered renegotiating the terms of its contract with the German company, nor the fact that it considered increasing its capital to prevent losses from reaching three-quarters of its capital, are such as to make it possible to consider this proof as having been provided…” Click here for English translation Click here for other translation France vs Raynolds Tobacco

US vs Proctor & Gamble, September 1990, US Tax Court, Opinion No. 16521-84.

Proctor & Gamble is an US corporation engaged in the business of manufacturing and marketing of consumer and industrial products. Proctor & Gamble operates through domestic and foreign subsidiaries and affiliates. Proctor & Gamble owned all the stock of Procter & Gamble A.G. (AG), a Swiss corporation. AG was engaged in marketing Proctor & Gamble’s products, generally in countries in which Proctor & Gamble did not have a marketing subsidiary or affiliate. Proctor & Gamble and AG were parties to a License and Service Agreement, known as a package fee agreement, under which AG paid royalties to Proctor & Gamble for the nonexclusive use by AG and its subsidiaries of Proctor & Gamble’s patents, trademarks, tradenames, knowledge, research and assistance in manufacturing, general administration, finance, buying, marketing and distribution. The royalties payable to Proctor & Gamble were based primarily on the net sales of Proctor & Gamble’s products by AG and its subsidiaries. AG entered into agreements similar to package fee agreements with its subsidiaries. In 1967, Proctor & Gamble made preparations to organize a wholly-owned subsidiary in Spain to manufacture and sell its products in that country. Spanish laws in effect at that time closely regulated foreign investment in Spanish companies. The Spanish Law of Monetary Crimes of November 24, 1938, in effect through 1979, regulated payments from Spanish entities to residents of foreign countries. This law required governmental authorization prior to payment of pesetas to residents of foreign countries. Making such payments without governmental authorization constituted a crime. Decree 16/1959 provided that if investment of foreign capital in a Spanish company was deemed economically preferential to Spain, a Spanish company could transfer in pesetas “the benefits obtained by the foreign capital.” Proctor & Gamble requested authorization to organize Proctor & Gamble Espana S.A. (Espana) and to own, either directly or through a wholly-owned subsidiary, 100 percent of the capital stock of Espana. Proctor & Gamble stated that its 100 percent ownership of Espana would allow Espana immediate access to additional foreign investment, and that Proctor & Gamble was in the best position to bear the risk associated with the mass production of consumer products. Proctor & Gamble also indicated that 100 percent ownership would allow Proctor & Gamble to preserve the confidentiality of its technology. As part of its application, Proctor & Gamble estimated annual requirements for pesetas for the first five years of Espana’s existence. Among the items listed was an annual amount of 7,425,000 pesetas for royalty and technical assistance payments. Under Spanish regulations, prior authorization of the Spanish Council of Ministers was required in order for foreign ownership of the capital of a Spanish corporation to exceed fifty percent. The Spanish government approved Proctor & Gamble’s application for 100 percent ownership in Espana by a letter dated January 27, 1968. The letter expressly stated that Espana could not, however, pay any amounts for royalties or technical assistance. For reasons that are unclear in the record, it was determined that AG, rather than Proctor & Gamble, would hold 100 percent interest in Espana. From 1969 through 1979, Espana filed several applications with the Spanish government seeking to increase its capital from the amount originally approved. The first such application was approved in 1970. The letter granting the increase in capital again stated that Espana “will not pay any amount whatsoever in the concept of fees, patents, royalties and/or technical assistance to the investing firm or to any of its affiliates, unless with the approval of the Administration.” All future applications for capital increases that were approved contained the same prohibition. In 1973, the Spanish government issued Decree 2343/1973, which governed technology agreements between Spanish entities and foreign entities. In order to obtain permission to transfer currency abroad under a technology agreement, the agreement had to be recorded with the Spanish Ministry of Industry. Under the rules for recording technology agreements, when a foreign entity assigning the technology held more than 50 percent of the Spanish entity’s capital, a request for registration of a technology agreement was to be looked upon unfavorably. In cases where foreign investment in the Spanish entity was less than 50 percent, authorization for payment of royalties could be obtained. In 1976, the Spanish government issued Decree 3099/1976, which was designed to promote foreign investment. Foreign investment greater than 50 percent of capital in Spanish entities was generally permitted, but was conditioned upon the Spanish company making no payments to the foreign investor, its subsidiaries or its affiliates for the transfer of technology. Espana did not pay a package fee for royalties or technology to AG during the years at issue. Espana received permission on three occasions to pay Proctor & Gamble for specific engineering services contracts. The Spanish Foreign Investments Office clarified that payment for these contracts was not within the general prohibition against royalties and technical assistance payments. Espana never sought formal relief from the Spanish government from the prohibition against package fees. In 1985, consistent with its membership in the European Economic Community, in Decree 1042/1985 Spain liberalized its system of authorization of foreign investment. In light of these changes, Espana filed an application for removal of the prohibition against royalty payments. This application was approved, as was Espana’s application to pay package fees retroactive to July 1, 1987. Espana first paid a dividend to AG during the fiscal year ended June 30, 1987. The Commissioner determined that a royalty of two percent of Espana’s net sales should be allocated to AG as royalty payments under section 482 for 1978 and 1979 in order to reflect AG’s income. The Commissioner increased AG’s income by $1,232,653 in 1978 and by $1,795,005 in 1979 and issued Proctor & Gamble a notice of deficiency.1 Proctor & Gamble filed a petition in the Tax Court seeking review of the deficiencies. Decision of the Tax Court The Tax Court held that the Commissioner’s allocation of income was unwarranted and that there was no deficiency. The court concluded that allocation of income under section 482 was
Germany vs "Sales KG", March 1980, Bundesfinanzhof, Case No IR 186/76

