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

Stora Enso Wood Products Ždírec s.r.o. is the Czech subsidiary of the Stora Enso Group, a multinational manufacturer of packaging and building products. In the years in question, Enso Wood Products Ždírec s.r.o. provided manufacturing services to its parent company and made losses. An audit was initiated by the tax authorities focusing on the method of determining transfer prices between related parties as defined in Article 23(7) of the Income Tax Act (which contains the Czech arm’s length principle). On the basis of a functional and risk analysis (in which it examined the extent to which the applicant depended on the decision-making mechanisms of another entity in the group), the tax administration concluded that Stora Enso Wood Products Ždírec s.r.o. did not act as a fully-fledged independent entity in its production and related activities, but as a producer with a limited functional and risk profile, since its production activities were influenced by transactions and relationships with its parent company, SEWP, which provided direct direction, coordination and management, both in terms of personnel and in terms of the competences and decision-making powers which it, as a superior entity to the applicant, possessed. The business model set up by the parent company SEWP did not therefore allow the applicant to negotiate contractual terms with its customers, nor was the applicant directly responsible for the purchase and delivery of goods. In the proceedings, the tax authorities did not dispute that the production and sale of lumber by the applicant was made both to related parties and to unrelated third parties (hereinafter referred to as ‘independent customers’). However, what was relevant in the present case was the finding that the sales to independent customers were also influenced by the ‘orders’ of SEWP’s parent company. The tax authorities made a transfer pricing adjustment based on the transactional net margin method and issued an assessment of additional income. Stora Enso Wood Products Ždírec s.r.o. filed an appeal, and in 2021 the regional court decided in favor of the company. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court overturned the lower court’s decision and ruled in favour of the tax authorities. Excerpts “…the tax authorities took the legal view that the principle that a company should not be forced to carry out transactions which are disadvantageous to it applies in a group. If a controlling person (typically the parent company) exerts its influence to implement a transaction which causes the company to suffer a pecuniary loss, the controlling person is obliged to compensate the company for the relevant loss by the end of the accounting period at the latest, or, at least within the same period, to conclude an agreement with the company in which the manner and time limit for compensating such loss are agreed. In the present case, since the applicant did not prove how the loss incurred in the determination of the sales prices applied between the applicant and its business partners (related and unrelated parties) was compensated by the parent company, nor did it explain why it was not adequately compensated for its service to the multinational Stora Enso group in its income, the tax authorities proceeded to determine the normal price and to increase the income tax base by the difference found. [18] In the light of the above, the Court finds that, in so far as the Regional Court held in the judgment under appeal that the tax authorities had unlawfully applied Section 23(7) of the Income Tax Act or Article 9 of the double taxation treaty to the applicant’s transactions with its independent customers, who were not demonstrably connected persons, that argument cannot be upheld. “ “…Since the applicant, on the instructions of its parent company, was selling its products below its operating costs and thus losing profit, the applicant should, according to the tax authorities, have received a payment from its parent company to compensate for the loss thus incurred (the difference between its profitability and that of independent comparable operators). Therefore, on the basis of the relevant evidence, the tax authorities concluded that a service was provided between the applicant and its parent company SEWP, thereby creating a relationship between them to which Section 23(7) of the Income Tax Act could be applied. The complainant then defined the service in question as ‘a service consisting in bearing risks which are beyond the control of the taxable person and which are determined by related parties’ (see paragraph 99 of the contested decision). [19] With regard to the Regional Court’s assertion that the tax authorities should have distinguished whether the business transactions were made with related parties or with unrelated third parties, since the applicant’s sales to unrelated parties amounted to 60 % in terms of both production and revenue, the Supreme Administrative Court, in agreement with the complainant, states that this issue may be relevant at the stage of determining the price of the service performed by the applicant for the parent company. In the present case, however, the Regional Court did not assess whether the price of the service was correctly set, but only whether the first condition was met, i.e. whether Section 23(7) of the Income Tax Act was applied to the relationship of related parties.” Click here for English Translation Click here for other translation 0358_7Afs_2100034A_20230825072524

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

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) An appeal was then filed with the CAA of Paris, where in April 2022 the Court dismissed the appeal and upheld the decision of the court of first instance. Finally an appeal was filed with the Conseil d’État. Judgement of the Conseil d’État The Conseil d’État dismissed the appeal of ST Dupont and upheld the decision of the Court of Appeal. Excerpt “ 15. It is clear from the documents in the file submitted to the lower courts that, in order to assess whether the prices at which ST Dupont sold its finished products to its distribution subsidiary ST Dupont Marketing constituted a transfer of profits abroad, it compared them to the prices at which the same products were sold to the independent South Korean company SJ Duko Co and to a network of duty-free sellers in South-East Asia. It considered that this comparison revealed the existence of an advantage granted by ST Dupont to its subsidiary, which it reintegrated into the parent company’s profits. However, in its response to the taxpayer’s comments, this adjustment was reduced by a “reduction” in the arm’s length prices used by the tax authorities, which consisted of aligning the margin on transactions with duty free shops with the margin on sales to SJ Duko, and then, in accordance with the opinion issued by the departmental commission for direct taxes and turnover taxes, by a further reduction of 50% of the amounts reintegrated into the company’s results. 16. In the first place, the company criticised the method used by the tax authorities on the grounds that ST Dupont Marketing and the Korean company SJ Duko Co were not comparable, since the former operated as a wholesaler and retailer while the latter only operated as a wholesaler. In rejecting this criticism on the grounds, firstly, that SJ Duko’s wholesale activity had been supplemented by that of exclusive sales agent and retailer and, secondly, that the applicant had not provided any evidence making it possible to assess the nature and cost of the differences in functions between ST Dupont Marketing and SJ Duko Co, taking into account in particular the assets used and the risks borne, and consequently to assess the existence, if any, of differences such that they would render the comparison irrelevant if they could not be appropriately corrected, the Court did not err in law. Although the company also argued that the differences in the functions performed by ST Dupont and the duty free shops prevented the duty free shops from being considered comparable, this criticism is new in the appeal and is therefore inoperative. 17. Secondly, in order to dismiss the criticism of the administration’s method based on the failure to take account of the difference in the geographical markets in which ST Dupont Marketing and SJ Duko Co operated, respectively, the Court was able, without committing an error of law, by disregarding the rules governing the allocation of the burden of proof or distorting the documents in the file submitted to it, to rely on the fact that ST Dupont’s transfer pricing documentation itself specified that retail prices were set uniformly by continental zone. 18. Thirdly, the Court noted, in a sovereign assessment not vitiated by distortion, on the one hand, that it did not follow either from the tables attached to the rectification proposal, or from the method of determining the selling prices of finished products to the various Asian subsidiaries, that the prices charged by ST Dupont to its customers depended on the quantities sold and, secondly, that the document produced by ST Dupont showing an overall statistical correlation between volume sold and unit price, which did not guarantee that the products compared were homogeneous, did not make it possible to establish this either. In relying on these factors to dismiss the company’s criticism based on the difference in the volume of transactions with ST Dupont Marketing and SJ Duko Co respectively, the Court did not err in law. 19. Fourthly, although the company criticises the grounds of the judgment in which the Court rejected its argument that the alignment of the mark-up applied to sales to duty-free shops with that applied to sales to SJ Duko Co meant that only one term of comparison was used, it is clear from other statements in the judgment, not criticised by the appeal, that the court also based itself on the fact that the tax authorities had, as an alternative, in their response to the taxpayer’s observations, applied a 27% reduction to the prices granted to duty-free shops in order to take account of the fact that these were

