Maersk Oil and Gas A/S (later TotalEnergies EP Danmark A/S) continued to make operating losses, although the group’s combined oil and gas operations were highly profitable. Following an audit of Maersk Oil, the tax authorities considered that three items did not comply with the arm’s length principle. Maersk Oil incurred all the expenses for preliminary studies of where oil and gas could be found, but the results of these investigations and discoveries were handed over to the newly established subsidiaries free of charge. Licence agreements were signed with Qatar and Algeria for oil extraction. These agreements were entered into with the subsidiaries as contracting parties, but it was Maersk Oil that guaranteed that the subsidiaries could fulfil their obligations and committed to make the required technology and know-how available. Expert assistance (time writing) was provided to the subsidiaries, but these services were remunerated at cost with no profit to Maersk Oil. An assessment was issued where additional taxable income was determined on an aggregated basis as a share of profits from the activities – corresponding to a royalty of approximately 1,7 % of the turnover in the two subsidiaries. In 2018, the Tax Court upheld the decision and Maersk Oil and Gas A/S subsequently appealed to the High Court. In 2022, the High Court held that the subsidiaries in Algeria and Qatar owned the licences for oil extraction, both formally and in fact. In this regard, there was therefore no transaction. Furthermore the explorations studies in question were not completed until the 1990s and Maersk Oil and Gas A/S had not incurred any costs for the subsequent phases of the oil extraction. These studies therefore did not constitute controlled transactions. The Court therefore found no basis for an annual remuneration in the form of royalties or profit shares from the subsidiaries in Algeria and Qatar. On the other hand, the Regional Court found that Maersk Oil and Gas A/S’ so-called performance guarantees for the subsidiaries in Algeria and Qatar were controlled transactions and should therefore be priced at arm’s length. In addition, the Court found that technical and administrative assistance (so-called time writing) to the subsidiaries in Algeria and Qatar at cost was not in line with what could have been obtained if the transactions had been concluded between independent parties. These transactions should therefore also be priced at arm’s length. The High Court referred the cases back to the tax authorities for reconsideration. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court decided in favour of the tax authorities and upheld the original assessment. The court stated that the preliminary exploration phases in connection with oil exploration and performance guarantees and the related know-how had an economic value for the subsidiaries, for which an independent party would require ongoing payment in the form of profit share, royalty or the like. They therefore constituted controlled transactions. Furthermore, the court stated that Maersk Oil and Gas A/S’ delivery of timewriting at cost price was outside the scope of what could have been achieved if the agreement had been entered into at arm’s length. Finally, the transactions were considered to be so closely related that they had to be assessed and priced on an aggregated basis and Maersk Oil and Gas A/S had not provided any basis for overturning the tax authorities’ assessment. Click here for English translation Click here for other translation Denmark vs Mogas September 2023 Suprem Court Case no 15265-16812-2022

Bavaria S.A. is part of the SABMiller group – a multinational brewing and beverage group – and in FY2013 the company had deducted costs related to various intra-group transactions – licences, cost of sales, procurement services, administrative services, technical support, other expenses (reimbursements to related parties), etc. Following an audit, the Colombian tax authorities disallowed the deduction of some of these costs. Deductions for investments in productive assets were also disallowed. This resulted in additional taxable income and an assessment was issued together with a substantial penalty. Judgement of the Supreme Administrative Court The Court partially upheld the assessment and partially annulled it. Excerpts “At this point it is necessary to clarify that, although the Administration alleges the violation of the arm’s length principle, insofar as it considers that no independent third party, in a comparable situation, would have paid the commission under the conditions carried out by Bavaria, the truth is that this assertion is only supported by the fact that the DIAN questioned whether SABMiller Procurement actually executed the functions that corresponded to it under the Global Supply Agreement. In fact, it should be noted that neither the censured act nor the opposition to the complaint challenged the validity of the supporting documentation provided by the plaintiff, which included information related to the operation carried out with SABMiller Procurement within the framework of the Global Sourcing Agreement. In other words, with the exception of the question of the performance of the duties, the DIAN did not provide any substantive reasons to support the infringement of the arm’s length principle. There is no evidence in the file to show that the remuneration in favour of the foreign related party was not paid on market terms and, consequently, there is no support for the defendant’s assertion that an independent third party would not have paid the commission. It is extremely important to remember that, for the purposes of questioning the remuneration paid by a taxpayer in favour of a foreign related party for non-compliance with the arm’s length principle, the DIAN must exercise the broad powers of inspection granted to it by articles 684 of the Tax Statute and, particularly, the third paragraph of article 260-2 ibidem. Note that the jurisprudence of this Section13 has warned that, if in the exercise of its functions, the Administration detects irregularities in the transfer pricing study, it is obliged to contradict it through a similar report that calculates the common profit margins in the market for comparable operations, agreed between independent parties, However, there are no such documents in the file.” “Chamber notes that there is no dispute between the parties as to the nature of the expenses in question, as both agree that they correspond to administration expenses incurred by the plaintiff in favour of its parent company abroad. Likewise, the parties agree that the payments made by the plaintiff to its parent company were not subject to withholding tax as they were foreign source income. In these circumstances, it is not possible to accept the deductibility requested by the plaintiff (i.e. administration and management expenses to the head office or offices abroad) in the light of Article 124 of the Tax Statute, since for this it was essential that the expense had been subject to withholding tax, as has been held by the jurisprudence of this Section and the Constitutional Court. The fact that the plaintiff was subject to the transfer pricing regime does not change this conclusion, which, it is reiterated, the withholding tax referred to in Article 124 is not a limitation, but a condition or condition of acceptance, against which there is no exclusion whatsoever for taxpayers subject to the aforementioned regime. Finally, it should be noted that, contrary to the plaintiff’s request, the deductibility of the disputed expenditure cannot be analysed in the light of Article 122 of the Tax Statute. This is because the rule regulates the deductibility of payments abroad, as a generic restriction and not subject to economic linkage for expenses incurred abroad to obtain income from national sources and for concepts other than administration expenses in favour of the parent company or offices abroad, which are the ones at issue in the specific case. In this respect, Article 124 expressly provides that “(…) Payments in favour of such parent companies or offices abroad for other different concepts are subject to the provisions of Articles 121 and 122 of this Statute”. (highlighted by the Chamber). The charge is not upheld. Consequently, the disallowance of $47,834,099,000 for administrative operating expenses for administrative services is maintained.” “The evidence in the case file shows that, under the CSA, Bavaria took as expenses the sum of USD4,720,084 and that it recorded invoiced expenses for technical assistance of USD16,472,000, equivalent to USD30,627,037,436, the latter being reported as technical assistance expenses with its foreign affiliate, SABMiller Latin America (Miami), in the supporting documentation. These figures total USD21,192,081, which does not exceed the figure of USD24,573,83 that would correspond to Bavaria under the CSA. In turn, in the Official Review Settlement, in order to conclude that Bavaria had been assigned a percentage greater than 34.4% (which is 87.5% of the 39.3%), the DIAN said that the plaintiff assumed expenses corresponding to USD30,097,400, as a result of adding the allocation of USD13,625,400 made by SABMiller Miami to Colombia with the USD16,472,000 invoiced by SABMiller Miami Bavaria itself. However, the truth is that this addition is not justified in the CSA criteria, and in the official assessment accused, there is no explanation, at least in summary, to justify this sum. It is not possible to reach the conclusion reached by the DIAN in the official assessment accused, according to which Bavaria assumed or recorded technical assistance expenses of USD30,097,851.” Click here for English translation Click here for other translation 25000-23-37-000-2017-00654-01(25885)_20230323 NW

