In the early 2000s the IRS issued a “APA study guide” where guidance is provided in relation to various practical issues in the area of transfer pricing. The study guide is part of a large collection of IRS practices and statistics from working with MAP and APA that can be accessed via this link. IRS - apa_study_guide 1999

On 25 February 2021, a note was released by the Spanish Tax Agency on number of practical issues relating to application of the arm’s-length range. The note – which is based on the OECD transfer Pricing Guidelines, guidance on benchmark studies issued by the Joint Transfer Pricing Forum, and relevant Spanish case laws – answers the following questions – How is the range of values determined? – Is it possible to determine a range of values in which the figures are relatively equally reliable? – How to proceed if a range is determined in which all figures are not relatively equally reliable? – When should statistical tools be used to narrow the range? – What should be done if there is a wide dispersion in the range? – Where in the range should the value of the linked transactions be selected? – When can the administration adjust the values used by the taxpayer in its controlled transactions covered by a range of values? The note concludes that – Any transfer pricing adjustment requires justification that the value declared by the taxpayer does not comply with the arm’s length principle. – While in some cases it will be possible to determine a single figure as a more reliable benchmark to establish whether a transaction is at arm’s length, in many cases the application of the most appropriate valuation method will lead to a range of figures. – In determining a range of arm’s length values, those transactions with a lower degree of comparability should be eliminated. Also, to the extent that comparability can be improved and where possible, comparability adjustments should be made for those values that require them. However, it is common for a lack of information to prevent such adjustments from being made. – A range of values with a wide dispersion is often indicative of comparability defects in the values that determine the range and should lead to a more detailed analysis. – After such refinements, a range of values could be obtained in which all results are very reliable and relatively equal. In this case, any point in the range complies with the arm’s length principle and therefore no adjustment is appropriate if the value reported by the taxpayer is within the range. If it is outside the range, the adjustment will take the value of the controlled transaction to the value that is closest within the range. – In practice, the range will usually not comprise very reliable and relatively equal results. In this case, once the least comparable results have been eliminated, if there are still defects in comparability that cannot be identified or quantified (and therefore cannot be adjusted for), statistical tools are commonly used which, while not eliminating these defects in comparability, improve the reliability of the analysis. This is achieved by narrowing the range by using only those values between the 1st and 3rd quartiles. – In this case, if the value declared by the taxpayer is within the arm’s length range (whether declared by the taxpayer and accepted by the government or determined by the government), no adjustments should be made. – If, on the other hand, the value declared by the taxpayer is outside the range, the adjustment should generally be made to the median. This is unless, as expressly stated in EU doctrine, after a thorough analysis of the facts and circumstances of the case, there is justification for choosing another particular point in the range, with the burden of proof falling on the person seeking to assert that other point. Click here for English translation Spain Feb 2021 nota_rango_valores

German legislation on transfer pricing has been updated to align the rules with the OECD Transfer Pricing Guidelines 2017. The new amendments are effective as of fiscal year 2022. The rules includes revised content on Substance over form Risk analysis Best method rule Use of interquartile range Aggregation of transactions Determination of actual ownership vs legal ownership DEMPE functions Valuation of Hard to value intangibles Unofficial translation of the new amendments to the German TP legislation Article 5 Amendment of the Foreign Tax Act The Foreign Tax Act of 8 September 1972 (BGBl. I p. 1713), as last amended by Article 4 of the Act of 25 March 2019 (BGBl. I p. 357), shall be amended as follows: section 1 shall be amended as follows: (a) Paragraph 1 shall be amended as follows: aa) In sentence 1, the words “related” shall be replaced by the word “related”. bb) In sentence 2, the words “and within the meaning of § 1a” shall be inserted after the word “provision”. (b) Paragraph 3 shall be replaced by the following paragraphs 3 to 3c: “(3) For the determination of the transfer prices (arm’s length prices) corresponding to the arm’s length principle for a business relationship within the meaning of paragraph 1 sentence 1, the actual circumstances underlying the respective business transaction shall be decisive. In particular, it shall be taken into account which functions are performed by which person involved in the business transaction in relation to the respective business transaction, which risks are assumed in this respect and which assets are used for this purpose (function and risk analysis). The relationships within the meaning of sentences 1 and 2 shall form the standard for determining the comparability of the business transaction to be examined with business transactions between unrelated third parties (comparability analysis); the relationships on which these business transactions are based shall be decisive in the corresponding application of sentences 1 and 2, insofar as this is possible. The circumstances at the time of the agreement of the business transaction shall be taken into account. The arm’s length price shall in principle be determined according to the most appropriate transfer pricing method with regard to the comparability analysis and the availability of values for comparable transactions of independent third parties. Differences between the ratios of the arm’s length transactions used for comparison and the ratios underlying the transaction under review that may affect the application of the transfer pricing method shall be eliminated by appropriate adjustments, if possible; this shall only apply if comparability is thereby enhanced. If no comparative values can be determined, a hypothetical arm’s length comparison shall be carried out for the determination of the arm’s length price in compliance with paragraph 1 sentence 3 from the perspective of the supplier and the respective service recipient using economically recognised valuation methods. (3a) The application of the arm’s length principle regularly leads to a range of values. This range shall be narrowed if differences in comparability remain after application of paragraph 3 sentence 6. If these values themselves do not offer any indications for a certain narrowing, the quarter of the smallest and the quarter of the largest values shall be disregarded from this range. If the value used by the taxpayer to determine his income lies outside the range pursuant to sentence 1 or the narrowed range, the median shall be decisive if the taxpayer does not credibly demonstrate that another value complies with the arm’s length principle. When applying the hypothetical arm’s length principle according to paragraph 3, sentence 7, a range of agreement regularly results from the minimum price of the supplier and the maximum price of the service recipient. In the cases of sentence 5, the mean value of the agreement range shall be used as a basis if the taxable person does not credibly demonstrate that another value within the agreement range complies with the arm’s length principle. (3b) If a function, including the associated opportunities and risks as well as the assets or other benefits transferred along with the function, is transferred and paragraph 3 sentence 7 is to be applied to the transferred function because no comparative data can be determined for the transfer of the function as a whole (transfer package), the agreement range shall be determined on the basis of the transfer package. This may be waived if the taxpayer can credibly demonstrate that neither significant intangible assets nor other benefits were the subject of the transfer of function. This applies if the receiving company performs the transferred function exclusively vis-à-vis the transferring company and the consideration to be recognised for the performance of the function and the provision of the corresponding services is to be determined according to the cost-plus method. (3c. A transfer or assignment for use of an intangible asset shall be remunerated if it is made on the basis of a business relationship as defined in paragraph 4 and it has a financial effect on the transferee, the user, the transferor or the assignor. Intangible assets are assets that are neither tangible assets nor equity interests nor financial assets which may be the subject of a transaction without being individually transferable; and which can give a person an actual or legal position over that asset. The identification of the ownership or holder of an intangible asset, including rights derived from such an asset, is the starting point for determining which party to the transaction is entitled to the revenue arising from any disposition of that intangible asset. To the extent that a related party of the owner or holder of the intangible asset performs functions, uses assets or assumes risks in connection with the development or creation, enhancement, maintenance, protection or any form of exploitation of the intangible asset, those functions shall be appropriately compensated by the owner or holder of the related party. The financing of the development or creation, maintenance or protection of an intangible asset shall be appropriately remunerated and shall not give rise

On 24 May 2022, the Italian Tax Agency (Agenzia delle Entrate) released CIRCULAR NO. 16/E containing operational instructions on issues relating to application of the arm’s length range. The circular – which is based on the OECD transfer Pricing Guidelines, guidance on benchmark studies issued by the Joint Transfer Pricing Forum, and relevant Italian case laws – provides operational instructions regarding the correct interpretation of the notion of “arm’s length range”, as also specified in Article 6 of the Decree of 14 May 2018, when applying the provisions set forth in Article 110, paragraph 7, of the Consolidated Income Tax Act or of the provisions contained in the Double Taxation Treaties entered into by Italy in accordance with Article 9 of the OECD Model Convention. The operational instructions concludes as follows the correct application of the most appropriate transfer pricing method may, instead of a single value, lead to a range of values all complying with the arm’s length principle; in such cases, the full range of values within the arm’s length range may be used if all the transactions identified in the range are equally comparable; if, on the other hand, some of the transactions within the range show defects of comparability that cannot be reliably identified or quantified and, therefore adjusted, the use of ‘statistical tools’ (in order to strengthen their reliability) and a value within the narrow range is preferable. Recourse, on the other hand, to a value as central as possible within the range (also in order to minimise the risk of error due to the presence of such defects) must be limited to cases in which the range does not include values characterised by a sufficient degree of comparability even to consider reliable any point within the narrow range by means of statistical tools and must, in any case, be specifically justified; Therefore, it will be the responsibility of the Offices to resort to the “full range” for the purpose of identifying the arm’s length range only in those cases in which a perfect comparability of all the observations of the set with the “tested party” can be discerned. In conclusion, in recalling once again that according to the OECD Guidelines the identification of a set of values could be symptomatic of the fact that the application of the arm’s length principle allows in certain circumstances to reach only an approximation of the conditions that would have been established between independent enterprises, it is recommended that the adjustments involving the identification of the point that best satisfies the arm’s length principle within the range be argued in detail. Click here for English translation Click here for other translation Italy Circolare N. 16 del 2022 intervallo di libera concorrenza vers 20 05 2022_

As part of tax legislation recently enacted in Hungary, rules governing the application of statistical tools – arm’s length range and adjustments within the range – will now be governed by law. When determining arm’s length prices based on benchmarks of comparables it will now be mandatory to use the interquartile range. If the price falls outside the arm’s length range, adjustment must be made to the median value – unless the taxpayer can prove that another value within the range is more appropriate. Where the price is within the arm’s length range, taxpayers will no longer be allowed to make year-end adjustments. The above amendments will have effect for FY 2022 and forward. Furthermore, certain information related to controlled transactions will now have to be provided in the corporate tax return. Details in this regard will be contained in a later Ministerial Decree. Click here for unofficial English translation Click here for other translation Hungary new TP legislation 27-07-22

The Platform for Collaboration on Tax (IMF, OECD, UN and the WBG) has published a toolkit for addressing difficulties in accessing comparables Data for Transfer Pricing Analyses. The Toolkit Includes a supplementary report on addressing the information gaps on prices of Minerals Sold in an intermediate form. PUBLIC-toolkit-on-comparability-and-mineral-pricing

In March 2017 the JTPF agreed the Report on the Use of Comparables in the EU. The report establishes best practices and pragmatic solutions by issuing various recommendations for both taxpayers and tax administrations in the EU and aims at increasing in practice the objectivity and transparency of comparable searches for transfer pricing. JTPF-comparables-October-2016 JTPG-comparables-Oct-2016

EU REPORT ON THE USE OF COMPARABLES IN THE EU Background The EU Joint Transfer Pricing Forum (JTPF), as part of its work programme for 2015- 2019 (“Tools for the rules”), addresses the use of comparables in the EU (section 2.2 doc. JTPF/005/2015). Non-Governmental Members and Member States were asked to provide contributions as part of the preparation of the two meetings of 18 February 2016 and 23 June 2016. Those led to issuing two working documents (respectively, (doc. JTPF/009/2016/EN and JTPF/013/2016/EN) and were considered in the preparation of an overview on the current state of play, issues and possible solutions. A draft discussion paper on “Comparables in the EU” was prepared and discussed at the JTPF meeting in February 2016 (doc. JTPF/001/2016/EN). The present report also reflects the outcome of this discussion. Contents Background………………………………………………………………………………………………………………. 3 Introduction: context and scope……………………………………………………………………………….. 3 Comparable search…………………………………………………………………………………………………… 4 General aspects……………………………………………………………………………………………………. 4 Search strategy proposal………………………………………………………………………………………. 5 Specific aspects dealing with internal comparables……………………………………………………. 6 Selecting internal comparables……………………………………………………………………………… 6 Using internal comparables…………………………………………………………………………………… 7 Specific aspects dealing with external comparables……………………………………………………. 8 Sources of information in the EU……………………………………………………………………………. 8 Selecting external comparables……………………………………………………………………………… 9 Processing and interpreting external comparables……………………………………………….. 11 Specific aspects of comparability adjustments…………………………………………………………… 13 Observation in practice:………………………………………………………………………………………… 13 General aspects to be considered for comparability adjustments…………………………. 13 State of play and way forward on pan-European comparables………………………………….. 14 Assessing the reliability of the comparability analysis………………………………………………… 16 2. Introduction: context and scope 2. The application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent parties (‘comparability analysis’). The OECD Transfer Pricing Guidelines (‘TPG’)1 describe two key aspects of the comparability analysis (i) to identify the commercial and financial relations between the associated enterprises, the conditions and economically relevant circumstances attaching to these relations in order that the controlled transaction is accurately delineated; (ii) the search for comparables, described as “compar(ing) the conditions and the economically relevant circumstances of the controlled transaction as accurately delineated with the conditions and the economically relevant circumstances of comparable transactions between independent enterprises“2. These two components are part of the typical process of a comparability analysis3, whereas the delineation is part of step 3 and the comparable search is addressed in steps 4 to 9. 3. Delineating the transaction (see component (i) above) and drawing conclusions from the risk analytical framework4 is the first step and separate from the search for comparables. The delineation has significant consequences on the result of the comparability analysis. The search for comparables therefore needs to be systematically positioned vis-à-vis the delineation of the transaction. It is the delineated transaction, which governs the comparables search and not vice versa. 4. This report focusses on the second component described above, i.e. the search for comparables. It contains various recommendations for both taxpayers and tax administrations and aims at increasing in practice the objectivity and transparency of comparable searches in the EU. The purpose here is to make progress towards best practices and to find pragmatic solutions for companies doing business in the while sections 3 and 4 apply to search for comparable data in general, Sections 5 and 6 are mainly related to the search for data on potential comparable companies (‘comparable company search’). 3.   Comparable search 3.1   General aspects 5. A comparable search should be put in context of the following general aspects. The search for comparable data is part of the comparability analysis. As such, it is inter-linked with the delineation of the transaction and directly based on the facts and circumstances of each individual case. Most Member States have set out legislation and practical guidance on how a comparability analysis should be performed5, which broadly reflect the guidance given in Chapter III of the OECD Transfer Pricing Guidelines. This Chapter has not been revised further to the recent Report on BEPS Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation and is confirmed as setting out the process of “making comparisons between the controlled transactions and the uncontrolled transactions in order to determine an Arm’s length price for the controlled transaction”. There is also more and more case law available on the use of comparables in EU Member States and in third countries6, which is of growing interest. Finding acceptable comparable data is regarded as a challenge in the practical application of transfer pricing. It is recognised that complete elimination of judgments from the selection of comparable data would not be feasible, but also that much can be done to increase objectivity and ensure transparency in the application of subjective judgements7 . A balance has to be found between (i) care, thought, analysis and judgment, on the one hand, and, (ii) ensuring consistency and maximizing objectivity, on the other hand. The first (i) attributes need to be exercised when searching for comparables but the second term (ii) is crucial in the context of the EU to ensure a proper implementation of the TPG and best practice and therefore to prevent tax disputes “Recommendation 1:  a) Both taxpayers and tax administrations should apply a principle of transparency when they respectively conduct or control a comparable search. This means that taxpayers should justify and document the steps of the searches vis-à-vis the tax administration, and, symmetrically, that the tax administration should provide the relevant information for these steps to the taxpayer, when preparing or challenging such searches. b) The burden on both taxpayers and administrations as regards comparable searches execution and review should be proportionate. Additionally, the emphasis should be placed on quality, transparency and consistency of the analysis when conducting a comparable search. Consistency here refers to the application of a coherent approach at each step from the start of the search until its last step (e.g. the adjustment phase), but also considering each step in relation with the others and, overall, the comparable search in correlation with the delineation of the transaction. Consistency over time is a good practice: once an approach is taken, it should be consistently applied, unless valid reasons are put

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. An appeal was filed with the Administrative Court by Eli Lilly, but the Court dismissed the appeal and decided in favour of the tax authorities. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The appeal of Eli Lilly was again dismissed and the decision of the administrative court – and the assessment of additional VAT upheld. “The complainant’s objections were not capable of overturning the conclusion that the supply of marketing services and the supply of the distribution (sale) of medicines were provided to different entities and that, in the eyes of the average customer, they were not one indivisible supply.” Click here for English Translation Click here for other translation Czech vs Eli Lilly Cr August 2023 6 Afs 125-2022 - 59

Two issues were adressed in this case – transfer pricing and withholding taxes. The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction. The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act. Judgement of the High Court In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were made in accordance with the arm’s length principle. The High Court emphasised, among other things, that the documentation did not sufficiently describe how prices and terms had actually been determined. The High Court also emphasised that there had only been a very general description and very sparse information about the sister company’s business activities, contractual terms and financial circumstances, including no information about to whom and at what prices the goods from the sister company were resold. SKAT was therefore entitled to make a discretionary assessment of the company’s taxable income. The High Court found no basis to set aside SKAT’s estimate, as the company had neither demonstrated that the estimate was exercised on an erroneous basis nor led to a manifestly unreasonable result. The High Court emphasised, among other things, the extent and nature of the deficiencies in the information basis and the fact that SKAT had unsuccessfully attempted to obtain additional information for use in the tax assessment. As regards the arm’s length interval used by SKAT, the High Court found, after an overall assessment, that SKAT had been entitled to use the interquartile range and adjusted the price to the third quartile. The High Court stated that the company had a central and value-creating function in the group, and that the comparability analysis was based on “limited risk distributors”, which were not directly comparable with the company. The High Court also found that the foreign sister company had to be considered a pure flow-through company that had no independent business justification in the group. In this connection, the High Court stated that there had been changing information about the sister company’s employees and that there was no documentation that there had been employees to carry out the alleged activities in the company. The analyses prepared after the tax assessment, including the capital adjustment test and the berry ratio analysis, as well as the other factors invoked by the company could not lead to a different assessment. In regards of the withholding tax issue the High Court found that the foreign sister company could only be considered to have acted as a flow-through company that did not bear any risk with the commodity trade. The High Court emphasised, among other things, that no hedging contracts had been presented. In light of the other circumstances of the case, the High Court found that the 13 transfers, which did not take place until 2010, could not be considered to have been made pursuant to the aforementioned agency agreement. The High Court stated that in the situation at hand, the company had a heightened burden of proof that there was no basis for considering the payments as subsidies/dividends with derived liability for withholding tax. The High Court found that the Danish company had not met this burden of proof through the testimony of the company’s former CEO and auditor. Finally, the High Court found that the Danish company was aware of all the circumstances surrounding the transfers to the foreign sister company in Y1 country, and that the transfers were very significant without documentation. On this basis, the High Court found that the Danish company had acted negligently and was therefore liable for the missing withholding tax, cf. section 69(1) of the current Withholding Tax Act, cf. section 65(1). Click here for English translation Click here for other translation Denmark vs Soy-Oil AS June 2023

Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%. However, Banana S.A. had continuous losses and for 2016 its return on total costs (ROTC) was -1.83%. To this end, an “adjustment” was made by adding “unearned income” related to storm damage to the actual results, which increased the company’s ROTC from -1.83% to 3.57%. The tax authorities disagreed with both the transfer pricing method used and the “adjustment” made to the results. An assessment of additional taxable income in an amount of B/.20,646,930,51. was issued, where the CUP method (based on quoted commodity prices for bananas) had been applied. Judgement of the Court The Court agreed with the tax authorities that the “adjustment” for “unearned income” was not allowed. “….In this sense, we agree with the Tax Administration when questioning the adjustment made by the taxpayer, attending to the reality exposed by the itself in the appeal , explaining that —————– produces different types of bananas according to their characteristics which are direct consequence of the position of the banana in the bunch, so that in the scenario of having lost an approximate of 700,000 boxes due to climatic events, it is impossible to claim that the total of boxes lost would have had a cost of USD 8.30, already that this would represent that the lost bunches, only had bananas extra quality, so that of according to the taxpayer’s own explanations is impossible. …. Based on the above, we can conclude that the taxpayer did not disclose the weather event that affected its plantations in the audited income statement for the period 2016, nor in its audited financial statements, since at the information financial that is uses to make the adjustments of comparability,such events were not reported since there is no financial information that validates their existence and therefore they are rejected.” However, as regards the transfer pricing method, the Court agreed with the taxpayer that although the product was the same, other comparability factors were not. On this basis, the assessment of the additional taxable income was changed by the court to the result previously determined by the tax authorities using the TNMM, without taking into account the adjustment for unearned profits. “….Tax Administration undermined the conclusions and results presented in the Transfer Pricing Study of ———————- for the year 2016, which were established using the Transactional Net Margin Method (TNMM), by not accepting that the taxpayer’s income and margin, which would have been higher had the weather events that caused losses not occurred, notwithstanding, the taxpayer emphasises that the Tax Administration accepted all the comparables used in the Transfer Pricing Study. In this regard, the taxpayer adds that had the weather events that caused the loss of 719,531 boxes of bananas not occurred, the company’s margins would have been within the inter-quartile ranges of the comparables selected for the Transfer Pricing Study, and secondly, being weather events of an exceptional nature. In this regard, the appellant adds that by using the Transactional Net Margin Method (TNMM), it is possible to adjust the company’s revenues and costs in order to show what the margin would have been………………………. .The operating margin of —————— was -1.83% in 2016, due to the damages caused by the weather events, which, had they not occurred, the adjusted margin would have been 3.57%. Since the Directorate General Revenue did not accept this argument, it concluded that since the appellant’s margin is not within the inter-quartile range, which is 0.71%, up to 11.09%, it then proceeded to adjust the operating profit margin of ——————, to the value of the —————- of the operating margins of the comparable companies selected for the Transfer Pricing Study, which is 4.83% and in order to achieve this profit margin, it proceeded to increase the appellant’s revenues in the amount of B/.6,747,901.75.” Click here for English Translation Click here for other translation Panama resoluciones_2023_08_08_Exp-068-2020

The tax authorities had issued a notice of assessment which disallowed tax deductions for royalties paid by R…Cash & C…, S.A. to its Polish parent company, O…Mark Sp. Z.o.o. R… Cash & C…, S.A. appealed to the Administrative Court, which later annulled the assessment. The tax authorities then filed an appeal with the Administrative Court of Appeal. Judgement of the Court The Court of Appeal revoked the judgement issued by the administrative court and decided in favour of the tax authorities. Extracts “It is clear from the evidence in the case file that the applicant has succeeded in demonstrating that the agreement to transfer rights is not based on effective competition, in the context of identical operations carried out by independent entities. The studies presented by the challenger do not succeed in overturning this assertion, since, as is clear from the evidence (12), they relate to operations and market segments other than the one at issue in the case. The provision for the payment of royalties for the transfer of the brands, together with the unpaid provision of management and promotion services for the brands in question by the applicant, prove that there has been a situation that deviates from full competition, with the allocation of income in a tax jurisdiction other than the State of source, without any apparent justification. The application of the profit splitting method (Article 9 of Ministerial Order 1446-C/2001 of 21 December 2001) does not deserve censure. Intangible assets are at stake, so invoking the comparability of transactions, in cases such as the present one, does not make it possible to understand the relationships established between the companies involved. It should also be noted that the Polish company receiving the royalties has minimal staff costs, and that brand amortisation costs account for 97.72% of its operating costs. As a result, the obligations arising for the defendant from the licence agreement in question are unjustified. In view of the demonstration of the deviation from the terms of an arm’s length transaction, it can be seen that the taxpayer’s declaratory obligations (articles 13 to 16 of Ministerial Order 1446-C/2001, of 21.12.200) have not been complied with, as there is a lack of elements that would justify the necessary adjustment. Therefore, the correction under examination does not deserve to be repaired and should be confirmed in the legal order. By ruling differently, the judgement under appeal was an error of judgement and should therefore be replaced by a decision dismissing the challenge.” Click here for English translation. Click here for other translation Portugal 2579-16-6 BELRS ORG

“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to 30 September 2017, which resulted in an assessment of additional taxable income. The transfer pricing issues identified by the tax authorities were the remuneration received by the Hungarian company for its manufacturing activities and excessive interest payments to a group company in Luxembourg. Judgement of the Supreme Court The Supreme Court set aside the judgment of the Court of Appeal and ordered the court to conduct new proceedings and issue a new decision. In its decision, the Court of Appeal had relied on an expert opinion, which the Supreme Court found to to be questionable, because there were serious doubt as to its correctness. Therefore, according to the order issued by the Supreme Court, the Court of Appeal may not undertake a professional assessment of the expert opinion that goes beyond the interpretation of the applicable legislation, nor may it review the expert opinion in the new proceedings in the absence of expertise. Excerpt “[58] In relation to the adjustment of the profit level indicator for manufacturing activities, the expert found that comparable companies do not charge taxes such as the local business tax and the innovation levy as an expense to operating profit, the amount of which distorts comparability, this is a clearly identifiable difference in the cost structure of the company under investigation and the comparable companies, so an adjustment should be made in accordance with the OECD guidelines and the Transfer Pricing Regulation, because the statistical application of the interquartile range restriction cannot be used to increase comparability. However, the Court of First Instance held that it was not disputed that, even if the interquartile range as a statistical method was used, it might be necessary to apply individual adjustments, but that the applicant had not provided the audit with a detailed analysis of the justification for the adjustment and had not provided any documentary evidence in the course of the two administrative proceedings to show how the adjustment applied served to increase comparability. However, the application for review relied on the contradictory nature of the reasoning in this respect, since, while the Court of First Instance criticised the lack of documentation to support the adjustment {Ist judgment, paragraph 34}, it shared the expert’s view that this would indeed require an investment of time and energy which taxpayers could not reasonably be expected to make {Ist judgment, paragraph 35}. [59] On the other hand, the judgment at first instance explained that the applicant had only carried out research in the course of the administrative proceedings into whether the countries of the undertakings used as comparators had a similar type of tax burden to the Hungarian local business tax, and the expert had referred in his expert opinion to the fact that the applicant had only identified this one difference when carrying out the comparative analysis, but, if a detailed analysis is carried out, each difference can be individually identified and quantified and it is for this reason that the OECD guidelines also allow a range of results to be taken into account, because it reduces the differences between the business characteristics of the associated enterprises and the independent companies involved in comparable transactions and also takes account of differences which occur in different commercial and financial circumstances. Thus, the expert did not share the expert’s view that, while the narrowing to the interquartile range includes differences that are not quantifiable or clearly identifiable, individual adjustments should always be applied in the case of clearly identifiable and quantifiable significant differences. Thus, the trial court took a contrary view to the expert on this issue. [60] Nor did the Court of First Instance share the expert’s view in relation to the interest rate on the intercompany loan granted to the applicant by its affiliate and did not accept the expert’s finding that the MNB’s interest rate statistics were an averaging of the credit spreads of the debtor parties involved in the financing transactions, on an aggregated basis and, consequently, the use of the MNB interest rate statistics is not in itself capable of supporting or refuting the arm’s length principle of the interest rate applied in intra-group lending transactions, whether long or short-term. Nor did it accept the method used and described by the applicant in the comparability field, since it did not consider that the applicant should have used an international database to look for comparative data, since comparability was questionable. Furthermore, it considered irrelevant the expert’s reference to the fact that the average loan interest rates in Hungary in 2016 were strongly influenced by the low interest rates on subsidised loans to businesses and criticised the fact that the expert did not consider it necessary to examine the applicant’s current account loans under the cash-pool scheme. [61] It can thus be concluded that the Court of First Instance, in its judgment, did not accept the reasoning of the private expert’s opinion and made professionally different findings from those of the expert on both substantive points. [62] The opinion of the appointed expert is questionable if a) it is incomplete or does not contain the mandatory elements of the opinion required by law, b) it is vague, c) it contradicts itself or the data in the case, or d) there is otherwise a strong doubt as to its correctness [Art. 316 (1) of the Civil Code]. The private expert’s opinion is questionable if a) the case specified in paragraph (1) is present [Art. 316 (2) a) of the Civil Code]. Section 316 of the Private Expert Act specifies and indicates precisely in which cases the expert’s opinion is to be considered as a matter of concern. Thus, the expert’s opinion is of concern if it is incomplete, vague, contradictory or otherwise doubtful. The latter case

Ferroli España, S.L.U. is a Spanish manufacturer manufacture of cookers and heaters. In FY 2010 and 2011 the company had various transactions with other companies in the Ferroli Group and reported negative profit margins on these transactions. According to the company this was due to the financial crises in Spain. Following an audit, the tax authorities issued a notice of assessment where the profit of Ferrolia had been adjusted resulting in additional taxable income. The TNN method had been used and profits were adjusted to the median. An appeal was filed by Ferroli. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since sufficient proof of such defects had not been established, the adjustment was reduced to the lower quartile (3 % ROS). Excerpts “We are therefore within the scope of point 3.61 of the OECD Guidelines, which states: “If the relevant terms of the controlled transaction (e.g. price or margin) are outside the arm’s length range determined by the tax administration, the taxpayer should be given the opportunity to argue how the terms of the controlled transaction satisfy the arm’s length principle, and whether the result falls within the arm’s length range (i.e. that the arm’s length range is different from that determined by the tax administration). If the taxpayer is not able to demonstrate these facts, the tax administration must determine the point within the arm’s length range to which to adjust the condition of the controlled transaction”.” “Well, the Central Economic-Administrative Court justifies the application of this rule in the following reasoning: “finding ourselves in a situation in which the margin used is out of range, and the reasons have not been accredited, we have to say that we consider it correct to apply the median or central tendency for the determination of the net operating margin between the company’s sales (in this sense, section 3.57 of the OECD Directives”. In the judgment of this Chamber and Section of 4 February 2021 (ROJ: SAN 416/2021, FJ 2.10), we have summarised the interpretative position on the conditions under which recourse to rule 3. 61 of the OECD Guidelines, as expressed in the judgment of 6 March 2019 (ROJ: SAN 1072/2019), in the following terms: “it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application”. In the aforementioned judgment of 6 March 2019 (ROJ: SAN 1072/2019, FJ 3), the improper application of the disputed rule by the Tax Administration was reasoned as follows: “In short, it seems to us that, in effect, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest interquartile range – 2.1% – it is appropriate, in effect, to carry out the corresponding adjustment. But the fact that this occurs does not, without more, allow the median to be applied in the terms provided for in rule 3.62, since the application of that rule is not justified by the fact of being outside the range of full competence, but rather by the existence of “defects in comparability”, which according to the arguments of the TEAC itself were not acceptable in 2008 and, by extension, neither would they be acceptable in relation to 2007″.” As we can see, the contested decision incurs in the same deficiency of reasoning that we appreciate in the precedent cited above, beyond the differences between the different factual assumptions being tried, as the Central Economic-Administrative Court considers the appeal to the median to be plausible due to the mere existence of a deviation from the range of full competence determined by the Tax Administration. The justification offered by the assessment agreement and which the respondent administration reiterates in its reply, that the margins obtained are too wide, is not sufficient to consider that the burden of reasoning and setting out the reasons that lead to the application of the median in accordance with the provisions of rule 3.61 of the OECD Guidelines, that is to say, due to the persistence of defects of comparability, has been fulfilled. The reasoning offered by the tax authorities that the margins are too wide, having accepted that in 2011 the arm’s length range is within an interquartile range between 3.60 and 6.90 per cent, is not considered sufficiently expressive of the reasons that would support the application of the median in the sense stated above. The plea on this point is upheld and the application of the lowest point of the arm’s length range determined by the tax authorities (3%) is considered appropriate, with the legal effects inherent in this statement.” Click here for English translation Click here for other translation Spain SAN_3400_2023 ORG NW