Germany vs “Sales KG”, March 1980, Bundesfinanzhof, Case No IR 186/76

The sales company … – (GmbH) was the managing general partner of the plaintiff and defendant, a limited partnership – “Sales KG” – in the years in dispute. The GmbH had a 10/11 share in the capital of “Sales KG”. The limited partner was the Dutchman G. Shareholders of the GmbH with a share of 99% were the … NV (NV) and the … in The Hague (NV L-V). “Sales KG” engaged in wholesale trade in …, which it purchased almost exclusively from NV. It granted its customers rebates, bonuses and discounts in the years in dispute (1962 – 1964). According to the findings of the tax authorities (FA), “Sales KG” had to pay interest on its goods liabilities after 90 days from 1963. It did not charge its customers corresponding interest. The tax authorities increased the profit of “Sales KG” mainly by adding profits allegedly transferred to the Netherlands. In the absence of suitable documentation, the profit shifting was to be estimated at 3% per annum of the purchase of goods from NV. The tax authorities relied on Article 6 of the Agreement between the Federal Republic of Germany and the Kingdom of the Netherlands for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital and Miscellaneous Taxes and for the Settlement of Other Questions in the Field of Taxation of 16 June 1959 – DBA-Netherlands – (BGBl II 1960, 1782, BStBl I 1960, 382), § 217 of the Reich Tax Code (AO) and § 19 No. 6 of the Regulation for the Implementation of the Corporation Tax Act (KStDV). “Sales KG” filed an action against the notices and the Fiscal Court (Finanzgericht, FG) amended the challenged notices and partly reassessed the profits of “Sales KG” and the profit shares of the partners. For the rest, it dismissed the action. The tax authorities lodged an appeal against this decision. Judgement of the Court The Court found that the tax court had correctly refused to increase the profit shares (§ 215.2 AO) of “Sales KG” by the profits allegedly transferred to the NV, as the conditions for a hidden distribution of profits (§ 6.1 sentence 2 of the Corporation Tax Act – KStG -, § 19 no. 6 KStDV) between the GmbH and its shareholder, NV in Holland, were not met. Excerpts “The requirements for a hidden profit distribution between the GmbH and the NV are not fulfilled. Although the FG did not have to decide on this question from its point of view, its findings are sufficient to exclude a hidden profit distribution in the case in dispute. According to the established case law of the Federal Fiscal Court (Bundesfinanzhof, BFH), a hidden profit distribution requires that a corporation grants its shareholders pecuniary advantages and that this benefit has its cause in the corporate relationship. The causality of the corporate relationship is given if the corporation would not grant the advantages to a non-shareholder if it exercised the due care of a prudent and conscientious manager (§ 43, paragraph 1 of the Limited Liability Companies Act) (cf. BFH judgements of 30 July 1975, I R 110/72, BFHE 117, 36, BStBl II 1976, 74, and of 3 February 1977, IV R 122/73, BFHE 121, 327, BStBl II 1977, 346, with further references). N.). The GmbH allegedly benefited the NV by causing it, as managing director and majority shareholder of the KG, to make payments (excessive prices for goods and interest payments) and to waive the passing-on of costs (cf. II 1 a above). Just as a pecuniary advantage can also be granted directly to a third party and indirectly to the shareholder instead of directly to the shareholder, the person directly granting the advantage does not have to be the GmbH itself; it can also be a third party who grants an advantage to the shareholder at the expense of his own profit. This advantage is granted indirectly by the GmbH to the extent that the reduction in profit of the third party affects its own profit (share), provided that the conditions for a hidden profit distribution are otherwise met. In principle, 10/11 of the KG’s loss of profit affects the GmbH’s profit; for the rest, the limited partner G bears the KG’s loss of profit. The Senate does not need to decide whether the possible loss of profits at the limited partnership is only fully attributable to the limited liability company because it alone caused it. In the case in dispute, there is already a lack of the fundamental prerequisite of a benefit which has its cause in the partnership relationship. It is not evident, nor has it been shown by the tax authorities, that the prices for the goods purchased by NV were higher than the usual prices for goods … Similarly, there are no indications that NV would have waived the default interest on the goods and would have partly supported the rebates, discounts and bonuses if it had not been a shareholder in the GmbH …” “If a transaction, in this case e.g. a possible transfer of profits (cf. German Memorandum on the DTA-Netherlands of 16 June 1959 on Article 6, printed in Handbooks on Double Taxation Agreements, Explanatory Notes on the German-Dutch DTA, text part), cannot already be covered under the domestic tax laws, then the direct application of Article 6 of the DTA-Netherlands would amount to an impermissible extension of the tax liability. The BFH rulings on the progression proviso do not contradict this. The progression proviso does not require a domestic statutory provision for its implementation (apart from the consent law pursuant to Article 59, paragraph 2, sentence 1 of the Basic Law – GG), because it does not create a tax liability, but maintains the existing one (BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65).
Arm's Length Principle