Medtronic had used the comparable uncontrolled transactions (CUT) method to determine the arm’s length royalty rates received from its manufacturing subsidiary in Puerto Rico for use of IP under an inter-group license agreement. The tax authorities found that Medtronic left too much profit in Puerto Rico. Using a “modified CPM” the IRS concluded that at arm’s length 90 percent of Medtronic’s “devices and leads” profit should have been allocated to the US parent and only 10 percent to the operations in Puerto Rico. Medtronic brought the case to the Tax Court. The Tax Court applied its own analysis and concluded that the Pacesetter agreement was the best CUT to calculate the arm’s length result for license payments. This decision from the Tax Court was then appealed by the IRS to the Court of Appeals. In 2018, the Court of Appeal found that the Tax Court’s factual findings had been insufficient. The Court of Appeals stated taht: “The Tax Court determined that the Pacesetter agreement was an appropriate comparable uncontrolled transaction (CUT) because it involved similar intangible property and had similar circumstances regarding licensing. We conclude that the Tax Court’s factual findings are insufficient to enable us to conduct an evaluation of that determination.” The Tax Court did not provide (1) sufficient detail as to whether the circumstances between Siemens Pacesetter, Inc. (Pacesetter), and Medtronic US were comparable to the licensing agreement between Medtronic US and Medtronic Puerto Rico (MPROC) and whether the Pacesetter agreement was one created in the ordinary course of business; (2) an analysis of the degree of comparability of the Pacesetter agreement’s contractual terms and those of the MPROC’s licensing agreement; (3) an evaluation of how the different treatment of intangibles affected the comparability of the Pacesetter agreement and the MPROC licensing agreement; and (4) the amount of risk and product liability expense that should be allocated between Medtronic US and MPROC. According to the Court of Appeal these findings were “… essential to its review of the Tax Court’s determination that the Pacesetter agreement was a CUT, as well as necessary to its determination whether the Tax Court applied the best transfer pricing method for calculating an arm’s length result or whether it made proper adjustments under its chosen method“. Hence, the case was remanded to the Tax Court for further considerations. Opinion of the US Tax Court Following the re-trial, the Tax Court concluded that the taxpayer did not meet its burden to show that its allocation under the CUT method and its proposed unspecified method satisfied the arm’s length standard. “Increasing the wholesale royalty rate to 48.8% results in an overall profit split of 68.72% to Medtronic US/Med USA and 31.28% profit split to MPROC and a R&D profits split of 62.34% to Medtronic US and 37.66% to MPROC. The resulting profit split reflects the importance of the patents as well as the role played by MPROC. The profit split is more reasonable than the profit split of 56.8% to Medtronic US/Med USA and 43.2% to MPROC resulting from petitioner’s unspecified method with a 50–50 allocation. According to respondent’s expert Becker, MPROC had incurred costs of 14.8% of retail prices. The evidence does not support a profit split which allocates 43.2% of the profits to MPROC when it has only 14.8% of the operating cost.” “We conclude that wholesale royalty rate is 48.8% for both leads and devices, and the royalty rate is the same for both years in issue. According to the regulations an unspecified method will not be applied unless it provides the most reliable measure of an arm’s-length result under the principles of the best method rule. Treas. Reg. § 1.482-4(d). Under the best method rule, the arm’s-length result of a controlled transaction must be determined under the method that, under the facts and circumstances, provides the most reliable method of getting an arm’s-length result. Id. § 1.482-1(c)(1). We have concluded previously that petitioner’s CUT method, petitioner’s proposed unspecified method, the Court’s adjusted CUT method in Medtronic I, respondent’s CPM, and respondent’s modified CPM do not result in an arm’s-length royalty rate and are not the best method. Only petitioner suggested a new method, its proposed unspecified method; however, for reasons previously explained, that method needed adjustment for the result to be arm’s length. “Our adjustments consider that the MPROC licenses are valuable and earn higher profits than the licenses covered by the Pacesetter agreement. We also looked at the ROA in the Heimert analysis and from the evidence cannot determine what the proper ROA should be. The criticisms each party had of the other’s methods were factored into our adjustment. Respondent’s expert Becker testified that you may not like the logic of a method but ultimately the answer is fine. Because neither petitioner’s proposed CUT method nor respondent’s modified CPM was the best method, our goal was to find the right answer. The facts in this case are unique because of the complexity of the devices and leads, and we believe that our adjustment is necessary for us to bridge the gap between the parties’ methods. A wholesale royalty rate of 48.8% for both devices significantly bridges the gap between the parties. Petitioner’s expert witness Putnam proposed a CUT which resulted in a blended wholesale royalty rate of 21.8%; whereas respondent’s expert Heimert’s original CPM analysis resulted in a blended wholesale royalty rate of 67.7%. In Medtronic I we concluded that the blended wholesale royalty rate was 38%, and after further trial, we conclude that the wholesale royalty rate is 48.8%, which we believe is the right answer.” Click here for other translation US Medtronic 2022 TC