Dart Sudamericana S.A. (now Dart Sudamericana SRL) imported so-called EPS T601 pellets from related party abroad for use in its manufacturing activities. The controlled transactions had been priced using the CUP method. Following an audit the tax authorities made a transfer pricing adjustment where it had applied the transactional net margin method (TNMM). According to the tax authorities, the price paid for the pellets in the controlled transaction was higher than the arm’s length price. The adjustment resulted in an assessment of additional taxable income. Not satisfied with the assessment Dart Sudamericana filed a complaint. Tax Court Ruling The court upheld the assessment issued by the tax authorities and dismissed Dart Sudamericana’s appeal. Excerpts “In short, the appellant merely tried to prove the similarity of the product in order to carry out the price comparison, which is not sufficient for a proper study of the comparability of the transactions. At the risk of being reiterative, the transactions should be analysed, not only the products being traded. Therefore, the tax authority is right – as stated above – in its challenge to the application of the Comparable Price Method between Independent Parties – CUP or Uncontrolled Price – as a method of price analysis for the importation of EPS pellets and the application – entirely in accordance with the position taken by the appellant in the 2003 period – of the Transactional Net Margin Method for the 2004 tax period. “ “…In this regard, and as the Tax Court rightly pointed out, the OECD Committee on Fiscal Affairs has stated in its report that multi-year data are useful for providing information about the relevant business cycles and product life cycles of comparables. Differences in the business cycle or product cycle may have a substantial effect on transfer pricing conditions that must be assessed to determine comparability. Accordingly, in order to gain a full understanding of the facts and circumstances surrounding a controlled transaction, it may be useful to examine data for both the year under review and prior years. This type of analysis may be particularly useful when using one of the profit-based methods, as is the case here. The facts and circumstances of the particular case will determine whether differences in economic circumstances significantly influence the price, and whether reasonably accurate adjustments can be made to eliminate the effects of such differences” (Vid. CNACAF, Sala I, “Volkswagen Argentina S.A.”, 26/12/2019. The emphasis is my own). In this context, it is noted first of all that it is not clear from the appeals made, both in administrative proceedings and before this Court, that the use of multi-annual data was due to differences in the economic cycle of the industry under test. Likewise, it has not been proven that the economic situation the country went through in 2001 and 2002 existed in the countries of the companies used for the comparability study. The experts say nothing in their reports on the issue, limiting themselves to stating that national legislation does not prevent the use of multi-annual data, which – as mentioned above – is not in dispute. Therefore, and considering that the inclusion of data from 2001 and 2002 would inevitably increase the differences in comparability with companies abroad, I consider that the tax authority is right.” Click here for English Translation Click here for other translation EXPTE-N°35.050-I

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. At the same time, 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 and later similar assessments were issued for the following years. An appeal was filed with the District Court by Eli Lilly which was dismissed by the Court. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of Eli Lilly – annulled the judgement of the District Court and set aside the assessment of the tax authorities. “The Supreme Administrative Court found no reason to depart from the conclusions of the judgment in Case No 3 Afs 54/2020, even on the basis of the defendant’s additional arguments. Indeed, the applicant can be fully accepted that it is at odds with the reasoning of the Supreme Administrative Court and puts forward arguments on issues which are rather irrelevant to the assessment of the case. First of all, the defendant does not dispute in any relevant way that the disputed supplies were provided to two different entities (the distribution of medicines to the complainant’s customers and the provision of marketing services to Eli Lilly Export), and that the ‘average customer’ cannot perceive those supplies as a single supply. This conclusion does not in any way undermine the defendant’s reiteration of the complainant’s assertion at the income tax audit that, for the purposes of assessing the correctness of the transfer pricing set between the complainant and Eli Lilly Export in terms of section 23(7) of the Income Tax Act, the marketing service should be regarded as an integral part of the distribution of the medicines and cannot be viewed in isolation when assessing profitability. In terms of transfer pricing, the economic interdependence of the two activities was assessed, which was essential only to determine whether the profitability of each activity should be compared separately with entities carrying out only the relevant activity. However, the aggregate assessment of these activities in terms of Section 23(7) of the Income Tax Act, which involves offsetting profits and losses from different types of business activities and comparing profitability with entities performing a similar role (i.e. performing both marketing and distribution), does not necessarily mean that there is a single transaction for VAT purposes. This issue is assessed separately in accordance with the aspects of the VAT Act and the VAT Directive respectively. [32] Nor can the defendant’s other arguments, which it repeats in support of the conclusion that the provision of marketing services constitutes a supply incidental to the domestic sale of medicines, be accepted. It does not follow from the judgment in Case 3 Afs 54/202073 that the concept of ‘third party consideration’ cannot exist. The Supreme Administrative Court has not denied that the total value of the consideration received from the final customer for the purposes of determining the tax base may, in general, also include payments from third parties (see, for example, paragraphs 62 et seq. of the judgment referred to above). However, in the context of the present case, in the case of the distribution of pharmaceuticals, the Court held that the consideration for marketing services could not be regarded as part of the value of the consideration, since those services were not provided to ‘customers’ who were merely recipients of marketing information. The consideration for those services was not then spent on behalf of or for the benefit of the customers. As regards the defendant’s reference to the judgment of the CJEU in Firma Z, the conclusions expressed there concern a different factual situation and legal issue. The substantive issue was the offsetting of a reduction in the taxable amount of one supply against the taxable amount of another supply, which is excluded under the common VAT system. However, as noted above, in the present case the complainant does not supply any other supply to its customers at the same time as the pharmaceuticals. Therefore, if the conclusion of the tax administration were accepted, it would have received a higher amount of VAT than the amount paid for the supply which was the only supply received by the customer from the complainant (the pharmaceuticals). The complainant’s final, potential or immediate customers cannot be the recipients of a marketing service at all (see above). [33] Nor can the defendant’s view that the method of pricing the marketing services shows an ‘unquestionable link’ between the marketing services and the sale of medicines be accepted. In that connection, the defendant points out that the pricing of marketing services is not based solely on the costs of marketing, but also on the costs of distributing the goods (medicines). It therefore concludes that it is a payment by a third party (Eli Lilly Export) on top of the price of the medicines which the complainant sells at regulated prices. This argument of the defendant cannot stand. As a general rule, it is a matter for the parties to negotiate the price or the method of calculating it. Furthermore,