An assessment had been issued by the tax authorites in regards of Auronext Pharma’s pricing of purchase and sales transactions with related parties. The tax authorities had rejected the CUP method applied by Auronext Pharma. “Since the comparable transactions were with related parties those transactions cannot be considered under CUP method for the purpose of benchmarking the taxpayers transactions.” Instead, the tax authorities used the Transactional Net Margin Method (TNMM). An appeal was filed by Auronext Pharma with the ITAT. Judgement of the Income Tax Appellate Tribunal The ITAT remanded the case to the tax authorities to examine afresh the data available with respect to un-related parties and find out whether the transaction of the assessee are at arm’s length or not by applying the CUP method. Excerpt ” (…) The sole basis of rejecting the method adopted by the assessee was the transactions were between the related parties and were not un-controlled transactions. A similar view was also expressed by the DRP while passing the impugned order in paragraph 2.2.1. and also in the report filed by the TPO before us dt. 01.05.2023 (supra). 14 Undoubtedly, the assessee in the rejoinder has rebutted the contention of the TPO/DRP and had submitted that the documents/data were furnished before the DRP, of unrelated parties transactions with respect to sale of goods/products. The record shows that the assessee had filed the documents before the DRP and on account of that reason only it was contended by the assessee that the data is readily available. In view of the above, we are of the opinion that the DRP/TPO is duty bound to examine the data available in respect of un-related parties and apply the CUP method to benchmark the international transactions. The assessee, in the original submissions as well as in rejoinder has given the details of unrelated parties, which are mentioned in the preceding paragraphs. In the light of the above, we deem it appropriate to remand back the matter to the file of the TPO/AO to examine afresh the data available with respect to un-related parties and find out whether the transaction of the assessee are at arm’s length or not by applying the CUP method. Needless to say,while doing so, the TPO, may not restrict to the comparables suggested by the assessee, who are unrelated parties and the TPO may be at liberty to find out any other suitable comparables having similar profile, functions and fulfil the other criteria laid down under rule 10B for CUP method.” “It may be apposite to mention that we have not expressed any opinion on merits of the case of the assessee, more particularly about the TNMM method and capacity utilization etc. Those issues are left open to be decided in appropriate proceedings.” India vs Auronext_Pharma_P_Ltd ITA-TP No 486-Hyd-2022 300523 ORG

SAS Weg France is owned by the Spanish company Weg Iberia, which in turn is wholly owned by the head company of the Weg Equipamentos Electricos SA group, based in Brazil. At the end of an audit covering the financial years 2010, 2011 and 2012, the tax authorities noted that SAS Weg France, which had not provided any documentation justifying the transfer pricing policy within the group, paid its suppliers, who were members of the group, within a maximum of 30 days of shipment of the goods, whereas delivery times averaged two months from Brazil and three months from China, and that its customers paid its invoices between 45 and 90 days after invoicing. According to the tax authorities SAS Weg France thus performed a gratuitous financial function which constituted an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. The tax authorities adjusted the company’s operating profit to the median of a benchmark study of fourteen comparable companies. As a result, the tax authorities reduced the losses declared by SAS Weg France for the financial year 2009, made it liable for additional corporate tax contributions for the financial years 2011 and 2012 and subjected the amounts transferred abroad to withholding tax. These taxes were subject to a 10% surcharge for failure to file a tax return pursuant to Article 1728 of the French General Tax Code. SAS Weg France was also fined for failing to provide transfer pricing documentation as required by the French General Tax Code. Dissatisfied with the assessment, SAS Weg France appealed to the Administrative Court, which dismissed the appeal in 2021. SAS Weg France then appealed against the decision of the Administrative Court to the Court of Administrative Appeals. Judgment of the Court The Appeals Court overturned the decision of the Administrative Court and ruled in favour of SAS Weg France. Excerpts: “4. In order to consider that the service provided by Weg France constituted an unjustified advantage that was not part of normal commercial management for the benefit of the group’s suppliers, the department compared the net margin rate of SAS Weg France, calculated after elimination of financial charges, with that of independent companies that did not have a specific financial function. The tax authorities selected a sample of fourteen independent companies that had adopted the same NAF code as SAS Weg France, i.e. wholesale of electrical equipment and wholesale of miscellaneous industrial supplies and equipment, with sales in excess of €5 million for 2010 and 2011 and whose sales amounted to less than 90% of sales, and that were positioned as wholesalers/dealers. 5. Weg France maintains, without being challenged on this point either at first instance or on appeal, that the products it distributes are intended solely for the industrial sector, whereas the sample of comparable companies used by the tax authorities includes companies that sell to individuals and companies that distribute household equipment, In this respect, the differences in margins noted by the department can be explained by the difference in situation between it and nine of the companies on the panel. In addition, the applicant company argued that, although five of the companies on the panel selected by the authorities could be considered comparable, their operating margins appeared to be consistent with the margins it had itself achieved during the period under review. In the absence of any challenge by the tax authorities to the arguments put forward by the applicant company in support of its plea, the tax authorities cannot be regarded as establishing the existence of a practice falling within the scope of Article 57 of the General Tax Code. It follows that Weg France is entitled to argue that the tax authorities were wrong to call into question the loss carried forward for 2009, to reinstate the sums considered as profit transfers in its taxable income for the financial years 2011 and 2012 and to consider that the benefits granted to the companies in the group constituted distributed income within the meaning of c. of Article 111 of the French General Tax Code subject to withholding tax.” Click here for English translation Click here for other translation France vs Weg France 25 May 2023 Case No 21LY03690

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

Menfi Industria s.p.a. is a manufacturer of household goods – appliances, crockery, stainless steel items. Following an audit the tax authorities served Menfi Industria a notice of assessment for FY 2008. According to the tax authorities the company had sold products to another group company, at a price lower than the normal value. The adjustment was determined using the TNMM method. Other non-transfer pricing adjustments were also made in the assessment. An appeal was filed by Menfi Industria, which the court of first instance found to be well-founded in regards of leasing fees, depreciations etc., but in regards of the transfer pricing adjustment the appeal was dismissed. Subsequently, the Lombardy Court of Appeal confirmed the decision of the first instance court. Menfi Industria then appealed to the Supreme Court. In its appeal Menfi Industris pointed out that, with regard to the issue of the sale of intra-group assets at a price lower than the normal price, the court of appeal ruled in an apodictic and tautological manner, essentially confining itself to affirming the legitimacy of the recovery only by stating that the methodology applied, i.e. the TNMM, was correct, without offering any specific argument as to the legitimacy. Menfi Industria further argued, that the judgment was contradictory in that, after stating that the arm’s length price was determined by the CUP method, the court in ist conclution stated that the methodology applied was correct, even though it was based on the TNMM. Judgement of the Supreme Court The Supreme Court set aside the judgement of the Court of Appeal and refered the case back to the court, in a different composition. Excerpts (…) “The appeal court, after pointing out, in its reasoning passage, that ‘normal value is determined by the method of comparing the average price or consideration charged’, arrives at the final consideration that the TNMM method applied is lawful, without this being logically supported by the main premise. This Court, (Cass. civ, No. 15668/2022), with specific reference to the Transactional Net Margin Method or TNMM, in referring to Section B of Part III of Chapter II of the OECD Guidelines of 2010 that regulates it, as, similarly, the subsequent edition of 2017, has had occasion to affirm the principle, which must be given further continuity here, according to which “on the subject of determining business income, the rules set forth in Presidential Decree No. 917 of 1986 Art. 110, paragraph 7, aimed at repressing the economic phenomenon of “transfer pricing”, i.e., the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD that is based on the determination of the net margin of the transaction (so-called “TNM”), which is the basis for the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the differences between the tested party and the comparable companies in terms of risks assumed or functions performed, and a reliable indicator of the level of profitability is assumed”. The judgment under review, as seen, reasoned, in the abstract, with regard to the application prerequisite set forth in Article 110, paragraph 7, cited above, but then deemed legitimate the TNMM method which, on the other hand, is not based on the comparison of the price charged for goods of the same or similar kind at the same state of marketing, but on the basis of the net margin of the transaction, thus showing a substantial contradiction in the motivational path. On the other hand, as has been said, the assessment of the correctness of the TNMM method applied required a verification of the assumptions legitimising its application, but the judgment under appeal totally failed to carry out, in its decisional reasoning, the necessary factual verifications in the identification of the transfer pricing method most appropriate to the case in hand, since it could not give relevance to the generic and abstract motivational passage according to which: ‘in the first analysis, the functions performed by the appellant company and the risks assumed by it were assessed’, since that passage of reasoning, devoid of specific factual elements of reference, cannot identify the necessary argumentative premise for the final conclusion to be correct. The second ground of appeal criticises the judgment, pursuant to Article 360(1)(3) of the Code of Civil Procedure, for breach and misapplication of Article 110(7) and (9) of Presidential Decree No 917/1986, for having held the TNMM method to be lawful, despite the fact that the aforementioned regulatory provisions require the application of the various traditional transactional methods as a matter of priority.” (…) “With reference to the present case, the appeal court held that the company had provided proof of the intra-Group supplies but then, again in part of its reasoning, stated that it rejected the company’s appeal. There is no possibility, on the basis of the content of the decision, of being able to hold that the expression ‘Evidence that has been provided by the company Menfi’, contains a mere material error, in the sense that, indeed, the court would have wanted to state that the evidence had not been provided: the expression finds its completeness in itself, there being no further motivational passage that would allow the second interpretative option to be preferred, resulting, in this case, in a judgment contrary to that expressly stated by the appeal court. In that regard, the present ground of appeal correctly states the intrinsic and unremediable inconsistency between the finding of fact made by the court and the subsequent ruling rejecting the company’s appeal.” Click here for English translation Click here for other translation Italy vs Fallimento Menfi Industria spa April 2023 Case

Sandakan Edible Oils SDN BHD principal activity is, amongst others, to carry out the refining and sale of edible oils and related products, and the packaging and sale of cooking oil. It applied the Comparable Uncontrolled Price (CUP) method as the transfer pricing methodology to determine the arm’s length pricing of its controlled transactions. Following an audit for FY 2010-2013 the tax authorities informed Sandakan Edible Oils SDN BHD that it would be invoking section 140A of the ITA to raise an additional assessment. The tax authorities rejected the CUP method and instead applied the Transactional Net Margin Method (TNMM). According to the benchmarking analysis, Sandakan Edible Oils SDN BHD’s financial results was within the interquartile range for all years, but for 2010 the results was below the median. On that basis the tax authorities held that the margin for 2010 should be adjusted up to the median. Sandakan Edible Oils SDN BHD filed a complaint with the Special Commissioners of Income Tax (SCIT) and in a decision issued in 2021 the SCIT set aside the assessment. The tax authorities then filed an appeal with the High Court. Judgement of the High Court The High Court dismissed the tax authorities appeal and upheld the decision of the Special Commissioners of Income Tax. Excerpts “The agreed issues for determination are as follows: – Issue 1: Transfer Pricing Adjustments (YA 2010) In performing transfer pricing adjustment on the Taxpayer for the YA 2010 pursuant to section 140A of the ITA, whether the Revenue is required under the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and the Revenue’s Transfer Pricing Guidelines to adjust the Taxpayer’s profits to the median in a case where its margin is within the inter­ quartile range?” (…) 64. All in all, I find that the SCIT’s decision is consistent with their earlier decision in Procter & Gamble (supra) that “if the price or profit margin is within the accepted interquartile range then a comparison need not be made (paragraph 3.60 of the 2010 OECD Guidelines). The SCIT’s decision was recently upheld by this Honourable Court on 7.4.2020. 65. The SCIT’s decision is also consistent with RW1’s own evidence that nothing in the Guidelines requires an adjustment to be made to the median, and the legal position in other jurisdictions applying the arm’s length principle under the OECD Guidelines. 66. The finding of facts of the SCIT will only be disturbed by this court when the SCIT was wrong in the evaluation of the It is for the Revenue to establish that there was a misdirection by the SCIT to warrant interference by this court. Unfortunately, the Revenue has not demonstrated any such errors in the facts of this case to warrant appellate interference. 67. I view the SCIT’s findings as rational and cogent and there are no flaws in its reasoning or the conclusions therein. Based on the evidence before the SCIT, it cannot be said that the findings of the SCIT are irrational or perverse. 68. I am of the view that the finding of the SCIT is based on the totality of the evidence adduced before them. To me, the SCIT had scrutinized the evidence of both parties and applied the law to the facts and made a reasonable conclusion. It is not the task of this court to scrutinize every piece of evidence adduced before the SCIT and to make another finding of fact. That task of fact-finding fall within the jurisdiction of the SCIT.“ Click here for other translation Malaysia vs Sandakan edible oil sdn bhd April 2023 WA-14-2-02-2021

The tax authority, based on the results of an audit, found that the prices in controlled export transactions of goods, carried out between “LK Ukraine Group” and related parties, did not comply with the arm’s length principle, i.e. the selling prices of the goods were lower than the minimum values of the arm’s length range. Disagreeing with this conclusion, “LK Ukraine Group” stated that the the method applied by the tax authority during the audit of prices in controlled transactions was unlawful and inappropriate due to the lack of information on all possible costs. At the request of the supervisory authority, “LK Ukraine Group” provided evidence that when determining the prices of goods, the group was guided by information based on monitoring, in particular, prices on the Euronext exchange, namely, the average selling prices of agricultural products on the terms of delivery EXW-port, which refuted the assertion of the authority that the controlled transactions did not comply with the arm’s length principle. The District Administrative Court dismissed the claim in a decision upheld by the Administrative Court of Appeal. The courts of previous instances concluded that, based on the Tax Code of Ukraine, the tax authority had calculated the median of the range to determine the price in a controlled transaction, which is consistent with the arm’s length principle. Judgement of the Supreme Court The Supreme Court also dismissed the appeal of “LK Ukraine Group” and upheld the challenged court decisions. If the audit of controlled transactions on export of “rapeseed” goods establishes that prices in controlled transactions on export of goods of the commodity carried out by the taxpayer (taking into account the adjustment for the cost of transshipment of goods on board the vessel) are less than the minimum values of price intervals (ranges), i.e., do not comply with the arm’s length principle and the selling prices are lower than the price range, the terms of such transactions differ from the terms and conditions applied between unrelated parties in comparable uncontrolled transactions. Click here for English translation Click here for other translation TPcase - Ukrain 23 March 2023

SGGE W T is a Spanish branch of SGG that carries out distribution and marketing activities related to the information technology network products and services. SGG is part of the KF group which “is an international group that provides solutions and services in the Information Technology (IT) sector, starting its activity in . .. as a distributor of access and communications networks”. The group “is the result of several corporate operations, mainly company acquisitions and mergers carried out to increase its share in world markets” and “is mainly organized in three divisions (SGG, QR and …) according to the IT areas (Technology, Integration and Consulting) in which they operate”. Following an audit of FY 2015 and 2016 the tax authorities issued assessments of additional income to the Spanish branch. One of the issues identified was SGGE’s remuneration for its sales and marketing activities. According to the tax authorities, the income of the Spanish branch was below the lower quartile of the range established under the TNMM. On this basis, the income was adjusted to the median. The tax authorities had also disallowed deductions for the cost of intra-group services. An appeal was filed by SGGE W T. Judgement of the Court The Court partially upheld and partially dismissed the appeal. Excerpt from the judgement concerning IQR and Median “Thus, this Court only appreciates, from the motivation of the Inspection, that there would be -according to the assessment- some defects of comparability that persist, unavoidable as a consequence of the selection process of comparable elements through databases, and of the limits of the available information, but it is not detailed what errors or circumstances concur in the selection of the comparable elements or what limits the available information has. It should be noted that when the Inspectorate, as transcribed above, refers to the fact that there are still defects in comparability, given that the resulting range does not include relatively equal results, it adds, paraphrasing the Guidelines, that these are defects that cannot be identified and quantified. Rule 3.57 of the OECD Guidelines – also transcribed above – refers to defects in comparability that cannot be identified or quantified and are therefore not susceptible to adjustment. Notwithstanding the foregoing, regardless of the possibility of identifying or quantifying such defects, the choice of the median, provided for in rule 3.62 of the OECD Guidelines, requires – as clearly stated by the Audiencia Nacional and this TEAC – that the Inspectorate must disclose the defects of comparability, and reasons must be given for the defect or defects of comparability that are found to persist and that cause the range not to include very reliable and relatively equal results. We have seen that when section 3.57 of the Guidelines refers to defects that cannot be identified or quantified, it immediately links it to the fact that this makes a specific adjustment impossible. This is perfectly logical, because if they could be concretely identified and quantified, the adjustment would be feasible. It is one thing if they cannot be identified in the sense of being precisely specified and quantified so that they can be adjusted or corrected, and another if elements or areas are detected which, due to their special circumstances or lack of documentation, allow us to conjecture that there is still a deficiency in comparability that cannot be corrected, for which reason there is no other recourse but to resort to the median. Therefore, the mere appeal to this generic reference cannot be considered sufficient; otherwise, the requirement to state reasons that the Audiencia Nacional and this TEAC maintain would be sterile. At the very least, it should be explained what errors or failures in the process of selecting comparables, or what limitations in the information available, determine, as a consequence, that there are such unidentifiable or unquantifiable defects in comparability. In the present case, the reasoning contained in the assessment notification -page 148- only talks about defects that are a consequence of the selection process and the limitations of the available information, but does not detail any aspects that could allow this reviewing body to assess which are the specific circumstances of the selection process that allow to consider that it will lead to unidentifiable or quantifiable defects of comparability; nor the specific circumstances of the available information from which it can be extracted that the limitations of the same (not identified by the Inspection in the aforementioned motivation) will lead to unidentifiable or quantifiable defects of comparability. Likewise, it is striking that the Inspection refers to defects derived from the process of selection of comparables when, in the Fourth Ground of Law of the agreement, in response to allegations, a table is drawn up in which five entities selected by the Inspection, which are the object of allegations by the taxpayer, are eliminated from the comparables, indicating that “the interquartile range derived from the remaining entities would not offer values very different from those resulting from the entities taken by the Inspection”. Also noteworthy is the statement made on page 209 of the contested resolution in which, in response to the allegation that the services of one of the comparable entities (…, S.A.) represent around 40% and 49% of the total income, in 2015 and 2016, respectively, it is stated that this “in no way implies that in all the other entities selected as comparable by the inspection this same circumstance is present”, indicating that in case it were so (that the percentage of 40% or 49% of the income from the provision of services were present in the other entities) “in no way would invalidate the sample of entities selected by the inspection since they are entities that carry out activities similar to those of the obligor and that constitute the best possible comparable”. It is striking that the Inspectorate states that the selected entities “constitute the best possible comparable” and that, nevertheless, the adjustment is based on the choice of the median “as the point in the range that

The tax authority had conducted a tax audit of “KOR Oil Company” on transfer pricing issues for FY 2013-2015. Based on the results of the audit, a notice was issued on corporate income tax in the amount of 138 515 235 and penalties in the amount 34 807 179. In the decision the tax authorities had based the pricing of the controlled oil transactions on market data provided by Argus China Petroleum, whereas the company had based the pricing on Brent quotation. On appeal, the assessment of additional tax was later canceled by the tax court and the court of appeal. In an appeal to the Supreme Court the tax authorities asked the court to cancel the the decision of tax court and the court of appeal. The tax authorities does not “…agree that the Argus China Petroleum source used by the Department does not contain information about daily quotations for goods, which does not comply with the requirements of paragraph 1 of Article 13 of the Law of the Republic of Kazakhstan “On Transfer Pricing” (hereinafter – the Law).The oil price published by Argus China Petroleum reflects the price on the border of Kazakhstan and China for actually completed transactions, and allows for a comparative analysis of supplies between unrelated parties with transactions involving interrelated parties. Therefore, such a price is appropriate to comparable economic conditions“. Furthermore, according to the tax authorities “…the Agreement between the Government of the Republic of Kazakhstan and the Government of the People’s Republic of China “On Certain Issues of Cooperation in the Development and Operation of the Kazakhstan-China Oil Pipeline” dated December 8, 2012 No. 1559 (hereinafter referred to as the Agreement), referred to by the plaintiff, does not regulate the taxation of subsoil users and the application of legislation on transfer pricing, and also does not establish a specific the formula for determining the price in oil purchase and sale transactions in the direction of China“. Judgement of the Court The Supreme Court ruled in favor of “KOR Oil Company”. Excerpts (Unofficial English Translation) “The plaintiff’s oil supply was carried out in the direction of China, where there is no price from the source of information. The absence of stock quotes in this direction is also confirmed by the defendant. Due to the absence of such quotations, the Company used the Brent quotation (DTD) published in Europe as the basis of the market price. …” “When checking, the Department applied the prices published in Argus China Petroleum, published by Argus Media Limited. However, as the local courts correctly note, the data published in Argus China Petroleum are statistical customs prices that were not calculated from the minimum and maximum values, and also are not an exchange quotation (market price) for oil, are not determined on the basis of exchange trading and are not published in their official documents. Thus, the data published in Argus China Petroleum are average monthly statistical prices, and not daily quotes, as required by Law. In addition, since 2018, the publication of data in this area has been stopped. Accordingly, the judicial board agrees with the conclusions of the local courts that in this case the prices published in Argus China Petroleum cannot be applied for taxation and transfer pricing purposes.” “The price level under oil purchase and sale agreements is determined on the basis of international oil quotations in units of oil volume per barrel and will be the same on the border of Kazakhstan and China for oil of all Kazakhstani shippers, regardless of the region of production. Thus, the Agreement assumes the application of a single price by all Kazakhstani exporters to China, taking into account international quotations. As the representatives of the defendant confirmed, in general, eight companies shipped crude oil to China via this pipeline during the period under review to one buyer. Everyone uses a single pricing approach. The resolution of the specialized judicial Board of the Supreme Court of the Republic of Kazakhstan dated October 26, 2020 established the illegality of the use by the state revenue authorities of the Argus China Petroleum information source for the export of oil from Kazakhstan to the PRC, the inconsistency of this approach with the requirements of the Agreement. ” “Thus, this resolution established the legality of the pricing approach of one of the eight exporting companies. In view of the fact that, according to the Agreement, a single pricing approach must be observed, the same pricing approach must be maintained with respect to the plaintiff.” “Having heard the participants of the court session, having examined the circumstances and materials of the case, the judicial board comes to the conclusion that the arguments of the cassation appeal were studied in detail in the court of appeal and they were given a proper legal assessment. In such circumstances, the defendant’s cassation complaint is subject to dismissal.” Click here for English Translation Click here for other translation KAZ vs KOR 24 January 2023 No 6001-22-00-6ap-1563

The tax authorities issued a transfer pricing adjustment of USD 1.4 million for FY2013, claiming that the remuneration of “Tech Distributor S.A.” had not been determined in accordance with the arm’s length principle. According to the tax authorities, there were inconsistencies between the amounts of controlled transactions reported in the transfer pricing documentation and the income tax return. The tax authorities also found that “Tech Distributor S.A.” had incorrectly included “other income” in the calculation of its operating margin for the purposes of applying the Transactional Net Margin Method (TNMM). Finally, some of the companies selected as comparables were rejected and “comparability adjustments” were also disregarded. After making these adjustments to the benchmark analysis, the profit margin of “Tech Distributor S.A.” was outside the interquartile range and therefore the profit was adjusted to the median. “Tech Distributor S.A. appealed to the Tax Tribunal. Decision of the Tax Tribunal The Tribunal dismissed the appeal and upheld the assessment of the tax authorities. According to the Tribunal, ‘other income’ should not be included in the calculation of the operating margin. The court also upheld the tax authorities’ rejection of some of the comparables and agreed that the comparability adjustments made by the company were incorrect. Click here for English translation Click here for other translation Panama TAT-RF-006

Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length. Following an audit, the tax authorities found that the company’s profit was outside the arm’s length range and issued an assessment of additional income for FY2014-2016. According to the tax authorities, Yazaki Bulgaria Ltd had not included all its costs when calculating its profit margin. Administrative Court Judgement The Administrative Court annulled the tax authority’s assessment and ruled in favour of Yazaki Bulgaria Ltd. Excerpt “It is undisputed in this case that the adjustments made by the appellant for comparability with the amounts of additional labour costs in individual years are as follows: For 2014, the reported operating loss of £2,192,845.67 was adjusted upwards to a net profit of £4,837,402.79 as a result of the elimination for comparability purposes of costs of £7,030,248. 46 leva; before adjustments a net profit margin of -1.02% is calculated and after adjustments the net profit margin indicator is +2.34% and falls above the lower quartile value which is 2.27; For 2015 – the reported net profit from operations of £4,086,310.44 has been adjusted upwards to a net profit of £11,832,352.26 as a result of eliminating for comparability purposes expenses of £7,746,041. 82 leva; before adjustments, the net profit margin is calculated at 1.43% and after adjustments, the net profit margin indicator is 4.26% and falls above the lower quartile value of 1.68%; for 2016 – the reported net profit from operations of £1,259,468.30 has been adjusted upwards to a net profit of £6,815,444.19 as a result of eliminating for comparability purposes expenses of £5,555,975. 89; Before adjustments, the net profit margin is calculated at 0.46% and after adjustments, the net profit margin indicator is 2.56% and falls above the lower quartile value which is 2.22% . In summary of the foregoing, the court finds that after the audited entity’s elimination of net profit comparability expenses, Y.B.’s net profit margin indicator falls within the interquartile range, and therefore, the conclusion that the company’s net profit margin indicator is below market values is not warranted. The adjustments made were to eliminate the effect of additional staff and training costs which affected the auditee’s net profit margin and, in the Court’s view, were consistent with the purpose of Article 4 N-9 of 14.08.2006 – to achieve a result that would have been achieved in an ordinary commercial or financial relationship between independent persons under comparable conditions. The additional costs have been recognized by the tax administration as actually incurred and are part of the costs taken into account in the declared financial result of the company. There is no basis for transformation of the financial result of the company, as done by the audit on the basis of Art, Article 16 and Article 78 of the Income Tax Act, since the net profit of the company falls within the market values when adjustments are made for comparability, i.e. there is no conduct on the part of the audited entity aimed at tax evasion. For the reasons set out above, the Court considers that the appeal should be upheld by annulling the contested revision act.” Click here for English Translation Click here for other translation Bulgaria vs YAZAKI BULGARIA LTD SAC No 22-2022

Following an audit the tax authorities concluded that ARGO-HYTOS s.r.o. sold goods (valves, blocks and hydraulic aggregates) to related parties at a price that differed from the prices that would have been agreed between unrelated parties under the same or similar conditions. Furthermore, according to the tax authorities ARGO-HYTOS s.r.o. did not satisfactorily document the difference from those normal prices. An appeal was filed by ARGO-HYTOS s.r.o. with the Regional Court which was dismissed the action by the above-quoted judgment No 30 Af 21/2019-46 (‘the contested judgment’). In the judgement, the Regional Court concluded that ARGO-HYTOS s.r.o. had not satisfactorily demonstrated the difference between the prices agreed between it and the companies of the ARGO-HYTOS group and the prices which would have been agreed between unrelated parties under the same or similar conditions. The Regional Court held that, if the tax authorities wished to justify the reasons for the increase in the applicant’s tax liability, it was incumbent on them to prove that the prices agreed between the applicant and its connected persons differed from those which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. Furthermore, it was its duty to inform the applicant of the difference and to give it time to comment and to substantiate its position. In such a case, the burden of proof would shift to the applicant. In order to fulfil its obligation, the tax authorities would have had to establish the normal price at which independent persons trade in order to compare the price agreed between related parties. The Regional Court did not find merit in the applicant’s objection that the tax authorities had wrongly excluded from the analyses carried out companies which had made a negative operating profit in the period in question. The applicant considered that this procedure was unacceptable, since, in its view, it cannot be assumed that if a comparable entity is negative in one year, it is loss-making in the long term and cannot therefore be regarded as a comparable entity. On this issue, the defendant stated that the excluded loss-making companies could not be considered comparable, since the applicant, as a contract manufacturer, could be considered to perform such functions and bear such risks as to make a reasonable stable profit. Moreover, those companies were not only excluded on the ground of loss-making but also on the ground of non-compliance with other criteria such as NACE code, independence or accounting methods. The Regional Court fully shared that view and therefore found the plea unfounded. On the question of the comparability of the sample of independent companies and the method of calculating the interquartile range, the Regional Court stated that the defendant agreed with the tax authorities which, after assessing the entities included by the applicant in the analysis comparing prices between related and unrelated entities in normal relations under similar or comparable conditions, concluded that none of those companies was comparable to the applicant. Therefore, the tax administration prepared its own SA5 analysis, which included seven companies that could be considered as comparable independent entities. For these companies, the interquartile range of EBIT margin values was found to be between 4,10 % and 8,19 % for the tax years under review, based on data for 2011 and 2013. The Regional Court agreed with this conclusion and thus found the procedure followed by the tax administrator and the defendant to be lawful and factually correct. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of ARGO-HYTOS s.r.o. Excerpts (Unofficial English Translation) “[22] The Supreme Administrative Court did not accept the complainant’s arguments that the law does not provide for the obligation to use a specific database for the analysis of compliance with the arm’s length criterion and that the tax administrator should therefore have respected the fact that the complainant chose the AMADEUS database and taken into account the information available to the complainant when negotiating prices for sales of goods within the ARGO-HYTOS group of related parties, that the tax administrator did not carry out a sufficient qualitative analysis and that it rejected the use of another commercial database. From a tax perspective, it is irrelevant whether or not the complainant had the relevant information to carry out its own internal analysis on the basis of which it set the transfer prices. The fact that the prices negotiated between related parties for the sale of goods or the provision of services differ from the prices normally negotiated between unrelated parties under similar or comparable conditions can be established objectively. It is not a subjective criterion for which the degree of prudence or effort of the taxable person could be taken into account. In other words, if the prices between related parties differ from those between unrelated parties, this is an objective fact, a bare fact which has tax consequences. If the taxpayer has assessed, on the basis of the information available to it, that there is no such difference, even though that assessment is contrary to the facts, then it must bear those tax consequences – it is its responsibility to ensure that it has the relevant information on how to set prices between related parties so that the tax base does not have to be adjusted. The complainant must therefore bear the consequences of having used a database for analysis which did not contain the information necessary to meet the comparability criteria in the relevant period under analysis. [23] The Supreme Administrative Court also did not accept the complainant’s objection regarding the calculation of the weighted average. Indeed, the method used by the complainant, according to which the average operating margin is calculated for all the companies together for each individual year and then averaged over the individual years, may not be more revealing than the method actually used by the tax authorities. The tax authorities are obliged to ascertain the prices at which unrelated persons

C. spółka z o.o. is part of a larger group and mainly (95%) sells products (boxes, metal enclosures, etc.) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. C. spółka filed an appeal with the Administrative Court. The Administrative Court predominantly dismissed the appeal and found in favor of the tax authorities. However, the tax authorities have wrongly determined the income of the complainant, by referencing to its entire activity, despite the fact that 5% of the transactions are not subject to regulation under the arm’s length provision. Because of this, the court repealed the decision of the first-instance authority and stated that when re-examining the case, the authority should take into account the position expressed. An appeal was then filed by C. spółka with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the Administrative Court. Excerpts “The company completely ignores in the cassation complaint that the tax documentation of the transaction submitted by it did not confirm its use of the “cost-plus” method of calculating the sales price to related parties with a mark-up of 30% on the direct costs constituting the cost base (depreciation, value of materials and energy used, third-party services, salaries and wages with mark-ups). The submitted tax documentation shows that in the Company, the valuation of the value of the products sold to related customers should follow the reasonable margin “cost-plus” method. In addition, the Company, in describing the method and manner of calculating income and determining the price of the subject of the transaction, explained, among other things, that in 2016, in transactions to related parties (i.e. to: C. GmbH,. P.GmbH, R. mbH), the price was the sales value of individual finished products, determined each time on invoices issued by the Applicant. The price for the individual products was determined on the basis of pre-agreed price lists or on the basis of ongoing arrangements and negotiations, taking into account changing market conditions. This was to be the method provided for in Article 11(2) of the A.p.d.o.p., consisting in setting the price for the sale of goods and rights and the provision of services in transactions with a related party at the level of the sum of the cost base and profit mark-up, comparable to the cost base and profit mark-up established between independent parties, which take into account comparable functions, risks incurred and assets involved. In the explanations submitted during the tax proceedings, the Company additionally stated that it calculated the selling prices of finished goods taking into account the following elements: – material costs; – third-party service costs; – labour costs; – a mark-up of 30%. It further explained that the 30% mark-up applied by it was established in 2005 and was not updated, and was applied in transactions carried out for related parties and independent parties under individual orders and orders. At the same time, it did not submit any documents related to the calculation of the sales prices of finished goods applied to related parties. It should also be emphasised that the Appellant, when preparing the profit and loss account in the comparative variant, did not separate in it such an item as management costs within the meaning of the Accounting Act, the determination of which is necessary in the event of a reliable application of the “cost-plus” method to transfer pricing settlements. The tax authority was therefore correct in concluding that the sales prices to related parties were not correctly calculated based on market standards. At the same time, it must be emphasised that the Company did not have any long-term contracts with customers, and production and sales were based on current orders from customers, including related and independent entities. In the business relationship concerning the production and sale of products to the related party C. GmbH (as parent company), the Applicant acted as a subcontractor, and these processes were planned on the basis of long-term contracts concluded by C. GmbH with its customers. The company did not in any way contractually secure its own turnover volume or even the planning of the supply of its products and services in the medium term. Most importantly, however, it is apparent from the evidence gathered, including the documentation obtained from the Applicant, that sales were made at amounts that did not take into account all costs incurred and that there was no rational reason for such sales prices. According to the tax authority’s calculations, the revenues obtained by the Company according to the reasonable “cost-plus” margin method indicated by itself should have been higher by approximately PLN 4.5 million. Meanwhile, the margin realised by the Applicant was negative and actually amounted to -6.80%. This indicates that the Company’s method of pricing to related parties, contrary to its position, did not assume the achievement of an adequate profit, and the tax documentation submitted for the Complainant’s transactions with related parties did not assume a mark-up of 30%, which would have translated into a profit for 2016 rather than a loss. Therefore, it is not possible to agree with the Company’s position that only objective factors influenced the negative financial result and were the only reason for the application of Article 11(1) of the A.T.C. Properly

Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the resale price method used by “Pharma Distributor Ltd” and instead applying the TNMM. An appeal was filed by “Pharma Distributor Ltd”. Judgement of the Tax Court The Court dismissed the appeal in part and allowed it in part. The tax authorities’ assessment was largely upheld in relation to sales activities, where it was found that the prices charged by “Pharma Distributor Ltd” were outside the interquartile range. In relation to the service activities, the Court found that the remuneration for these activities was within the arm’s length range and therefore annulled the assessment. Excerpts “In the light of the above, as regards the applicant company’s intra-group transactions Nos 1 to 4, there is a question of non-compliance with the arm’s length principle, since the ratio of net profit margin (partial result) to sales for the applicant company’s trading sector, for the tax period 01/01/2019-31/12/2019, amounts to 1.45%, i.e. it is outside the limits of the 1st (2.38%) and the 3rd quartile (7.11%) of the net profit margin to total sales ratios of the comparable companies in the sample. As regards the applicant’s intra-group transaction No 5, its pricing is in line with the principle of equidistance, as the ratio of net profit margin (partial result) to sales for the applicant’s industrial sector, for the tax period 01/01/2019-31/12/2019, amounts to 2.86%, i.e. it is within the limits of the 1st (2.21%) and the 3rd quartile (13.91%) of the net profit margin to total sales ratios of the comparable companies in the sample. Therefore, the following accounting difference is calculated for compliance with the arm’s length principle, which is added to the accounting differences of the financial year in application of article 50 of Law4172/2013.” Click here for English translation Click here for other translation Greece Case No 3712_2022

“Gas-Trader KtF” – a subsidiary in the E.ON group – had entered into loan agreements with other group companies and the related parties had determined the interest rate by application of the CUP method using the Thomson Reuters LoanConnector database. Comparable transactions was extracted from the database by searching for credit rating, type of debtor party, date of loan, maturity, transactions with completed status, and spread/provision fee. An audit was conducted by the tax authorities for FY 2012-2013 and the interest rate determined by the group was found to be incompliant with the arm’s length principle. The tax authorities applied the same method as Gas-Trader but added further search criteria in the selection of comparable transactions – credit purpose and insurance coverage. This resulted in a different range and an assessment of additional taxable income was issued. An appeal was filed by Gas-Trader KtF with the National Tax and Customs Board of Appeal where a judgement in favor of the tax authorities was issued. Then an appeal was then filed with the courts where the decision was annulled and the Board of Appeal ordered to initiate new proceedings. During these proceedings, an expert opinion was obtained which was in favor of Gas-Trader. However following objections from the tax authorities, the Board of Appeal dismissed the expert opinion and decided predominantly in favor of the tax authorities. An appeal was then filed with Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court set aside the decision and issued a judgement in favor of Gas-Trader. In its judgment, the Court states “[26] A large amount of data is needed to determine the transfer price. However, the available information may be incomplete, difficult to interpret, difficult to obtain for reasons of confidentiality, or may not exist at all, or the relevant independent enterprise itself may be missing. In the practical application of the arm’s length principle, the objective is always to determine an acceptable estimate of arm’s length profit based on reliable data. The ‘estimated’ nature of the transfer price means that it is never an exact tax act, but requires both the taxpayer and the tax authorities to subsequently take evidence that is clearly identifiable and realistic. The Curia has stated in its judgment Kfv.I.35.550/2018/12 that the question of transfer pricing can be a technical question or a purely legal question depending on the underlying facts. In the case at hand, the defendant transformed the decision into a question of law by basing its decision not on an examination of the transfer pricing method, but on a different classification of the underlying legal relationship from that of the plaintiff in that case. In the present case, the Curia adds that, in the event of a substantive examination of the transfer pricing method by the tax authorities, the applicant may also submit a request for evidence on a technical point in the course of the judicial review. [27] Among the methods of transfer pricing, both the Directives and the Tao [Corporate Tax and Dividend Tax] Law recognise the method of comparative independent prices. Pursuant to Section 18(2)(a) of the Tao Law, the arm’s length price is to be determined by one of the following methods: the arm’s length price method, whereby the arm’s length price is the price that independent parties would apply for the sale of a comparable asset or service in an economically comparable market. The problem in applying this method is the identification of the ‘economically comparable market’, which is ultimately achieved by applying the correction/constraint criteria within the scope of the method. Indeed, an independent transaction can only be compared with a controlled transaction using the method of comparable independent prices if one of the following two conditions is met: (a) none of the differences, if any, between the transactions to be compared or between the undertakings entering into those transactions can materially affect the free market price, or (b) relatively accurate adjustments can be made to eliminate the distortive effect of such differences. Therefore, where distorting differences exist between controlled and unrelated transactions, adjustments should be made to at least broadly eliminate price influencing factors and enhance comparability. Each of the narrowing methods should be assessed for their relative accuracy and only those adjustments should be made that are likely to improve comparability. [28] In the case at bar, it is a fact that the defendant did not make a finding with respect to the plaintiff’s records that the plaintiff had developed what it considered to be an appropriate transfer price, that the defendant agreed to the use of the comparative independent pricing method. The court’s remedy resulted from a difference in the criteria considered by the parties to eliminate the distorting effect of the differences. It may also be noted that in the decision of the Court of Appeal ordering a new trial in the main proceedings, the defendant excluded the application of the interquartile range correction criterion of narrowing the range around the midpoint. [29] Defendant used the data extracted by the plaintiff from the LoanConnector database to verify the transfer pricing. In its procedure, it considered the relevant aspects of the Directives to be relevant, according to the review request: in the expected audit practice, tax auditors should be flexible in their approach, take into account the business considerations of taxpayers and start their analysis from the perspective of the pricing method chosen by the taxpayer. If the taxpayer’s screening strategy is reproducible and the screening steps are suitable to produce a suitable sample for the transaction under consideration, the tax administration will use the taxpayer’s database screening as a basis. If, for any reason, the tax administration disputes the screening steps, it will attempt to make the necessary adjustments based on the taxpayer’s research to ensure that the results calculated from the improved sample are consistent with the market price principle. As a starting point, the tax administration does not therefore seek to determine the price or range of prices applicable to

A. S.R.L. was issued with a notice of additional taxable income based on an audit of the pricing of the company’s controlled transactions. Among other things, the tax authority had found that the company had claimed to have achieved a profitability rate of 10% on the sale of finished products to the related company B., when in fact this was not the case. If the profitability had been 10%, corporate income tax of RON 3,840,000 would have been paid, but A. S.R.L. only paid RON 188,302 in tax. In the assessment, the tax authority had applied the TNMM using the median of the ROTC indicator for comparable independent companies and, on this basis, determined additional income for the period 2012-2016. An appeal was lodged which went to the High Court. Judgement of the Court The Court dismissed the appeal and found largely in favour of the tax authorities. Excerpt (In English) “As stated in Art. 3.43 of the OECD Guidelines the illustrative list of selection criteria presented in the Guidelines is neither limiting nor prescriptive, as long as the whole process of searching for comparables is transparent and verifiable. The transfer pricing file notes that a number of quantitative and qualitative criteria were also applied to the companies initially selected, so that the expert found that the independent companies considered by the complainant company in determining the interquartile range were comparable in terms of the criteria set out in the OECD Guidelines. The High Court finds that the appellant-respondents did not provide a basis for requiring the introduction of the size criterion in the selection of comparable companies. The Appellants’ argument is that the use of a minimum threshold for these criteria (size criteria) would have been relevant in the identification of independent companies for the comparability sample, but they have not indicated what the legal basis is for such an obligation, in order for the Court of Appeal to find a possible misapplication of the law. The algorithm for selecting comparable companies is entirely an economic, factual algorithm which is within the competence of specialists and the soundness of which can be verified only by the court of first instance, and it is not appropriate for the appeal brought on the basis of grounds of appeal to analyse that aspect. The High Court finds that the Court of First Instance did not misapply the law when it found that the independent companies taken into account by the applicant company in determining the interquartile range were comparable in terms of the criteria set out in the OECD Guidelines, and that the fact that the tax authorities had found that the operating income obtained by F. are lower than those of the Appellant was not sufficient to exclude it from the comparability sample, since the tax authorities did not justify the need to introduce a size criterion for maintaining it in the comparability sample for the period 2012-2016. At the same time, however, since the expert’s verification revealed situations in which A. did not fall within the interquartile range calculated for independent companies with the same functional profile, it was necessary to adjust the company’s income, which was such as to render the claim only partially unlawful. As regards the criticism that the tax inspection authorities found that the company claimed to have achieved a 10% profitability rate from the sale of finished products to the affiliated company B., but in reality this profitability rate did not exist in the financial results of the respondent, the first court took into account the fact that, in the light of the provisions of Articles 3.62 and 3.76 of the OECD Guidelines, the expert identified in the transfer pricing file the choice and justification of the transfer pricing calculation method and the data used, which is as follows: “7.3.2 Application of the cost-plus method to the operating profit/net margin method.” Article 3.62 of the 2010 OECD Guidelines states, “In determining this point, if the range contains relatively equal and highly reliable results, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability flaws remain as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (e.g. median, principal or weighted averages, etc., depending on the specific characteristics of the data set), in order to minimise the risk of error due to remaining unknown or unquantifiable comparability flaws.” Art. 3.76 of the OECD Guidelines states, “To obtain a complete understanding of the facts and circumstances surrounding an audited transaction, it may generally be useful to examine data from both the year under review and previous years. Analysis of such information could reveal facts that may have influenced (or should have influenced) transfer pricing. For example, the use of prior years’ data will show whether the taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of certain economic conditions in a prior year that resulted in higher costs in the following year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis can be particularly useful when applying a transactional projection method. See paragraph 1.72 on the usefulness of multi-yearly data in examining loss statements. Multi-year data can improve understanding of long-term arrangements.” Following the analysis of the transfer pricing file and the chapters of the 2010 OECD Guidelines mentioned above, the expert concludes that the multi-year weighted average of the profit indicator determined in the transfer pricing file over the period 2012-2016 for comparable independent companies is a viable calculation option as set out in the OECD Guidelines, but not fully justifiable in this case. As regards the request to the expert to verify whether, in the light of the OECD Guidelines, the adjustment is made to the multi-year average of the range analysed or to the annual median, it was held that, in view of the provisions of Chapters A.7.

Amway India is engaged in the business of direct selling of consumer products through multi-level marketing. For FY 2013-2014 Amway paid royalties to a foreign Amway group company. Following an audit, an assessment was issued by the tax authorities where the royalty had been reduced based on a benchmark study resulting in additional taxable income. An appeal was filed by Amway India with the Income Tax Tribunal where the assessment was set aside. An appeal was then filed by the tax authorities with the High Court. In the appeal the tax authorities stated that the Tribunal had failed to appreciate the fact that the royalty payments were excessive considering the Advertisement, Marketing and Promotion (‘AMP’) expenses incurred by Amway India for the benefit of the group’s trademark and brand. According to the tax authorities Amway India created marketing intangibles for the group and should be compensated with a payment from the group rather than having to pay huge royalties. Judgement of the High Court The Court ruled in favor of Amway India. Excerpts “9. A perusal of the above order reveals that the ITAT and CIT (A), both fact finding authorities have concurrently held that the rejection of the two comparables by the TPO is based on conjectures and surmises and thus, deleted the addition made on account of transfer pricing adjustment for transaction related to royalty. Learned Counsel for the appellant concedes that if the rejected two comparables are taken into consideration, the payment made by the assessee to its AEs towards royalty would be at arm’s length and no adjustment would be merited. He also concedes that the said two comparables comply with all the filters prescribed by the TPO. In this view of the matter, we therefore find that the reliance placed by CIT(A) and ITAT on the judgment of this Court in Chrys Capital Investment (supra), was correct. The relevant portion of the said judgment reads as follows, “44. In light of the above findings, this Court concludes as follows: (a) The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. …………………..”    (Emphasis Supplied) 10. In this view of the matter, no substantial questions of law arise for consideration and accordingly, the appeal is dismissed” PCIT-Vs-Amway-India-Enterprises-Delhi-High-Court (1)

In case concerns the tax implications of four reinsurance agreements concluded between Codan Forsikring (Codan Insurance) and a controlled Irish company, RSA Reinsurance Ireland Ltd. for FY 2010-2013. The tax authorities had increased Codan Insurance’s taxable income for FY 2010, 2011 and 2012 by DKK 23 million, DKK 25 million, and DKK 18 million and reduced the taxable income for FY 2013 by DKK 4 million. At issue was whether expenses incurred by Codan for reinsurance of policies in Ireland were commercially justified and thus deductible. If so, there were questions as to whether the reinsurance agreements were concluded at arm’s length and whether Codan Insurance’s transfer pricing documentation met the requirements that could be made. By decision of 26 June 2019, the Tax Court reduced the assessment to DKK 0 for the 2010-2012 tax years and upheld Codan’s taxable income for FY 2013. An appeal was filed by the tax authorities. Judgement of the Eastern High Court The High Court upheld the decision of the tax Court and set aside the assessment of the tax authorities. The Court found that the reinsurance agreements with the Irish subsidiary served a commercial purpose and that there were no grounds for setting them aside. The significance of the existence of a controlled relationship between Codan Forsikring and RSA Reinsurance, including the determination of the amount of the commission, had then to be assessed according to the rules on arm’s length correction of transactions between related parties. The Regional Court further found that the transfer pricing documentation was not deficient to such a significant extent that it could be equated with a lack of documentation and that Codan Insurance’s income could not, on the basis specified, be assessed on an estimated basis pursuant to section 3B(8) of the current Tax Control Act, cf. section 5(3). Finally, the Regional Court found that the reinsurance agreements were not outside the scope of what could have been agreed between independent parties, cf. The Regional Court therefore upheld Codan Forsikrings’ claim for acquittal. Click here for English Translation Denmark vs Insurance 11370-2020

Sulzer Tech India Pvt Ltd (the assessee) is in the business of providing design and engineering services. To that end Sulzer Management AG, an associated enterprise provided various IT and support services to Sulzer Tech India. The payment for these services had been determined based on a benchmark study where Sulzer Management AG was chosen as the tested party. The cost plus margin for the selected comparables ranged from 4.08% to 7.08%, with a median of 5.69%, and on that basis the payment to Sulzer Management of Rs. 2,52,49,650, which was equal to cost plus 5%, was considered to be at arm’s length. The tax authorities disagreed and held that Sulzer Tech India at arm’s length would not have paid any amount toward services which are not availed to it and have not benefited its business. Accordingly, an adjustment of additional income of Rs. 2,52,49,650, was issued. Judgement of the Income Tax Appellant Tribunal The Tribunal set aside the assessment of the tax authorities. Excerpt “From careful perusal of all the details filed by the assessee, we are of the considered view that lower authorities were not justified in holding that no services were rendered by the associated enterprise in respect of which payments were made by the assessee. We are further of the view that none of the basis for rejecting these details by the learned DRP is arising from the record. Further, the lower authorities claimed to have adopted ‘other method’ by applying need, benefit and evidence test for considering the arm’s length price of this transaction to be NIL. In this regard it is pertinent to note that the provisions of Rule 10AB of the Income Tax Rules, 1962, which provides as under: “10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm’s length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.” Thus, as per the provisions of aforesaid Rule, the ‘other method’ shall be the method which takes into account the price which has been or would have been charged or paid for the same or similar uncontrolled transaction between non-associated enterprises. However, in the present case, the lower authorities without searching for similar uncontrolled transaction between non-associated enterprises, straightaway treated the value of the international transaction to be at NIL. In this regard, it is relevant to note following observations of Hon’ble Delhi High Court in Cushman and Wakefield (India) Pvt. Ltd., [2014] 367 ITR 730 (Del.): “35. The TPO’s Report is, subsequent to the Finance Act 2007. binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO’s authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot-after a consideration of the facts-state that the ALP is ‘nil’ given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure.” As noted above, in the present case, no search was conducted to find out the independent entity in a comparable transaction and the arm’s length price of the international transaction was treated to be NIL. In the present case, no doubts about payments made by the assessee have been raised by the Assessing Officer under section 37 of the Act. Further, accrual of benefit to assessee or the commercial expediency of any expenditure incurred by the assessee cannot be the basis for disallowing the same, as held by Hon’ble Delhi High Court in the case of EKL Appliances Ltd. [2012] 345 ITR 241 (Del.).” Click here for translation India vs Sulzer Tech India Pvt Ltd 250722 ITA No 633-MUM-2021

Poltova GZK is a Ukrainian subsidiary of the Ferrexpo group – the world’s third largest exporter of iron ore pellets. In FY 2015 the iron ore mined in Ukraine by Poltava GZK was sold to other companies in the group – Ferrexpo Middle East FZE, and the transfer prices for the ore was determined by application of the CUP method using Platts quotations. However, according to the tax authorities Poltava GZK used Platts quotations for pellets with a lower iron content when pricing the higher quality pellets, resulting in non arm’s length prices for the controlled transactions and lower profits in the Ukraine subsidiary. The tax authorities also found that Poltava GZK had overestimated the cost of freight – in the case of actual transportation of pellets by ships of different classes (“Panamax”, “Capesize”), the adjustment of the delivery conditions was carried out only at the maximum rate. On that basis an assessment was issued. Not satisfied with the assessment an appel was filed Poltova GZK, and in 2019 the Administrative Court and later the Court of Appeal set aside the assessment of the tax authorities. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court partially annulled the decision of the Administrative Court and Court of Appeal and ruled predominantly in favor of the tax authorities approving the position that the transfer prices of the iron ore pellets did not correspond to the arm’s length price. The Court confirmed the validity of the tax assessment and the legality of the issued tax notice-decision regarding the reduction of the negative taxable income in an amount of 1.3 billion hryvnias (~$35 millions).  The Court confirmed that the taxpayer did not take into account the actual properties of the products specified in the Quality Certificates, namely: the content of impurities (silicon dioxide) and the moisture level when pricing the controlled transactions. The court confirmed that the constant fluctuation of prices on the market of iron ore pellets is not a basis for comparing prices in CU with the average indicator in comparable operations for a certain period (month) without constructing a price range. Also, the taxpayer had overestimated the cost of freight. Click here for English translation Click here for other translation Ukrain vs PrJSC Supreme Administrative Court case no 440-1053-19

C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. Judgement of the Administrative Court The Court found that the TNMM was the most appropriate method to determine the company’s income in 2016, and that the comparability analysis was carried out in accordance with the regulations and data available to the authority. However, the tax authorities have wrongly determined the income of the complainant, by referencing to its entire activity, despite the fact that 5% of the transactions are not subject to regulation under Article 11(1)-(3) of the A.p.d.o.p. Because of this, the court repealed the decision of the first-instance authority and stated that when re-examining the case, the authority should take into account the position expressed in the court’s decision. Excerpt from the judgement regarding adjustments where the result is within the inter quartile range “It is also necessary to share the Applicant’s position regarding the use of the median average, well, the authority of first instance, which was accepted by the Appellate Body, stressed on page 151 of the issued decision that the statistical analysis conducted by it used positional measures, as the comparative analysis is an approximation of the prices used in transactions between unrelated parties. In order to determine the range of prices, statistical tools in the form of quartiles (…) were used to analyse the results, the analysis carried out assuming that the appropriate range of results is the interquartile area (first quartile, median, third quartile). Hence, according to the authority, in practice, the most common assumption is that the market values are those that fall between the value of the lower quartile and the upper quartile of the sample population. The inter-quartile range is used to define the rules generally applicable in the market. It should be noted here that the inter-quartile area for 2016, ranges from 1.61% to 3.89%, so since the market value of the EBIT(2) operating margin is already the value of the bottom quartile of 1.61%, and the estimation made is to determine the margin obtained in comparable transactions by independent entities – §18 of the MF Regulation (and such market transactions are already at the level of the bottom quartile), there is no legal basis for determining the market values of EBIT(2) using the arithmetic average of the median operating margin.” Click here for English Translation Click here for other translation I SA_Go 103_22 - Wyrok WSA w Gorzowie Wlkp. z 2022-06-09

A Korean subsidiary (“Semicon-sales”) of a foreign group was active in distribution and sales of semiconductors for the automotive and industrial industry. Following an audit, the tax authorities found that the subsidiary had purchased semiconductors from a foreign affiliated company at a higher price than the arm’s length price. An assessment was issued where the the sum of the difference between the arm’s length price and the reported price had been included in the taxable income for FY 2015-2018. Both “Semicon-sales” and the tax authorities had applied the TNMM to find the arm’s length price, but the tax authorities had rejected the comparables selected by “Semicon” and replaced them with others. Not satisfied with the assessment “Semicon-sales” filed an appeal. Judgement of the Court The court remanded the case with an order to exclude from the benchmark comparables where the sales volume is significantly different from that of the “Semicon-sales”. Since the proportion of the taxpayers transactions with large companies is significant, the transaction stage, sales volume, customer, business environment should also be taken into consideration. Click here for English translation Click here for other translation Korea vs Corp 2022-06-09 인쇄 - 국세법령정보시스템

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €133,076,615. In November 2019 the district court ruled predominantly in favor of the tax authorities but reduced the adjustment to €78.294.312. An appel was filed by Fertilizer BV with the Court of Appeal. Judgement of the Court of Appeal Various issues related to the assessment was disputed before the Court. Dispute 1: Allocation of debt and equity capital to a permanent establishment in Libya in connection with the application of the object exemption. More specifically, the dispute is whether the creditworthiness of the head office was correctly taken as a starting point and a sufficient adjustment was made for the increased risk profile of the permanent establishment. The Court of Appeal answered this question in the affirmative, referring to the capital allocation approach that is regarded as the preferred method for the application of Article 7 of the OECD Model Convention. Dispute 2: Should all claims and liabilities denominated in dollars be valued in conjunction? The mere fact that claims and debts are denominated in the same currency is insufficient to conclude that there is cohesion. The court takes into account the nature of the contracts in the light of the risks present and whether hedging of risks is intended. The Court shall make a separate assessment for each risk to be identified. The Court values the forward exchange contracts USD 200,000,000 and USD 225,000,000 in connection with USD debt I and USD debt II, and the claim of [N SA] in connection with the forward exchange contract USD 60,000,000. Dispute 3: Was the profit of a subsidiary of interested party, [E BV], (deliberately) set too high? Interested party wants to deviate from its own tax return and internal transfer pricing documentation and refers to a report prepared by [W]. The Court of Appeal places the burden of proof on the interested party. In the opinion of the Court of Appeal, it does not follow from the aforementioned report that there is no trade at arm’s length within the group. The Court of Appeal also pointed to the global character of the report, which means that it is not a transfer pricing report. Furthermore, it has not become plausible that the companies with which [E BV] is compared in the report are sufficiently comparable. The interested party has not made it plausible that the profit has been set at a prohibitively high level. Dispute 4: Did the tax inspector rightly make an adjustment of € 42,843,146 in connection with the Supply Agreement concluded between [E BV] and an affiliated company of the interested party and [E BV], [J Ltd]? The Supply Agreement states that [J Ltd] is obliged to purchase the surplus produced by [E BV] with a new factory at cost price plus a mark-up of 5%. For the remaining goods, transfer prices are used which are based on the [concern Transfer Pricing Master File]. The Court of Appeal placed the burden of proof that the transfer price applied to the surplus was at arm’s length on the interested party. In the opinion of the Court of Appeal, the interested party has not provided this evidence. The Court of Appeal ignored the Supply Agreement. This agreement does not reflect the economic reality, since [E BV] is also a ‘fully fledged’ producer with regard to the surplus. The Court of Appeal derives this from the transfer price documentation and the fact that after the conclusion of the Supply Agreement, the functions performed, the investments made and the capital utilisation have (practically) not changed. The transfer price report from [Y] submitted by the interested party does not lead to a different opinion. There is no breach of the principle of equality since the interested party does not substantiate, or substantiates in too general a manner, that its case is comparable to the Starbucks, Nike and Apple cases and the other examples mentioned by it. The fact that the [group] also concluded agreements with third parties that are (somewhat) similar to the Supply Agreement does not lead to a different opinion either. It cannot be determined whether the functions performed, risks run and assets used by these third parties are comparable to the functions performed, risks run and assets used by [E BV]. Finally, the Court of Appeal ruled that the taxation of a possible profit transfer should not be taken in 2011, the year in which the Supply Agreement was agreed upon, but from month to month (year to year) in which the non-business conduct took place. In all, the Judgement of the Court of Appeal resulted in the additional taxable income of Fertilizer BV being reduced to € 65.609.318. Click here for English Translation Click here for other translation ECLI_NL_GHSHE_2022_1198 (1)

Promgas s.p.a. is 50% owned by the Italian company Eni s.p.a. and 50% owned by the Russian company Gazprom Export. It deals with the purchase and sale of natural gas of Russian origin destined for the Italian market. It sells the gas to a single Italian entity not belonging to the group, Edison spa, on the basis of a contract signed on 24 January 2000. In essence, Promgas s.p.a. performes intermediary function between the Russian company, Gazprom Export (exporter of the gas), and the Italian company, Edison s.p.a. (final purchaser of the gas). Following an audit for FY 2005/06, the tax authorities – based on the Transaction Net Margin Method – held that the operating margin obtained by Promgas s.p.a. (0.23% in 2025 and 0.06% in 2006) were not in line with the results that the company could have achieved at arm’s length. Applying an operating margin of l.39% resulted in a arm’s length profit of €4,227,438.07, for the year 2005, which was €3,426.803.00 higher than the profit declared by the company. Promgas s.p.a. appealed against the notice of assessment, which was upheld by the Provincial Tax Commission of Milan, with sentence no. 356/44/11, notified on 23/12/2011. The tax authorities then filed an appeal with the Regional Tax Commission of Lombardy which upheld the the tax authorities main appeal and rejected the company’s cross appeal. Promgas s.p.a. then filed an appeal with the Supreme Court Judgement of the Supreme Court The Supreme Court remanded the cast to the Regional Tax Commission of Lombardy Excerpts “…. 8.1. The failure to examine the facts put forward by the taxpayer company to oppose the set of comparables identified by the Revenue Agency resulted in a defect in the overall reasoning of the contested judgment, as denounced by the appellant company in its fifth and sixth grounds of complaint. 8.2. As is clear from the criteria indicated in the OECD Guidelines referred to above, in order for the application of the TNMM to be reliable, it is necessary to conduct an analysis of comparability that passes through the two moments of the choice of the tested party and the identification of the comparable companies, an identification that, under free market conditions (arm’s length principle), presupposes a “comparison” (internal or external) between the tested party and comparable companies that satisfies the five factors of comparability indicated by the OECD criteria (characteristics of goods and services functional analysis; contractual terms underlying the intra-group transaction; business strategies; economic conditions). It is through such a comparison that the factors that may significantly influence the net profit indicators (see paragraph 7.9 below) are identified on the basis of the facts and circumstances of the case. 8.3. Indeed, the reliability of such a method, according to the prevailing practice and interpretation, must pass through the following steps – selection of the tested party for the analysis; – determination of the financial results relating to the controlled transactions – selection of the investigation period; – identification of comparable companies; – accounting adjustments to the financial statements of the tested party and differences in accounting practices, provided that such adjustments are appropriate and possible; – assessment of whether adjustments are appropriate or necessary to take account of differences between the tested party and the identified comparable companies in terms of risks assumed or functions performed; – selection of a reliable profitability profit level indicator (so-called Profit Leverage/ Indicator, or PLI). 8.4. The CTR’s failure to verify the circumstances alleged by the taxpayer, resulted, in essence, in the pretermission of the comparability analysis for the selection of the TNMM applied to the case, and thus, of the procedure for the identification of comparable transactions and the use of relevant information to ensure the reliability of the analysis and the compliance of the PLI, or PLI, with the principle of free competition, or rather, the reliability of the selected TNMM. 9. The seventh ground of appeal – alleging breach of Article 6(1) of Legislative Decree 18/12/1997, no. The seventh ground of appeal – which alleges infringement of Article 6(1) of Legislative Decree No 472 of 18 December 1997, on the ground that the Regional Tax Commission held that the financial penalties applied by the Tax Office were lawful, erroneously excluding the existence of a ground of non-punishability, without specifically verifying the percentage of discrepancy between the amount declared by the company (0.23%) and the amount assessed by the Administration (1.39%) – is considered to be absorbed by the acceptance of the fifth and sixth grounds of appeal. 10. In conclusion, the appeal must be upheld limited to the fifth and sixth grounds of appeal, with absorption of the seventh and dismissal of the remainder. The judgement must be set aside in relation to the upheld grounds, with a reference back to the CTR, in a different composition, for a new examination of the merits of the dispute from the point of view of the standards of comparability relating to the method chosen and the penalty profile also in the light of the more favourable ius superveniens.” Click here for English translation Click here for other translation Italy-Sez-5-Num-15668-Anno-2022-

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” An appeal was then filed by the tax authorities. Judgement of the Court of Appeal The Court upheld the decision of the Tax Tribunal and set aside the assessment issued by the tax authorities. Excerpts “(…) Fourth: That the OECD regulations – while article 38 of the LIR was in force – should be understood as a guide with indications or suggestions for determining prices assigned between related parties with respect to those charged between independent parties. The aim is to eliminate distortions that may arise between companies with common ownership and to respect market rules. Notwithstanding the above recognition, Article 38 of the LIR regulated transfer prices and even though its normative content was minimal and insufficient to provide an adequate response on the matter, its text must be followed for the purposes of resolving the conflict in question, especially if one considers that the third paragraph of the provision states that when prices between related companies are not in line with the values charged between independent companies for similar transactions, “the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the transaction, or the production costs plus a reasonable profit margin. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also consider the resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies”. The following paragraph adds that if the company does not carry out the same type of operations with independent companies, the Regional Directorate “may challenge the prices based on the values of the respective products or services on the international market (…) for this purpose (…) it shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information”. It can be inferred from the transcribed rule that the use of external comparables is only authorised if the company does not carry out any type of transaction of goods and services with independent companies; that the challenge must be well-founded; and that the taxpayer and the SII are free to use the method that seems most appropriate to them as long as the legal requirements are met. It is also relevant to note that the domestic regulations at that date did not contemplate all the methods included in the OECD guidelines and it is inappropriate, under article 38 of the LIR, to resort directly to such guidelines in respect of situations not provided for in the domestic regulations, i.e., in relation to methods not included in the aforementioned provision. An interpretation contrary to the above would infringe the principle of legality of taxes or legal reserve, according to which only the law can impose, eliminate, reduce or condone taxes of any kind or nature, establish exemptions or modify existing ones and determine their form, proportionality or progress. Fifth: That the contested act shows that the method used by the SII for the entire period under review, business year 2012, corresponds to the so-called “Transactional Net Margin Method” for marketing operations, and the ” Comparable Uncontrolled Price Method” for financial operations, The Court therefore agrees with the findings of the lower court in grounds 22 to 25 of the judgment under review regarding the lack of the necessary grounds for the administrative act, in that the tax authority, although obliged to do so, omitted to analyse the transactions in accordance with the legislation in force at the date on which they were carried out…” Click here for English translation Click here for other translation Chile vs Avery Dennison Chile May 2022