The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV. The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto. However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007. As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors on 22 September 2004 and paid to the insurance company managing the pension plan on 25 May 2005, and another contribution of EUR 132,074.67 on 31 July 2007, which was passed on to the Dutch parent company. The accounting expenses entered in the accounts by EPSON IBERICA in this connection amounted to EUR 2 709 972.88 (EUR 2 842 047.55 – EUR 132 074.67), which the entity entered off the books and which, consequently, were not deducted fiscally. In particular, the accounting expense computed in FY 2004 and 2005 for the amount of the commitment assumed (2.2 million euros) was not deducted in that year, in accordance with the provisions of Article 13.3 “Provision for risk and expenses”, of the Consolidated Text of the Corporate Income Tax Law However, when the beneficiary (Mr. Jose Augusto) of these contributions receives the amounts from the retirement plan, the corresponding contributions made are deductible at EPSON IBERICA. In 2009, Mr. Jose Augusto exercised his right to receive the benefits provided for in that pension plan and, therefore, the entity made a negative adjustment of EUR 2,709,972.89 in its tax return for that year, an adjustment which, in the Inspectorate’s opinion, should have amounted to only EUR 473,477.59, since not all the contributions made to the aforementioned pension plan were deductible. The contributions made after that date, which amounted to 263,174.45 euros (10 % of 2,631,744.41 euros). The remaining 90 % of the contribution from 1 January 2002 is deemed to have been made by the parent company in the Netherlands, EPSON EUROPE. – The settlement agreement acknowledges that the adjustment should have been bilateral, since the expenditure actually occurred, but considers this provision inapplicable because EPSON EUROPA is resident in the Netherlands, and Article 9 of Spain’s double taxation agreement with the Netherlands does not provide for bilateral adjustment. – In its tax return for 2010, EPSON IBERICA offset in full, for an amount of EUR 1 359 101.07, the negative tax base which it had claimed to have from the previous year (2009), but which it no longer had following the audit carried out. EPSON IBERICA did not agree with the aforementioned settlement agreements and the imposition of the penalty relating to the FY 2009 and 2010 and filed economic-administrative claims against them before the Central Economic-Administrative Court. The claims were resolved by the Central Economic-Administrative Tribunal on 4 February 2016, rejecting them. EPSON’s legal representatives then filed a contentious-administrative appeal against the above decision, which was processed under case number 314/2016 before the Second Section of the Contentious-Administrative Chamber of the National High Court, and a judgment rejecting the appeal was handed down on 22 February 2018. The appellant filed a writ requesting a supplement to the previous judgment, and the Chamber issued an order on 14 May 2018, in which it declared that there was no need to supplement the judgment. The High Court also decided in favour of the tax authorities, and this decision was then appealed by EPSON to the Supreme Tribunal. At issue before the Supreme Tribunal was whether or not the tax authorities should have taken into account the disallowed deduction – resulting in a higher income – when determining the arm’s length remuneration of EPSON IBÉRICA which was based on the transactional net margin method (TNMM). Judgement of the Court The Supreme Court dismissed the appeal of EPSON IBÉRICA and decided in favour of the tax authorities. Excerpt “The key issue in the present appeal is, in fact, the apportionment of costs between EPSON EUROPA and EPSON IBERICA. The judgment under appeal has chosen to consider the apportionment made by the tax inspectorate to be correct, in the light of the circumstances and the evidence in the proceedings. It is not an arbitrary assessment; it is coherent and reasonable and, therefore, we must abide by its result. The assessments under appeal are therefore in accordance with the law, and the adjustment sought by EPSON IBERICA is not appropriate. Lastly, there is nothing to be said in relation to the penalties, since that issue is not covered by the order for admission. In view of the foregoing, in circumstances such as those described, the answer to the appeal is as follows: ‘the Tax Inspectorate is not obliged to take into consideration the transfer pricing policy of the corporate group, in particular where it is based on the Transactional Net Margin Method (TNMM), when regularising transactions involving companies in the same multinational group, where it is not possible to make the relevant bilateral adjustment, in order to proceed to a full regularisation of the taxpayer’s situation.” Click here for English Translation Click here for other translation Spain v Epson STS_1111_2021