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. In 2017 the Administrative Court decided in favour of Ferragamo and dismissed the assessment issued by the tax authorities. According to the Court the tax administration had not demonstrated the existence of an advantage granted by Ferragamo France to the Italien parent, Salvatore Ferragamo SPA, nor the amount of this advantage. This decision was later upheld by the Administrative Court of Appeal. An appel was then filed by the tax authorities with the Supreme Court. The Supreme Court (Conseil d’Etat) overturned the decision and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Judgement of the Administrative Court of Appeal The Administrative Court of Appeal issued a final decision in June 2022 in which the 2017 decision of the Paris Administrative Court was annulled and the tax assessment issued by the tax authorities reinstated. “Firstly, Ferragamo France argued that the companies included in the above-mentioned panel were not comparable, since most of their activities were carried out in the provinces, whereas its activity was concentrated in international tourist areas, mainly in Paris, and their workforce was less than ten employees, whereas it employed 68 people, that they are mere distributors whereas it also manages a network of boutiques and concessions in department stores, and that some of them own their premises whereas it rents its premises for amounts much higher than the rents in the provinces, the relationship between external charges and turnover thus being irrelevant. However, most of the comparables selected by the administration, which operate as multi-brand distributors in the luxury ready-to-wear sector, were proposed by Ferragamo France itself. Moreover, the company does not indicate the adjustments that should be made to the various ratios of salary and external costs used to obtain a result that it considers more satisfactory, even though it has been established that additional costs in the area of salaries and property constitute an advantage granted to Salvatore Ferragamo Spa. Furthermore, apart from the fact that it has not been established that some of the companies on the panel own their premises, Ferragamo France does not allege that excluding the companies in question from the calculation of the ratios would result in a reduction in the amount of the adjustments. Lastly, as regards the insufficient consideration of the management of a network of department stores’ boutiques and concessions, Ferragamo France does not provide any specific information in support of its allegations, whereas the comparison made by the administration is intended to assess the normality of the remuneration of its retail activity.” … It follows from all of the above that the Minister of the Economy, Finance and Recovery is entitled to argue that it was wrong for the Administrative Court of Paris, in the judgment under appeal, to discharge, in terms of duties and increases, the supplementary corporate tax assessment to which Ferragamo France was subject in respect of the financial year ended in 2010, of the withholding tax charged to it for 2009 and 2010 and of the supplementary minimum business tax and business value added contribution charged to it for 2009 and 2010 respectively. This judgment must therefore be annulled and the aforementioned taxes, in duties and increases, must be remitted to Ferragamo France.” Click here for English Translation Click here for other translation France vs Ferragamo CAA de PARIS, 2ème chambre, 30_06_2022, 20PA03601

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o. with the Regional Court which – by judgment of 30 October 2019 – dismissed the appeal and confirmed the additional payment order issued by the tax authorities. In its decision the Regional Court concluded that Aisan Industry Czech, s.r.o. should have been compensated for carrying out manufacturing services to the benefit of the multinational Aisan Industry group. The court also concluded that Aisan Industry Czech, s.r.o. was in fact a contract manufacturer – as stated in the original transfer pricing documentation – and not a full-fledged manufacturer as stated in the later “updated” transfer pricing report in which the FAR profile of the company had been significantly altered after receiving the initial assessment. According to the Regional Court, it had been established that the price of the service negotiated between the Aisan Industry Czech, s.r.o. and its parent company Aisan Industry Co., Ltd. was different from the price that would have been negotiated between independent parties under the same commercial conditions. By selling products to related and unrelated parties at prices determined by the group, Aisan Industry Czech, s.r.o. did not even achieve a minimum level of operating profitability. In FY 2011 Aisan Industry Czech, s.r.o. had a negative profit margin of 3,27 %. According to the court Aisan Industry Czech, s.r.o. should have received a remuneration of CZK 61 080 700 from the Aisan group for the manufacturing services, i.e. the difference between the operating margin it would have achieved at at arm’s length, 1,26 % (the minimum of the profit margin of comparable entities), and the profits it had actually achieved -3.27 %. According to the Regional Court, it was not the pricing of the individual products that was relevant, but rather the overall set-up of Aisan Industry Czech, s.r.o.’s operation within the Aisan group as a contract manufacturer bearing disproportionate risks which were not compensated. Therefore it was not appropriate to set a reference price and analyse the individual transactions since the involvement in the group distorted both transactions with related and unrelated parties, as all the prices had been determined by other group entities. An appeal was then filed against the decision of the Regional Court with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The court fully agreed with the decision and conclusions of the Regional Court, which it considered to be correct and well reasoned. Excerpts “In the course of the tax audit, the tax administrator found, on the basis of an analysis of the transfer prices, that the complainant bore risks that were beyond its control and that this fact was not reflected in the pricing policy, which was influenced by the connected persons. The influence of related parties resulted in the complainant selling its products below its operating costs and not being compensated for those losses. ” “Given that the complainant could not influence from whom and for how much it would purchase inputs, nor to whom and for how much it would sell its products (output price), the tax authorities considered the transactions carried out to be controlled, since it was the parent company Aisan JP together with its sister companies ACE and ACA that influenced this, although the risks involved were borne by the complainant.” “As regards the plea that the defendant and the Regional Court erred in law in failing to distinguish between transactions with related parties and those with unrelated parties, that plea is also unfounded. In that regard, it should be noted that the complainant was represented by the companies of the Aisan group, which concluded the transactions to which the complainant was bound. It is clear from the commission agreements that the sister companies ACA and ACE did so in relation to all customers, irrespective of whether they were related or unrelated. The e-mail communications also show the influence of the parent company Aisan JP regarding the final approval of the sale. It is clear from the summary of the functions of the original transfer pricing report that the selection and final approval of material suppliers, setting of delivery terms, price negotiations and negotiation of delivery terms with end customers is without the influence of the complainant. These decisions are made by the parent company Aisan JP and its sister companies ACA and ACE, which also determine the final prices and quantities of products. Although the complainant sells production and purchases materials from unrelated parties, all sales plans are provided by related parties of the Aisan group…..Therefore, in the present case, all transactions carried out by the complainant are considered to be controlled transactions on the basis of a function and risk analysis. The conclusion of both the defendant and the Regional Court that it was not appropriate to analyse individual transactions, since related parties influenced all transactions, is therefore correct.” “The Regional Court and the defendant also correctly stated that the reasons given by the complainant for the negative operating profitability cannot be accepted, also because the complainant did not show negative profitability only in 2011, but it was a long-term trend from 2009 to 2012. For these reasons, the administrative authorities were justified in concluding that the