By judgment of 22 May 2020, the Administrative Court upheld the complaint filed by “Rubbertek Bulgaria” and set aside an assessment for FY 2015-2016 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. According to the Administrative court, the tax assessment was unfounded and unsubstantiated. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that the decision of the Administrative Court was incorrect. The court erred in finding that the decision of the tax authorities referred to other comparable companies than those in Rubbertek Bulgaria’s documentation. Furthermore, the court uncritically accepted Rubbertek Bulgaria’s claim that the reason for the deviation of the declared income from the median for 2015 and 2016 was a relocation of assets from the German company to the Bulgarian company. Judgement of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities and set aside the decision of the Administrative Court. Excerpts “”The Court of First Instance erred in holding that the auditing authorities failed to analyse/examine specific transactions, one or more of which were found to have been entered into under conditions the performance of which led to tax avoidance.” “The Court of First Instance also erred in finding that the tax authorities had not proved in the course of the audit proceedings that the profit level indicator, net cost plus surcharge, fell below the lower quartile as a result of the relocation process from the Rubbertek group of companies.” “In view of the foregoing, the financial results of the audited entity for 2015 and 2016 were lawfully restated in an upward direction by the audit act on the basis of Article 78, in conjunction with Article 16(1)(a) of the Tax Code. 1 of the Income Tax Act, as a result of which the due corporate tax and interest were established. In accordance with the positive tax results for 2015 and 2016, the transformation of the financial result for 2017 is also lawful. (1) of the Code of Civil Procedure, to rule on the merits, by which the company’s appeal against the revision act should be dismissed as unfounded.” “ Click here for English Translation Click here for other translation Bulgaria Решение №3453

DELSEY España distributes and sells suitcases and other travel accessories of the DESLEY brand on the Spanish market and belongs to the French multinational group of the same name. The Spanish distributor had declared losses for FY 2005-2010 and was subject to a transfer pricing audit for FY 2011 to 2014. Based on the audit, the tax authorities concluded that the losses in FY 2005-2010 was a result of controlled transactions not being priced at arm’s length. The same was concluded for FY 2011 and 2012. The CUP method and RPM method applied by the taxpayer was found to be inappropriate and was replaced with the TNMM by the tax authorities. An appeal was filed by Delsey España S.A. Judgement of the Court The Court dismissed the appeal and upheld the assessment. Click here for English translation Click here for other translation Spain vs Delsey STSJ_CAT_1467_2022 ORG1

Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group. Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions. The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability analysis (aimed at identifying the net remuneration margin obtained by independent third parties in similar transactions), identifying only three comparables.. The tax authorities replied that the analysis carried out using the Transactional Net Margin income method, had revealed an average Return On Sales (R.O.S.) equal to 13.35 %, with the consequent ascertainment of the company’s higher profitability and the recovery for taxation of intra-group costs exceeding the normal value. The Provincial Tax Commission decided in favor of Burkert Contromatic Italiana s.p.a., noting that the choice of companies made by the tax authorities was completely different from that made by the company. In particular, they pointed out that the benchmark analysis carried out by the taxpayer, and attached to the appeal, had the objective of identifying independent companies operating in the national territory engaged in activities comparable to that of the taxpayer itself, i.e. commercial companies that purchased products from third-party suppliers and resold them on the national market to third-party customers; this comparison had indicated an average profitability of 4.85% compared to that ascertained by the Office of 10.26%. It also excluded that the Office had provided clear and irrefutable evidence of the methodology applied in the assessment. An appeal was lodged by the tax authorities, which complained of failure to state reasons or insufficient reasons on decisive facts and infringement of Article 110, paragraph 7, since the grounds of the judgment did not show the reasons in law justifying the acceptance of the appeal. The Regional Tax Commission rejected the appeal of the tax authorities. It held that there was no “omitted and/or grossly inadequate motivation on decisive and controversial facts” on the part of the judges at first instance and even less a violation of the provisions of Article 110, paragraph 7, of the TUIR. The tax authorities  then filed an appeal with the Supreme Court. In the appeal the tax authorities stated that it is a clear case of motivation by reference, since the regional tax court confines itself to using vague and general formulas, stating that the judgment of the provincial tax court is “clear” and “well-founded”, without giving any reason to understand why the objections raised by the tax authorities to the judgment at first instance were unfounded and why the reasoning provided by the judge at first instance was shared. Judgement of the Supreme Court The Supreme Court decided in favor of the tax authorities. It set aside the judgment under appeal and referred the case back to the court of first instance, with a different composition. Excerpts “Referring to the judgment appealed against, the C.T.R. [Commissione tributaria regionale] limited itself to stating that the first judges, ruling on the benchmark analysis, “for the purpose of identifying the companies comparable to the appellant and the relevant interquartile range of market value”, carried out by the Office on the basis of a comparison with three companies, had concluded that the Administration had not offered irrefutable evidence of the methodology applied in the assessment. It did not, however, adequately explain either the reasons why it intended to adhere to the decision of the Provincial Tax Commission and, therefore, the reasons why the method used by the Office could not be considered reliable, or why the method used by the taxpayer company should be preferred, and it failed to examine the specific observations made by the Tax Office, which had clearly and exhaustively set out the methodology actually applied and the results of the audit. In so doing, it failed to explain whether the assessment made by the tax authorities deviated from the criteria that must guide the analysis of intra-group transactions aimed at ascertaining whether the taxpayer company complied with the arm’s length price by comparing it with similar transactions carried out by independent third party companies. The taxpayer’s defence is therefore not adequately argued and the overall reading of the judgment, which also includes the factual premise and the arguments put forward by the parties at the various stages of the proceedings, does not bear witness to an independent assessment by the appeal court because it does not allow for an understanding of the assessment made with regard to the transfer pricing analysis carried out by the Office.” Click here for English translation Click here for other translation ITA_20220118

“Construction Service S.A.” is active in Design, Repair and Construction of buildings. During the FY 2011-2013 it paid for services – management services and construction services – rendered from related parties. Following an audit the tax authorities issued an assessment where payments for these services had been adjusted by reference to the arm’s length principle. According to the authorities the benchmark studies in the company’s transfer pricing documentation suffered from comparability defects and moreover it had not been sufficiently demonstrated that the services had been effectively provided. The tax authorities pointed out that since the company is not considered comparable to the taxpayer, the interquartile range would be from 5.15% to 8.30% with a median of 5.70%; therefore, the taxpayer’s operating margin of 4.07% is outside the interquartile range. Not satisfied with the adjustment “Construction Service S.A.” filed an appeal with the Tax Court Judgement of the Tax Court The court ruled in favour of “construction S.A” and revoked the decision of the tax authorities. Excerpts “Without prejudice to the foregoing, we must clarify that the adjustments to the financial information must use, precisely, the financial information, which leads us to disagree with the decision of the taxpayer’s expert to use the information from the income tax return for the calculation of the operating margin, knowing that there are quantitative and qualitative differences with respect to the financial information (page 565 of the Court’s file), and even with the information contained in the transfer pricing studies, which makes his answers to questions 1 and 2 less reliable, since the information used to determine the interquartile range is based on financial information (not tax information) of the comparables.” “In this regard, this Court considers that although the OECD Transfer Pricing Guidelines indicate in the section entitled “Multi-year data” of the Comparability Analysis Section, in paragraphs 3.75 to 3. 79, the possibility of using data relating to several years for the profitability analysis or multi-year data, the Tax Administration, used information from 2010 to 2012 of comparable companies since the appellant itself indicated in the 2012 Transfer Pricing Study, the total transactions carried out with its related parties abroad, taking into account that it was in this period, in which the transactions were carried out, according to the global financial information of the audited Financial Statements as of 31 December 2012 by , therefore the operating margin that should be adjusted to the median of free competition, the costs of the operations with related parties of ———— to the year 2012, but we agree with the Tax Administration that the additional liquidation for the Income Tax is the one declared for the fiscal period 2013, since it was in that period due to the opted method where the total gross income, costs and expenses were allocated, which includes as already mentioned the adjustment of the operating margin (See fs. 221 to 244 of Volume 1 of the DGI’s file). Therefore, it is not possible for the taxpayer, at this stage, to point out that the Tax Administration should have used the information from the periods of the companies selected as comparable, in accordance with the Transfer Pricing guidelines, taking into consideration the income tax return for the 2013 tax period, which includes the 3 years of operations of the work, i.e. from 2011 to 2013 (instead of 2010-2012), and which yields a profitability indicator or operating margin according to ————, (even though the company ——————– has been rejected, and maintaining those that the DGI did accept), of 4. 58%, a median of 4.67% and 7.85%, which, in its opinion, would place it within the range of compliance with the arm’s length principle. Similarly, we consider it important to point out that in the same way that the taxpayer cannot claim to use its aggregated financial information, ignoring the analysis made in its transfer pricing report submitted in the 2012 period, neither is it correct for the tax authorities to make an adjustment to the taxpayer’s segmented financial information (2012), and use, for the purposes of the additional assessment, the taxpayer’s accumulated income tax return, corresponding to the entire project. It is essential that any adjustment to the taxpayer’s financial/tax information is made in a congruent manner, i.e. taking into account the accumulated activity and not in a partial manner.” “preceding paragraphs and on the OECD’s guidelines in points 1.42, 1.52, 1.53, 1.55, 1.57 and 1.59 of Chapter I, which deals with the Arm’s Length Principle of the Transfer Pricing Guidelines.” “In this sense, this Court has stated in Resolution n.° TAT-RF-002 of 10 January 2020, regarding the possible manipulation of comparables known by the Anglo-Saxon expression “cherry picking”, in the following terms: “just as the criteria for discarding must be applied uniformly by the taxpayer, they must also be applied uniformly by the Tax Administration, regardless of whether the results of the analysis are in favour of or against the Treasury (The three companies challenged by the Tax Administration were those that presented the lowest operating margins: 1. 00%; -0.03% and -23.64% respectively), concluding that “it is incongruous to object to comparables that are in similar circumstances with others that have been accepted, i.e. that have a reasonable level of comparability with the examined party”.” “By virtue of the allegations made by both parties, we consider from the procedural evidence in the file that the process followed to identify potential comparables by both parties has been systematic and verifiable; however, we agree with the taxpayer that the companies selected by them are comparable with ————, and comply with the Principle of Full Competition, therefore, they should be taken into account within the interquartile range, since we consider that the elements of the comparability analysis, indicated by the DGI, are not compromised. In view of the above, as we do not agree with the objection made to this comparable company by the Tax Administration, and as the taxpayer is within the range of full competence, this Court must revoke Resolution no. 201-3306 of

The tax authorities excluded some of the entities selected by the taxpayer in a benchmark study, as it considered that they did not meet the necessary comparability requirements, and also included some of the excluded entities, as it considered that they were comparable. These modifications to the benchmark resulted in a variation of the arm’s length range, with the margin earned by the taxpayer falling outside the range. The taxpayer argued that the recalculation of market value should be based on a complete new analysis to replace the one provided by the entity. In relation to the rejection of certain comparables, the taxpayer argued that the information used by the tax authorities and consulted on the internet was not available at the time the transfer pricing documentation was prepared. Judgement of the TEAC The TEAC rejected the claim filed by the taxpayer and upheld the assessment of the tax authorities. It is not necessary to carry out a new economic analysis to replace the one provided by the entity, given that the inspection accepts said analysis, and what it limits itself to is correcting the defects present in the same. It is considered reasonable for the inspectorate to apply a rejection criterion based on the number of employees, taking into account that the taxpayer has more than 200 employees on its payroll and that the claimant applied other rejection criteria in order to ensure comparability of the size of the companies. It is understandable that the administration uses the information contained in the websites of the companies selected as comparable at the time of the inspection, it is quoted “as it could not be otherwise”. The TEAC refers to the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations, which stress the importance of verifying the information obtained in the databases. The inspection is justified in making the adjustment to the median because the Administration has revealed  comparability defects in the benchmark provided by the taxpayer in the economic analysis. Click here for English translation Click here for other translation Spain vs XZ SA, Resolución de 23 noviembre 2021 (Rec. 4881-2019)

This case deals with arm’s length remuneration of a Greek Diary Distributor. Following an audit of “Diary Distributor Ltd.”, the Greek tax authorities determined that the prices paid to related parties for FY 2017 had been above the arm’s length price. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Diary Distributor Ltd.” Judgement of the Court The court dismissed the appeal of “Diary Distributor Ltd.” and upheld the assessment of the tax authorities Click here for English translation Click here for other translation gr-ded-2021-579_en_ath-579_2021

Varian Medical Systems Iberica S.L. is the Spanish subsidiary of the multinational company Varian Medical Systems and carries out two types of activities – distribution and after-sales services. The products sold was purchased from related entities: Varian Medical Systems Inc., Varian Medical Systems UK Ltd., Varian Medical Systems International AG and Varian Medical Systems HAAN GmbH. The remuneration of Varian Medical Systems Iberica S.L. had been determined by application of the net margin method for all transactions and resulted in a operating margin of 2.86% in 2005 and 2.75% in 2006. In 2010 an audit were performed by the tax authorities for FY 2005 and 2006, which resulted in an adjustment. The tax authorities accepted the net margin method, but made various corrections in its application. The adjustments made by the tax authorities resulted in a operating margin of 6.45% in the two years under review, The tax administration argued that the margins determined by Varian Medical Systems Iberica S.L. could not be accepted due to various technical discrepancies in the application of the method. Instead they determined that a operating margin of 6.45% would have been obtained in an arm’s length situation. The target margin of 6.45% resulted in a decrease in the cost of purchases of goods from related manufacturing entities by 725,108 euros in 2005 (1 October 2005 to 30 September 2006) and by 1,008,065 euros in 2006 (1 October 2006 to 30 September 2007). Varian Medical Systems Iberica S.L. filed an appeal before the Regional Administrative Court of Madrid, which was dismissed. An appeal was then filed to the Central Administrative Court, which was also rejected. Judgement of the Nacional Court The Court decided in favor of Varian Medical Systems Iberica S.L. and set aside the tax assessment. Excerpts: “Indeed, as stated in paragraph 1.48 of the 1995 OECD Guidelines (and in similar terms in paragraph 3.60 of the 2010 version of the OECD Guidelines), “if the relevant terms of the controlled transactions (e.g. price or margin) are within the arm’s length range, no adjustment should be made”. In the light of the foregoing, the Board agrees with the application in so far as it states, at p. 15, that “[a]ccording to the Court of First Instance’s findings, the Court of First Instance has held that “in accordance with the OECD Guidelines, given that the operating margin of the distribution function declared by VMS (2.86% in 2005-2006 and 2.75% in 2006-2007), is within the arm’s length range (either the taxpayer’s interquartile range, which ranges from 1.06% to 5.25%, or that of the Inspectorate, which ranges from 1.55% to 6.45%), no adjustment is necessary”. “The arm’s length price declared by the appellant company, as stated above, was within the arm’s length range determined by the tax authorities, ergo, no adjustment was appropriate.” “In conclusion, for the reasons set out above, the technical basis used by the tax authorities to regularise the taxpayer’s situation, as regards the points at issue here, is not in accordance with the law.” Click here for English translation Click here for other translation SPAIN vs SAN_4241_2021

This case deals with arm’s length pricing of various inter-company loans which had been granted – free of interest – by Cypriot company Ltd. to an affiliate group company. Following an audit of Cypriot company Ltd, an upwards adjustment of the taxable income was issued. The adjustment was based on a comparison of the terms of the controlled transaction and the terms prevailing in transactions between independent parties. The lack of interest on the funds provided (deposit of a remittance minus acceptance of a remittance) was not considered in accordance with the arm’s length principle. Cypriot company Ltd disagreed with the assessment and filed an appeal with the tax court. Judgement of the Tax Court The Tax Court dismissed the appeal of Cypriot company Ltd. in regards of the arm’s length pricing of the loans. Excerpt “It is evident from the above that the bond loan taken is related to the outstanding balance of the debt as at 31/12/2014 and is not an investment option. As the contracting companies are related entities, the above transaction falls within the scope of the verification of the arm’s length principle. As in the previous cases above, the independent party for the comparison of the terms of the transaction is understood to be domestic financial institutions. Therefore, the independent market interest rate for the calculation of interest is the interest rate of bank loans in euro for the interest rate category to non-financial companies “To non-financial companies – Long-term loans of regular maturity – Loans over EUR 1 million”, according to the methodology defined by the Bank of Greece. For the month of purchase of the bonds (December 2015), the applicable average market interest rate is approximately 4.86%, higher than the one specified in the contract (2%). It can therefore be seen that in the present case the principle of equal distance is not respected, since interest crediting the lender with a lower interest rate than the one applicable between independent parties is calculated. The accounting of interest on the funds granted at a lower rate of interest constitutes a derogation from the arm’s length principle. Therefore, the audit was right to calculate imputed credit interest in order to restore the arm’s length principle and in accordance with the provisions of Article 50 of the Law. 4174/2013. The applicant claims that it was not informed as to how to calculate the interest for the 2018 tax year in the note of findings, however, the reasoning and the numerical verifications are identical to the corresponding accounting differences of the previous years for which it received detailed information and therefore the allegations made as to the violation of the right to be heard in this matter lack any substantial basis. Since the applicant company also claims that the contested acts, which are unfavourable attributive acts, were adopted by the Tax Administration after the expiry of the exclusive period of one month from the submission of the observations and in breach of the provisions of Article 28 of Law No. 4174/2013 in conjunction with the provisions of Article 10 par. 5 of Law no. 2690/1999. However, this claim is rejected as unfounded as the right to control and issue tax acts is regulated exclusively by Article 36 of Law No. 4174/2013 and as it is clear from the evidence in the file, the stamp duty and income tax differences in question were charged by the issuance and notification of the contested acts within the prescribed limitation period (except for the contested stamp duty act for the tax year 2014, which was referred to above). Because the findings of the audit, as recorded in the 08/12/2020 partial audit reports of the income tax and stamp duty assessment of the C.E.M.E.P. auditor, on which the contested acts are based, are considered to be valid, acceptable and fully reasoned.” Click here for English translation Click here for other translation ΔΕΔ Α 2940ORG

RKS, whose business consists of the manufacture of very large custom bearings for the civil and military industries, is controlled by the Swedish group SKF through  (SAS) SKF Holding France. RKS was subject to a tax audit for FY 2009 and 2010, at the end of which the tax authorities adjusted the prices at which it had invoiced its products to the SKF group’s distribution companies abroad. According to the tax authorities, RKS was a simple manufacturing company that did not have control over strategic and operational risks, at therefore should not have losses resulting from such risks. As a result of the adjustment, SKF Holding France (the immediate parent of RKS) was subject to additional corporate income taxes amounting to EUR 5,385,325, including penalties. In a 2018 judgment the Montreuil Administrative Court discharged the additional taxes. However, this decision was set aside by the Versailles Administrative Court of Appeal in a judgment of 22 June 2020 in which the appeal of the tax authorities was granted. This judgement was then appealed by SKF to the Supreme Court. Judgement of the Supreme Court The Supreme Court decided in favor of SKF Holding and annulled the decision of the Versailles Administrative Court of Appeal. Excerpts from the Judgement “It is clear from the documents in the file submitted to the court that the administration applied a “transactional net margin method” (TNMM) during the audit of RKS, which consisted of comparing the ratio of net margin to turnover of this company for the transactions in question with that of eight companies operating at arm’s length and in similar fields of activity. In doing so, it found that the company’s net margin ratio was -10.46% in 2009 and -21.87% in 2010, whereas it was 2.33% in 2009 and 2.62% in 2010 for the average of the companies compared. Consequently, the administrative court of appeal was able to hold, without any error of law, that the service, at the end of this comparison, of which it noted that no criticism was addressed to it, had established a presumption of transfer of profits for the transactions in question, up to the difference between the amount of revenue recorded and that which would have resulted from the application of the average net margin rate of the panel of comparable companies. However, SKF Holding France argued before the court, in order to justify this difference, that RKS had a more important functional role than that of a simple production unit within the SKF group, which meant that it had to assume a development risk and a commercial risk and that this risk had affected its operating profit for the years in dispute. Firstly, as recommended by the OECD Transfer Pricing Guidelines, in order for it to be considered established that a company belonging to a group is in fact intended to assume an economic risk which the group’s transfer pricing policy leads it to bear, and that this policy is therefore consistent with the arm’s length principle, it is necessary for that company to have effective control and mitigation functions over that risk, as well as the financial capacity to assume it. In holding that RKS was not liable for economic losses related to the operation of its business on the sole ground that it did not have the status of ‘main contractor’ within the SKF group, without investigating whether its functional position within the SKF group was such that it could not be held liable, without investigating whether its functional position within the group gave it the right to bear the specific risks it invoked, namely, on the one hand, strategic risks linked to the choice to develop new products, and, on the other hand, operational risks linked to the efficiency of the production processes, the court vitiated its judgment with an error of law. Secondly, in holding that the negative margin rate of the company RKS was not the result of the realisation of a risk that it was intended to assume, the Administrative Court of Appeal noted that the consolidated result of the SKF group, all activities taken together, was at the same time between 6 and 14%, that the company’s purchases of raw materials had been stable and that its sales had not suffered any decrease in volume except for wind turbines. In so doing, it did not respond to the argument that SKF Holding France raised to justify the drop in RKS’s margin over the two financial years in question, according to which this company had suffered the consequences of a strategic risk linked to its choice to reorient its sole activity towards the wind power sector. It therefore vitiated its judgment by failing to state adequate reasons.” Click here for English translation Click here for other translation France vs SKF 041021 Conseil d'Etat Case no 443133

At issue is the selection of the most appropriate transfer pricing method for sale of coal mined by Carbones El Tesoro S.A. in Colombia to its related party abroad, Glencore International AG. Carbones El Tesoro S.A. had determined the transfer price by application of the TNMM method. The tax authorities found that the most appropriate method for pricing the transactions was the CUP method. To that end, the tax authorities applied a database (McCloskey price list) in which the price, was determined by referring to a good similar to that traded (thermal coal) and to the Btus (British Thermal Unit) thereof. On 29 April 2011, the Settlement Management Division of the Barranquilla Regional Tax Directorate issued an assessment by which it modified the income tax return for the taxable year 2007, in the sense of disregarding as a net loss for the year the amount of $30. 509.961.000 and imposed a penalty for inaccuracy of $16.597.418.784, based on the questioning of the method that the taxpayer chose to establish the profit margin in the coal supply operation with its economic partner abroad. Carbones El Tesoro S.A. filed an appeal with the Administrative Court Judgement of the Administrative Court The Court decided in favour of Carbones El Tesoro S.A. and set aside the assessment of the tax authorities. Excerpts “4.4 In accordance with the above, and in accordance with the information provided by the plaintiff in the supporting documentation, the Chamber finds that the plaintiff set out in detail the economic reality of its operation of exploitation, production and sale of coal to its related party abroad, including the business and commercial structure, and the activities that each of the parties involved carried out. From this, it can be seen that the plaintiff operated as a producer with limited risks insofar as the risks assumed were limited to those related to its functions of exploitation, production and transport from the mine to delivery at the port, so that all those risks related to the functions of negotiating the price with the final customer, invoicing, collection, commercialisation, marketing, marketing, sales and distribution of the coal to the final customer were limited to those related to its functions of exploitation, production and transport from the mine to delivery at the port, collection, commercialisation, marketing, logistics and transport – including the contracting of vessels and the respective insurances – from the port of the vessel in Santa Marta to the delivery to the final client, were assumed by the foreign affiliate, since it was the one with the necessary infrastructure and expertise for such work, as indicated in the supporting documentation. 4.5. Considering the supporting documentation submitted by the applicant, the Board notes that the applicant presented the criteria used to eliminate possible comparables on the basis of the functions performed. To this end, it eliminated companies whose function in addition to coal mining was to carry out other activities such as electricity generation and/or distribution, or gas exploration and/or production, companies whose mining activity corresponded to products other than coal, companies that leased coal mines, or that were active in the oil industry without segmenting their financial statements by activity, companies that were in Chapter 11, and companies that did not have sufficient descriptive information on the business (…). This demonstrates that the plaintiff undertook a functional level analysis to support that, under the TNMM method, the information available and used presented a high level of comparability that was more suited to its particular situation. In the same vein, in its functional analysis, the complainant presented aspects related to the company’s management, production planning, mine contracting services, coal mining operations and the way it transported coal. He further stated that his responsibility was to plan the production of the El Tesoro mine, coordinate the receipt of coal purchased from local suppliers and transport it to Santa Marta, where it was loaded onto vessels contracted by his company. In addition, it included information about the market and sales, where it stated that it had not carried out any marketing, sales or distribution activities in relation to the exported products, given that 100% of the sales were made to its related party abroad, the latter being the one who decided the sales strategy. It added that the distribution and logistics of the delivery from the port in Santa Marta was the responsibility of its related party and the risks related to the coal were transferred to it once the coal was loaded onto the vessels (…). 4.6. On the other hand, as stated in legal basis 3, the CUP method compares the price of goods or services agreed between independent parties in comparable transactions. Its use implies that the economic characteristics of the transactions being compared must be analysed to determine a high degree of comparability. Thus, the CUP method is not the most appropriate when the conditions of the good are not sufficiently similar, or when the functions, including the risks assumed by the parties, cannot be adjusted in the particular case. When using commodity price lists (in a recognised and transparent commodity market), relevant circumstances such as the nature of the commodity, volume discounts, timing of transactions, terms of insurance, terms of delivery, and currency, among others, must be considered. In this case, the agreements and contracts that fix the terms of these factors are contrasted with those of third parties, in order to verify whether they coincide with those that would have been agreed in comparable circumstances. Under these premises, the Court finds that the defendant, through the use of the CUP method, applied a database in which the price, even though it referred to a good similar to the one traded – thermal coal – and to the Btus of this, was not sufficient to prove that the prices set in said database were for transactions in which the parties assumed similar functions, risks and negotiation terms as those of the transaction analysed. Nor is there any analysis of the appropriateness

A Oy, the parent company of group A, had not charged a royalty (the so-called concept fee) to all local companies in the group. The tax authorities had determined the level of the local companies’ arm’s length results and thus the amounts of royalties not collected from them on the basis of the results of nine comparable companies. The comparable companies’ performance levels were -0,24 %, 0,60 %, 1,07 %, 2,90 %, 3,70 %, 5,30 %, 8,40 %, 12,30 % and 13,50 %. The interquartile range of the results had been 1.1-8.4% and the median 3.7%. The tax inspectors had set the routine rate of return for all local companies at 4,5 %, which was also used by A Ltd as the basis for the concept fee. A’s taxes had been adjusted accordingly to the detriment of the company. Before the Supreme Administrative Court, A Oy claimed that the adjustment point for taxable income should be the upper limit of the full range of 13,5 % in the first instance and the upper limit of the quartile range of 8,4 % in the second instance. The Supreme Administrative Court, taking into account the number of comparable companies, the dispersion of their results and the width of the overall range, as well as the fact that the results of five comparable companies had been below the 4.5% used in the A Ltd Concept Fee scheme, held that, in determining the level of the arm’s length results of the group’s local companies, the range could have been narrowed to the interquartile range of the results of the comparable companies within the meaning of paragraph 3.57 of the OECD Transfer Pricing Guidelines. The royalties charged to the local companies would have been at market rates if A Oy had charged the local companies a concept fee or other royalty so that the local companies’ results would have been within the interquartile range. In such a case, A Oy’s trading income would not have been lower than it would otherwise have been, within the meaning of Article 31(1) of the Tax Procedure Act, as a result of the non-arm’s length pricing. To the extent that the level of the results of the local companies had exceeded the quartile range, the amounts of the additions to the company’s taxable income should have been calculated by adjusting the results of the local companies to the arm’s length level, i.e. to the upper limit of the quartile range of 8,4 %. The Supreme Administrative Court therefore annulled the tax adjustments made to the detriment of the company and cancelled the increases in the company’s taxable income in so far as they were based on the local companies’ profit margins between 4,5 % and 8,4 % for the tax years 2010 to 2012. Click here for English translation Click here for other translation Finland vs A Oy Sep 2021 KHO-2021-127Org

“Yogo Food-Distributor” is a subsidiary in the “Yogo Group” and trades in spices and canned meat and vegetables from the territory of the former Yugoslavia. The main sales markets are Austria and Germany (90%), the remainder being distributed among France, Scandinavia, Great Britain and the Benelux countries. Following an audit the tax authorities issued an assessment of additional taxable income determined by way of a benchmark study into comparable businesses. Yogo Food Distributor was of the opinion that the benchmark-study did not comply with the OECD guidelines in regards of comparability factors and filed a complaint with the Court. Judgement of the Court The contested notices (corporate income tax notices for the years 2010, 2011 and 2012, each dated 13 October 2014) and the preliminary appeal decision (dated 22 September 2017) are annulled pursuant to section 278(1) BAO and the matter is referred back to the tax authority. Excerpt “In order to be able to assess the arm’s length nature of these agreements and the payments made on the basis of these agreements, it is necessary to investigate the following issues: – First, in the sense of a function and risk analysis, it must be determined which assets were used in the context of the complainant’s business activities and which risks it had to bear, in each case in relation to the years in dispute. The contract of 13 December 2002 states that the complainant had “no suppliers/customers or the necessary financial resources”. On the other hand, within the EU, it could provide “warehouse management, logistics, personal customer care, contact with forwarding agents, etc.”. It will “endeavour to explore sales-promoting ideas or identify new products that meet market demand and implement them in agreement with the O-AG”. The O-AG is obliged to “establish the first contact with the customer or to sell the goods on the Western European market”. Financial support is also promised. In payment transactions, the complainant is to act as invoicing party, but all payment flows are to go through O-AG’s accounts. – There are no findings as to which concrete tasks and activities the complainant actually fulfilled or carried out from 2002 onwards and whether the actual circumstances (the conduct of business, the distribution of tasks between the complainant and O-AG, the contracting parties’ powers and possibilities of disposition) still corresponded in the years in dispute to those at the time of the conclusion of the contract in 2002. – With regard to the Supplementary Agreement I-2010 of 26 January 2010, it must be determined which of the economic aspects cited (cost increases in sales, unchanged or reduced sales prices, increased customer bonuses) are suitable to justify a change in the amount of the commission for an individual business year in advance in view of the actual economic relations of the contracting parties (business handling, distribution of tasks, powers and possibilities of disposition) between the complainant and O-AG. – With regard to Supplementary Agreement II-2010 of 26 January 2010, it must be determined which “economic circumstances” justify the granting of a lump-sum support contribution and from which an “increased need for marketing activities and listing expenses” results, this again for a single business year in advance. – With regard to the Supplementary Agreement I-2011 of 29 March 2011, it must be determined, taking into account the results of the functional and risk analysis, to what extent the actual economic circumstances between the complainant and O-AG changed at the time of the conclusion of this agreement compared to those in 2002 (conclusion of the agreement of 13 December 2002). 12.2002), taking into account the wording in the supplementary agreement: “…The complainant thus acts as the successor supplier of Y-Deutschland customers, Y-Deutschland delivers/invoices to the complainant. All expenses/income relating to the change of distribution or the subsequent distribution are for the account/benefit of [the complainant]. O-AG assumes any existing debtor risk at the time of the sales conversion. …” Furthermore, it has to be determined which “imminent additional expenses with regard to marketing activities” are suitable to justify the waiver of the contractually agreed commission “in connection with all sales of the Y-Germany business” and a reduction of the commission (obviously meant – for the remaining sales) for a single business year in advance, this taking into account the complaint’s allegations regarding the take-over of the distribution “of Markte M for the markets Germany, Benelux and France”. In this context, the results of the investigations which led the tax office to qualify these transactions as the “purchase of a distribution area” (preliminary appeal decision) must also be mentioned. – With regard to the Supplementary Agreement I-2012 of 9 January 2012, it must be determined, taking into account the results of the functional and risk analysis, to what extent the “need for increased sales promotion measures” or a product range expansion for an upcoming business period are suitable to justify a lump sum payment of EUR 250,000 from the complainant. Insofar as the tax office, based on the results of the investigation, comes to the conclusion that the contractual agreements concluded by the complainant with O-AG stand up to an arm’s length comparison, findings are to be made, based on corresponding investigations and in compliance with the right to be heard of the parties, as to the extent to which the conclusions on the arm’s length nature of the commission amount, which were apparently drawn from the database studies in the administrative files submitted, are still considered viable, taking into account the results of the functional and risk analysis to be carried out and taking into account the objections of the complainant.” Click here for English translation Click here for other translation Austria GZ RV-3100163-2018