The Intevac group initially focused on designing and producing thin-film production systems for the manufacturing of hard disk drives (“HDD”). However, sometime in or around the mid-2000s, Intevac Asia Pte Ltd received a purchase order for a tool designed for the manufacturing of solar cells. Intevac Asia Pte Ltd did not possess the relevant R&D capabilities to develop such a tool and therefore entered into a Research and Development Services Agreement with Intevac US dated 1 October 2008 (“the RDSA”). The RDSA provided that Intevac US would undertake R&D activities in the US for the benefit of Intevac Asia Pte Ltd. In 2009, the management of the Intevac group decided to plan for the possibility that Intevac Asia Pte Ltd would expand its R&D capabilities in relation to non-HDD products. Accordingly, Intevac Asia Pte Ltd and Intevac US entered into a Cost-Sharing Agreement dated 1 November 2009 (“the CSA”), which superseded the RDSA. The purpose of the CSA was to allow Intevac Asia Pte Ltd and Intevac US to combine their R&D efforts and to share the costs and risks of their R&D activities. It differed from the RDSA in the following respects. (a) Under the RDSA, the Appellant was to acquire all beneficial and economic rights to the Intellectual Property (“IP”) developed in the performance of the RDSA. However, under the CSA, the Appellant and Intevac US would each acquire the right to exploit any IP and intangible property generated in the performance of the CSA within their respective sales territories. (b) The Appellant was the only party that would benefit from the outcome of the R&D activities carried out under the RDSA. However, under the CSA, both the Appellant and Intevac US had a direct stake in any R&D developed for the joint benefit of the parties. Under the new cost-sharing agreement, Intevac Asia Pte Ltd made payments to the U.S. company during FY 2009 and 2010 and claimed tax deductions for payments. Following an audit, the tax authority concluded that deductions for R&D expenses incurred under the cost-sharing agreement was governed exclusively by Section 19C until FY 2012, and that the payments made by the taxpayer under the cost-sharing agreement were not deductible under Section 14D. Hence an assessment was issued where the additional deductions was added back to the taxable income of Intevac Asia Pte Ltd. Judgement of the High Court The court decided in favour of the tax authorities. The R&D payments made to the U.S. parent did not qualify as deductible costs under Section 14D(1)(d). Click here for translation Singapore vs Intevac-2020-sghc-218 no 3 of 2020

Altera’s request for a Supreme Court review of the decision issued by the US Court of Appeal in June 2019 has been denied. A case cannot, as a matter of right, be appealed to the U.S. Supreme Court. A party seeking to appeal to the Supreme Court from a lower court decision must file a writ of certiorari. If a court grants the writ of certiorari, then that court will hear that case. However, if four Justices do not agree to review the case, the Court will not hear the case. This is defined as denying certiorari. Altera’s request for Supreme Court review of the decision issued by the Court of Appeal. Altera Reply 19-1009 Cert Reply Brief The Commissioner of Internal Revenue’s response to Alteras request Internal revenue brief for respondent in opposition 19-1009 Altera Corp. Opp.

A / S Norske Shell runs petroleum activities on the Norwegian continental shelf. By the judgment of the Court of Appeal in 2019, it had been decided that there was a basis for a discretionary tax assessment pursuant to section 13-1 of the Tax Act, based on the fact that costs for research and development in Norway should have been distributed among the other group members. According to section 13-1 third paragraph of the Norwegian Tax Act the Norwegian the arms length provisions must take into account OECD’s Transfer pricing guidelines. And according to the Court of Appeal the Petroleum Tax Appeals Board had correctly concluded – based on the fact – that this was a cost contribution arrangement. Hence the income determination then had to be in accordance with what follows from the OECD guidelines for such arrangements (TPG Chapter VIII). The question before the Supreme Court was whether this additional income assessment should also include the part of the costs charged to A/S Norske Shell’s license partners in recovery projects on the Norwegian continental shelf. The Supreme Court concluded that the tax assessment should not include R&D costs charged to A/S Norske Shell’s license partners on the Norwegian continental shelf. Click here for translation Norges Høyesterett - Dom HR-2020-1130-A