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) Still not satisfied with the result, an appeal was filed by ST Dupont with the CAA of Paris. Judgement of the CAA The Court of appeal dismissed the appeal of ST Dupont and upheld the decision of the court of first instance. Excerpt “It follows from the above that the administration provides proof of the existence and amount of an advantage granted to ST Dupont Marketing that it was entitled to reintegrate into ST Dupont’s results, pursuant to the provisions of Article 57 of the General Tax Code, before drawing the consequences on the amount of the deficits declared by this company in terms of corporation tax, on the liability of the sums thus distributed to the withholding tax and on the integration in the base of the minimum contribution of professional tax and the contribution on the added value of companies. 29. It follows from all the foregoing that ST Dupont is not entitled to maintain that it was wrongly that, by the contested judgment, the Paris Administrative Court rejected the remainder of its claim. Its claims for the annulment of Article 4 of that judgment, for the discharge of the taxes remaining in dispute and for the restoration of its declared carry-over deficit in its entirety must therefore be rejected.” Click here for English translation Click here for other translation France CAA de PARIS, 2ème chambre, 13_04_2022, 19PA01644, Inédit au recueil Lebon

A Danish parent in the Maersk group’s oil and gas segment, Maersk Oil and Gas A/S (Mogas), had operating losses for FY 1986 to 2010, although the combined segment was highly profitable. The reoccurring losses was explained by the tax authorities as being a result of the group’s transfer pricing setup. “Mogas and its subsidiaries and branches are covered by the definition of persons in Article 2(1) of the Tax Act, which concerns group companies and permanent establishments abroad, it being irrelevant whether the subsidiaries and branches form part of local joint ventures. Mogas bears the costs of exploration and studies into the possibility of obtaining mining licences. The expenditure is incurred in the course of the company’s business of exploring for oil and gas deposits. The company is entitled to deduct the costs in accordance with Section 8B(2) of the Danish Income Tax Act. Mogas is responsible for negotiating licences and the terms thereof and for bearing the costs incurred in this connection. If a licence is obtained, subsequent expenditure is borne by a subsidiary or branch thereof, and this company or branch receives all revenue from extraction. Mogas shall ensure that the obligations under the licence right towards the State concerned (or a company established by the State for this purpose) and the contract with the independent joint venture participants are fulfilled by the local Mogas subsidiary or permanent establishment. Mogas has revenues from services provided to the subsidiaries, etc. These services are remunerated at cost. This business model means that Mogas will never make a profit from its operations. It must be assumed that the company would not enter into such a business model with independent parties. It should be noted that dividend income is not considered to be business income.” According to the tax authorities Mogas had provided know-how etc. to the subsidiaries in Algeria and Qatar and had also incurred expenses in years prior to the establishment of these subsidiaries. This constituted controlled transactions covered by the danish arm’s length provisions. Hence an estimated assessment was issued in which the additional income corresponded to a royalty rate of approximately 1,7 % of the turnover in the two subsidiaries. In 2018, the Tax Court upheld the decisions and Mogas subsequently appealed to the regional courts. Judgment of the Regional Court The Regional 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 Mogas 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 Mogas’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. As a result, the Court referred the cases back to the tax authorities for reconsideration. Excerpts “It can be assumed that MOGAS’s profit before financial items and tax in the period 1986-2010 has essentially been negative, including in the income years in question 2006-2008, whereas MOGAS’s profit including financial items, including dividends, in the same period has been positive, and the Regional Court accepts that income from dividends cannot be regarded as business income in the sense that dividends received by MOGAS as owner do not constitute payment for transactions covered by section 2 of the Tax Act. However, the Regional Court considers that the fact that MOGAS’s profit before financial items and tax for the period 1986-2010 has been essentially negative cannot in itself justify allowing the tax authorities to make a discretionary assessment.” “As stated above, the performance guarantees provided by MOGAS and the technical and administrative assistance (timewriting) provided by MOGAS constitute controlled transactions covered by Article 2 of the Tax Code. The performance guarantees, which are provided free of charge to the benefit of the subsidiaries, are not mentioned in the transfer pricing documentation, and the Regional Court considers that this provides grounds for MOGAS’s income relating to the performance guarantees to be assessed on a discretionary basis pursuant to Section 3 B(8) of the Tax Control Act currently in force, cf. Section 5(3).” “Already because MOGAS neither participates in a joint venture nor acts as an operator in relation to oil extraction in Algeria and Qatar, the Court considers that MOGAS’ provision of technical and administrative assistance to the subsidiaries is not comparable to the stated industry practice or MOGAS’ provision of services to DUC, where MOGAS acts as an operator. Against this background, the Regional Court considers that the Ministry of Taxation has established that MOGAS’ provision of technical and administrative assistance (timewriting) to the subsidiaries at cost price is outside the scope of what could have been obtained if the agreement had been concluded between independent parties, cf. tax act Section 2 (1).” Only part of the decision have been published. Click here for English translation Click here for other translation bs-41574-2018-og-bs-41577-2018