Australia vs Commonwealth Aluminium Corporation Ltd, August 1980, HIGH COURT OF AUSTRALIA, Case No. HCA 28

This case is about the tax authorities power to determine a taxable income according to section 136 of the Australian Income Tax Assessment Act 1936 (Cth) which provides: “Where any business carried on in Australia – (a) is controlled principally by non-residents; (b) is carried on by a company a majority of the shares in which is held by or on behalf of non-residents; or (c) is carried on by a company which holds or on behalf of which other persons hold a majority of the shares in a non-resident company – and it appears to the Commissioner that the business produces either no taxable income or less than the amount of taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall, notwithstanding any other provision of this Act, be liable to pay income tax on a taxable income of such amount of the total receipts (whether cash or credit) of the business as the Commissioner determines. “...However, it is sufficient to state that the taxpayer has not discharged the onus of proving that its business was not principally controlled by non-residents” Australia vs Commonwealth Aluminium Corporation Ltd Aug 12 1980 HCA 28
Arm's Length Principle
Costa Rica vs Nestlé, April 2012, Supreme Court, Case No 10-017768-0007-CO Res. Nº 2012004940

Costa Rica vs Nestlé, April 2012, Supreme Court, Case No 10-017768-0007-CO Res. Nº 2012004940

In an appeal to the Supreme Court in Costa Rica, Nestlé claimed that the basis for an arm’s length adjustment was unconstitutional, since the arms length principle as described in the OECD transfer pricing guidelines had not been incorporated into the laws of Costa Rica. Judgement of the Supreme Court The Court dismissed the appeal of Nestlé. “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility of admitting “other -better- techniques”. What is important is that the contested Interpretative Guideline does not aim to eliminate other multiple scenarios arising from different forms of company organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt a certain technique or several techniques to regulate a certain behaviour of companies, or recognise legal practices to reduce taxes, it is possible to admit that if there are clashes with tax legislation and with reality, in the absence of a law, it is ultimately up to the judge to decide on the correct application of the technical rules. Thus, in the absence of any particular legislation, this fact does not prevent the parties in conflict from presenting their arguments, producing evidence and demonstrating the need to apply other criteria that allow for the non-application of the technical rule that adopts the guideline in question, or of another possible method, a situation that evidently makes the discussion a matter of ordinary legality. For all of the above reasons, the action should be dismissed, as it is in fact being dismissed.” Click here for English translation Click here for other translation Costa Rica vs Nestlé April 2012 SP
Arm's Length Principle