Altera has asked the US Supreme Court for a judicial review of the Decision from the U.S. Court of Appeals for the Ninth Circuit over the validity of Internal Revenue Service regulations  that requires related companies to share the cost of stock-based employee compensation when shifting their intangible assets abroad applying US Cost Sharing regulations. In the decision a divided panel in the Court of Appeal upheld the regulation as “permissible” and therefore entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). In the Petition Altera presents three questions: 1. Whether the Treasury Department’s regulation is arbitrary and capricious and thus invalid under the Administrative Procedure Act, 5 U.S.C. 551 et seq. 2. Whether, under SEC v. Chenery Corp., 332 U.S. 194 (1947), the regulation may be upheld on a rationale the agency never advanced during rulemaking. 3. Whether a procedurally defective regulation may be upheld under Chevron on the ground that the agency has offered a “permissible” interpretation of the statute in litigation. Under the third bullit Altera argues that the Chevron doctrin was applied erroneously by the Court of Appeals. The Chevron doctrin states that an agency is allowed a “permissible” interpretation where statutes are not sufficiently clear. Excerps from the 1984 Chevron case: "In these cases the Administrator's interpretation represents a reasonable accommodation of manifestly competing interests and is entitled to deference: the regulatory scheme is technical and complex, the agency considered the matter in a detailed and reasoned fashion, and the decision involves reconciling conflicting policies. Congress intended to accommodate both interests, but did not do so itself on the level of specificity presented by these cases. Perhaps that body consciously desired the Administrator to strike the balance at this level, thinking that those with great expertise and charged with responsibility for administering the provision would be in a better position to do so; perhaps it simply did not consider the question at this level; and perhaps Congress was unable to forge a coalition on either side of the question, and those on each side decided to take their chances with the scheme devised by the agency. For judicial purposes, it matters not which of these things occurred. Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices-resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to agency charged with the administration of the statute in light of everyday realities. When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges - who have no constitu­ency - have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones: "Our Constitution vests such responsibilities in the political branches." TVA v. Hill, 437 U. S. 153, 195 (1978). We hold that the EPA's definition of the term "source" is a permissible construction of the statute which seeks to accommodate progress in reducing air pollution with economic growth. "The Regulations which the Adminstrator has adopted provide what the agency could allowably view as ... [an] effective reconciliation of these twofold ends" United States v. Shimer, 367 U. S., at 383." Altera ends the partition with the following statement: “The Ninth Circuit permitted a startling departure from accepted rules of administrative law, and its expansion of Chevron validates the concerns many Justices have raised about that doctrine. The Tax Court rejected the agency’s position in an opinion that was striking for its “uncommon unanimity and severity of censure,” yet the court of appeals simply “assume[d] away” the regulation’s problems, “send[ing] a signal that executive agencies can bypass proper notice-and- comment procedures as long as they come up with a clever post-hoc rationalization by the time their rules are litigated.” App., infra, 160a, 165a, 167a (Smith,  J., dissenting from denial of rehearing). It is time for this Court to step in.” Altera Supreme Court Petition

The principal activity of Shell Services Asia Sdn Bhd in Malaysia is to provide services to related companies within the Shell Group. For FY 2011 – 2016 the company was part of a contractual arrangement for the sharing of services and resources within the Shell Group as provided in a Cost Contribution Arrangement. The tax authorities conducted a transfer pricing audit, and based on the findings, issued a tax assessment, where the Cost Contribution Arrangement had instead been characterised as an intra-group services arrangement. As a result the taxable income was adjusted upwards by imposing a markup on the total costs of the services provided for fiscal years 2012, 2014, 2015 and 2016. Consequently, the company had to pay the additional taxes in the amount of: RM 3,474,978.44; RM 2,559,754.38; RM 7,096,984.69; RM 2,537,458.50; RM 15,669,176.01. The company did not agree with the proposal and an appeal for leave was filed with the High Court related to statutory powers/legal jurisdiction of the authorities. Courts decision The appeal was dismissed. The judgement by the High Court only relates to proceedings and no views is expressed regarding the tax assessment. Excerpt “this judgement concerns solely DGIR’s decision on s 140A ITA which do not fall within the 3 Catagories. There may be decisions of DGIR under the ITA which fall within any one or more of the 3 Catagories and in such cases, leave of court should therefore be granted pursuant to O 53 r 3(1) RC for a judicial review of those decisions.” Malaysia vs Shell_High_Court BA-25-68--08-2019

The principal activities of Shell Services Asia Sdn Bhd in Malaysia is to provide services to related companies within the Shell Group. The company is part of a contractual arrangement for the sharing of services and resources within the Shell Group as provided in a Cost Contribution Arrangement. The tax authorities conducted a transfer pricing audit, and based on the findings, issued a tax assessment for fiscal years 2011 to 2016, where the Cost Contribution Arrangement had been recharacterised as an intra-group services arrangement. The taxable income was adjusted by imposing a markup on the total costs of the company for fiscal years 2012, 2014, 2015 and 2016. Consequently, the company had to pay the additional taxes in the amount of: RM 3,474,978.44; RM 2,559,754.38; RM 7,096,984.69; RM 2,537,458.50; RM 15,669,176.01. The company did not agree with the proposal. The judgement by the High Court only relates to proceedings and no views is expressed regarding the tax assessment. Malaysia vs Shell_High_Court BA-25-68--08-2019

In a public ruling, the General Tax Coordination Office in Brazil (COSIT) found that a transaction labled as a “cost sharing agreement” between a foreign group and its Brazilian subsidiary, was in fact a mere agreement for provision of services. COSIT pointed to the key characteristics of cost sharing agreements. These had been listed in a prior ruling from 2012: Segregation of costs and risks inherent in the development, production or acquisition of goods, services or rights; Consistent contribution by each entity with expected and effectively-received benefits by each entity; Identification of the benefit to each participant entity; Mandatory reimbursement of costs incurred with no mark-up; Advantages offered to all participating group entities; and Payments for support activities whether such activities were actually used. Click here for translation SC_Cosit_n_276-2019

In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. At issue is the correct method for valuing the preexisting intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of innovcation, the value of workforce in place, going concern value, goodwill, and growth options. The panel concluded that the definition of “intangible” does not include residual-business assets, and that the definition is limited to independently transferrable assets. The Court of Appeal concluded “We therefore agree with the tax court that the former regulatory definition of an “intangible” does not include residualbusiness assets.” The Court thus affirmed the prior decision of the tax court US vs Amazon August 2019