“TP Packaging” is mainly engaged in the marketing of packaging materials, which in 2013 required a number of goods and services provided by its related companies. The transfer pricing analysis of the controlled transactions was carried out with “TP Packaging” as the tested party. The transactional net margin method (TNMM) was applied using the profitability indicator ROS (return on sales) and external comparables (eleven comparables). “TP Packaging”‘s financial information for the years 2011 to 2013 was used but certain adjustments had been made to the 2013 financial results. The results showed that “TP Packaging”‘s profitability in 2013 was within the interquartile range. The tax authorities agreed with the study presented in the transfer pricing analysis. However, they did not accept the use of multi-year financial information (years 2011 to 2013) and the adjustments made to the financial results. As a result, “TP Packaging”‘s profitability in 2013 was now below the interquartile range. A transfer pricing adjustment was therefore made to the median, which resulted in an assessment of additional taxable income. Not satisfied with the assessment, “TP Packaging” appealed to the Tax Court. Decision of the Tax Court The Court upheld the assessment issued by the tax authorities and dismissed the appeal of “TP Packaging”. Excerpts “It should be reiterated that the purpose of the accounting adjustment referred to by the appellant was to prepare and present its financial statements in accordance with the IFRS accounting standard, this not having been an aspect taken into account in the search for and selection of comparable companies, given that independent companies were identified as such which adopted in some cases a different accounting standard (US GAAP) and in others the same accounting standard (IFRS), it is therefore not apparent that the exclusion of the accounting adjustment referred to by the appellant helped to improve comparability with the abovementioned companies, the argument that the comparable companies did not make an accounting adjustment to their financial information is not a valid reason, since, as mentioned above, the exclusion of that accounting adjustment would mean that the appellant’s financial information would no longer be shown in accordance with IFRS, which would be justified in the transfer pricing analysis if it were intended to bring the appellant’s accounting standard, as the party under analysis, into line with the accounting standards used by the independent third parties selected as comparable, which has not been verified in the present case. On the other hand, the transfer pricing analysis under the application of the TNM method performed by the submitted study, as well as the analysis performed by the Administration, used the financial information of the Appellant’s complete financial statements as the examined part, i.e. both parties considered it appropriate for the comparability analysis not to segment the Appellant’s financial information (which excludes income and expenses not related to the related transactions under examination)”, Therefore, the Appellant’s claim that the accounting adjustment for the adoption of IFRS relates to other transactions (machine leases) and that its exclusion for the transfer pricing analysis would therefore improve comparability with the independent companies selected as comparables is not supportable. From the foregoing, it is established that the relevance of the comparability adjustment proposed by the appellant (exclusion of the accounting adjustment for the adoption of IFRS) for the purposes of the transfer pricing analysis is not substantiated, and therefore the rejection by the Administration of said adjustment is in accordance with the law.” Click here for English Translation Click here for other translation Peru 06526-1-2021

SONY Music Entertainment Colombia S.A. had filed transfer pricing information and documentation, on the basis of which the Colombian tax authorities concluded that payments for administrative services provided by a related party in the US had not been at arm’s length. SONY Colombia then filed new transfer pricing information and documentation covering the same years, but where the tested party had been changed to the US company. Under this new approach, the remuneration of the US service provider was determined to be within the arm’s length range. The tax authorities upheld the assessment issued based on the original documentation. A complaint was filed by SONY and later an appeal. Judgement of the Administrative Court The court allowed the appeal and issued a decision in favor of SONY. Excerpts “The legal problem is to determine, for the tax return of the taxable period 2007 of the plaintiff: (i) Whether it is appropriate to take into account the correction of the transfer pricing information return submitted by the plaintiff and its supporting documentation, and whether the information submitted is sufficient to determine compliance with the arm’s length principle. … In the present case, the DIAN [tax authorities], by means of the contested acts, disregards operating expenses of $1,963,235,000 of the plaintiff’s income tax return for the taxable period 2007, because it considered that the administrative expenses that the plaintiff paid to its related party in the United States of America (United States) were not adjusted to market prices, which had been agreed with other suppliers. In order to justify the disregard of the aforementioned expenses, the DIAN took as reference the individual informative declaration of transfer prices (DIIPT) and the supporting documentation initially submitted by the plaintiff, in which it was determined that it was outside the market range. Furthermore, it stated that if the corrections to the DIIPT and the supporting documentation are taken into account, there is no reason to justify that the analysis of administrative expenses should be carried out for the company located abroad. For its part, the plaintiff considers that the DIIPT and the initial supporting documentation should not have been taken into account, due to the fact that the correction was made in which it is demonstrated that the expenditure operation was carried out at market values, since the related company in the United States should be analysed, and not the company in Colombia as was done in the original declaration. … From the cited provisions it is clear that there is room to impose a sanction in the case of the correction of the individual informative declaration or of the supporting documentation, in the event of errors or inconsistencies in these documents. On previous occasions, this Court has recognised that it is appropriate to correct the information return and supporting documentation. However, regardless of whether the correction of the return or of the supporting documentation is punishable, such corrections should be examined by the Administration, in order to determine whether the transactions recorded by the taxpayer with his economic partners were in accordance with the arm’s length principle. …. In addition, the documentation clarifies that the reason for the study from the company abroad was an administrative services contract that had been in place since 2005, for which the company abroad was paid $3,569,194,000, a payment that was corroborated by the DIAN in the audit process by means of the withholdings made, transactions carried out and items paid. This contract was submitted to the file and shows that Sony Colombia and Sony United States agreed that “The Services provided by SBME will be invoiced to the Company at a rate calculated at cost plus an increase of 8%. The Services will be billed periodically, but in no case will they be billed for periods longer than one year”, a clarification together with the global situation of the music industry that justifies the Markup analysed, and the comparable companies in the supporting documentation. … Consequently, it is reiterated that the change of the tested party was supported and it is clarified that such change only affects the information of the administrative services transaction, since the transfer pricing methods apply to individual transactions, as determined by article 260-2 of the Tax Statute. … In this context, the plaintiff could correct its DIIPT and its supporting documentation, the information submitted in its corrections should have been taken into account, the plaintiff was free to choose to carry out its analysis of the foreign company, and it complied with the requirements of its supporting information together with the arm’s length principle. Consequently, the contested measures should be annulled, and the other pleas in law are dismissed as the main plea is well founded.” Click here for English translation Click here for other translation Colombia vs SONY Music Entertainment Colombia S.A., July 2021 ORG

Lux PPL SARL received a profit participating loan (PPL) from a related company in Jersey to finance its participation in an Irish company.  The participation in the Irish company was set up in the form of debt (85%) and equity (15%). The profit participating loan (PPL) carried a fixed interest of 25bps and a variable interest corresponding to 99% of the profits derived from the participation in the Irish company, net of any expenses, losses and a profit margin. After entering the arrangement, Lux PPL SARL filed a request for an binding ruling with the Luxembourg tax administration to verify that the interest  charge under the PPL would not qualify as a hidden profit distribution subject to the 15% dividend withholding tax. The tax administration issued the requested binding ruling on the condition that the ruling would be terminate if the total amount of the interest charge on the PPL exceeded an arm’s length charge. Later, Lux PPL SARL received a dividend of EUR 30 million from its participation in the Irish company and at the same time expensed interest on the PPL in its tax return in an amount of EUR 29,630,038. The tax administration found that the interest charged on the PPL exceeded the arm’s length remuneration. An assessment was issued according to which a portion of the interest expense was denied and instead treated as a hidden dividend subject to the 15% withholding tax. Lux PPL SARL filed an appeal to the Administrative Tribunal in which they argued that the tax ruling was binding on the tax administration. In regards to interest charge, Lux PPL SARL argued that according to the OECD TPG, if the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Judgement of the Administrative Tribunal The Tribunal found the appeal of Lux PPL SARL justified and set aside the decision of the tax administration. According to the Tribunal, the arm’s length interest charge under the PPL could be determined by a comparison with interest on fixed interest loan and any interest charge within the arm’s length range would satisfy the arm’s length principle. Click here for English translation Click here for other translation Lux vs LUXPPL SA July 2021 Case No 43264

An adjustment for FY 2013 and 2014 had been issued to a pharmaceutical company in Panama “Pharma Distributor S.A” that resulted in an income adjustment of 19.5 million dollars, which in turn resulted in additional taxes of 2.4 million dollars. The resale price method had been used by Pharma Distributor S.A. to determine the market value of an asset acquired from a related entity that was sold to an independent entity. This method was rejected by the tax authorities based on the fact that the analysis presented by the taxpayer did not meet the requirements for application of the method. The tax authorities instead applied a TNMM. The tax authorities also rejected tax deductions for expenses purportedly paid for administrative services due to the absence of supporting documentation. Provisions of article 762-G “Administrative services received” in the Tax Code in Panama contemplates tax deductibility for such expenses exclusively when services have actually been rendered to the benefit of the recipient. Decision of the Court The Court held in favor of the tax authorities. The Court ratified the position of the tax authorities regarding the non-deductibility of the expense paid for administrative services. In addition, the Court’s resolution indicates inconsistencies and imprecision in the delineation of the transaction within the comparability analysis, selection and application of the Resale Price Method, concluding that the level of comparability presented in the supporting documentation would be inadequate for application of the method. It was also indicated that Pharma S.A assumed operating expenses in excess of those of simple distributors. Hence Pharma Distributor S.A. should be characterized as a fully-fledged distributor and be compensated for the additional functions performed and risks assumed. Due to these methodological inconsistencies, the Court agreed that the TNMM – as suggested by the tax authorities – was the more appropriate method in the case at hand. Click here for English translation Click here for other translation Panama vs Pharma 2021

“Stream-Heat” is active in the production of steam, heat and electricity, which it sells to its parent company on a cost recovery basis. By agreement between the parent company and Stream-Heat, the consideration for the supply of energy was fixed in the form of a RÁD (availability fee) and an energy fee. Stream-Heat’s results for 2017 were affected by the outcome of the administrative lawsuit and the subsequent Courts review of the findings for 2013. According to the decision in relation to the assessment paid by Stream-Heat to the tax authority on the basis of the final decision, Stream-Heat included the refund in other income for the year and as income from taxes on profits, which resulted in a profit in the applicant’s taxable result, compared to losses in previous years. In order to settle the payment obligation arising from the previous proceedings, Stream-Heat entered into an agreement with the parent company on 31 December 2015, on the basis of which Stream-Heat invoiced its parent company for an extraordinary RÁD of HUF 422,885,000. The parties have agreed that if the assessment is cancelled and the tax authority refunds the above amount to Stream-Heat, Stream-Heat will credit this amount to the parent company. Following the refund, the amount credited to the parent company as part of the GST in 2017 was not adjusted as a credit, but Stream-Heat used the amount refunded to prepay the loan granted by the parent company to finance the investment in December 2017, at the parent company’s discretion. In its transfer pricing records, Stream-Heat determined the arm’s length price using the transactional net profit method. Stream-Heat calculated the arm’s length profit range on the basis of an index using data from comparable companies for the years 2014-2016, which it determined by comparing its return on equity (ROE) (7.95%) with the return on equity (ROE = profit after tax/equity) of comparable companies. The companies included in the analysis achieved an average ROE of between 2.03% and 15.45% during the period under review. Stream-Heat used a different formula for the calculation of the own ROE ratio, namely the corporate tax base/equity ratio, as opposed to the formula used for the calculation of the comparable company ratio. The tax authority accepted the methodology used by Stream-Heat, the comparative database search and the interquartile range, but recorded that the revenue items recognised as a result of the curia judgment could not be considered as revenue from ordinary economic activities, either for the period in question or for the nature of the applicant’s business, nor as sales revenue, because of the one-off, non-recurring, exceptional and extraordinary event. In the case of Stream-Heat, the return on capital invested has been negative for several years, as a result of the fact that the pricing between the parties does not cover the return on capital. The tax authority carried out a tax audit of the applicant for the year 2017, covering all taxes and budgetary support except VAT, in which it examined Stream-Heat’s transfer pricing practices. On the basis of the above facts, it found that Stream-Heat’s ROE ratio, with no amount refunded under the Court decision and calculated using the transfer pricing documentation formula, was below the lower end of the interquartile range after adjustment. The Tax Court considered the income recognized as a result of the Court judgment to be an extraordinary item that materially affects comparability, and thus adjusted Stream-Heat’s earnings for the resulting gain. The tax authority was of the opinion that Stream-Heat should have achieved a profit on equity of 2.03%, which is the lower limit of the interquartile range of comparable companies’ data, even without taking into account the income from the remittance, and therefore increased Stream-Heat’s corporate tax base by this difference, with the result that Stream-Heat was charged 31. 875,000.00Ft, and, in addition, realising the effect of the above findings in the tax category of the income tax of energy suppliers, calculated a further tax difference of 29,841,000.00Ft for Stream-Heat. Thus, in total, the first instance decision No 6103467240 of 17 February 2020 assessed a tax overpayment of 61,716,000 HUF against Stream-Heat, of which 57,781,000 HUF was considered a tax deficit. A tax penalty and a late payment surcharge were charged on the tax deficit discovered. By decision No 4317986856 of 26 May 2020, the Court issued a decision in favour of Stream-Heat. It pointed out that the tax authority had not challenged the accounting treatment of the taxpayer’s accounts on the basis of the Curia judgment, but that the refund was a one-off, exceptional and extraordinary event, the result of which was to be adjusted when determining the net profit indicator. The finding was not that Stream-Heat should have credited the amount of the rebate to the GGE, since the parties are free to form their civil law relationship, but that the tax law consequence was linked to the fact that the applicant’s energy service invoiced to its parent company did not cover its profitable operation for several years. In the period covered by the tax audit, this indicator did not turn into a positive pre-tax result because of the market basis of the service, but only because the tax authority made a significant refund to Stream-Heat. In that regard, the tax authorities emphasised that the reimbursement is essentially entirely devoid of any quid pro quo, since there is no direct causal link between the service provided by the applicant and the amount of the reimbursement. With regard to the calculation of the ROE ratio, the tax authorities explained that Stream-Heat’s practice does not ensure objective comparability on a level playing field, since profit after tax is a measure of the profitability and profitability of an undertaking, which is the difference between profit before tax and tax liability, whereas corporation tax is the basis, the sum of the profit before tax and the tax base adjusted for tax adjustments. Stream-Heat has not provided any reasonable justification for determining its own ROE ratio using a different

A Oy was part of the A group, whose parent company was A Corporation, a US corporation. A Oy had acted as the group’s limited risk distribution company in Finland. The transfer prices of the group companies had been determined on a mark-to-market basis using the net transaction margin method and the group companies’ operating profit on a mark-to-market basis had been determined on the basis of US GAAP, the accounting standard commonly applied within the group. The target profit level for the group’s limited risk distribution companies, including A Ltd, was set at 0,5 % in the group’s transfer pricing documentation, based on a comparables analysis. In 2011, the competent authorities of the countries of residence of the A Group’s European manufacturing companies had entered into an Advance Transfer Pricing Agreement (APA) under which transfer pricing is monitored in accordance with the Group’s common accounting standard, US GAAP, and the market-based operating profit level for the limited risk distributors is 0.5%. The tax authorities in the countries of residence of certain European limited risk distributors had also issued rulings approving a profit level of 0.5% for local distributors. A Ltd had made a deduction in its 2011 financial statements to adjust its 2010 operating profit level to match the profit level under A Group’s transfer pricing principles. The company had filed a corrected tax return for the 2010 tax year, in which the adjustment was reported as a deduction from taxable income. When the company’s tax return for the 2010 tax year had been resubmitted, the Tax Administration had considered that the company had to achieve a level of operating profit in line with market conditions on the basis of financial statements prepared in accordance with Finnish accounting legislation. In addition, the Tax Administration had removed from the comparators in the comparison file submitted by the company those peer companies whose reported annual operating profit levels had been lower than or equal to 0 %. The tax administration had set the company’s normal market operating profit at 1 %. The Supreme Administrative Court held that the level of A Oy’s arm’s length profit could be determined on the basis of US GAAP accounting standards, since the A group generally prepared its financial statements in accordance with these accounting standards and since the group monitored transfer pricing on the basis of the accounts kept in accordance with US GAAP accounting standards. The Supreme Administrative Court also considered that the prior transfer pricing agreement between the competent authorities of the countries of residence of the European manufacturing companies of the A group and the decisions of the tax authorities of the countries of residence of the other limited risk distribution companies had to be given probative value. In addition to these considerations, taking into account that loss-making peers that meet the conditions of the comparability analysis are not to be rejected merely because they suffer losses, the Supreme Administrative Court confirmed that the 0,5 % profit determined for A Ltd under US GAAP was, in the circumstances of the present case, at arm’s length. The Supreme Administrative Court did not immediately take up the issue of how to calculate the taxable income of A Oy when the company’s US GAAP profit for the financial year 2010 was 0,5 %, but annulled the decisions of the Administrative Court and the Tax Adjustment Board and the resubmitted tax return for the tax year 2010 and remitted the case to the Tax Administration for reconsideration. Click here for English translation Click here for other translation KHO2021-73ORG

This case deals with arm’s length pricing of limited risk manufacturing services. Following an audit of the X Ltd, the prices paid to a foreign manufacturer in the group was determined by the Grees tax authorities to have been above the arm’s length price. On that basis an upwards adjustment of the taxable income of X Ltd. was issued. Judgement of the Court The court dismissed the appeal of the X Ltd. Since the audit findings as recorded in the partial income tax audit report of the Head of the C.E.M.E.P. dated 08/07/2020 are found to be valid, thorough and fully substantiated, the present appeal must be dismissed. Click here for English translation Click here for other translation gr-ded-2021-1674_en_ath-1674_2021

Following an audit the tax administration had adjusted the margin obtained by the taxpayer to the median, as it was below the interquartile range of the benchmark analysis. An appeal was filed by the taxpayer with the TEAC. Judgement of the TEAC The TEAC upheld the taxpayer’s appeal and annulled the decision of the tax authorities. Excerpt “… In the present case, the inspectorate has accepted the comparability study of the company without noting any shortcomings in the study. It only notes, perhaps as a justification for the unreliability of the company’s information, that: It should be clear, therefore, that, according to the background information in the file, at no time has group X commissioned or agreed to have its costs and other elements determining the group’s internal data, including its own costs, verified by an independent third party, prior to their provision to the entity responsible (…) for preparing the documentation on related-party transactions, provided in the course of this verification. This observation, in any event, referring to the entity’s costs, does not constitute a defect in the comparability of the study carried out by the taxpayer, since, as we have seen, the method and the search for comparable companies have been admitted by the inspection, as have the interquartile ranges resulting from this selected sample. In conclusion, once it has been established that the appellant’s margins in the years under discussion are outside the lowest interquartile range, the corresponding adjustment should indeed be made. However, the fact that this is the case does not, without more, allow the median to be applied in the terms provided for in Rule 3.62, since the application of that rule is not justified by the fact of being outside the arm’s length range, but by the existence of ‘shortcomings in comparability’, which have not been explained by the inspectorate, so that the application of the median is not justified. This is in line with what is stated in the Judgment of the Audiencia Nacional of 06-03-2019 (appeal number 353/2015), which, after some illustrative reasoning in this regard, concludes (only this conclusion is extracted, without prejudice to the interest of the full Judgment, to which we refer): “Now, in our opinion, it is clear that, if the ROS is outside the limits of the inter-quantile range, the corresponding adjustment must be made, since only from 2.1% is the company within the comparable market margins. In order for the median to be applied, however, there must also be ‘comparability defects’. In the present case, no defects of comparability have been revealed in the study carried out by the taxpayer, which, as we have said, has been accepted by the inspectorate, so that the application of the median is not in accordance with the law and, consequently, we must uphold the claimant’s claims and annul the settlement. …” Click here for English translation Click here for other translation Spain vs XZ SA, May 2021, TEAC, Case No Rec. 2545-2019

The Danish tax authorities had issued a discretionary assessment of the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and continuous losses. Judgement of the Supreme Court The Supreme Court found that the TP documentation provided by the company did not comply to the required standards. The TP documentation did state how prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis, as required under the current § 3 B, para. 5 of the Tax Control Act and section 6 of the Danish administrative ordinance regarding transfer pricing documentation. Against this background, the Supreme Court found that the TP documentation was deficient to such an extent that it had to be equated with missing documentation. The Supreme Court agreed that Tetra Pak’s taxable income for FY 2005-2009 could be determined on a discretionary basis. According to the Supreme Court Tetra Pak had not proved that the tax authorities’ discretionary assessments were based on an incorrect or deficient basis, or that the assessment had led to a clearly unreasonable result. Hence, there was no basis for setting aside the assessment. The Supreme Court therefore upheld the prior High Court’s decision. In the decision reference is made to OECD 2010 Transfer Pricing Guidelines Importance of Transfer Pricing documentation and comparability analysis: Para 1.6, 2.22, 2.23, 2.78, 3.1, 3.22 and 5.17 Choice of tested party: Para 3.18 Exceptional and extraordinary costs and calculation of net profit indicator/profit level indicator: Para 2.80 Click here for translation bs-19502-dom-til-hjemmesiden

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” Click here for English translation Click here for other translation CH vs Avery Dennison 16-9-0001493-0

BIOMERIEUX ESPAÑA SA is active in the business of clinical and biological analysis, production, distribution, training and technical assistance. Likewise, the provision of computer services and, in particular, the computer management of laboratories. Following an audit the tax authorities found that the controlled prices agreed for the acquisition of instruments and consumables between bioMérieux España and its related entities, bioMérieux SA and bioMérieux Inc, did not provided bioMérieux España with an arm’s length return on is controlled activities. A tax assessment was issued for FY 2008 on the basis af a thorough critical analysis of the benchmark study provided by the BIOMERIEUX, and detailed reasoning and analysis in regards to comparability and market developments. Judgement of the National Court The Audiencia Nacional dismissed the appeal of Biomerieux España SA and decided in favour of the tax authorities. Excerpts “As we already reasoned in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ), it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application. In our opinion, the Inspectorate, in this case, does reason and state the reasons.” “2008 was a year of outstanding economic results for the bioMérieux Group, as well as for bioMérieux Spain in terms of sales growth, according to the report. However, this situation of increased results for the Group is not reflected in the income statement of bioMérieux Spain’s distribution business, whose profitability fell from 8% in 2007 to 4.47% in 2008. This is not consistent either with the Group’s results or with the market remuneration for performing the same functions in 2007 and 2008, a market which has not been shown to have seen its margins of free competition reduced.” “It is true that, as stated in point 1.13 of the Guidelines, the objective sought by the rule is “to arrive at a reasonable approximation of what would be an arm’s length result based on reliable information. At this point, it should also be remembered that transfer pricing is not an exact science, but requires value judgements on the part of both the tax administration and taxpayers”. Precisely for this reason, the correct thing to do is to proceed as the inspectorate did, i.e. to ask the appellant to justify the price set and to analyse the reasonableness of the price obtained. In this sense, it is reasonable to require the appellant to keep the information regarding the criteria they have used to set the transfer price and the documentation that has justified them or, at least, to be able to precisely identify the sources from which they have obtained the information. This will allow for verification. In this sense, paragraph 3.3 of the OECD Guidelines “considers it good practice for a taxpayer that uses comparables to justify its transfer prices ( ) to provide the other interested party with the supporting information that allows it to assess the reliability of the comparables used”.” “All these reasons, assessed as a whole, lead us to conclude that the detailed analysis carried out by the Inspectorate allows us to conclude that the calculations made by the Inspectorate are closer to the purpose of the rule, that is to say, to the search for the price set at arm’s length, than those provided by the appellant.” “The applicant submits that the Spanish authorities have reached an amicable agreement with the French authorities and have fixed the agreed mark-up as market rate at 6,20 %. What is sought is to apply the same margin in relation to the US company, in respect of which there is no amicable procedure. The tax authorities opposes this argument, reasoning that the transfer price agreed with France in an amicable procedure is the result of a negotiation between sovereign entities involving considerations of international public law, and therefore its results cannot be extrapolated.” “The agreement obtained is an agreement that binds the negotiating States, but cannot extend its effects to relations with another State. The fact that the Kingdom of Spain, for reasons unknown to us, has reached an agreement with the Republic of France does not mean that the transfer price fixed by the Spanish administration is not correct, but simply that the States have given in on their respective claims and reached an agreement, the effects of which cannot be extrapolated.” Click here for English Translation Click here for other translation SAN_416_2021

ABC Ltd is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts). Catalysts are used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, applicant requires, inter alia, some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (“the Swiss Entity”). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). ABC Ltd and the Swiss Entity are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2011 by an amount of R114 157 077. According to the revenue service the prices paid for the PGMs had not been at arm’s length. The assessment set aside the CUP method and instead applied the TNMM method using ROTC as the Profit Level Indicator. The assessment was based on a detailed analysis of the total cost base incurred by ABC Ltd in acquiring the PGMs and other raw materials, including the manufacturing and distribution costs of the catalysts. The role played by ABC Ltd in purchasing and manufacturing the catalysts, the assets and the risks involved, which risks applicant had accounted for in its financial statement was also taken into account. ABC Ltd held that the South African arm’s length provision in section 31(2) of the ITA only permitted tax authorities to adjust the consideration in respect of the transactions between it and the Swiss Entity to reflect an arm’s length price for the purchase and supply of PGMs; in the event the ‘jurisdictional facts’ called for by section 31 were established as a matter of fact. It also stated that even if it had been found that it had not paid an arm’s length price for the PGMs, which it denies, the tax authorities was only entitled to adjust the price/consideration paid for the PGMs as between applicant and the Swiss Entity, not the consideration between applicant and third parties. In this regard, the tax authorities’ adjustment of ABC Ltd’s profits pursuant to its application of the TNMM was not a legitimate exercise of transfer pricing power authorized by section 31(2). As a consequence, ABC Ltd argues, the additional assessment is legally impermissible. The issue which ABC seeks separated therefore, is whether the conduct of tax authorities fell within the powers set out in section 31(2). Decision of the Tax Court ABC Ltd’s application for separation was dismissed by the Tax Court. “Applicant [ABC Ltd] refers to the process of establishment of the arm’s length nature of a transaction between connected persons as jurisdictional facts. Plain from its own advocation of the CUP method is that it accepts that there are various methods that can be employed in establishing the arm’s length nature of a transaction. The appropriateness of a method to test the arm’s length nature of a transaction however, is determined by the circumstances of a case. See in this regard PN 7 and the TPGs. It cannot merely be artificially assumed as applicant argued during the hearing of this matter. In this regard, and for the purpose of advancing the separation application, applicant submitted that the court may accept (artificially so) that the price it paid for the PGMs to the Swiss Entity was not an arm’s length price, even though this is denied. But this cannot be done and applicant knows this. For example, in furtherance of its preferred CUP method, applicant went further and stated that there would have been no need for adjustment had respondent [COMMISSIONER FOR SOUTH AFRICAN REVENUE SERVICE] adopted the CUP method. From the preceding statement, it must be accepted that applicant is aware that the establishment as a fact whether a consideration is or is not at arm’s length precedes the question of adjustment, regardless of what method is employed. The establishment of the arm’s length nature of a transaction is the first step in transfer pricing matters and it involves a factual inquiry which culminates in a decision being made as to which of the methods endorsed by PN 7 is to be employed. Applicant is also wrong in its submission that the question of respondent’s powers – in terms of section 31(2) – can be determined without reference to the merits or to the question of whether the PGM transactions were or were not at arm’s length. As respondent puts it, the question of adjustment does not even arise prior to determining the arm’s length nature of a transaction. The inquiry into the arm’s length nature of a transaction is an overriding principle in transfer pricing matters and cannot be receded to the back. I agree. Respondent at one point likened applicant’s approach with the separation application to determining quantum in a damages claim prior to determining the question of liability. I agree. On the conspectus of evidence before this court, ordering a separation will not achieve any practical benefit. On the contrary, it would result in piecemeal litigation, increase costs, and delay finalisation of the matter. At first, one may be allured by the points raised by applicant. However, on close interrogation there is neither a cogent point worthy of testing nor will the objects set out in Blair Atholl be served with the separation.” Click here for translation SARS vs ABC (PTY) LTD January 2021 Case No IT 14305

A-Contract Manufacturer LDA is an entity residing in Portugal, whose main activity is contract manufacturing of coffee machines and irons, as well as spare parts, tools etc. on behalf of its German parent B A.G. Following an audit, the tax authorities found that the results of A-Contract Manufacturer LDA had not been at arm’s length. An assessment of additional income was issued where the adjustment had been determined based on a benchmark study and use of statistical tools – interquartile range and median. Not satisfied with the assessment A-Contract Manufacturer LDA brought the case to the CAAD, a Portuguese arbitration tribunal. Decision of CAAD The CAAD decided in favour of the tax authorities and upheld the assessment. Excerpt “In sum, regarding the first claim of the Claimant that the arm’s length principle was violated, it appears that the Defendant did nothing more than, in compliance with the duty imposed by art. In short, as to the first claim of violation of the arm’s length principle, it appears that the Claimant, in compliance with the duty imposed by article 3 of Ministerial Order no. 1446-C/2001, of 21 December, and in the exercise of a margin of technical discretion resulting from that precept, carried out calculations that are fully based on the OECD guidelines, after concluding that “the operating result generated [by the Claimant] was lower than it would have been had those transactions been carried out between independent entities” (point 1.4 of the RIT). The mere invocation of its nature as a “contract manufacturer” is not a reason to preclude the application of the arm’s length principle to the special relations between the Claimant and the corporate Group of which it forms part, and even less to conceive any exceptional regime vis-à-vis the rule of application of the OECD Guidelines and the national rules that define those guidelines. As to the Claimant’s second allegation that the arm’s length principle was violated, consisting in the argument that the median value used by the Defendant was highly inflated, this is a mere divergence of quantifications and calculations between the Claimant and the Defendant, and not a doubt that, as the Claimant claims, could lead to the application of art. 100 of the CPPT – since the conclusions of the RIT do not show any such doubt, besides the fact that there is no evidence of any error in the calculations made by the AT that led to the results shown in the RIT. Moreover – and this is the most relevant point – even with lower medians and interquartile ranges such as those proposed by the Claimant, the margins presented by the Claimant are well below these medians, and outside these ranges, with all the consequences that we have seen must result.” Click here for English translation. Click here for other translation Portugal P808_2019-T - 2020-12-21

Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Click here for English translation Click here for other translation TAIIA-R1705038TM

The disputed issue concerns the purchase prices of natural gas by SC A from an affiliated company SC B. By orders of the National Energy Regulatory Authority (NERA), the prices of supply of natural gas to domestic and non-domestic consumers were regulated and fixed, but not the price at which SC A purchased it from the SC B. The tax authority issued an assessment where the price of the controlled gas transaction was determined by reference to profit level indicators of comparable businesses. SC A brought the decision to the Romanian courts. Judgement of the Court of Appeal The appeal of SC A was dismissed and the assessment of the tax authorities upheld. Excerpt “In the present case, in order to adjust the expenses for the cost of the goods purchased from SC “B.” SRL, based on the level of the central market trend, the tax body used the information provided by the ORBIS and FISCNET applications. Following the comparative analysis of the information provided by the two IT applications, the tax body identified 22 potentially comparable companies in Romania, of which only one met the qualitative criteria, which is why it correctly moved to a higher search level, namely that of the European Union, identifying 6 companies that were comparable in terms of quantity and quality. In this regard, it was noted that, according to Article 8 of OPANAF No 442/2016, transactions between related persons are considered to be carried out according to the market value principle if the financial indicator of the transaction/transaction value (margin/profit/price) falls within the range of comparison. The following provisions shall be respected in determining the comparator range: 1. the comparability analysis will consider territorial criteria in the following order: national, European Union, pan-European, international; 2. reasonable availability of data at the time of transfer pricing or at the time of their documentation, for which the taxpayer/payer being verified provides supporting documentation for the data used at the time of transfer pricing; 3. the margin of comparison is the range of price or margin/profit values for comparable transactions between independent comparable companies; 4. for the determination of outliers, the margin of comparison shall be divided into 4 segments. The maximum and minimum segments represent the extreme results. The range of comparison is the range of price or margin/output values for comparable transactions between independent comparators, after eliminating the extreme results from the margin of comparison; 5. the extreme results within the margin of comparison shall not be used in determining and calculating the estimate/adjustment; 6. if the median value cannot be identified (the median value is the value at the middle of the range of comparison), the arithmetic mean of the two middle values of the range of comparison shall be taken. In so far as the tax authority complied with the legal procedure for estimating the purchase prices, as required by ANAF Order 442/2016, the appellant’s criticisms are unfounded, especially as they do not essentially concern the specific procedure carried out by the tax authority. Consequently, the appellant’s criticisms, which relate to the ground for annulment relied on, are unfounded, which is why the appeal was dismissed as unfounded.” Click here for English translation Click here for other translation Romania vs SC A Case no 238-12032021