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

Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question. Skechers held that the losses did not derive from the costs of the intra-group purchases of the goods, but from the fixed start-up costs, not compensated by an adequate volume of sales, as an effect also of the competitive Italien market. The provincial and later the regional Tax Commission rejected the taxpayer’s appeal. The judge of appeal held that Skechers had not proved that the losses stemmed from the fixed start-up costs, which – moreover – were found only in relation to the Italien company and not in relation to the distribution companies located in other European countries; it then held that it was Skechers’ burden to prove the arm’s length nature of the costs. Skechers then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision and remanded the case to the Regional Tax Commission in a different composition. Excerpts “6. The following principle of law should therefore be stated: “on the subject of the determination of business income, the transfer pricing rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 22 December 1986. 917 of 22 December 1986 imposes on the tax authorities the burden of proving the existence of transactions between related companies at a price other than the market price, using in this regard the transfer pricing methods described in the OECD Guidelines as soft law rules; once that burden of proof has been discharged, the taxpayer bears the burden of proving that those transactions took place for market values to be considered normal, having regard to the same stage of marketing, time and place where the goods and services were acquired or rendered, having regard – in particular – to the market context in which the taxpayer was operating”. 7. The judgment under appeal, in so far as it burdened the taxpayer company with the proof of the existence and inherent nature of the fixed operating costs, did not comply with the aforesaid principles, both in so far as the burden of proof lies with the Office, and in so far as the burden of proof must relate to the appropriateness of the transfer prices of the purchases of goods, in the market conditions in which the taxpayer company was required to operate, according to one of the criteria indicated in the OECD Guidelines. Nor can the burden of proof be discharged by alleging the mere uneconomicity of management (even if ascribed to the incidence of the aforesaid purchases), since the judge of the merits must verify the use of one of the methods indicated in the aforesaid Guidelines. The merit judge’s assessment must then be carried out in relation to the context in which the taxpayer company was operating at the time of the assessment, during which there had been a high incidence on the typical management of fixed operating costs, due to the start-up phase, which would have required the realisation of higher sales volumes in order to reach the break-even point. 8. The appeal must therefore be upheld and the contested judgment set aside, with reference back to the court a quo, in a different composition, also for the settlement of the costs of the proceedings.” Click here for English translation Click here for other translation Italy vs Skechers USA Italia SRL 2908-2022

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. 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 Administrative Court The court decided in favor of SKF Holding and annulled the decision of the Versailles Administrative Court of Appeal. Excerpt “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, RKS argued before the court, in order to justify this difference, that it 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 and 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 in accordance 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 a drop in volume except for wind turbines. In so doing, it did not respond to the argument that the company raised to justify the drop in margin over the two financial years in question, according to which it 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 RKS October 2021 Conseil d'État, 8ème - 3ème chambres réunies, 04_10_2021, 443130

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

The French tax authorities had issued an assessment to SARL Elie Saab France in which they asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the SARL Elie Saab trademark. The Supreme Administrative Court upheld the decision of the tax authorities. “It is clear from the statements in the judgment under appeal that the company Elie Saab France is responsible for the management, manufacture and distribution for the Elie Saab group of the top-of-the-range daywear line, distributes “Elie Saab” brand accessories for all the group’s entities, as well as the distribution in France and for European customers of the haute couture line, and sells, in its Paris boutique and to boutiques distributing the brand worldwide, a line of evening wear and accessories developed by the group’s Lebanese subsidiary. In addition, Elie Saab France has a showroom in the Paris boutique to present the brand’s haute couture creations, for which it pays the rent and the property fittings as well as the staff costs. Finally, it is responsible for organising the fashion shows of the “Elie Saab” brand for the haute couture and ready-to-wear collections, and is in charge of the brand’s communication and promotional campaigns. Considering that the French company, which has been largely loss-making since its first financial year ended in 2002, was incurring expenses for the benefit of the group as a whole and not for its own activity, the tax authorities reinstated, on the basis of Article 57 of the General Tax Code, in the taxable results of the financial years ended from 2007 to 2010 the amount of expenses related to the promotion of the “Elie Saab” brand and the organisation of fashion shows that had not been re-invoiced to the Lebanese parent company, a margin of 5% for those expenses that had been re-invoiced at cost price, as well as the personnel expenses of the press department.” “Firstly, by rejecting the argument of Elie Saab France that the payment by it of the disputed promotional and communication expenses, which had not been incurred solely to enhance the value of the Elie Saab brand, which was the property of its Lebanese parent company, but also for the exercise of its own activity, in particular in its capacity as the group’s profit centre for the “accessories” activity and as the person responsible for the high-end daytime ready-to-wear line, the court implicitly but necessarily ruled, in a sufficiently reasoned decision and without committing an error of law, that the tax authorities had established the assumption of responsibility by the French company for expenses incumbent on its foreign parent company and, consequently, the existence of a practice falling within the provisions of Article 57 of the General Tax Code.” “Secondly, in holding that Elie Saab France had not established the existence of consideration likely to counter the presumption of transfer of profits to the Lebanese holding company, arguing on the one hand that its parent company had not re-invoiced expenses that it had incurred for the benefit of the group’s entities, such as expenses relating to the provision of services to the group’s employees, The court did not err in law or distort the documents in the file by arguing, on the one hand, that the parent company did not re-invoice expenses that it had incurred for the benefit of the group’s entities, such as expenses related to the provision of support services, to the contract with the Fashion TV channel and to the remuneration of the two co-managers of the parent company and of the group’s creator, and, on the other hand, that the parent company did not invoice a trademark fee.” “It follows from the foregoing that Elie Saab France has no grounds for seeking the annulment of the judgment which it is challenging. Its claims under Article L. 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English Translation Click here for other translation France vs SARL Elie Saab France June 2021 Conseil d'État Case No 433985FR