US vs E.I. Du Pont de Nemours & Co, October 1979, US Courts of Claims, Case No 608 F.2d 445 (Ct. Cls. 1979)

Taxpayer Du Pont de Nemours, the American chemical concern, created early in 1959 a wholly-owned Swiss marketing and sales subsidiary for foreign sales — Du Pont International S.A. (known to the record and the parties as DISA). Most of the Du Pont chemical products marketed abroad were first sold by taxpayer to DISA, which then arranged for resale to the ultimate consumer through independent distributors. The profits on these Du Pont sales were divided for income tax purposes between plaintiff and DISA via the mechanism of the prices plaintiff charged DISA. For 1959 and 1960 the Commissioner of Internal Revenue, acting under section 482 of the Internal Revenue Code which gives him authority to reallocate profits among commonly controlled enterprises, found these divisions of profits economically unrealistic as giving DISA too great a share. Accordingly, he reallocated a substantial part of DISA’s income to taxpayer, thus increasing the latter’s taxes for 1959 and 1960 by considerable sums. The additional taxes were paid and this refund suit was brought in due course. Du Pont assails the Service’s reallocation, urging that the prices plaintiff charged DISA were valid under the Treasury regulations implementing section 482. The Court ruled in favor of the tax authorities with the following reasons: “In reviewing the Commissioner’s allocation of income under Section 482, we focus on the reasonableness of the result, not the details of the examining agent’s methodology …. The amount of reallocation would not be easy for us to calculate if we were called upon to do it ourselves, but Section 482 gives that power to the Commissioner and we are content that his amount… was within the zone of reasonableness. The language of the statue and the holdings of the courts recognize that the Service has broad discretion in reallocating income … A ‘broad brush’ approach to this inexact field seems necessary.” E. I. DU PONT DE NEMOURS CO. v. U
Arm's Length Principle

Germany vs Corp, January 1973, Bundesfinanzhof, Case No BFH, 10.01.1973 – I R 119/70

A hidden distribution of profit presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. It should be noted that a director must be allowed a certain degree of commercial discretion. 1) As was stated in the judgment of the Senate in Case I R 21/68, a hidden profit distribution presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. This means that it is not the diligence of the managing director in the event of a dispute but the diligence of a prudent and conscientious manager that is the yardstick. For this reason, neither the intention of the corporation to distribute the profit in a hidden manner nor the agreement of the parties that the allocation is made with due regard to the corporate relationship is necessary (BFH judgement of 3 December 1969 I R 107/69, BFHE 97, 524, BStBl II 1970, 229). On the other hand, in the case of a transaction between the company and the shareholder, the disproportion between performance and consideration is not in itself sufficient for a hidden profit distribution to be assumed. In addition, a prudent and conscientious manager would have recognised this mismatch and would not have seen any legal or operational reason to conclude the transaction nevertheless. It must not be overlooked that a manager must be granted a certain degree of commercial discretion. His actions must, of course, be geared to the circumstances of the company. Click here for translation BFH I R 119-70
Arm's Length Principle
Canada vs Miron and Frères Ltd, June 1955, Supreme Court, Case No. S.C.R. 679

Canada vs Miron and Frères Ltd, June 1955, Supreme Court, Case No. S.C.R. 679

Miron and Frères Ltd acquired a farm from one of its shareholders, Gérard Miron, at a price ($600.000) far exceeding the original cost ($90.000) one year prior to the transaction. Miron and Frères Ltd claimed a capital cost allowance based on the price paid. Considering that the purchase was not a transaction “at arm’s length” but was one between a corporation and a controlling shareholder, the tax authorities rejected the claim and based the allowance on the original cost to the shareholder. Judgement of the Supreme Court The appeal filed by Miron and Frères Ltd was dismissed with costs. “Notwithstanding that an assessment is, by virtue of s. 42(6) deemed to be valid and binding, subject to appeal, the appellant saw fit to adduce no evidence with respect to the shares or the subject matter of control apart from the share-holdings as above set out. It is now argued on behalf of the appellant that it was for the respondent to support his decision by such evidence relative to control of the shares so held as he saw fit. In my view this is a misconception. The Minister, having concluded in the making of the assessment that the relevant transaction was not one between persons dealing at arm’s length, it was for the appellant to show error on the part of the Minister in this respect; Johnston v. Minister of National Revenue. This it did not attempt to do.” Click here for translation 1955 scr 679