In this case, a Romanian manufacturer and distributor (A. SA) in the Electrolux group (C) had been loss making while the group as a whole had been profitable. The tax authorities issued an assessment, where the profit of A. SA had been determined based on a comparison to the profitability of independent traders in households appliances. When calculating the profit margin of A. SA certain adjustments was made to the costs – depreciations, extraordinary costs etc. When comparing A. SA’s net profit to financial results with those of the group to which it belongs, it emerged that, during the period under review, the applicant was loss-making while C. made a profit. With reference to paragraphs 1.70 and 1.71 of the OECD Transfer Pricing Guidelines, when an affiliated company consistently makes a loss while the group as a whole is profitable, the data may call for a special analysis of the transfer pricing elements, as this loss-making company may not receive an adequate reward from the group of which it is part and with which it does business for the benefits derived from its activities. An analysis of the way in which the prices at which the applicant’s products are sold to other companies in C. are determined shows that those prices are imposed by the group, and that there is a uniform group policy of remunerating the manufacturing companies within the group and those carrying out distribution activities. According to the document called “Framework Documentation 2013”, Annex 28 of the transfer pricing file, transfer prices are established on the basis of budgeted estimated costs, comprising direct material cost, direct labour cost and direct manufacturing costs, as well as indirect manufacturing costs and processing costs, plus a margin of 2.5%. Compared to this mark-up, the mark-up applied to B.’s direct and indirect production costs was between 27.04% and 34.87% over the period 2008-2013, as shown in B.’s public financial statements. It is true that B. is an entrepreneur whose activity involves several functions and risks, which may lead to higher mark-ups or higher losses, but it is worth noting that the mark-up applied to the cost of goods sold by B. is 11-14 times higher than that established for A. S.A.. During the entire period subject to tax inspection, the applicant incurred losses, while C. made a profit. In the years 2010, 2011 and 2013, with a turnover of more than 400.000.000 RON, the applicant always recorded a net loss. According to the tax authorities the court of first instance erred in finding that the comparison between the operating cost margin of 2.50% established by the transfer pricing policy for the applicant’s household appliance manufacturing activities and B.’s gross cost margin was erroneous, given that the applicant failed to identify the source of the cost of goods sold values used for the calculation of B.’s gross cost margin, according to RIF p. 5. A comparative analysis of the applicant’s sales invoices for household appliances to C. on the one hand and to independent companies on the other found that, for identical products, in similar quantities, at similar times of the year, the applicant sold to independent companies, under conditions presumed to be competitive and negotiated, at unit prices at least 25% higher than the prices at which it sold the same products to group companies. Judgement of Supreme Court The Court referred the case back to the lower court, within the limits of the cassation, for the completion of the evidence, in compliance with the rulings given on the questions of law in this decision. Excerpt “The Court of First Instance held that the defendant authorities had estimated the income which the applicant should have obtained from transactions with related persons by taking into account the median value of the interquartile range, relying on the provisions of Article 2(2)(b) of the EC Treaty. (2) and (3) of Annex 1 to OPANAF No 222/2008. These provisions, which concern both the comparison and the adjustment, stipulate, with regard to the first issue, that the maximum and minimum segments of the comparison interval are extreme results which will not be used in the comparison margin. They were held by the court to unduly restrict the range of comparison since neither Article 11 of the Tax Code, to the application of which the Order is given, nor the Methodological Norms for the application of the Tax Code provide for the exclusion of the upper and lower quartiles from the range of comparison. Citing paragraph 2.7 of Chapter II, Part I of the OECD Guidelines, which it held to be of superior legal force to FINANCE Ordinance No 222/2008, the court concluded that, in order to consider that the prices charged in transactions with related persons comply with the arm’s length principle, it is sufficient that the taxpayer’s net margin falls within the interquartile range of comparison, without eliminating the extremes. The High Court finds that there is no argument to exclude from the application of the provisions of OPANAF No 222/2008 relating to the preparation of the transfer pricing file and, in particular, the provisions cited above, which exclude extreme results from the comparison margin. The Order is a regulatory act and applies in addition to the provisions of Article 11(11) of Regulation (EC) No 1073/2004. (2) of the Tax Code and Art. 79 para. (2) of O.G. no. 92/2003 on the Fiscal Procedure Code. The higher rules do not regulate the comparison method or the adjustment method, which were left within the scope of the secondary rules. On the other hand, the provisions of the Guidelines cited by the Court of First Instance do not support the thesis that such extreme results are not excluded, since they refer to the choice of the most appropriate method for analysing transfer prices between related persons, and not to the comparability analysis referred to in Chapter III, Section A.7, which allows the use of a comparison range and the exclusion of extremes (paragraph 3.63). Moreover, the comparison

ST Microelectronics Pvt. Ltd. is a subsidiary of ST Microelectronics Pte. Ltd. which in turn is a wholly owned subsidiary of ST Microelectronics NV, Netherlands. ST Microelectronics Pvt. Ltd. is into the business of Integrated Circuit Design, CAD Tools and software development for its overseas group concerns. It also provides marketing support services to a group company and software development services related to design implementation and maintenance with respect to Integrated Circuits as required by guidelines/instructions. During the year under assessment, the taxpayer entered into various transactions with its Associated Enterprises. In order to benchmark its international transactions qua provision of software development services and qua provision of marketing support services ST Microelectronics used Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost as the Profit Level Indicator (PLI) being the Most Appropriate Method (MAM), computed its own margin at 11.11% as against weighted average arithmetic mean margin of 19 comparables at 11.31% and found its international transactions at arm’s length. The Transfer Pricing Officer by applying qualitative and quantitative filters finally selected 13 comparables and computed their margin at 23.20% and thereby computed the adjustment of Rs.38,30,91,011/-. The taxpayer carried the matter before the Disputes Resolution Panel by way of filing objections who has excluded one comparable and included another comparable in the final list which resulted in a margin of 21.53%. On that basis the adjustment was revised to Rs.33,01,81,949/-. ST Microelectronics filed an appeal with the Income Tax Tribunal. Judgement of the Tribunal The Tribunal allowed the appeal filed by ST Microelectronics. Click here for other translation India vs ST Microelectronics Pvt. Ltd September 2020 Delhi tax tribunal ITA No 6169-Del-2012

In regards of transfer pricing A. SA had two activities – production of dairy products and distribution of milk – that had been subject to an audit by the tax authorities which resulted in an assessment of additional taxable income. The transfer pricing assessment had been upheld by the court of first instance and A. SA then filed an appeal to the Supreme Court. In regards of production activities the main criticism by A. SA was that the tax authorities had replaced one market price with another price considered convenient by tax authorities, without legal basis, although the tax inspection accepted the list of companies and comparable transactions for all three sections of the file. The judge of the merits did not motivate his choice in law and supports the maintenance of the median according to the RIF, but does not specify how he reached this conclusion, the data for which the cost plus method is substituted and the legal grounds are not analysed. In regards of distribution activities the criticism was that the forensic accountant reached the same conclusion as the company under review, but the court did not retain it, stating that it would require the tax authority to request a change in the transfer pricing file. The court also noted that the expert “commented lapidarily” in his analysis and in his conclusion. It considers that the court’s conclusion to rely strictly on the tax authority’s interpretation is erroneous, since the tax authority does not regularly carry out price analyses on affiliated companies in the geographical area in which the company is located. In practice, as long as the tax body cannot be suspected of having business ideas, it also follows that the tax body cannot correctly and consistently analyse pricing in an independent market as well as in a controlled market; in the present case, however, the method was chosen by the tax inspectorate with the intention of maximising the amounts set for additional payment, without taking into account, as it should have, the objective factors and the legal provisions applicable in the case, which were interpreted erroneously, without taking into account the principles of the OECD Guidelines. The tax body has access to databases on transfer pricing practices within the ANAF central unit. In this respect, the query of the database by the tax authority is absolutely necessary in order to determine both the transfer pricing method and the prices charged, and not the arbitrary determination of a random method without any reasoning. Judgement of Supreme Court The Supreme Court dismissed the appeal of A. SA and upheld the decision of the court of first instance. Excerpts “7.3.3.1. Production activity. The main criticism on this aspect concerns the re-framing of all market prices in the comparison range with the median price. The tax authority removed two companies from the comparison list which did not meet the independence criteria and calculated separately for each of the years under review at the median level resulting from this recalculation. The first court held that the tax authority correctly referred to the median resulting from the comparison of the 4 companies that met the independence criteria and did not make an estimate in accordance with Article 3 of OPANAF No 222/2008, since formally, F. met the conditions to be used for the price comparison, but the median resulting from the analysis of the 6 companies is different from the one resulting from the removal from the comparison of the companies that did not meet the independence criteria, and the new C. pen. The new C.C. had been established in the abstract, ignoring the above calculation formula. In accordance with Article 2 of Order No 222/2008 on the contents of the transfer pricing file: “(1)The margin of comparison is the range of price or profit values for comparable transactions between comparable independent companies. (2) For the determination of extreme values, the comparison margin shall be divided into 4 segments. The maximum and minimum segments represent the extreme results. For the purpose of determining the comparator range, the extreme results within the comparator range will not be used. (3) If the transfer price consideration established by the taxpayer is not included in the comparison range, the competent tax authority shall establish the median value as the transfer price at market price. The median value shall be the value which is in the middle of the comparison range. (4) If the median value cannot be identified, the arithmetic mean of the two middle values of the comparison range shall be taken. (5) The benchmarking will consider territorial criteria in the following order: national, European Union, international.” The tax authority justified the measure taken by the fact that the adjustment occurred in the case of years for which the indicator in question was found to be lower than the minimum limit of the quartile range, and that applying the calculation of the adjustment to the median of the quartile range is correct and logical, because just as the indicator in question can have values lower than the median, so it can also have values higher than the median. The High Court finds that the first court applied the law correctly, validating the measure ordered by the tax authority. The applicant’s claim that the tax inspection team accepted the list of companies and comparable transactions for all three sections (concerning the activity of selling raw milk as a raw material, concerning the activity of producing dairy products and concerning the activity of distributing goods) cannot be upheld, so that it was not necessary to apply the median value for the transfer price at market price. The acceptance referred to by the tax authority concerned only the fact that the transfer pricing file submitted to the tax inspection met the minimum requirements in terms of content (comparative lists, calculation of profit indicators for the companies included in those lists, information from the accounting records). Otherwise, a tax audit would be pointless if the actual handing over

An assessment had been issued where the pricing of intra group rental expenses for machinery had been set aside by the tax authorities for FY 2010-2013. By an application filed with the Court of Appeal S.C. A. S.R.L. requested the Court for annulment of the assessment issued by the tax authorities. The Court of Appeal by judgment no. 164 of 31 October 2017, partially partially annulled the assessment. Unsatisfied with this decision, both parties filed an appeal to the High Court. S.C. A. S.R.L. considers that the first court misapplied the substantive rules of law applicable to the case with regard to the additional determination of a corporation tax in the amount of RON 56,715 for 2010, with reference to the interpretation of the OECD Guidelines. “Although the expert appointed by the court of first instance correctly established the adjusted margins of trade mark-up for each of the years 2010 to 2013 and the adjusted margins of operating profit for the same period, he erred in finding that, for the purposes of the final calculation, an analysis of the year-by-year comparability of the profitability indicators obtained in the period 2010 to 2013 is required. The approach is wrong because paragraphs 3.76 and 3.79 of the OECD Guidelines require the elimination of any market influences or gaps that may have an impact on the company, the only correct method being to use multi-year financial data. The use of this method is intended to minimise the impact of individual factors on comparable entities and the economic environment, as well as temporary economic factors such as the economic crisis.” Judgement of Supreme Court The Supreme Court upheld the decision of the court of first instance. Excerpts “As regards the method chosen, although the appellant criticises the ‘year-on-year’ comparability method, it does not specifically point out what its shortcomings are, but only why it is necessary to use the method of multi-year or agreed financial data. The ‘year-on-year’ comparability method was used because it was observed that the adjusted net trading profit margins and adjusted operating profit margins for 2012 were lower than the lower quartile limit, so it was correctly required to adjust the company’s 2012 revenue to bring the profitability indicators to the median of the market range obtained for independent comparable companies. Paragraph 3.76 of the OECD Guidelines was correctly interpreted by the court of first instance as meaning that the provision primarily considers the analysis of the data for the year under assessment and, in the alternative, the data for previous years, so that the use of the aggregate comparison method is not required. Furthermore, paragraph 3.79 of the OECD Guidelines states that the use of multi-yearly data may only be used to improve the accuracy of the range of comparison, but in the present case the appellant has not shown in concrete terms the consequences of using that method.” “With regard to the estimation of transfer prices and the increase of the tax base by the amount of RON 3 815 806, the appellant-respondent submits that the difference in income between the expert’s report and the tax inspection report is due solely to the fact that the expert used the indicators from 7 companies and the tax authority used the indicators from 3 companies out of the 11 chosen. The criticism is unfounded because the expert and, by implication, the court of first instance, demonstrated that there were 4 other companies which were comparable in terms of the activity carried out and for which the tax inspection authorities considered that there was no information, but it was demonstrated by the evidence in the file that they should be included in the comparability sample.” Click here for English translation Click here for other translation Jurisprudence 4453-2020

“Petroleum Wholesale Corp” is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation and financial reports and other publicly available information, an assessment was issued for FY 2013 and 2014 resulting in additional taxes and surcharges of approximately $ 14 millions. Petroleum Wholesale Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities with a minor adjustment in the calculations for 2014. “…we consider that the Tax Administration adhered, in this case, to the powers conferred by law, and that there is no defenselessness, since it was verified that, in the course of the audit, several requests for information were made (as evidenced in the minutes of the proceedings in the background file), and then, in the governmental channel, after notification, the evidence requested by the plaintiff was admitted and practiced, in the first instance, having carried out the corresponding procedural stages.” “In view of the above, we consider that the taxpayer should have been consistent in the handling of the financial information used, and calculate the gross margin in accordance with the guidelines established in our legislation…” “In this sense, it is noteworthy that a method was chosen that weighs the margins, rather than the price of the product, when the part analysed is exclusively dedicated to the distribution of oil, a product that has a public market price, and in the Panamanian case, there is a suggested price for its purchase and sale to the consumer.” “Based on the calculations described in the previous point, no adjustment would be necessary to the calculation of the additional settlement for the period 2013, as it coincides with the work carried out by the tax authorities (see Table n.). 40 to sheet 309 of the background file). Therefore, we will only proceed with the adjustment of the taxpayer’s financial information for the 2014 period, specifically the cost of sales, in order to bring it to the median of the interquartile range, reflecting, for clarity, a comparative analysis of the adjustment made in the first instance, with the findings described in this resolution“ Click here for English translation Exp. 099-19

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal lids for jars etc. The Polish tax authorities had issued an tax assessment for FY 2009 – 2012 based on a TNMM benchmark study where financial results of comparable independent manufactures operating in the packaging industry showed that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities The Court of first instance held in favor of the tax authorities. The case was then brought before the Administrative Court of Appeal. In the Court’s view, the authorities did not subject the case to thorough verification in accordance with the legal standards on which the decision was based – including, in particular, the analysis of comparable transactions (CUP’s). In the Court’s opinion, the authorities have illegally equated the fact of the loss achieved by the applicant with the data resulting from the general financial ratios for the entire activity of the applicant in 2013. The economic rationality of the transaction should be assessed, in the opinion of the Court, through the prism of the benefit that a specific entity may obtain from the transaction and not in relation to general financial ratios of the compared entities covering the entirety of their activity for a given year. For as long as the tax authority does not prove that the difference in price conditions was only for the purpose of tax avoidance and did not result from economic conditions, the abovementioned Article 11 cannot be applied (cf. glossary to the judgment of the Supreme Court of 22 April 1999, Case No III RN 184/98, OSP 2000, No 5, p. 264). Click here for translation Poland vs C group August 2020

“G Pharma Ltd” is a distributor of generic and specialised pharmaceutical products purchased exclusively from affiliated suppliers. It has no significant intangible assets nor does it assume any significant risks. However for 17 consecutive years it has had losses. Following an audit, the tax authorities issued an assessment, where the income of G Pharma Ltd was determined by application of the Transactional Net Margin Method (TNMM). According to the tax authorities a limited risk distributor such as G Pharma Ltd would be expected to be compensated with a small, guaranteed, positive profitability. G Pharma Ltd disagreed with the assessment and filed an appeal. Judgement of the Court The court dismissed the appeal of G Pharma Ltd and upheld the assessment issued by the tax authorities. Excerpts “First, the reasons for the rejection of the final comparable sample of two companies were set out in detail and then the reasons for using the net profit margin as an appropriate indicator of profitability for the chosen method of documenting intra-group transactions were documented in a clear and substantiated manner, citing the relevant OECD guidelines, in order to establish whether or not the principle of equidistance was respected. Subsequently, since the claim concerning the inclusion of the company ……………………. in the final sample of comparable companies was accepted, the calculations of the arm’s length thresholds were provided in order to assess whether or not the arm’s length principle was respected. Following the above, the method of calculation of the resulting difference due to the non-respect of the arm’s length principle in the intra-group invoicing of the applicant’s transactions with the related companies of the group was analysed. Consequently, the applicant’s claims in respect of the first plea in law of the application are not upheld and are rejected as unfounded in law and in substance. Because the applicant itself, as documented in detail in the documentation file, arrived at the above method of documentation, which it nevertheless applied on incorrect bases. The choice of the gross profit margin as an appropriate indicator of profitability is incorrect as it is not provided for in the OECD guidelines” “based on the above, it would be expected that it would be compensated with a small, guaranteed, positive profitability. Instead, the picture it presents over time is one of a company with consistently disproportionately high losses from inception to the present day beyond any notion of business sense or contrary to normal commercial transactions, which demonstrates the need to adjust its intragroup pricing given the fact that all of its purchases and a significant portion of its operating expenses are intragroup transactions. Since the applicant’s claim that ‘in calculating the adjustment to its operating profitability, due to non-compliance with the arm’s length principle, account should also be taken of the adjustments to the tax adjustment already made by the accounting differences declared by the company’ cannot be accepted and is rejected, since this is a comparison between dissimilar figures, that is to say, a comparison between the applicant’s tax result and the accounting results of comparable companies in the sample. Because the applicant’s claim that, ‘any adjustment to its operating profitability should be based on the 1st quartile value and not that of the median’, is not accepted and is rejected, as, when assessing the operating profile, the applicant performs additional functions beyond a mere reseller and in particular than the comparable companies in the final sample as it has a disproportionately high cost of operating expenses to gross income compared to the comparable companies. Moreover, none of the comparable undertakings in the final sample is representative of the industry as they all have similar gross revenues to the applicant and therefore similar market share in the pharmaceutical industry. The choice of the median is the most appropriate because it eliminates possible comparability deficits (differences in factors and circumstances) that may exist between the applicant and the undertakings in the sample. Because the tax audit has come to the clear and well-founded conclusion that the pricing policy pursued by the applicant with its related undertakings does not comply with the arm’s length principle and is outside the acceptable limits. Since it follows from the foregoing that the contested income tax assessment measure was lawfully adopted, the applicant’s claims to the contrary must be rejected as unfounded.” Click here for English translation Click here for other translation ΔΕΔ 1582-2020

A Greek MNE Group, “Agri Ltd”, was active and specialised in wholesale trade of agricultural machinery, parts and tools. In 2012 a German company was established by the group to distribute products in the Central European region. The pricing of the goods sold by Agri Ltd. to the German distributor was determined by testing the income of Agri Ltd using a TNMM. Following an audit the tax authorities issued a revised tax assessment, where the pricing of the inter-company transactions had instead been determined by applying a traditional cost plus method where the German subsidiary was the tested party. The resulting assessment was appealed by Agri Ltd. Judgement of the Court The court dismissed the appeal of Argri Ltd. “Since the tax audit, documented and clearly concluded that the cost plus margin method should have been chosen for the sales of the applicant to its subsidiary, the findings of the audit, as recorded in the 18.12.2019 Partial Income Tax Audit Report, are considered valid, acceptable and fully justified. Since it is clear from the above that the impugned income tax adjustment order was lawfully issued, the applicant’s contentions to the contrary are rejected as unfounded.” Click here for English translation Click here for other translation ΔΕΔ Α 1514-2020

At issue was the question of whether the Danish tax authorities had been entitled to make a discretionary assessment of the taxable income of Icemachine Manufacturer A/S due to inadequate transfer pricing documentation and continuous losses. And if such a discretionary assessment was justified, the question of whether the company had lifted the burden of proof that the tax authorities’ estimates had been clearly unreasonable. The Court ruled that the transfer pricing documentation provided by the company was so inadequate that it did not provide the tax authorities with a sufficient basis for determining whether the arm’s length principle had been followed. The tax authorities had therefore been entitled to make a discretionary assessment of the taxable income. For that purpose the Court found that the tax authorities had been justified in using the TNM method with the Danish company as the tested party, since sufficiently reliable information on the sales companies in the group had not been provided. Click here for translation (Part I) Click here for translation (Part II) DK Icemachine manufacturer june 2020

Auto Parts Ktf’s principal activity is the manufacture and sale of passenger cars and spare parts. Between 1 January 2013 and 31 December 2014, it sold its products to its affiliated undertakings and to unrelated parties. Auto Parts Ktf had prepared transfer pricing documentation, in which it determined the arm’s length price using the transaction net margin method (TNMM). Auto Parts Ktf identified 9 comparable companies for 2013 based on a benchmark using the Amadeus database version of 17 April 2014, and based on the financial documents of these companies for 2010-2012, it defined the interquartile range of the normal price range as the market price range between 2.13% and 9.78%. For 2014, it did not update its benchmark, but fixed the minimum-maximum range as in 2013 and considered this as the market price range. For both years, the applicant examined the total operating profit of the manufacturing activity on a consolidated basis, which showed a profit of 2,22 % in 2013 and 1,52 % in 2014. As this fell within the interquartile range for 2013 and 2014, it made no adjustment. The tax authority examined the applicant’s transfer pricing documentation during the course of its audit, and accepted that the sales of the two products should be treated as a single transaction and priced using the TNMM method. It did not accept, however, that Auto Parts Ktf had examined the arm’s length nature of its overall operating results. The tax authority found that Auto Parts Ktf made a loss of -0.92% on its related party transactions in 2013 and 0.84% in 2014. It recorded that the net profit margin realised on related party transactions was below the lower end of the market price band (lower quartile 2.10%) in both years. In view of this, it increased its corporate tax base by HUF 6,665,000,227 in 2013 and HUF 8,331,347,000 in 2014. It assessed a total of HUF 1,071,880,000 in corporate taxes against the applicant, on top of which it charged a tax penalty and a late payment penalty. The Administrative Court decided in favour or Auto Parts Ktf and an appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court. The Court dismissed the appeal of Auto Parts Ktf and remanded the case to the court of first instance. “[24] One of the main areas of international taxation is the determination of the appropriate price for tax purposes and the adjustment of the taxable amount in the light of this determination. The adjustment is essentially based on a comparison of the transfer price between related enterprises under Article 9 of the Model Convention (the price at which an enterprise supplies goods or intangible assets or services to its related enterprise) with the arm’s length price between unrelated parties. The purpose of the transfer pricing analysis is to review and analyse in detail whether the parties in the related party transaction have deviated from the terms and conditions that would also apply to unrelated parties and whether and to what extent this has had the effect of causing the taxable tax base of the taxpayer to differ from what it would have been had the terms and conditions not been different. By adjusting these differences, the effect of any distortions of the tax base due to related party transactions is neutralised. The Court of First Instance erred in accepting the applicant’s method of calculation, namely that the operating result and, in that context, the statement of profit margin were calculated for the company as a whole, for the total operating result, and not examined separately. In doing so, it ignored the essence of transfer pricing, namely that the profit rate in related party transactions must be calculated separately from the profit rate in unrelated party transactions. A calculation which works out the profit rate on the basis of total operating profit is wrong and cannot lead to an appropriate result for transfer pricing purposes. [25] The aggregated approach relied on by the applicant does not provide guidance as to the basis for the calculation, namely the operating result, but defines the cases in which it is possible to depart from the main rule of a transaction-by-transaction analysis and when they can be treated as a whole. The Curia fully agrees with the defendant’s position in this respect, which is set out in detail in paragraph 4 of page 14 of the defendant’s decision. The method of calculation can be followed precisely on page 43 of the decision of the first instance, and the statement of profit margins for affiliated undertakings is substantiated and correct. [26] In its decision, the defendant correctly recalculated the operating result between the applicant’s affiliated undertakings, accepted the method and filtering used by the applicant and the market price range determined on this basis, including the application of the applicant’s calculated interquartile range for 2013. All these factors were used to determine the adjusted profit and the corporation tax payable. [27] The Curia agreed with the defendant that the plaintiff’s incorrect determination of the operating result between related companies led to the tax difference in the decision. In its application for review, the defendant did not challenge the first instance court’s rejection of the use of the interquartile range in determining the 2014 result, and the Curia therefore did not address the relevant part of the first instance court’s judgment. Therefore, the order of the Court of First Instance to set aside the judgment of the Court of First Instance and to initiate new proceedings is correct, as explained above, as amended. In the new procedure, the corporation tax difference for 2014 for the applicant must be determined by taking into account the minimum-maximum market price range worked out by the applicant and accepted by the defendant, on the basis of the operating profit adjustment carried out by the defendant.” Click here for English translation. Click here for other translation Kfv.35618_2019_11

Results in a Danish company engaged in distribution of pharmaceuticals were significantly below the arm’s length range of net profit according to the benchmark study, but by disregarding annual goodwill amortization of DKK 57.1 million, the results were within the arm’s length range. The goodwill being amortized in Pharma Distributor A A/S had been determined under a prior acquisition of the company, and later – due to a merger with the acquiring danish company – booked in Pharma Distributor A A/S. The main question in the case was whether Pharma Distributor A A/S were entitled to disregard the goodwill amortization in the comparability analysis. The national tax court had ruled in favor of the company, but the national court reached the opposite result. Thus, the National Court found that the goodwill in question had to be regarded as an operating asset, and therefore the depreciation had to be regarded as operating expenses when calculating the net profit (EBIT margin). In 2017 the Danish tax tribunal found in favor of Pharma Distributor A A/S However, The Danish National Court found that the controlled transactions had not been priced in accordance with the arm’s length principle in section 2 (2) of the Tax Assessment Act. 1, and that the tax authorities was therefore basically justified in assessing the income of Pharma Distributor A A/S. But there was no basis for adjustment for the income year 2010, where the EBIT margin of the company (including goodwill amortization) was within the interquartile range of the benchmark. The National Court further found that Pharma Distributor A A/S had not demonstrated that the companies whose results were included in the benchmark possessed goodwill that was simply not capitalized and which corresponded approximately to the value of the goodwill in Pharma Distributor A A/S. Therefore, the National Court did not find that adjusting for goodwill amortization in the comparability analysis, would make the comparison more correct. Pharma Distributor A A/S also claimed that special commercial conditions (increased price competition, restructuring , etc.) and not incorrect pricing had led to lower earnings. The Court found that such conditions had not been demonstrated by the company. On this basis, the National Court found that the tax authorities was entitled to make the assessment of additional income in FY 2006-2009, but not for FY 2010. The court found that, when adjusting the taxable income, an individual estimate must be made for each year, based on what income the defendants could be assumed to have obtained if they had acted in in accordance with the arm’s length principle. The court referred the case for re-assessment of the taxable income for FY 2006-2009. Click here for translation SKM2020-105-olrn

To acquire companies and resell them with capital gains a French Investment Fund distributed the capital of its investors (€ 5.4 billion in equity) between a French Fund Commun de Placement à Risques (FCPRs) and British Ltds managed by the French Investment Fund. For the purpose of acquiring the [X] group (the target), the French Investment Fund set up three legal entities in the Netherlands, [Y] UA, [B] BV, and [C] BV (the acquisition holding company). These three joint taxed entities are shown as Fiscal unit [A] below. The capital to be used for the acquisition of [X] group was divided into four FCPRs that held 30%, 30%, 30% and 10% in [Y] respectively. To get the full amount needed for the acquisition, [Y] members provided from their equity to [Y]: (i) member capital (€ 74.69 million by the FCPRs, € 1.96 million by the Fund Management, € 1.38 million by [D]) and (ii) investment in convertible instruments (hybrid loan at 13% per annum that is not paid, but added interest-bearing: € 60.4 million from the FCPRs and € 1.1 million from [D]). Within Fiscal unit [A], all amounts were paid in [B], which provided the acquisition holding company [C] with € 72.64 million as capital and € 62.36 million as loan. [C] also took out loans from third parties: (i) a senior facility of € 113.75 million from a bank syndicate and (ii) a mezzanine facility of € 35 million in total from [D] and [E]. On November 22, 2010, the French [F] Sàrl controlled by the French Investment Fund agreed on the acquisition with the owners of the target. “Before closing”, [F] transferred its rights and obligations under this agreement to [C], which purchased the target shares on January 21, 2011 for € 265 million, which were delivered and paid on January 31, 2011. As a result, the target was removed from the fiscal unit of the sellers [G] as of 31 January 2011 and was immediately included in the fiscal unit [A]. [C] on that day granted a loan of € 25 million at 9% to its German subsidiary [I] GmbH. Prior to the transaction the sellers and the target company had agreed that upon sale certain employees of the target would receive a bonus. The dispute is (i) whether the convertibles are a sham loan; (ii) if not, whether they actually function as equity under art. 10 (1) (d) Wet Vpb; (iii) if not, whether their interest charges are partly or fully deductible business expenses; (iv) if not, or art. 10a Wet Vpb stands in the way of deduction, and (v) if not, whether fraus legis stands in the way of interest deduction. Also in dispute is (vi) whether tax on the interest received on the loan to [I] GmbH violates EU freedom of establishment and (viii) whether the bonuses are deducted from the interested party or from [G]. Amsterdam Court of Appeal: The Court ruled that (i) it is a civil law loan that (ii) is not a participant loan and (iii) is not inconsistent or carries an arm’s length interest and that (iv) art. 10a Wet Vpb does not prevent interest deduction because the commitment requirement of paragraph 4 is not met, but (v) that the financing structure is set up in fraud legislation, which prevents interest deduction. The Court derived the motive from the artificiality and commercial futility of the financing scheme and the struggle with the aim and intent of the law from the (i) the norm of art. 10a Corporate Income Tax Act by avoiding its criteria artificially and (ii) the norm that an (interest) charge must have a non-fiscal cause in order to be recognized as a business expense for tax purposes. Re (vi), the Court holds that the difference in treatment between interest on a loan to a joined tax domestic subsidiary and interest on a loan to an non-joined tax German subsidiary is part of fiscal consolidation and therefore does not infringe the freedom of establishment. Contrary to the Rechtbank, the Court ruled ad (viii) that on the basis of the total profit concept, at least the realization principle, the bonuses are not borne by the interested party but by the sellers. Excerpts regarding the arm’s length principle “In principle, the assessment of transfer prices as agreed upon between affiliated parties will be based on the allocation of functions and risks as chosen by the parties. Any price adjustment by the Tax and Customs Administration will therefore be based on this allocation of functions and risks. In this respect it is not important whether comparable contracts would have been agreed between independent parties. For example, if a group decides to transfer the intangible assets to one group entity, it will not be objected that such a transaction would never have been agreed between independent third parties. However, it may happen that the contractual terms do not reflect economic reality. If this is the case, the economic reality will be taken into account, not the contractual stipulation. In addition, some risks cannot be separated from certain functions. After all, in independent relationships, a party will only be willing to take on a certain risk if it can manage and bear that risk.” “The arm’s-length principle implies that the conditions applicable to transactions between related parties are compared with the conditions agreed upon in similar situations between independent third parties. In very rare cases, similar situations between independent parties will result in a specific price. In the majority of cases, however, similar situations between independent third parties may result in a price within certain ranges. The final price agreed will depend on the circumstances, such as the bargaining power of each of the parties involved. It follows from the application of the arm’s-length principle that any price within those ranges will be considered an acceptable transfer price. Only if the price moves outside these margins, is there no longer talk of an arm’s-length price since a third party acting in

Prime Plastichem Nigeria Limited is a private limited company which engages in the business of trading in imported plastics and petrochemicals. Prime Plastichem Nigeria Limited had applied an internal CUP in determining the arm’s length price of its purchase of petrochemical products from its offshore related party, Vinmar Overseas Limited by comparing the controlled prices of products with the prices whereby the products were sold to third party customers. However, in 2014, Vinmar Overseas Limited did not sell to third party customers in Nigeria and there was no basis for applying the internal CUP. Prime Plastichem Nigeria Limited instead applied the TNMM. In 2016, the Nigerian Tax Authorities reviewed the transfer pricing and disregarded the CUP analysis applied in the 2013 TP documentation, applied TNMM to both 2013 and 2014 transactions, and issued an assessment of ₦1.74 billion. Both parties disagreed on the applicable profit level indicator (PLI) to be adopted in applying the TNMM and the comparables selected in the TNMM analysis. Prime Plastichem Nigeria Limited appealed to the Tax Appeal Tribunal and on 19 February 2020, the Tribunal upheld the assessment. The Nigerian Tax Appeal Tribunal held that the ₦1.74 billion assessment issued by the Nigerian Tax Authorities to Prime Plastichem Nigeria Limited with respect to the company’s TP audit was lawful. Prime Plastichem Nigeria Limited had not been able to provide satisfactory explanation for its use of CUP for 2013 where there was insufficient information available to reliably apply the CUP. Furthermore, Prime Plastichem Nigeria Limited had not applied the TNMM method consistently in 2014 across years. The Tribunal agreed with the Tax authorities that Gross Profit Margin was the applicable PLI especially because the Tax authorities was able to establish that the Gross Profit Margin is in line with best practices and the fact that it also took into account the various factors enumerated by the OECD. Nigeria-vs-prime-plastichem-nig-ltd