In this case, the US Court of Appeal had reversed a decision from the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was invalid under the Administrative Procedure Act. The Court of Appeal ruled that the Commissioner of Internal Revenue had not gone beyond the authority delegated under 26 U.S.C. § 482, and that the Commissioner’s rule-making authority complied with the Administrative Procedure Act. The Opinion was shortly after (August 7, 2018) withdrawn by the Court of Appeal. A final Decision was issued June 7, 2019, reaching the conclusion that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was not (arbitrary and capricious) invalid under the Administrative Procedure Act.. The Court held that the Treasury reasonably interpreted § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and concluded that the regulations are a reasonable method for achieving the results required by the statute. US vs Altera Corp 2019

In this case the IRS was of the opinion, that Medtronic erred in allocating the profit earned from its devises and leads between its businesses located in the United States and its device manufacturer in Puerto Rico. To determine the arm’s length price for Medtronic’s intercompany licensing agreements the comparable profits method was therefor applied by the IRS, rather than the comparable uncontrolled transaction (CUT) used by Medtronic. Medtronic brought the case to the Tax Court. The Tax Court applied its own valuation analysis and concluded that the Pacesetter agreement was the best CUT to calculate the arm’s length result for intangible property. This decision from the Tax Court was then appealed by the IRS to the Court of Appeals. The Court of Appeal found that the Tax Court’s factual findings were insufficient to enable the Court to conduct an evaluation of Tax Court’s determination. Specifically, the Tax Court failed to: address whether the circumstances of the Pacesetter settlement was comparable to the licensing agreements in this case, the degree of comparability of the contractual terms between the two situations, how the different treatment of intangibles affected the two agreements and the amount of risk and product liability expenses that should be allocated. Thus, the case has been remanded for further consideration. US vs Medtronic 16 August 2018

In this case, the US Court of Appeal reversed a decision from the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was invalid under the Administrative Procedure Act. The Court of Appeal ruled that the Commissioner of Internal Revenue had not gone beyond the authority delegated under 26 U.S.C. § 482, and that the Commissioner’s rule-making authority complied with the Administrative Procedure Act. US-vs-Altera-16-70496 The Opinion was shortly after (August 7, 2018) withdrawn by the Court of Appeal and are now avaiting the opinion of a new panel. See below. US-vs-Altera-16-70496-Withdrawn

EPSON IBÉRICA S.A.U. had deducted the full employee pension costs of a CEO that had worked both for the HQ in the Netherlands and the local Spanish Company. The tax authorities issued an assessment where 90% of the pension costs had been disallowed in regards to the taxable income in Spain. The disallowed percentage of the costs was based on the CEO’s salary allocation between Netherlands (90%) and Spain (10%), cf. the agreement entered between the parties. EPSON IBÉRICA S.A.U. brought the assessment to the Courts. Judgement of the Court The High Court dismissed the appeal of EPSON IBÉRICA S.A.U. and decided in favour of the tax authorities. Excerpt “…this Chamber shares and endorses the detailed reasoning of the TEAC starting from a fundamental fact, that if the contract of 25 June 2004, firmado between Mr. Humberto and Sek, by which the latter was appointed as Riji of Epson, Chairman of Epson Europe BV and President of Epson Ibérica, S.A.U. and of Epson Portugal Informática, S.A., established a distribution of 90% and 10% to be paid by Epson Europe BV and Epson Ibérica SAU, respectively, in order to satisfy the bonus to Mr Hiji, in line with the time worked by Mr Hiji for each of the companies, it is logical that that same proportion should be maintained in respect of the other EUR 2.2 million, as a result of the ‘Your Retirement Package’ and not, as the applicant claims, that that amount should be paid in full by the present appellant. The fact that Mr Humberto had devoted his whole life to the present appellant, before it was called Epson Ibérica, SAU and was absorbed by the multinational group Epson, it was called Tradeteck, is not an obstacle to the inclusion obtained, on the basis not only, as the Inspectorate states, ‘that what he worked until 1986 he would already have received’, but also that it is not congruent with what happened after 2002, the date on which Mr Humberto was appointed President of Epson Europe. BV, a situation or cause from which the contract of 29 June 2004, referred to above, arose. The reasoning of the claim, despite the argumentative effort of the governing document, cannot be admitted, without the invocation of the transfer prices referred to therein being relevant for the resolution of the issue at hand. As regards the impossibility of the bilateral adjustment, we refer to the contested decision. In definitive, the plea must be rejected.” Click here for English Translation Click here for other translation SP vs EPSON SAN_1065_2018

In an ongoing transfer pricing battle between Microsoft and the IRS related to Microsofts’ use of a IP subsidiary in Puerto Rico to shift income and reduce taxes, the District Court of Washington has now ordered Microsoft to provide a number of documents as requested by the IRS. US vs Microsoft May 2017 US District Court In a prior decision from November 2015 the District Court ruled, that the IRS’ use of an external representative was not in conflict with US regulations. Microsoft argued that the IRS’ use of an outside law firm, Quinn Emanuel Urquhart & Sullivan, to assist in the audit was an improper delegation of its authority to examine taxpayer books. The Court ruled that the government had a legitimate purpose in continuing to pursue the audit, and that the use of Quinn Emanuel was not a breach of IRS authority that would invalidate the summonses. “The court’s role in this matter is not to pass judgment on the IRS’ contracting practices, but to enforce or not enforce the summonses,” Martinez wrote. The law allows the IRS some flexibility in its use of outside contractors, he said, and Microsoft’s characterization of the role of Quinn Emanuel “greatly exceeds what is evident in the record.” U.S. v. MICROSOFT CORP November 2015

Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions  in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSA”), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have a lifetime of 6 to 20 years. On that basis, the buy-in payment for pre-existing intangibles had been set to $254.5 million. The IRS disagreed with the valuation and calculated a buy-in payment of $3.5 billion, by applying a discounted cash-flow methodology to the expected cash flows from the European business. The IRS took the position, that the intangibles transferred to Amazon Europe had an indefinite useful life and had to be valued as integrated components of an ongoing business rather than separate assets. The case brought before the US Tax Court HAD two issues had to be decided: Amazon Europe’s buy-in payment with respect to the intangibles transferred; and The pool of cost, on which Amazon Europe ongoing cost sharing payments were to be calculated. The Courts decision on Amazon Europe’s buy-in payment IRS’s position of “indefinite useful life” in the valuation of the intangibles and the buy in payment was rejected by the court, and the comparable uncontrolled transaction (“CUT”) method applied by Amazon – after appropriate upward adjustments – was found to be the best method. The Courts decision on Cost Share Payments The Court found that Amazon’s method for allocating intangible development costs, after adjustments, was reasonable. US CSA regulations pre- and post 2009  US CSA regs in effect for 2005-2006 refer to the definition of intangibles set forth in section 1.482-4(b), Income Tax Regs. Here intangibles are defined to include five enumerated categories of assets, each of which has “substantial value independent of the services of any individual.” These include patents, inventions, copyrights, know-how, trademarks, trade names, and 20 other specified intangibles. The definition of intangibles in the pre 2009 CSA regs did not include value of workforce in place, going concern value, goodwill, and growth options, corporate resources or opportunities. In 2009 new CSA regs were introduced in the US where the concept of “platform contribution transaction” (PCT) applies. According to the new regs. there are no limit on the type of intangibles that must be compensated under a cost sharing arrangement. But these new US CSA regulations did not apply to the years 2005 – 2006 in the Amazon case. See also the US vs. Veritas case from 2009. 2019 UPDATE The 2017 decision of the Tax Court has later been appealed by the Commissioner of Internal Revenue US-vs-Amazon-March-2017-US-Tax-Court-2

On July 27, 2015 the United States Tax Court issued its ruling regarding the petition filed by Altera Corporation and its subsidiaries against the Commissioner of Internal Revenue. The court found in favor of Altera, and concluded that on an arm’s length basis employee profit sharing should not be included in compensation between related parties under Qualified Cost Sharing Agreements. The case was appealed by the Commissioner of Internal Revenueon February 23, 2016. In the appeal the Commissioner argues that the Tax Court erred as a matter of law in holding that the 2003 cost-sharing amendments are invalid to the extent they require the sharing of stock based compensation costs. In July 2018 the Court of Appeal reversed the decision from the Tax Court and found in favor of the Commissioner. US-vs.-Altera-Tax-Court-Decision-2015 And US-vs.-Altera-Brief-Appellant-16-70497

In this case the Federal Court of Appeal upheld the decision of the Canadian International Trade Tribunal in which the tribunal upheld seven decisions – one for each of the years 2005 through 2011 – of the Canada Border Services Agency under subsection 60(4) of Canada’s Customs Act. Skechers Canada, a subsidiary of Skechers USA, purchases footwear to sell in Canada from its parent at a price equal to the price paid by Skechers US to its manufacturers, the cost of shipping the foodware to the US and warehousing, and an arm’s length profit. Skechers Canada also makes payments to Skechers US pursuant to a cost sharing agreement to compensate the parent for activities associated with the development and maintenance of the Skechers brand and to the creation and sale of footwear. The Court ruled that CSA payments relating to research, design, and development (R&D) were “in respect of” the goods sold for export into Canada and thus part of the “price paid or payable” for the goods for customs purposes. As a result, Skechers Canada must add the amounts of these payments made to Skechers USA to the customs value of imported footwear supplied by its parent. In its conclusion, the Court found that the conclusion reached by CITT “falls within the range of possible, acceptable outcomes, defensible in respect of the facts and the law.” Canada-Sketcher

The tax authorities had issued an assessment where deductibility of service costs charged to an Italien company had been disallowed for tax purposes, as the Italien company – according to the tax authorities – had not provided sufficient proof of the alleged benefits from the purported services received (marketing, telephone, EDP and legal, accounting and tax consultancy services). Judgement of the Supreme court. The Court dismissed the appeal of Alfa Gomma. Excerpts from the Judgement “By the second ground, alleging infringement of Article 2697 of the Civil Code, the appellant criticises the judgment of appeal in so far as it finds that Alfa Gomma Sud did not discharge its burden of proof, since the documentation produced does not make it possible to carry out an adequate check as to the existence, relevance and usefulness of the costs of the services charged by the parent company Alfa Gomma SpA. It submits that, in so doing, the court of second instance wrongly burdened the taxpayer with the burden of proving facts and legal relationships relating to other entities, since it was only required to offer evidence of the contractual source of the costs charged by the parent company and of their regular invoicing to the taxpayer subsidiary.” “In fact, the OECD Guidelines on the provision of intra-group services already state in §7.25 that “the allocation [of costs] may be based on turnover” and in §7.27 they clarify that, however, “when an indirect allocation method is used, the relationship between costs and services appears unclear and therefore it may be difficult to assess the benefit obtained”. The legitimacy of the administrative practice (Ministerial Circular No. 32/9/2267 of 22 September 1980) which justifiably subordinates the deductibility of costs deriving from contractual agreements on services rendered by the parent company (cost-share agreements) to the actuality and inherent nature of the expense to the business activity exercised by the subsidiary and to the real advantage derived by the latter, without the control requirements of the parent company, peculiar to its function as shareholder, being relevant in this regard. In such a perspective, it is not sufficient to show the contract concerning the services provided by the parent company to the subsidiaries and the invoicing of the fees, since those elements necessary to determine the actual or potential benefit obtained by the subsidiary receiving the service must specifically emerge.” “…In the present case, the services concretely provided to Alfa Gomma Sud remained in the appeal at the level of a purely abstract statement..” The Court ruled in favor of the tax administration. Click here for English translation Click here for other translation Italy Supreme-Court-18-July-2014-No.-16480.pdf