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

A fully fledged Norwegian distributor in the H group was restructured and converted into a Limited risk distributor. The tax authorities issued an assessment where the income of the Norwegian distributor was adjusted to the median in a benchmark study prepared by the tax authorities, based on the “Transactional Net Margin Method” (TNMM method). Decision of the Tax Board In a majority decision, the Tax Board determined that the case should be send back to the tax administration for further processing. Excerpt “…The majority agrees with the tax office that deficits over time may give reason to investigate whether the intra-group prices are set on market terms. However, the case is not sufficiently informed for the tribunal to take a final position on this. In order to determine whether the income has been reduced as a result of incorrect pricing of intra-group transactions and debits, it is necessary to analyze the agreed prices and contract terms. A comparability analysis will be needed, cf. OECD TPG Chapter III, including especially OECD TPG Section 3.4. to be able to determine whether the intra-group prices have been at arm’s length. When analysing the controlled transactions and identifying possible comparable uncontrolled transactions, reference must be made to the comparability factors as instructed in OECD TPG section 1.36. A functional analysis must be performed to identify which party to the contractual relationship is to form the basis for the choice of pricing method in accordance with OECD TPG clause 3.4, step 3, as well as a market analysis to identify how this may affect the price in the controlled transactions. See OECD TPG Section 3.7, step 2. In the majority’s view, the tax office is closest to making the necessary analyzes and assessments of the above matters. The majority therefore believes that the decision should be revoked and sent back to the tax office for possible new processing, cf. the Tax Administration Act § 13-7 (3).” Click here for translation Spørsmål om inntekten til selskapet er ..

Weitian Technology Co. Ltd (AKA ProLight Opto Technology Corp), a Taiwanese company active in the global LED industry, claimed that factors affecting market prices had not been fully considered while determining the prices of products sold to its subsidiary in Shanghai, and that this had caused major losses in the subsidiary. To account for these losses, at the end of 2015, a year end adjustment was made, which was reported as a tax deductible sales allowance in the tax returns. The tax authorities denied the deduction. An appeal was filed by the company with the Supreme Administrative Court in 2019. Judgement of the Supreme Administrative Court The court dismissed the appeal. Deductions for the year end adjustment could not be allowed in this case for the following reasons: A year end adjustment is a mechanism provided to MNEs to achieve an arm’s-length result when the agreed terms and conditions pertaining to the price-relevant factors are changed. Documents must demonstrate the reasons for making the adjustment, the method for the adjustment, and the terms and conditions of the adjustment. Weiwei Technologies provided only internal approvals and debit notes. There were no documents showing conditions or terms, whether price-relevant factors had been concluded by both parties, or how the adjustment would occur for each transaction. Click here for English Translation Taiwan 109-661 Click here for other translation Taiwan 109-661

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. The Administrative Court decided in favour of Ferragamo and dismissed the assessment. According to the Court the tax administration has not demonstrated the existence of an advantage granted by Ferragamo France to Salvatore Ferragamo SPA, nor the amount of this advantage. Judgement of the Conseil d’Etat The Conseil d’Etat overturned the decision of the Administrative Court and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Click here for English Translation Click here for other translation Fr vs IT fash

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

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

The activity of Spółka A sp. z o.o. included salmon breeding, processing, smoking and sale and distribution of the finished products. The company operated within Group A with head quarter in the Netherlands. By decision of 27 May 2019, the tax authorities determined that the operating expenses determined by transactions with related parties were inflated by PLN 29,613,156.00. The authorities did not accept calculations presented by the Company, as there were no reliable accounting records regarding the amount of costs incurred. Furthermore, the authorities held that the cost plus method, which should guarantee profit on the transaction in the Company, had been applied incorrect. The dispute before the administrative Court boils down to assessing whether the court of first instance, in compliance with the provisions in force, reversed the decision of the authorities in its entirety and referred the case back for reconsideration due to the deficiencies found in the evidentiary proceedings, making it necessary to conduct the proceedings in a significant part. “As indicated by the Supreme Administrative Court in its judgment of 20 June 2018 in case II FSK 1665/16, the regulation contained in Art. 11 of the LLD is a special regulation and its purpose is to protect the interests of the State Treasury against such activities of taxpayers which consist in applying prices deviating from market prices in controlled transactions in order to achieve a favourable tax result for themselves. Therefore, the rationale for the application of Article 11 of the ACT is not only the fact of occurrence of the relationship referred to in paragraphs 1 and 4, but the use of those relationships to change the level of taxation (tax avoidance). The regulation contained in Article 11 of the CFRA is based on the assumption that all transactions should comply with market conditions, i.e. conditions which would be agreed upon by independent entities in the same or in a similar situation. However, the mere fact of economic relations referred to in Article 11 of the CFR may not in itself give rise to negative tax consequences for related entities. However, the use of such relationships to change the level of taxation contrary to the statutory obligation is of tax significance. Using the position of affiliated entities for such purpose finds a tax sanction, which is the estimation of income. However, this sanction cannot be applied without proving that the related party position is used to shift income (profits) in order to reduce taxation. The findings in this respect should have the characteristics of a clear, logical conclusion from the evidence gathered. “…The estimation of prices applied in transactions between taxpayers and related parties cannot be made solely by simply transferring the price or margin from a transaction between independent parties – without assessing the comparability of the terms of those transactions. The tax authority, based on comparative data, should therefore primarily demonstrate the reliability of the transactions (entities) compared, and thus also refer to the economic functions and strategies applied by operators, also in the context of assessing the importance of these factors for the possibility of comparison.” “…in the opinion of the Court, the Director of the Chamber rightly revoked the decision of the tax authorities of 27 May 2019 due to failure to observe the obligation to analyse the possibility of applying the so-called traditional methods of estimating the income of a Party, indicated in the Regulation, and failure to justify the reasons why the Body decided that those methods could not be applied in this case. The First Instance Authority did not justify that the most appropriate pricing method in the case should be the transactional net margin method.” Click here for translation Poland vs Sp zoo July 2020

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle). In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to the relevant provocations that H1 A/S has not lifted the burden of proof that the payments of royalties to the group-affiliated company G1 SA, constitutes a deductible operating expense, cf. section 6 (a) of the State Tax Act. 4.5 and par. 4.6, the national court finds that the company’s royalty payment cannot otherwise be regarded as a deductible operating expense.” Adecco appealed the decision to the Supreme Court. The Supreme Court overturned the decision of the High Court and ruled in favor of Adecco. The Supreme Court held that the royalty payments had the nature of deductible operating costs. The Supreme Court also found that Adecco A/S’s transfer pricing documentation for the income years in question was not insufficient to such an extent that it could be considered equal to lack of documentation. The company’s income could therefore not be determined on a discretionary basis by the tax authorities. Finally, the Supreme Court did not consider that a royalty rate of 2% was not at arm’s length, or that Adecco A/S’s marketing in Denmark of the Adecco brand provided a basis for deducting in the royalty payment a compensation for a marketing of the global brand. Click here for translation DK Adecco HR-dom 250620