The issue in this case was the pricing of advertising services acquired by ACTRAD s.r.o. from related parties PRESSTEX PRINT and PRESSTEX MEDIA . According to the authorities ACTRAD instead of acquiring advertising and promotional services directly from the sports clubs (which was possible), used the services of intermediaries PRESSTEX PRINT and PRESSTEX MEDIA, who increased the price of the services provided significantly (290, 229 and 102 times), without adding any value to the transaction. The final price paid for the advertisement thus increased 290 times in 2011, 229 times in the first half of 2012 and 102 times in the second half of 2012 compared to the initial invoice. This increase occurred while the content, scope and form of the services remained unchanged. The result of the arrangement was a reduction in the tax bases of ACTRAD s.r.o. The tax authorities issued an assessment of additional income taxes for FY 2011 and 2012 in a total amount of ~CZK 80.000.000. ACTRAD s.r.o. disagreed with the assessment and brought the case to court. The regional court ruled in favor of the tax authorities and this decision was then appealed the decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court dismissed the appeal of ACTRAD s.r.o. as unfounded. “As has been repeatedly stated above, the tax authority, in full compliance with the wording of the law and the relevant case-law, sought out the entities to which advertising was also provided at the time and in the places in question (or, alternatively, obtained the prices of advertising directly from the provider). He then determined the reference price as the highest amount of the range found. This procedure does not require any expertise beyond that which is normally available to the tax authorities’ officials. The Court of Cassation also finds no merit in the complainant’s objection that the Regional Court should have departed ‘from the established judicial practice of evaluating expert reports’.” “In the opinion of the Supreme Administrative Court, the tax administration authorities acted in full compliance with the legal provisions and did not commit any faults for which the Regional Court should have annulled their decision. In the light of the above (proof of the existence of connected persons and different prices), it was for the complainant to explain and substantiate to its satisfaction the difference between the prices found. The complainant did not fulfil that obligation, since during the tax (and court) proceedings it did not allege or prove rational reasons for incurring costs higher than the normal price between persons in normal commercial relations.” “The Supreme Administrative Court did not find any other defects in the decisions of the tax administration authorities and the Regional Court for which their decisions should be annulled. Their conclusions are fully supported by the legislation and the administrative file and are fully reasoned. The Court of First Instance agrees with their assessment and adopts it in full and refers to it in detail. For that reason, the Court of Cassation could not even find it possible for the applicant to dispute their reasoning.” Click here for English Translation Click here for other translation 0176_7Afs_1900026A_20200213103130_20200303094022_prevedeno

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

“AC S.A” is engaged in sale of ventilation, heating and cooling equipment in Panama. AC S.A pays royalties for use of IP owned by the parent company of the AC Group. Following a audit carried out by the Tax Administration in Panama it was concluded that the profits of AC S.A 2.04% was below the arm’s length range determined by application of a TNM-method. After removing non-comparables from the benchmark study provided by the company, the interquartile range had a lower quartile of 6.15% and a median of 8.41%. Hence an assessment of additional taxable income was issued for FY 2014, bringing the profits of AC S.A up to the median (8.41%) of the adjusted benchmark. AC Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities, but made adjustment to the benchmark resulting in a lower quartile of 3.16% and a median of 6.2%. The adjustment issued by the tax authorities was therefore reduced by one third. Click here for English translation Panama AC Company

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €162,506,660. Fertilizer BV is the parent company of a fiscal unity for corporation tax (hereinafter: FU). It is a limited partner in a limited partnership under Dutch law, which operates a factory in [Country 1]. The interested party borrowed the money for the capital contribution to the limited partnership from a wholly-owned subsidiary. The share in profits from the limited partnership was expressed as profit from a permanent establishment. In dispute was the amount of interest attributable to the permanent establishment. The court followed the inspector in allocating – in connection with the [circumstances] in [Country 1] – 75% equity and 25% loan capital to the PE. Furthermore, the FU had deposits and loans in USD. These positions were partly hedged by forward exchange contracts. Fertilizer BV valued these deposits and loans at the historical acquisition price or lower value in use. In dispute between the parties was whether and to what extent the positions should be valued as connected. In the opinion of the court, the mere fact that deposits and loans were denominated in USD did not mean that they should be valued as connected. The court considered part of it to be connected. Fertilizer BV is a production company. It sells its products to affiliated sales organisations at prices derived from market prices. After the commissioning of a new factory, Fertilizer BV produced more than before (hereinafter: the surplus). On the basis of two agreements, Fertilizer BV sold the surplus, at cost price with a surcharge of 5%, to a subsidiary established abroad. In the opinion of the court, no real commercial risk had been transferred to the subsidiary and the inspector rightly corrected the taxable amount. Click here for English Translation Click here for other translation ECLI_NL_RBZWB_2019_4920

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. Judgement of the Court The Court dismissed the appeal of Eli Lilly CR s.r.o. and decided in favour of the tax authorities. According to the court marketing services constituted partial supply that was part of the distribution activities and should have been considered, from the VAT perspective, a secondary activity used for the purpose of obtaining benefit from the main activity. Therefore, Eli Lilly CR s.r.o should have been paying VAT on income from the marketing services. “a customer purchasing medicinal products from the claimant is the recipient of a single indivisible supply (distribution and marketing),” “the aim of such marketing is certainly to increase the customer awareness of medicines distributed by the claimant, and, as a result to increase the marketability of these medicines” For Eli Lilly Export S.A., marketing was a secondary benefit. Eli Lilly CR s.r.o. was the owner of the products when the marketing services were provided. Eli Lilly Export S.A. was not the manufacturer of the products and did not hold the distribution license for the Czech market. Therefore, Eli Lilly Export S.A. could not be the recipient of the marketing services provided by Eli Lilly CR s.r.o. Hence, the payment received by Eli Lilly CR s.r.o. for marketing services was in fact “a payment received from a third person”. An appeal to the Supreme Administrative Court was filed on 14 February 2020 by Eli Lilly CR. Click here for English Translation Click here for other translation Czech vs Eli Lilly 2020

The tax authority had set the price range for “APA Ktf’s” request for an advance pricing arrangement (APA) at 12.50 to 22.50 basis points. According to the tax authorities, it follows from points 3.61 and 3.62 of the Guidelines that it is only appropriate to adjust the arm’s length price for such transactions to a level close to the mid-point of the range if there is a comparability gap. In the present case, however, it had not been established that there are any shortcomings in comparability, so the first turn of paragraph 3.62 applies: any point in the range, including the mid-point, is in accordance with the arm’s length principle. Judgement of the Court of Appeal. The Court of Appeal pointed out that the applicant had applied for the determination of the normal market price under Article 132/B of the Art. “[37]Defendant [tax authorities] argued in its application for review that, under paragraphs 3.61 and 3.62 of the Guidelines, it is only appropriate to adjust the arm’s length price for such transactions to a level close to the mid-point of the range if there are comparability gaps. In the present case, however, the defendant has not established that there are any shortcomings in comparability, so the first turn of point 3.61 applies: any point in the range, including the mid-point, is in line with the arm’s length principle. In other respects, the defendant argues that, even if there are no shortcomings in comparability, only the extreme values of the range can be used, and not other values, such as the mean value: this cannot be combined with the interpretative criteria required by Article 28 of the Fundamental Law. [38] In its application for review, the defendant also argued that the principle of the proper exercise of rights under Article 1(2) of the Tao Law must be taken into account when applying Article 18(1) of the Tao Law. However, no breach of that fundamental principle of the Tao Law was found in the decision of the defendant which was the subject of the judicial review, nor is it found in the upheld decision of the first instance. Page 37, paragraph 3 of the first instance decision states in general terms, without mentioning the place of the legislation, that “The tax authority’s … transfer pricing adjustment up to the nearest point of the band is not based on Article 97(6) of the Tax Code, but on the relevant provisions of the Tao. In the absence of a specific provision of authority to that effect, the court of first instance could not rule on the matter by a final judgment and, consequently, it cannot be the subject of a review procedure. In the absence of a final judgment, the Curia also failed to analyse the question, following the applicant’s counterclaim, whether transfer pricing can be regarded as a rule or tax advantage (tax exemption, tax reduction) affecting the tax liability or tax liability affected by Section 1(2) of the Tao.tv. [39] In addition to the facts of the case, the applicant was required to determine the value according to which the condition of the controlled transaction had to be corrected, pursuant to Article 18(1) of the Tao.tv. In the absence of a provision in the Tao.tv., the method of correction was, by virtue of § 31(2)(b) of the Tao.tv., the first turn of point 3.62 of the Guidelines: any point within the range corresponds to the arm’s length price. On the basis of the actual content of Article 18(1) of the Tao Law, the Court of First Instance correctly concluded that neither the APA Decision, nor the Guidelines, nor the Tao Law, implied that, in the case of several normal market prices that can be designated in a given range, the adjustment for a consideration applied outside that range can only be made to the nearest extreme value. [40] In the light of the above, the Curia upheld the judgment of the court of first instance on the basis of Paragraph 275(3) of the Hungarian Civil Code. Content of the decision in principle [41] In the case of an arm’s length price set in a decision fixing the arm’s length price (advance pricing arrangement), the consideration applied outside the arm’s length range may be adjusted not only to the nearest extreme value but also to any element of the range, in accordance with Section 18(1) of the Tao.tv.” Click here for English translation Click here for other translation 35-504

Company A is a Portuguese company in Group G (with an Indian parent) engaged in the production and sale of footwear and fashion accessories. Company C and Company D are also subsidiaries of the Group. Company A sold raw materials and goods to Company C and Company D, but also to unrelated parties. Company A had determined the pricing of the controlled transactions using the TNMM. External comparables were found using a commercial database. The Portuguese tax authority instead applied the TNMM using exclusively internal comparables, and on that basis it was concluded that the pricing of the controlled transactions had not been at arm’s length. The Tribunal found that the method applied by the tax authority was the most appropriate method for pricing the controlled transactions. Part 1 – Click here for translation Part 2 – Click here for translation P511_2018-T - 2019-10-10 - JURISPRUDENCIA

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal closures. The tax authorities had issued an tax assessment for FY 2009 – 2012 based on a benchmark study. Decision of the Administrative Court The Court upheld the decision of the tax authorities concerning income for the tax year from 01/01/2012 to 31/12/2012. In 2012, the Polish manufacturing site operated by producing lids for jars. In the course of the audit proceedings against the Party regarding corporate income tax for 2012, the first instance authority determined – based on a comparative analysis of the financial results of similar independent manufactures operating in the packaging industry on the market in Central and Eastern Europe, that this market showed an upward trend and in none of the years 2009-2012 this industry recorded a downward trend, reaching in the audited year 2012 In the case of three selected domestic entrepreneurs selected for analysis profitability based on EBIT from 8.52 % to 13.13%, and in the case of companies operating on markets in Central and Eastern European countries – the interquartile range determined on the basis of the EBIT ratio: upper quartile 10.30%, median: 8.69%, lower quartile 7.74%. The above circumstances allowed the authority of first instance to state that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities Thus, in the opinion of the Court, it became necessary to determine the Party’s income. The above conclusions – regarding the lack of application by the Party in transactions with related entities of market prices of goods sold – the authority derived from the conducted comparative analysis of entities dealing with identical activities of the Party (i.e. the production of food packaging). The tax authorities subjected this analysis to the entities selected by it that have no connections with other entities, selected in terms of criteria such as: area of ​​activity, PKW codes, turnover, period of activity, and then (due to the fact that the above typing criteria allowed to obtain a comparative base consisting of only three units) extended them by a geographical criterion, then is other Central […] countries, obtaining a database of six entities in total. Profitability based on the EBIT ratio was compared in this group (according to the formula: operating profit (operating loss / operating income x 100%). obtaining a database of six entities in total. Profitability based on the EBIT ratio was compared in this group (according to the formula: operating profit (operating loss / operating income x 100%). obtaining a database of six entities in total. Profitability based on the EBIT ratio was compared in this group (according to the formula: operating profit (operating loss / operating income x 100%). Click here for translation Poland 2019

Following an audit Broker A SRL was ordered to submit corrective statements on the corporate income tax for the tax years 2016 and 2017, and not to take over the tax loss from previous years, in the amount of RON 62,773,810 in 2016 and 2017. The tax authorities had found shortcomings in the comparability study drawn up by the company and replaced it with their own study. According to Broaker A SRL the transfer pricing adjustment was unlawful: the measure of reworking the comparability study has no legal basis and was not reasoned by the tax authorities; the findings of the tax inspection bodies are based on a serious error concerning the accounting recognition of A. BV’s income in its records; unlawfulness as regards the adjustment of income in respect of support services. ANAF has made serious errors of calculation by reference to its own reasoning in establishing the adjustments. unlawfulness of the tax decision in relation to the adjustment of expenditure on strategic management services. The findings of the tax inspection team lead directly and directly to double taxation at group level of this income, to which the following criticisms are made: the tax authorities erroneously adjusted income relating to strategic management services which were not the subject of the Support Services Contract between A. SRL and A. BV and which were not provided by the company; the imposition of the obligation to re-invoice A. BV for management services leads to double taxation at group level. Judgement of Supreme Court The Supreme Court found the appeal of Broker A SRL unfounded and upheld the assessment of the tax authorities. Click here for English translation Click here for other translation Rom Bro Sep 2019 3818-2019

The Absolut Company AB had been issued an assessment of additional taxable income of SEK 247 mio. The assessment was based on the position that (1) The Absolut Company AB had been selling below the arm’s length price to an US group company – The Absolut Spirit Company Inc. (ASCI), and (2) that acquired distribution services from ASCI that had been priced above the arm’s length price. In 2018 the Swedish Administrative Court of Appeal ruled in favor of the tax administration. The Swedish Supreme Administrative Court has now ruled in favor of The Absolute Company AB. According to the Supreme Administrative Court the Swedish Tax Agency did not fulfill the burden of proof. The Supreme Administrative Court further states that the full range of results in the benchmark study could be applied and that a multiple year analysis of the tested party data can be used to support an arm’s length result. Click here for translation Sweden vs Absolut AB 2019

Auto Parts Ktf’s principal activity is the manufacture and sale of passenger cars and spare parts. Between 1 January 2013 and 31 December 2014, it sold its products to its affiliated undertakings and to unrelated parties. Auto Parts Ktf had prepared transfer pricing documentation, in which it determined the arm’s length price using the transaction net margin method (TNMM). Auto Parts Ktf identified 9 comparable companies for 2013 based on a benchmark using the Amadeus database version of 17 April 2014, and based on the financial documents of these companies for 2010-2012, it defined the interquartile range of the normal price range as the market price range between 2.13% and 9.78%. For 2014, it did not update its benchmark, but fixed the minimum-maximum range as in 2013 and considered this as the market price range. For both years, the applicant examined the total operating profit of the manufacturing activity on a consolidated basis, which showed a profit of 2,22 % in 2013 and 1,52 % in 2014. As this fell within the interquartile range for 2013 and 2014, it made no adjustment. The tax authority examined the applicant’s transfer pricing documentation during the course of its audit, and accepted that the sales of the two products should be treated as a single transaction and priced using the TNMM method. It did not accept, however, that Auto Parts Ktf had examined the arm’s length nature of its overall operating results. The tax authority found that Auto Parts Ktf made a loss of -0.92% on its related party transactions in 2013 and 0.84% in 2014. It recorded that the net profit margin realised on related party transactions was below the lower end of the market price band (lower quartile 2.10%) in both years. In view of this, it increased its corporate tax base by HUF 6,665,000,227 in 2013 and HUF 8,331,347,000 in 2014. It assessed a total of HUF 1,071,880,000 in corporate taxes against the applicant, on top of which it charged a tax penalty and a late payment penalty. Judgement of the Administrative Court. The Court allowed the appeal of Auto Parts Ktf. “The applicant has also duly explained why its pricing mechanism is determined by the local market, a position supported by the applicant’s expert. For example, in countries where own brand cars are available, it can be stated without further proof that … is less able to penetrate the market and that this has an obvious impact on its pricing policy. It can also be stated without further proof that the company’s aim is to be present on as many markets as possible and to sell as many products as possible in order to reduce fixed costs. The Court also notes that the expert clearly stated that the OECD Guideline 3.57 does not require the normal market value range to be narrowed down to the interquartile range. This is only possible if data on comparable transactions is limited. Defendant used the interquartile range for 2014 on the basis that the overall comparability of the companies included in the comparison was lower because there was no independent car manufacturer in the market. However, this does not justify the application of the above-mentioned statistical method. The companies included in the comparison all have the same activities – otherwise they would not have been included in the screening result – and the screening provided sufficient data, so there was no real reason for the tax authority to narrow the minimum-maximum range based on the operating results of the companies included in the comparison for 2014. In conclusion, it can therefore be concluded that the applicant correctly treated its operating results as a whole in the context of the determination of the arm’s length price. The correctness of the method applied was clearly confirmed by the expert and it can therefore be concluded that the defendant reached the conclusion, without justification and incorrectly, that only the result of sales to affiliated companies could be examined in the context of determining the arm’s length price and therefore incorrectly adjusted the corporate tax base. In the light of the above, the court ruled as set out in the operative part, in that the annulment only affects the provisions of the defendant’s decision and the decision at first instance which are challenged in the action. The tax authority at first instance may not, in the repeated proceedings, adjust the applicant’s corporation tax base on the ground that only its transactions with related parties may be taken into account in determining the arm’s length price. Nor can it adjust the corporate tax base on the ground that the interquartile range applies for 2014. Accordingly, it is obliged to adjust the other tax consequences, such as the amount of the tax penalty and the amount of the late payment penalty. ” Click here for English translation. Click here for other translation K.27084_2019_8

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate and carried out its own analysis on the basis of the comparative data from 66 transactions. In addition, data posted on the internet on the website of the National Bank of Poland was consulted. The summary showed that in the aforementioned period, the average interest rates applied by Polish financial institutions for loans granted to enterprises in EUR ranged from 2.4% to 3.6%. Furthermore, by letters in April 2017 the tax authorities requested information from domestic financial institutions regarding the interest rates and commission rates for loans granted to commercial companies in the period from June 2013 to September 2014. The information received showed that the interest rates applied by the banks were set as the sum of: the EURIBOR base rate (usually three months) and the bank’s margin. Between June 2013 and September 2014, interest rates varied and ranged from 0.515% to 6.50%. On the basis of the information received an assessment was issued where the interest rate on the three inter group loans had been lowered from 9% to 3.667% resulting in lower interest expenses and thus additional taxable income. Shopping Centre Lender sp.k. filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been followed correctly by the tax authority. Judgement of the Administrative Court The Administrative Court issued a judgement in favour of Shopping Centre Lender sp.k. The Court found that the tax authorities procedure for estimating income had been in breach of the provisions of the Act and the Ordinance on transfer pricing adjustments. Click here for English Translation Click here for other translation Poland vs A Lender May 2019 AC

In this case Nestlé Zambia had reported continuous losses for more than five years. Following an Transfer Pricing audit covering years 2010 – 2014, the tax administration  issued an assessment whereby profits were adjusted to ZMW 56,579,048 resulting in additional taxes of ZMW13,860,103 plus penalties and other levies. The assessment was based on Nestlé Zambia being characterised as a limited risk distributor instead of a full fledged dristributor. Nestlé  Zambia held that the tax administrations characterisation of the entity as a limited risk distributor was incorrect and that the assessment had not been performed in accordance with the arm’s length principle.  The Tribunal ruled in favor of Nestlé, except for it’s position on the characterisation of the entity as a limited risk distributor (ground four cf. the excerp below). “The summary of our findings is  that  there  was  basis  for  initiating  a  transfer pricing audit in this case because as has been stated in  Paragraph  1.129  of  the OECD Guidelines that, “When an associated enterprise consistently realises losses while the Multinational enterprise group as a whole is profitable, the facts could trigger some special scrutiny of transfer pricing issues.”  We opine that the Appellant being in continuous loss making position,  triggered  an  enquiry  into  transfer  pricing  issues but the manner in  which  the  Respondent  went  about  the  enquiry  was wrong. There could be transfer pricing issues that require  scrutiny  particularly  in light of  the  testimony  from  AWl  that  the  Appellant  is  continuously  making losses while it’s related parties are making profits. The Appellant succeeds in Grounds One, Two, Three, Five and Six but fails in Ground Four. The net effect is therefore that the assessment by the Respondent that the Appellant was liable to pay a sum of ZMW13,860,103.00 was wrongly arrived at. This is so because the said assessment was based on inaccurate transfer pricing results emanating from use of an inappropriate transfer pricing method, disproportionate comparables and an unjustified add back of unrealized exchange losses. By reason of the foregoing, the assessment by the Respondent is accordingly and hereby set aside.” Zambia vs Nestle March 2019

The tax administration had issued an adjustment to the taxable profit of IKEA’s subsidiary in Spain considering that taxable profit in years 2007, 2008, and 2009 had not been determined in accordance with the arm’s length principle. In 2007 taxable profits had been below the interquartile range and in 2008 and 2009 taxable profits had been within the interquartile range but below the median. In all years taxable profits had been adjusted to the median in the benchmark study. Judgement of the Court In regards to the adjustment mechanism – benchmark study, interquartile range, median – the Court provide the following reasoning “However, the OECD Guidelines in point 3.60 provide that “if the relevant terms of the controlled transaction (e.g. price or margin) are within the arm’s length range, no adjustment is necessary”. Conversely, under rule 3.61, if the relevant terms of the controlled transaction “(e.g., price or margin) are outside the arm’s length range determined by the tax administration, the taxpayer should be given the opportunity to argue how the terms of the controlled transaction satisfy the arm’s length principle, and whether the result falls within the arm’s length range (i.e., that the arm’s length range is different from the arm’s length range determined by the tax administration). If the taxpayer is unable to demonstrate these facts, the tax administration must determine the point within the arm’s length range to which to adjust the condition of the controlled transaction”. And, finally, rule 3.62 provides: “In determining this point, where the range comprises highly reliable and relatively equal results, it may be argued that any one of them satisfies the arm’s length principle. Where some defects in comparability persist, as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (e.g. median, mean or weighted mean, depending on the specific characteristics of the data) in order to minimise the risk of error caused by defects in comparability that persist but are not known or cannot be quantified”. In the Board’s view, the appellant should be upheld on this point. Indeed, as we have indicated, the Inspectorate was consistent, it gave the same treatment to the 2007 and 2008 financial years, as it understood that it should apply the median of 4.1%, in accordance with point 3.62 of the Guideline, it was appropriate to use measures of central tendency such as the median, specifically because it considered that “the study has comparability defects given that the companies included in the samples have lower sales volumes” – p. 38 of the Ruling. 38 of the Resolution. Logically, the circumstances justifying the use of the median were valid for both 2007 and 2008, as the reasons were the same. However, the TEAC, starting from the fact that the Inspectorate assumes the opinion of PwC, affirms that the data obtained will never be perfectly reliable, not being congruent “that the sample is used as an analysis of comparability as well as to extract data on which the regularisation itself is based, to then be rejected for the effect that could be favourable to the interested party, such as for the application of rule 3.60 of the aforementioned Guidelines, which excludes adjustments when they are within the range”. Therefore, it annulled the Agreement on this point, as the entity was within the range, remember that the interquartile range was between 2.1% and 7.6% and in 2008 it was at 2.42%. In other words, for the TEAC it was not possible to apply the rule of art. 3.62 on which the Tax Inspectorate based itself, because in 2008, the company was within the margins required by art. 3.60, which was not the case in 2007. However, in our opinion it is clear that if the ROS is outside the limits of the inter-quantile range, the corresponding adjustment must be made, as only from 2.1 % onwards is the company within the comparable market margins. However, in order to apply the median, there must also be “comparability defects”, and if these did not exist for 2008, for the same reason they did not exist for 2007 either. It should be noted that, in response to the arguments of the Inspectorate which argued that there were defects of comparability, the TEAC states that “a difference in the volume of sales is not sufficient reason to reject the validity of the report… The fact that the entity being verified occupies a leading position within its sector due to its sales volume does not in itself cause a lack of comparability – p. 40 TEAC Resolution-. In short, it seems to us that, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest inter-quantile range – 2.1% – it is indeed appropriate to make the corresponding adjustment. However, the fact that that is the case does not, without more, allow the median to be applied in the terms provided for in Rule 3.62, since the application of that rule is not justified by the fact of being outside the range of full competence, but by the existence of ‘comparability defects’, which, according to the arguments of the TEAC itself, were not the case in 2008 and, by extension, would not be the case in relation to 2007 either. The plea is upheld, since the Board agrees, with the applicant, that the adjustment should have been made on 2.1% and not 4.1%. It is not necessary, therefore, to analyse whether the median of the interquantile range should have been used instead of the median of the sample.” Click here for English translation Click here for other translation Spain vs Ikea 06 March 2019

Monsanto Chile – since 2018 a subsidiary of Bayer – is engaged in production of vegetable seeds and Row Crop seeds. The company uses its own local farmers and contractors, employs some 250 people and hires a maximum of 2,000 temporary workers in the summer months. It receives parental seed from global planners in the US and other countries and then multiplies these seeds in Chile on its own or third-party farms. The seeds are then harvested, processed and shipped to locations specified by global planners. Following an audit of FY 2009-2010 an adjustment was issued related to the profitability obtained in the operations of the “Production” segment (sale of semi-finished products to related parties) and “Research and Development” carried out on behalf of related parties abroad. The adjustment was determined by the tax authorities using the a Net Margin method. The tax authorities found that the income obtained under the production segment and in the research and development business line, did not provide a reasonable return to the local company, since in the production segment the operating margin over costs and expenses (ROTC) obtained by Monsanto Chile amounting to -5.87% was lower than the ROTC obtained by comparable companies which were in a range between 4.573% and 12.648%, with a median of 11.216%; and in the research and development segment the ROTC obtained by Monsanto Chile was -6.54%, whereas the arm’s length ROTC determined by the tax authorities was in a range between 7.93% and 12.48%, with a median of 10.21%. An assessment was issued in 2013 where an adjustment of $2,422,378,384 had been determined in regards to the production segment, and an adjustment of $38,637,909 had been determined in regards to the Research and Development segment, in total resulting in additional taxes of $862,958,963. Monsanto was of the opinion that the assessment was bared due to statues of limitations, and that the transfer pricing analysis conducted by the tax authorities in regards to both the production segment and the research and development segment was erroneous. Monsanto also held that the added fine was unfounded. Decision of the Tax court The decision of the Tax Court was largely in favour of the tax authorities. “That the claim filed in the main part of page 1 by Mr. Manuel Jiménez Pfingsthorn, RUT N°7.021.291-9, on behalf of MONSANTO CHILE S.A., is partially accepted, RUT N°83.693.800-3, against the Assessment N° 38, carried out on 28 August 2013, by the Large Taxpayers Directorate of the Internal Revenue Service, only insofar as the fine established in article 97 N°11 of the Tax Code is left without effect, as stated in recital 35°), being rejected for the rest. III. That the Director of the Large Taxpayers’ Directorate of the Internal Revenue Service shall arrange for administrative compliance with the above decision, for which purpose he must carry out a tax re-calculation.“ Following the decision of the tax court, an appeal has been filed by Monsanto Chile to the Court of Appeal where the appeal is still pending. Click here for English translation CH vs M14-9-0000002-3

Following an audit of GE Medical Systems Limited Partnership (SCS), which is engaged in the manufacturing and marketing of medical equipment and software, the French tax authorities issued an assessment related to the “value added amount” produced by the company, which serves as the basis for calculating the French minimum contribution of business tax provided for in Article 1647 E of the General Tax Code. The tax authorities was of the view that (1) prices charged for goods and services provided to foreign-affiliated companies had been lower than arm’s length prices and that (2) part of deducted factoring costs were not deductible in the basis for calculating the minimum business tax. On that basis a discretionary assessment of additional minimum business tax was issued. GE Medical Systems appealed the assessment to the Administrative Court of  Appeal. The Court of Appeal came to the conclusion that the basis for assessment of arm’s length prices of the goods and services sold had been sufficient, but in regards to the denial of deductions of the full factoring costs the court ruled in favor of GE Medical Systems. GE appealed the decision in relation to basis for the assessment of arm’s length prices for goods and services, and the tax authorities appealed the decision in relation to allowance of the full deduction of factoring costs in the basis for calculating the minimum business tax. The Supreme Court – Conseil d’État – denied the appeal of GE Medical Systems in relation to the basis for determining arm’s length prices of the goods and services sold to foreign-affiliated companies. On the issue of full deduction of factoring costs, the Supreme Court allowed the appeal of the tax authorities and annulled the decision of the Administrative Court of Appeal. Click here for Translation Conseil_d_État_8ème_-_3ème_chambres_réunies_28_11_2018_410779_Inédit_au_recueil_Lebon (1)

The Italian tax authorities had issued an assessment against a local distribution company of a multinational group, where the transfer pricing analysis conducted by the taxpayer had been disregarded. The tax authorities, carried out a new benchmark analysis based on the transactional net margin method (“TNMM”) and adjusted the company’s profitability to the median. Judgement of the Court The Court decided in favour of BI S.r.l. and cancelled the assessment. The Court stated that the profitability range calculated by the tax authorities goes, for the year 2013, from a minimum value of 1.40% to a maximum of 18.28%. The local distribution company had obtained a ROS/EBIT margin of 8.38%, and since the last percentage falls between the minimum and the maximum, the court set aside the assessment. In regards to the TP analysis performed by the tax authorities the Court stated: “The company had applied the CUP method, as it was considered the most direct and reliable method to apply the principle of free competition and, therefore, according to today’s appellant, this method had to be preferred to the application of any other method. The Office, on the other hand, considered the TNMM method more correct, thus arriving at ROS (return on sales) values that were totally different from those applied by the company for the three-year period 2010, 2011 and 2012. The office, by changing method, without any specific reason had settled on the percentage of the median. The office had taken refuge behind that percentage, without justifying in the notices of assessment why “The appellant’s objections on the issue of comparables are upheld, as the present company exercised, for the years in dispute, sales and routine functions, while the key role within the group was played by the company B.R.; the latter, as the “real entrepreneur” who was responsible for the fundamental decision-making fruitions, the definition of the various business strategies and, no less, the fruitions in the development and production area.” “B.I. was the sole distributor in Italy of a single supplier, to which it was linked by a shareholding relationship. The comparables compared by the Office did not adequately match the model of the company under examination, as the companies compared carried out production activities, operated in different sectors and distributed different products. This being the case, the office had identified competitors that were not comparable in terms of product sector, market and risk level. These obvious differences in distribution channels, type of goods or products sold or totally different local realities make the analysis carried out by the office unacceptable as a whole.” Click here for English translation Click here for other translation Commissione Tributaria Provinciale Lombardia Milano

ZERAIM IBERICA SA, a Spanish subsidiary in the Swiss Syngenta Group (that produces seeds and agrochemicals), had first been issued a tax assessment relating to fiscal years 2006 and 2007 and later another assessment for FY 2008 and 2009 related to the arm’s length price of seeds acquired from Zeraim Gedera (Israel) and thus the profitability of the distribution activities in Spain. The company held that new evidence – an advance pricing agreement (APA) between France and Switzerland – demonstrated that the comparability analysis carried out by the Spanish tax authorities suffered from significant deficiencies and resulted in at totally irrational result, intending to allocate a net operating result or net margin of 32.79% in fiscal year 2008 and 30.81% in 2009 to ZERAIM IBERICA SA when the profitability of distribution companies in the sector had average net margins of 1.59%. The tax authorities on there side argued that the best method for pricing the transactions was the Resale Price Method and further argued that the companies in the benchmark study provided by the taxpayer were not comparable. The authorities also pointed to the fact that ZERAIM IBERICA SA prior to entering the distribution agreement had a gross margin of around 40%, and now after entering the agreement would have a net margin of only 1.5%. The Court held in favor of the tax authorities due to (1) lack of explanation to the shift in profitability of ZERAIM IBERICA SA before and after entering the distribution agreement and (2) lack in comparability between the companies selected for the benchmark study and the Spanish distributor and (3) the transactional net margin method presented by the taxpayer in accordance with Spanish regulations is subordinated to the direct methods (resale price minus etc.). Click here for English translation Click here for other translation Spain vs Zeraim SAN_2856_2018