The issue in the VERITAS case involved the calculation of the buy-in payment under VERITAS’ cost sharing arrangement with its Irish affiliate. VERITAS US assigned all of its existing European sales agreements to VERITAS Ireland. Similarly,VERITAS Ireland was given the rights to use the covered intangibles and to use VERITAS US’s trademarks, trade names and service marks in Europe, the Middle East and Africa, and in Asia-Pacific and Japan. In return, VERITAS Ireland agreed to pay royalties to VERITAS US in exchange for the rights granted. The royalty payment included a prepayment amount (i.e. lump-sum payment) along with running royalties that were subject to revision to maintain an arm’s length rate. Thereafter, VERITAS Ireland began co-developing, manufacturing and selling VERITAS products in the Europe, the Middle East and Africa markets as well as in the Asia-Pacific and Japan markets. These improvements, along with the establishment of new management, allowed VERITAS’ 2004 annual revenues to be five times higher than its 1999 revenues from Europe, the Middle East and Africa, and Asia-Pacific and Japan. the IRS’s economic expert employed the income method to calculate the buy-in payment (for pre-existing intangibles that were to be used by the parties to develop future technology under the cost sharing arrangement). These calculations were based on the assumption that the transfer of pre-existing intangibles by VERITAS US was “akin to a sale” and should be evaluated as such. To value the transfer, the IRS expert aggregated the intangibles so that, in effect, he treated the transfer as a sale of VERITAS US’s business, rather than a sale of each separate intangible asset. The aggregation of  the intangibles was necessary, in the view of the IRS expert, because the assets collectively (the package of intangibles) possessed synergies and, as a result, the package of intangibles was more valuable than each individual intangible asset standing alone. The Court rejected the IRS’s method on the following premises: The IRS did not differentiate between the value of  subsequently developed intangibles and pre-existing intangibles, thus including intangibles beyond what  is required for the buy-in payment; The IRS included intangibles such as access to VERITAS US’s marketing and R&D teams, which are not among the intangibles recognized by the US transfer pricing rules; and The IRS incorrectly assigned a perpetual useful life for transferred intangibles that have a useful life of four years. US veritas

In a decision the IRS determined that Xilinx should have allocated stock option costs for foreign subsidiary research and development employees as part of its Section 482-7 cost-sharing agreement calculation. The United States Tax Court overruled the IRS, finding that in an arm’s-length situation, unrelated parties would not allocate employee stock option costs in the way determined by the IRS. The Court of Appeals later in 2009 overruled the opinion of the tax court, and found in favor of the IRS. US-vs-XILINX-INC-CIR06-74246

In a decision the IRS found that Xilinx should have allocated stock option costs for foreign subsidiary research and development employees as part of its Section 482-7 cost-sharing agreement calculation. In this decision, the United States Tax Court overruled the IRS, finding that in an arm’s-length situation, unrelated parties would not allocate employee stock option costs in the way determined by the IRS. The US Court of Appeals later in 2009 overturned the opinion of the tax court, and found in favor of the IRS. US-Xilinx_decision_08302005

The IRS ruled that Seagate should have included the cost of employee stock options in the net revenue calculation associated with its cost-sharing agreement with its foreign subsidiaries. Seagate appealed the ruling on the grounds that the IRS was not aware of actual arm’s length circumstances relating to the employee stock option compensation. In this case, the United States Tax Court found in favor of the IRS. US-Seagate_decision_12222000

In the Seagate Tech case the US Tax Court was asked to decide on several distinct transfer pricing issues arising out of a transfer pricing adjustments issued by the IRS. Whether respondent’s reallocations of gross income under section 482 for the years in issue are arbitrary, capricious, or unreasonable; whether respondent should bear the burden of proof for any of the issues involved in the instant case; whether petitioner Seagate Technology, Inc. (hereinafter referred to as Seagate Scotts Valley), paid Seagate Technology Singapore, Pte. Ltd. (Seagate Singapore), a wholly owned subsidiary of Seagate Scotts Valley, arm’s-length prices for component parts; whether Seagate Scotts Valley paid Seagate Singapore arm’s-length prices for completed disk drives; whether Seagate Singapore paid Seagate Scotts Valley arm’s-length royalties for the use of certain intangibles; whether the royalty fee Seagate Singapore paid Seagate Scotts Valley for disk drives covered under a section 367 private letter ruling applies to all such disk drives shipped to the United States, regardless of where title passed; whether the procurement services fees Seagate Singapore paid Seagate Scotts Valley were arm’s length; whether the consideration Seagate Singapore paid Seagate Scotts Valley pursuant to a cost-sharing agreement was arm’s length; and whether Seagate Scotts Valley is entitled to offsets for warranty payments Seagate Singapore paid to Seagate Scotts Valley. US-vs-SEAGATE-TECH-US-TC-149-1994