SAS RKS, a French subsidiary of the Swedish SKF group, was engaged in manufacturing of bearings. RKS had, with the exception of 2008, had a negative results since 2005. Following an audit for FY 2009 and 2010, the French tax administration by application of the TNMM method, determined that SAS RKS should have a net profit margin of 2.33% in 2009 and 2.62% in 2010. The tax assessment was brought to the Montreuil Administrative Court, and in April 2018 a judgement in favor of the company was issued. This judgement was appealed by the tax authorities to the CAA. The CAA overturned the judgment of the Administrative Court and found in favor of the tax authorities. “The administration has qualified as hidden income the profits mentioned in the preceding paragraphs, transferred by the company RKF to the business units of the SKF group, established abroad. While the applicant does not dispute that the reduction in its prices may constitute income distributed in a concealed manner, it submits that the administration has not adduced evidence of an intention to grant and receive a benefit without consideration. However, it follows from the above that RKS has sold its products at a loss since 2005 and that its purchasers have benefited, during the same period, from transfer prices decided each month by the Swedish parent company AB SFK in order to guarantee them a gross margin of 3 %, irrespective of the cost price of these products to their supplier. Under these conditions, which are unrelated to the formation and negotiation of prices in normal commercial relations, the intention to grant and receive a benefit is established.“ Click here for translation CAA de VERSAILLES, 1ère chambre, 22_06_2020, 18VE02848, Inédit au recueil Lebon _ Legifrance

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

A Oy had operated as the marketing and sales company of an international group in Finland. With the exception of 2008, the company’s operations had been unprofitable in 2003-2011, while at the same time the Group’s operations had been profitable overall. A Oy had purchased the products from the contract manufacturers belonging to the group. The method used in the Group’s transfer pricing documentation for product purchases had been characterized as a modified cost-plus / profit margin method (TNMM). The tested parties were contract manufacturers belonging to the group, for whom four comparable independent companies had been found in a search of the Amadeus database. According to the documentation, the EBITDA target margin for the Group’s contract manufacturers was set at two percent. When submitting A Oy’s tax return for 2010, the tax Office had considered, on the basis of the OECD’s 2010 Transfer Pricing Guidelines (paragraphs 1.70 – 1.72), that in independent business transactions the sales company would have received a  compensating adjustment or other equivalent credit as an adjustment. In addition, the tax office had considered that the analysis of the manufacturing companies had not made it possible to assess A Oy’s situation with sufficient reliability in relation to the long-term losses of A Oy’s operations. For this reason, the tax office had used A Oy as a test party when it had determined the company’s arm’s length profit level. Based on its report, the tax office had made an increase in the amount of taxable income reported by the company for the tax year 2010 and 2007-2009. The Supreme Administrative Court held that the loss of the group company did not in itself indicate that the company were to receive a service fee or other consideration from other group companies who could be considered to have benefited from the activities of the loss-making sales company. When determining the market conditionality of a loss-making group company’s transfer prices using the cost-plus or transaction margin method, the OECD transfer pricing guidelines require that a company for which reliable data can be found for the most closely comparable transactions be tested. Taking into account the activities performed by A Oy on the one hand and the contract manufacturers belonging to the A group on the other hand, the risks borne by them and their assets, A Oy should not have been chosen as the tested party. The contract manufacturers belonging to the group should have been selected as the companies to be tested, as had been done in the transfer price documentation of the A group. It had not been alleged in the case that A Oy’s transfer pricing had not been carried out in accordance with the transfer pricing documentation prepared by the Group or that the independent companies referred to in the Group’s transfer pricing documentation were not comparable. Therefore, and because A Oy had presented business reasons for its losses, the Supreme Administrative Court annulled the tax adjustments. Click here for translation KHO2020-34

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

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o. with the Regional Court. Judgement of the Regional Court The court dismissed the appeal and upheld the assessment of the tax authorities. In its decision the Regional Court concluded that Aisan Industry Czech, s.r.o. should have been compensated for carrying out manufacturing services to the benefit of the multinational Aisan Industry group. The court also concluded that Aisan Industry Czech, s.r.o. was in fact a contract manufacturer – as stated in the original transfer pricing documentation – and not a full-fledged manufacturer as stated in the later “updated” transfer pricing report in which the FAR profile of the company had been significantly altered after receiving the initial assessment. According to the Regional Court, it had been established that the price of the service negotiated between the Aisan Industry Czech, s.r.o. and its parent company Aisan Industry Co., Ltd. was different from the price that would have been negotiated between independent parties under the same commercial conditions. By selling products to related and unrelated parties at prices determined by the group, Aisan Industry Czech, s.r.o. did not even achieve a minimum level of operating profitability. In FY 2011 Aisan Industry Czech, s.r.o. had a negative profit margin of 3,27 %. According to the court Aisan Industry Czech, s.r.o. should have received a remuneration of CZK 61 080 700 from the Aisan group for the manufacturing services, i.e. the difference between the operating margin it would have achieved at at arm’s length, 1,26 % (the minimum of the profit margin of comparable entities), and the profits it had actually achieved -3.27 %. According to the Regional Court, it was not the pricing of the individual products that was relevant, but rather the overall set-up of Aisan Industry Czech, s.r.o.’s operation within the Aisan group as a contract manufacturer bearing disproportionate risks which were not compensated. Therefore it was not appropriate to set a reference price and analyse the individual transactions since the involvement in the group distorted both transactions with related and unrelated parties, as all the prices had been determined by other group entities. Click here for English Translation Click here for other translation 15Af_105_2015_29