In this case, the French tax authorities questioned the method implemented by GE Healthcare Clinical Systems to determine the purchase price of the equipment it was purchasing from other General Electric subsidiaries in the United States, Germany and Finland for distribution in France. The method used by the GE Group for determining the transfer prices was to apply a margin of 5% to all direct and indirect production costs borne by the foreign group suppliers. For the years 2007, 2008 and 2009 the tax authorities applied a TNM-method based on a study of twenty-six comparable companies. The operating results of GE Healthcare France was then determined by multiplying the median value of the ratio “operating result/turnover” from the benchmark study to the turnover in GE Healthcare Clinical Systems. The additional profit was declared and qualified as constituting an indirect transfer of profits to the related party suppliers in the General Electric Group. The GE Group disagreed and brought the case to Court. First, the Tribunal dismissed the application by judgment of 18 May 2015, as did the Versailles Administrative Court of Appeal in a judgment of 9 February 2017. Finally, the Conseil d’Etat rejected the appellant’s appeal on the ground that the administration had established the existence of a benefit constituting a transfer of profits. When the tax authorities note that the prices charged to a company established in France by a foreign related company are higher than those charged to independent parties, without this difference being explained by the different circumstances, it is entitled to reinstate in the results of the French company an amount equal to the advantage. The Conseil d’Etat also confirmed that a benchmark study could include companies whose turnover was not identical to that of the taxpayer. Click here for translation Conseil_d_État_8ème_-_3ème_chambres_réunies_06_06_2018_409645

Microsoft Ibérica S.R.L is responsible for distribution and marketing of Microsoft products in Spain. According to an agreement concluded between Microsoft Ibérica and MIOL (Microsoft’s Irish sales and marketing hub) with effect from 1 July 2003, Microsoft Ibérica would received the largest amount of either a commission based on sales invoiced in Spain or a markup on it’s costs. In support of the remuneration according to the agreement, Microsoft had provided a benchmark study. The Spanish tax authorities found that Microsoft Ibérica had not been properly remunerated due to the fact that goodwill amortisations had been eliminated by in the transfer pricing analysis. By including the goodwill amortisations in the analysis, the result of the local company was below the interquartile rang. The authorities further held that the selected comparables in the benchmark study suffered from comparability defects, in that they had less functions and risk than Microsoft Ibérica. An assessment was issued where the results were adjusted to the upper quartile of the benchmark results. The Court of first instance held in favor of Microsoft and set aside the assessment. This decision was appealed to the High Court by the authorities. The High Court overturned the decision and decided in favour of the tax authorities. Excerpts from the Judgement: “We understand that the appellant’s conduct was deliberate, seeking to make the inspection proceedings time-barred. For a year, the Inspectorate was unable to carry out its work normally; in fact, what the Inspectorate did was to waste many hours of work examining the various incomplete accounts which did not comply with the Spanish accounting plan, which the appellant was handing in, wasting hours of work paid for out of the State’s general budget. The appellant, with only two days left, submitted a copy of the accounts which replaced “the computer copies of the accounts on CDs submitted to the inspection on 21/05/20 10, 9/09/2010 and 26/11/2010 which contained errors in the conversion of the accounts from the American chart of accounts to the Spanish chart of accounts”. The Chamber cannot support this conduct of the party by declaring the inspection procedure time-barred, as the delay is attributable to the taxpayer’s conduct. In finding that there is a delay attributable to the taxpayer for 344 days, it is unnecessary to examine the rest of the delays. The Inspector procedure took 705 days, discounting 344 days, the procedure finalised in 361 days, therefore, even if the other delays that are questioned are not attributable to the taxpayer, which in many cases overlap with the delay for not handing over the accounts, the Inspector procedure would have concluded before one year had elapsed.” “The Inspectorate indicated that there was another compelling reason to weigh in support of the application of a value located in the upper interquartile range of the study carried out by the Inspectorate, since within the sample of companies considered comparable there are some, five in particular that carry out service activities (CNAE activity codes 7221-7222), which are more similar than the rest to the activity formally assumed by MICROSOFT IBÉRICA – the provision of marketing services – and whose net margins were higher. The Inspectorate considered this sample of entities to be the most appropriate in terms of comparability, as it would yield a margin with a median of 6.15% (weighted average for the period). The reasoning of the Inspectorate, which was complemented by everything else it argued in the agreement, is considered to be correct, but it should also be considered that this reasoning is complementary to the criteria of the Chamber, which has considered that the contract signed by Microsoft fixed a commission that had to be settled monthly.” “The Chamber cannot share the criteria of the report for the following reasons. The expert assumes an interpretation of the contract signed in 2003 that is contrary to the one we have set out in the corresponding legal basis of this Judgment. It is the function of the Chamber to interpret contracts. The increase in the taxable bases derives directly from those agreed by Microsoft and MIOL, any other consideration being unnecessary. Furthermore, the expert considers that companies with losses have been eliminated without reasonable criteria, when this Chamber has endorsed that this criterion was in accordance with the law. Furthermore, the expert assumes that the appellant does not perform strategic functions, whereas the Chamber has concluded otherwise.” “WE RULE 1) That we DISMISS AND REVERSE the present contentious-administrative appeal number 337/2014, brought by the Solicitor Ms. Sonsoles Díaz-Varela Arrese, on behalf of MICROSOFT IBÉRICA, S.R.L, assisted by the Lawyer Ms. Cristina Fernández Rodríguez against the decision dated 8 May 2014 issued by the Central Economic Administrative Court, and we CONFIRM AND CONFIRM the said decisions as being in accordance with the legal system. 2) The plaintiff is ordered to pay the costs incurred in these legal proceedings.” Click here for English translation Click here for other translation SPA vs MS SAN_1125_2018

In 2016 the Swedish Tax Tribunal ruled against the tax administration in the case of The Absolut (vodka) Company AB. The Administrative Court of Appeal has now overturned the Tribunal’s ruling and consequently SEK 247 mio. are now added to the taxable income of The Absolut Company AB. The Swedish tax administration found that The Absolut Company AB sold Absolut Vodka below the arm’s length price to a group company – The Absolut Spirit Company Inc. (ASCI). Furthermore, the swedish company acquired distribution services from ASCI at a price above the arm’s length price. The Court adresses: – timing of data and information in a Benchmarking search – use of interquartile range or full range – use of multible years data – the issue of hindsight Click here for translation Sweden vs The Absolute Company, Jan 2018, Administrative Court of Appeal, No 1610-16

An agreement between a Swedish company, VSM Group AB, and an American distributor, VSM Sewing Inc, stated that the distributor would receive compensation corresponding to an operating margin of three percent. Benchmark studies showed that the agreed compensation was arm’s length. Each year, the company made a year end adjustment to ensure that the pricing was arm’s length. In cases where the outcome was outside the interquartile range, additional invoicing took place so that the operating margin was adjusted to the agreed level. But no additional invoicing took place where the operating margin deviated from what was agreed but was within the interquartile range. The company argued that the pricing was correct as long as the operating margin was within the interquartile range. The company also argued that the agreement between the parties had a different content than the written agreement because the parties consistently applied an understanding of the arrangement that deviated from the written content. The Court of Appeal considered that the wording of the agreement was clearly formulated and lacked room for interpretation. The agreement had also been followed and the compensation had been adjusted to the agreed level in cases where additional invoicing had taken place. The mere fact that the parties deviated from the terms of the written agreement in cases where the level of compensation proved to be within the interquartile range, cannot mean that the agreement is given a different meaning, even if it has been done consistently. The Court of Appeal found that such a deviation would not have been accepted by an independent party and that it was clear that an incorrect pricing had taken place which had a negative effect on the Swedish company’s results. Click here for translation Jönköping KR 2038-2041-15VSM Group AB

Following an audit the tax authorities issued an assessment, where the interest rate on a loan had been changed based on application of transfer pricing rules. An appeal was filed by “Holding S.A.” arguing that the transfer pricing rules do not apply to the loan operations observed, since there has not been a lower payment of income tax as required by paragraph a) of article 32-A of the aforementioned tax law, This is also not verified by having obtained losses in the years 2000 to 2005, since being a holding company and only receiving income from dividends, such losses cannot be carried forward, in addition to the fact that the only effect of the objection formulated is to reduce the loss and not to determine a higher tax payable. Judgement of the Tax Court The Tax Court sets aside the assessment and decided in favour Holding S.A. Excerpts “In this sense, it has not been proven that the Administration had carried out a due comparison of the same or similar transactions in order to correctly establish the market value of the transactions analysed in application of the transfer pricing rules, specifically, in accordance with the provisions of paragraph d) of article 32°-A of the Income Tax Law. Consequently, the objection raised by the Administration should be lifted, and the appealed decision should be revoked and the contested resolutions of determination should be annulled, as well as the fines applied. Click here for English Translation Click here for other translation Peru 2017_1_05608

The tax authorities had disallowed royalty payments of 3% of net sales from Cussons Indonesia to its parent company in the UK, PZ Cussons International Ltd. According to the tax authorities Cussons had been unable to prove that the transaction was at arm’s-length, as well as unable to provide transfer pricing documentation. Cussons claimed that the royalty payments was supported with documents such as royalty agreement, VAT payment, and withholding tax on royalty. Cussons further argued that sales in Indonesia were positively influenced by Cusson’s trademark. Following a tax court decision (Put.53966/2014) in favour of Cussons, the tax authorities brought an appeal to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities and upheld the decision in favour of Cussons. Click here for translation putusan_907_b_pk_pjk_2017_20210530

At issue were tax deductions for expenses related to assets and expenses for services paid by SC A SRL to a related party, C SpA Italy. Following an audit the tax authorities had issued an assessment, where certain costs were considered non deductible and where the cost of services had been determined by applying the transactional net margin method (TNMM). The assessment was brought to the courts by SC A SRL. Judgement of Supreme Court The Supreme Court found the appeal of SC A SRL unfounded and decided in favor of the tax authorities. Excerpt “As regards the criticisms made by the appellant concerning the use of the net transaction margin method used by the tax authorities and held by the judgment delivered by the court of first instance to be correct, the Supreme Court considers them to be unfounded. As is apparent from the evidence adduced in the case, during the period examined by the tax inspection bodies, it was found that the transactions carried out by the appellant were transactions between related persons and that the price at which goods were transferred in transactions between related persons was the transfer price. Since the appellant submitted an incomplete record of the transfer prices charged in relation to the affiliated person C Spa Italia, in the period 2007-2010, without justifying the transfer prices charged, the tax authorities proceeded in accordance with the provisions of Article 3 of OMFP No 222/2008 to adjust the transfer prices charged between the two companies pursuant to the provisions of Article 11(1) and (2) of Law No 571/2003 on the Fiscal Code, as subsequently amended and supplemented. The trial judge correctly rejected the conclusions contained in the expert’s report with regard to the method of the net transaction margin used by the tax inspection bodies, the court of judicial review, in its analysis of that ground of appeal, points out that the purpose of the forensic technical expert’s report is to provide the court with an expert opinion on the documentation under examination, but the assessment of the evidence is made on the basis of the judge’s reasoning by correlating it with the other evidence adduced in the case and analysing it in the light of the legal rules applicable in the matter. In that context, the High Court finds that the criticisms made by the appellant-appellant in relation to the method of the net trading margin used which led to the adjustment of the income from operations in relation to the affiliated company C Spa Italia in the amount of 35 246 585 lei are in fact unfounded, since the judgment under appeal correctly held that the contested administrative and fiscal acts by which additional tax liabilities were established representing income tax with ancillary charges for the period under review are lawful and well founded. Having regard to all those considerations, the High Court, pursuant to Article 20(1) of Law No 554/2004 and Article 312(1) of the Code of Civil Procedure, will dismiss the appeal brought by the applicant, company A SRL, as unfounded. ” Click here for English translation Click here for other translation ROM Jurisprudence 2651-2016

“Cork Portugal SA” is engaged in the production and marketing of natural wine corks and is part of a Multinational group operating in the sector of closures for the wine industry. The Portuguese tax administration issued an adjustment of EUR 337,493.97 to the taxable income for 2010 on the basis that, its sales of cork to a related company in the US – via an Irish trading company B within the group – had not been at arm’s length. Portuguese provisions of Article 63(1) of the CIRC, provides “In commercial transactions […] carried out between a taxable person and any other entity, whether or not subject to IRC, with which he is in a situation of special relations, terms or conditions substantially identical to those that would normally be contracted, accepted and practised between independent entities in comparable transactions must be contracted, accepted and practised”. The adjustment was based on a benchmark study provided by the company. Net cost plus margin of comparables (average 2007-2009)Maximum: 9,48%3rd Quartile: 6.82%Median: 5,76%,1st Quartile: 4,60%,Minimum:-2,19% In 2010, the net cost plus margin of “Cork Portugal SA” on sales to B… was 2.91% – a figure that falls within the identified full range – but outside the interquartile range. The Arbitration Tribunal upheld the transfer pricing adjustment issued by the tax authority. “The profit sharing [between Portugal and Ireland] that is concretely presented to us does not reflect the activities / responsibilities of each entity in the group, and the reasons why such a differentiated allocation of margins over operating costs, which is only 2.91% for the Applicant, is not demonstrated, while B…(which carries out an activity of “management assistance”) obtains a marketing margin of 12.4%, with its participations and responsibilities in the process being as proven to be so different.And where, as a result, in addition to the arguments already summoned, it seems to us based on the facts and the best prudence that the application of the clause in concrete advises, the choice of the median as the point that best reflects the arm’s length behaviour between comparable independent entities, in this specific case and according to the proven circumstances of the same.“ Click here for English Translation P609_2015T - 2016-05-02 - JURISPRUDENCIA Decisao Arbitral

During the period from 1 January 2003 to 31 December 2005 all the products marketed by GE Healthcare Clinical Systems (France), a company wholly owned by the American company GE Medical Systems Information Technologies and the exclusive distributor in France of medical equipment produced by the General Electric group, were supplied to it by its German subsidiary, GE Medical Systems Information Technologies (MSIT) GmbH, of which it held 100% of the capital. Transfer prices were determined based on the cost plus method. Following an audit of the accounts of GE Healthcare Clinical Systems, the tax authorities dismissing the cost plus method and instead set up a sample of eight companies considered comparable to GE Healthcare Clinical Systems. The difference between the operating loss declared by this company and its arm’s length operating results, calculated on the basis of the median of the net operating margin of the eight companies deemed to be comparable, constituted an indirect transfer of profits granted without consideration by GE Healthcare Clinical Systems to its supplier, GE MSIT GmbH, within the meaning of Article 57 of the general tax code. This transfer of profits constituted income distributed to a company established in Germany, within the meaning of the provisions of Article 111c of the General Tax Code, the administration subjected GE Healthcare Clinical Systems to the withholding tax provided for in Article 119a(2) of this code, in respect of the 2004 and 2005 financial years, at the rate provided for by the French-German tax treaty GE Medical Systems, which took over the rights and obligations of GE Healthcare Clinical Systems following the merger of that company, is appealing against the judgment of 3 January 2013 by which the Montreuil Administrative Court dismissed the latter’s application for discharge of the withholding tax and the corresponding penalties to which it was subject in respect of the financial years ended in 2004 and 2005, which were levied on 30 April 2009; Judgement of the Court of Appeal The Court of Appeal upheld the assessment of the tax authorities and dismissed the appeal of GE Medical Systems Excerpts “22. Considering that the administration, which did not limit itself to noting the loss-making results, with the exception of the year 2000, of GE Healthcare Clinical Systems during the financial years 1998 to 2005, which are not attributable to salary and structural costs as the applicant company maintains, failing to provide any proof of its allegations, and to pointing out that these losses represented 60% of the turnover for the year 2005, thus provides proof of the relevance of the method derived from the study of net transactional margins; that in these circumstances, given the size of the difference between the operating losses declared by GE Healthcare Clinical Systems and the company’s arm’s length operating results resulting from the application of the transactional net margin method, which amounted to EUR 3,675,112 for 2004 and EUR 5,025,107 for 2005, it must be regarded as establishing that the company’s operating losses were in line with the net margin method, it must be regarded as establishing that in the financial years 2004 and 2005 GE Healthcare Clinical Systems, by paying GE MSIT GmbH purchase prices that were excessive in relation to an arm’s length situation, transferred to it profits in the amount of the difference recorded, respectively, in respect of each financial year, within the meaning and for the application of Article 57 of the General Tax Code ; – As regards the justification of the advantages granted : 23. Considering that neither GE Healthcare Clinical Systems nor GE MEDICAL SYSTEMS establishes or even alleges that the advantages granted by GE Healthcare Clinical Systems to its German subsidiary were justified by the obtaining of counterparties favourable to the activity of GE Healthcare Clinical Systems or to its operating results; 24. Considering that it follows that the tax authorities were right to consider that GE Healthcare Clinical Systems indirectly transferred to its German subsidiary profits amounting to EUR 3,675,112 for the 2004 financial year and EUR 5,125,107 for the 2005 financial year;” Click here for English translation. Click here for translation France vs GE CAA de VERSAILLES, 7ème Chambre, 03_12_2015, 13VE00965

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

This case is about an Italian company, ILPEA S.p.A, transactions with its US subsidiary. The company stated that there were substantial difference between the products sold to its subsidiary in the United States and the benchmark transactions considered by the Tax Administration – quality of the products, volumes of sales, terms of sale. These differences affected the pricing, so that these transactions could not be compared with other transactions with independent parties. The Court found that the transactions carried out with controlled companies must be evaluated according to the “normal value”, defined as the average price charged for similar goods or services with independent parties and at the same marketing stage. Therefore, “normal value” is considered to be the ordinary prices of goods and services charged at arm’s length conditions, referring in the extend possible to “pricelists” and “rates”. The Court also stated that the tax administration does not have to prove existence of tax minimization, but only the existence of transactions between affiliated companies. The taxpayer must prove that the transactions have been priced at market value. Click here for English translation Click here for other translation Italy Supreme-Court-21st-July-2015-n.-15298

Adaptec. Ltd. is engaged in the business of software, design and development and testing in the field of storage solutions. It filed its tax return declaring income of Rs.89,51,330. Since assessee is functioning as service provider to it’s group parent on cost + 10% margin basis. Following an audit, the tax authorities selected 17 comparable companies, and arrived at an arithmetic mean of 25.26% and issued an assessment of additional taxable income of Rs.63,53,365. Adaptec filed an appeal with the Income Tax Appellate Tribunal. Judgement of the Court The Court ruled predominantly in favour of the tax authorities but remanded the case for recalculations. India vs Adaptec_India_P_Ltd 206-Hyd-2014

Quark Systems Pvt. is engaged in providing customer support services on behalf of the Quark Group. TNMM had been applied as the most appropriate method for determining arm’s length income. In an audit, the tax administration rejected one of the companies selected as a comparable on the basis that it was in a start-up and had losses for consecutive years. Quark Systems argued that once functional comparability is established, the comparable should not be rejected on grounds such as start-up phase. Quark also argued for rejection of a high-margin comparable on the basis that the company had significant controlled transactions. The Appellate Tribunal upheld the need for a proper functional analysis of the tested party and the comparables in determination of ALP and objected to the selection of comparables merely on the basis of business classification provided in the database. The case was returned to the tax administration India vs Quark Systems Pvt Ltd No 1 2012

The tax authorities had disallowed royalty payments of 3% of net sales from Cussons Indonesia to its parent company in the UK, PZ Cussons International Ltd. According to the tax authorities Cussons had been unable to prove that the payment was at arm’s-length, as well as unable to provide transfer pricing documentation supporting the pricing. Cussons claimed that the royalty payments was supported with documents such as a royalty agreement, documentation for VAT payments, and withholding tax on royalty. Judgement of the Tax Court The court decided in favour of Cussons and set aside the assessment of the tax authorities Click here for translation putusan_put-53966_pp_m.ivb_15_2014_20210530 (1)

Wx-Distributor (a subsidiary of the Wx-group i.d.F. Bw.) is responsible for the distribution of household appliances in Austria. It is wholly owned by Z. Deliveries to Wx-Distributor are made by production companies of the Group located in Germany, Italy, France, Slovakia, Poland and Sweden with which it has concluded distribution agreements to determine transfer prices. On average Wx-Distributor had been loss-making in FY 2001-2005. Following an tax audit, the intra-group transfer prices were re-determined for the years 2001 to 2004 by the tax authorities. It was determined that the transfer prices in two years were not within the arm’s length range. The review of the tax authorities had revealed a median EBIT margin of 1.53% and on that basis the operating margin for 2001 were set at 1.5%. For the following years the margin was set at 0.9% due to changed functions (outsourcing of accounts receivable, closure of half the IT department). The resulting adjustments were treated as hidden distribution of profits to the parent company. An appeal was filed by Wx-Distributor. Judgement of the Court The Court decided predominantly in favour of the tax authorities. Excerpts “The functions and risks described above do not justify distribution agreements that do not ensure that the applicant, as a limited risk distributor, will not be able to achieve an overall (cumulative) positive operating result over a reasonable (foreseeable) period of time. This is also the case if this would be associated with higher losses for the independent production companies.” “In the view of the UFS, the use of the median in the event that the EBIT margin achieved is outside the range is to be applied in the present case because, according to the study, there is no ‘highly reliable’ range (cf. Loukota/Jirousek comments on the criticism of the Transfer Pricing Guidelines 2010 ÖStZ 2011) due to comparability deficiencies. Insofar as the applicant assumes that the correction of the EBIT margin to the median value constitutes an impermissible punitive taxation and possibly seeks an adjustment to the lower bandwidth value, whereby it recognisably refers to a decision of the BFH of 17 October 2001 I R 103/00, according to which an estimate is based on the upper or lower value of the bandwidth of arm’s length transfer prices, which is more favourable for the taxpayer. In addition to the existing comparability deficiencies, which in themselves justify an adjustment to the median, reference should also be made to the transfer pricing study by Baker&McKenzie from 2005, which was also submitted by the applicant. It may be true that transfer prices have to be fixed in advance, but in the case at hand no transfer prices were fixed per transaction carried out; instead, distribution agreements had been concluded in unchanged form since 1999 and the arm’s length nature of these agreements was justified by the results of comparative company studies. From the above point of view, it is permissible to use a study (Baker&McKenzie) for the further assessment of the arm’s length nature of the EBIT margin, which was prepared at a time (here 31 December 2005) that follows the period in which the net returns to be assessed were generated (2001 to 2005), but which refers to data material that originates from this period (2002 to 2004). This is because a comparison of the net returns achieved in the period under review (2001 to 2005) with comparable enterprises based on data from the years 1996 to 1999 can at best be used for planning purposes, but subsequent significant developments in the period under review (e.g. economic downturns…) are not (or cannot be) taken into account. According to Baker&McKenzie, the data material used in this process led to the result of comparable net yields with a median of 2.3% and a quartile range between 1.3% and 3.9%. An appendix to this study, which was prepared especially for the company and deals with the special features of inventory adjustment, accounts receivable and accounts payable, shows a comparable median EBIT return for the company of 2.6% with a quartile range of 1.5% to 4.1%. The values shown were achieved by comparable companies in the audit period and are consistently above the adapted median according to the transfer pricing study by Ernst & Young, which is why the adjustment to the lower range requested by the applicant is also unjustified for this reason. If the UFS bases its assessment of the arm’s length transfer price on the Ernst & Young study and uses the median achieved there, this is because it follows the applicant’s argumentation regarding the price determination required in advance and for this reason bases its considerations regarding comparable net returns on the modified Ernst & Young transfer price study. There are no other particular influencing factors that would make an adjustment of this study necessary. In view of the above considerations, the UFS assumes that the median net return of 1.49% determined in the modified comparative study by Ernst & Young submitted by the applicant is appropriate and should be applied for the audit period.” Click here for English translation Click here for other translation Austria vs Distributor UFS 30-7-2012 RV-2515-W-0960673-1

The tax authorities had not contested but have accepted the method (TNMM) used by the company to assess their transactions with related or affiliated parties, the dispute is therefore limited to certain aspects of the application of the methodology. Boehringer had used ROS indicator (operating profit margin) which the tax authorities accepted for the resale function but applied the ROTC indicator (profit margin on costs and expenses) for the manufacturing function. On the use of foreign comparables the tax court held in favor of the company and revoked the adjustment back to the authorities. Click here for English Translation Tribunal Fiscal de la Nación

EcoloJeans SL had made purchases from its majority shareholder, Mr Donato. According to the tax authorities, the agreed prices for these purchases were higher than the arm’s length price, resulting in lower taxation. The tax authorities had determined the arm’s length price by applying the resale price method, based on the margin obtained by companies in the same sector in comparable transactions with independent parties. For this purpose, a sample of six wholesalers had been selected – two whose identification data were known and four that had not been identified by the authorities for reasons of confidentiality. EcoloJeans SL filed a complaint against the assessment to the TEAR, but the complaint was later rejected. An appeal was then lodged with the TEAC (Tribunal Económico Administrativo Central), which was partially upheld in the sense that the Tribunal found a lack of reasoning (due to use of secret comparables), leaving EcoloJeans SL defenceless. Judgement of the National Court. The Court upheld the TEAC’s decision in regards of lack of reasoning (use of secret comparables) in the pricing of the controlled transactions. Excerpt “In the contested decision, the TEAC analyses the valuation method used by the Actuary, which was based on data obtained from certain companies in the sector, and states, textually: “Having analysed the file by this Central Court, the only documentation relating to these companies that is contained is a sheet for each one on which, obtained from the AEAT database, the recorded profit and loss account of the 1998 Corporation Tax returns is reflected, the ‘screenshots’ of the AEAT’s CDB to which the interested party refers, and which contain the data used by the inspection (turnover and supplies), without figuring either the tax identification number or the name of the holder of those data, or any reference to the activity carried on. The regulations require that the act of determining the normal market value be reasoned, containing the grounds on which the valuation made is based; that the valuation that gives rise to the increase in the taxable base with respect to that declared is rationally and sufficiently justified. And the meaning or purpose of that statement of reasons is to preserve the interested party’s right of defence, and therefore the Administration must use in that valuation procedure data that can be made fully known to the interested party so that it can defend itself adequately, and not data affected by confidentiality, and which, for that reason, the interested party is denied knowledge thereof, as occurs in the present case, however relevant such data may be for the specific case. Therefore, this Court considers that the interested party’s right of defence has been impaired as a result of the Inspectorate’s actions, preventing the lack of identification of the companies used in the sampling to determine the market value, the verification by the interested party of their suitability or unsuitability for the purposes of the valuation and, therefore, preventing it from timely defending its right and adequately opposing the valuation carried out, causing it, in short, a defencelessness that would lead to the annulment of the act. For all of the above reasons, and considering that this Court considers that there is a lack of reasoning in the valuation agreement which caused him to be defenceless, his claim on this point must be upheld and the adjustment made must be annulled”. Click here for English translation Click here for other translation Spain vs Ecolojeans S.L. May 2011 SAN_2304_2011 ORG NW

In this case a Korean subsidiary, Photo Corp, sold photo paper, film, and other imports from overseas related parties to local stores. The Korean Tax Authority had applied the transactional net margin method (TNMM) to derive the arm’s length price. Six comparable companies had been selected and a tax assessment was issued based on the difference between the operating profit margin of the comparable companies and Photo Corp. Photo Corp disagreed with the assessment and filed an appeal claiming that the selected six companies were not comparable. The court found the tax authorities had applied the transaction net profit margin method without explaining why the traditional methods (CUP, RSM, CPM) could not be applied. The court also found that five of the selected comparables were retailers, and about ten times larger in terms of sales and company size than the tested party. In addition one of the selected companies manufactured products through separate research and development with the company’s affiliated research institutes and four of the selected companies sold high-end luxury goods to general consumers in department stores and other places. The court concluded that the six companies were not suitable for comparison in calculating the arm’s length price. The court refered the case back to the authorities with an order to re-examine the basis for applying a CUP-method. Translation of Korean 2006서1465 Korean 2006서1465

The Korean company was active as a domestic wholesaler of hospitals and pharmaceutical equipment imported acquired from foreign related parties. The taxation authorities have calculated the normal price by applying the TNM method for controlled transactions between the Korean company and it’s foreign related parties. In years where profits in the company was below the interquartile range the tax authorities issued an adjustment. But in years where profits was above the range no downward adjustment was made. The company filed a tax appeal claiming that income in year where profits had been to high should also be adjusted. The Judgement of the Court “Law No. 4 No. 1 on international tax adjustments” tax authorities deal is one of the parties in the international trade foreign related parties the transaction price if you do not meet or exceed the normal price, the residents based on the normal price The taxation authority can determine or adjust the tax base and tax amount of the tax base. “This means that the tax authorities can make adjustments as well as increase and decrease based on the normal price. If the tax authorities have begun to verify the appropriateness of the transfer price, it is considered that the business year that does not meet the normal price and the business year that exceeds the normal price , It is possible to allow discretionary accruals only for business years that fall short of the normal price in several business years It is reasonable to assume that there is no discretion to choose from the taxation based on taxation. Therefore, it is legitimate for the Board of Directors to tax the amount of the taxpayer’s transfer price below the normal price in the 2003 fiscal year, but the taxpayer did not adjust the amount exceeding the normal price in the 2004-2005 fiscal year.” The court ruled that the position of the tax authorities (not to adjust in years where profits were above the interquartile range) was unjustified and illegal. Click here for English Translation 2008서1588

At issue was rental payment for real estate between related parties – Mr O.V. and his father. The tax authorities claimed that the price had not been determined in accordance with the arm’s length principle. Judgement of the Supreme Administrative Court The Supreme Administrative Court found the appeal of Mr O.V. to be well-founded and therefore annulled the contested judgment of the Regional Court and referred the case back to it for further proceedings. In these further proceedings, the Regional Court is bound by the legal opinion of the Supreme Administrative Court expressed in this judgment. “It can be concluded that if the tax administrator concludes that the price negotiated between related or close persons is not a price negotiated in normal business relations, it proceeds in accordance with the provisions of Section 23(7) of the Income Tax Act, i.e. it adjusts the tax base by the difference found. The Income Tax Act provides the tax administrator with a wide scope for determining the price customary in business relations. However, its decision and selection criteria must be objective, fair and reviewable. The tax authorities did not do so and the appeal is therefore well-founded in that respect.” Click here for English Translation Click here for other translation Czech No 8 Afs 80-2007 - 105

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

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany. The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the median value. The assessment must instead be based on the best value for the taxpayer. Distributors incurring losses for more than three years: The Senate understands its ruling in BFHE 170, 550, BStBl II 1993, 457 to say that whenever a distribution company sells products of an affiliate company and suffers significant losses for more than three years, a rebuttable presumption is triggered that the agreed transfer price has not been at arm’s length. The assumption of a rebuttable presumption means that the taxpayer can explain and prove why the actually agreed transfer price is nevertheless appropriate. This applies if the articles purchased exceeds 95% of the total turnover. The taxpayer may, For example, explain why the actual development is either due to mismanagement or other reasons that were not foreseen and, above all, that timely adaptation measures have been taken. Losses can be accepted over a period of more than three years if the corresponding proof is provided. It may be necessary to extend the period within which profit must be achieved. If proof is not provided and the taxpayer does not take any adaptive measures, a reasonable profit can be estimated and spread over the years. Click here for English translation Click here for other translation I R 103-00

The Pharmatique Industrie case shows the high comparability standard required by the courts of France. The tax authorities used five similar license agreements in the same pharmaceutical sector, as comparables in a transfer pricing dispute regarding payments of royalties for the use of knowhow and trademarks. Judgement of the Court The court ruled in favour of the tax authorities. Excerpt “.., is not confirmed by a reading of the contracts attached to the file not only the granting of trademarks for the specialities in question, but also, as in the grants put forward by way of comparison by the administration, of manufacturing processes or know-how, the service must be regarded as providing proof of the exaggerated nature and therefore non-deductible nature of the said royalties in the above-mentioned proportion; that in any case, and without it being necessary to examine whether the royalties are deductible in principle, it follows that the company PHARMATIQUE INDUSTRIE is not entitled to maintain that it is wrongly that, by the judgement in question, which is sufficiently reasoned, the Administrative Court of Paris rejected the request of the company Laboratoires Schoum for discharge of the supplements to corporation tax…” Click here for English translation Click here for other translation Société Pharmatique Industrie, July 1994, CCA, No 92PA01392