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions had been concluded between independent parties. SKAT does not consider it in accordance with section 2 of the Tax Assessment Act that during the period 2006 to 2009, H1 A/S had to pay royalty to G1 SA for the right to use trademark, “know-how intangibles” and “ international network intangibles ”. An independent third party, in accordance with OECD Guidelines 6.14, would not have agreed on payment of royalties in a situation where there is a clear discrepancy between the payment and the value of licensee’s business. During the period 2006 to 2009, H1 A/S did not make a profit from the use of the licensed intangible assets. Furthermore, an independent third party would not have accepted an increase in the royalty rate in 2006, where the circumstances and market conditions in Denmark meant that higher profits could not be generated. H1 A/S has also incurred considerable sales and marketing costs at its own expense and risk. Sales and marketing costs may be considered extraordinary because the costs are considered to be disproportionate to expected future earnings. This assessment takes into account the licensing agreement, which states in Article 8.2 that the termination period is only 3 months, and Article 8.6, which states that H1 A/S will not receive compensation for goodwill built up during the contract period if the contract is terminated. H1 A/S has built and maintained the brand as well as built up “brand value” on the Danish market. The company has contributed to value of intangible assets that they do not own. In SKAT’s opinion, an independent third party would not incur such expenses without some form of compensation or reduction in the royalty payment, cf. OECD Guidelines 6.36 – 6.38. If H1 A/S was not associated with the trademark owners, H1 A/S would, in SKAT’s opinion, have considered other alternatives such as terminating, renegotiating or entering into more profitable licensing agreements, cf. OECD Guidelines 1.34-1.35. A renegotiation is precisely a possibility in this situation, as Article 8.2 of the license agreement states that the agreement for both parties can be terminated at three months’ notice. The control of the group has resulted in H1 A/S maintaining unfavorable agreements, not negotiating better terms and not seeking better alternatives. In addition, SKAT finds that the continuing losses realized by the company are also due to the Group’s interest in being represented on the Danish market. In order for the Group to service the global customers that are essential to the Group’s strategy, it is important to be represented in Denmark in order to be able to offer contracts in all the countries where the customer has branches. Such a safeguard of the Group’s interest would require an independent third party to be paid, and the company must therefore also be remunerated accordingly, especially when the proportion of global customers in Denmark is significantly lower than in the other Nordic countries.“ Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle) . In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to

A/S Norske Shell – an entity within the Dutch Shell group – had operations on the Norwegian continental shelf and conducted research and development (R&D) through a subsidiary. All R&D costs were deducted in Norway. The Norwegian tax authority applied the arms length principle and issued a tax assessment. It was assumed that the R&D expense was due to a joint interest with the other upstream companies in the Shell group. The Court of Appeal found that the R&D conducted in Norway also constituted an advantage for the foreign companies within the group for which an independent company would demand compensation. The resulting reduction in revenue provided the basis for determining the company’s income on a discretionary basis in accordance with section 13-1 of the Tax Act. The tax authorities determination of the amount of the income reduction had not based on an incorrect or incomplete fact, nor did the result appear arbitrary or unreasonable. The Court of Appeal concluded that the decision was valid and rejected the company’s appeal. The judgement has later been appealed to the Supreme Court, HR-2020-122-U. Click here for translation No vs Shell Borgarting lagmannsrett 2019

The Italian company J.T.G.P spa, a subsidiary in a multinational pharma group ALPHA J, had recorded operating losses for fiscal years 1997 to 2013, where, at a consolidated level, the group had showed positive results. According to the Italian tax authorities, the reason why the Italian company was still in operation was due to the fact that the group had an interest in keeping an international profile, and to that end the Italian company performed marketing activities benefiting the Group. An assessment was issued where the taxable income of the Italian company was added compensation for inter-company marketing services carried out by the Italian company on behalf of the group. The company argued that the pharmaceutical market and the governmental policy on the prices of medicines in Italy was the reason for the losses. In support of this claim the company submitted broad documentary evidence during the audit. Judgement of the regional Court The Court held in favor of the taxpayer. According to the Court, the company had demonstrated that the reasons for the losses were not the result of improper transfer pricing policies, but rather local market conditions – drug prices, etc. Furthermore, the court found that no conclusive evidence had been provided by the tax authorities to support the existence of “hidden” marketing services performed by the Italian company to the benefit of the group. Excerpt “The existence of losses has been demonstrated by the taxpayer where the type of products marketed and the specificity of the Italian pharmaceutical market, which is stationary as a result of the forced reduction in the prices of reimbursable drugs and the regulation of price increases for C-range products and the difficulty of competing with larger groups, have been highlighted. In addition, the company does not operate in the field of generic products but deals exclusively with general practitioners and specialists and distributes its products through a network of pharmaceutical wholesalers who, in turn, serve pharmacies throughout the country and is subject to government policies regarding the pricing of pharmaceutical products. In any event, it should be noted that, from a statutory point of view, the company had achieved positive results in 2013 and in subsequent years in terms of net income, as shown by the financial statements for the years ended 31 December 2013, 31 December 2014, 31 December 2015 and 31 December 2016 on file, nor did the Office prove that the services had resulted in an advantage for the group, having limited itself to presumptions.“ Click here for English translation Click here for other translation Italy vs Corp Commissione tributaria 1 marzo 2019, Case n. 928

A Polish Subsidiary A SP. z o.o. had incurred a loss in 2012 in the amount of PLN 1,357,333.66 and following an audit the tax authorities issued an assessment whereby the loss was reduced by an amount of PLN 234,019.90. The disputable issue was whether, in the circumstances of the case under consideration, the tax authorities correctly determined the amount of the applicant’s loss for 2012 in an amount other than that resulting from the correction of the declaration due to the finding that the Company undervalued income from transactions concluded with related entities for a total amount of PLN 234,019.90. The Administrative Court dismissed the complaint of A SP z o.o. According the the provided transfer pricing documentation the company had applied a TNMM and determined remuneration based on cost added a fixed percentage of 4% for the parent company, 8% for other companies. Meanwhile, the mark-ups actually applied by the applicant company in transactions concluded with related entities: B K- S.RA. and K-LLC – (booked on accounts 70101 and 70301) showed that they differ significantly from the above-mentioned mark-ups resulting from the transfer price documentation submitted by the Company, corresponding to market conditions. The applicant did not even try to explain this discrepancy. Therefore, the tax authority correctly calculated the amount of understatement / overstatement of revenues from sales made by the Company to related entities, referring the value of the mark-up resulting from transfer pricing documentation (4% for the parent company, 8% for other companies) to the value of costs related to individual transactions. In the opinion of the Court, the tax authorities showed without doubt that the transactions concluded by the Company with related entities set conditions different from those that would be determined by independent entities and that, as a result, in the audited tax year the Company reduced sales revenues by PLN 234,019.90, which was a premise to apply on the provisions of art. 11 paragraph 1 updop and annual settlement of the Company for 2012. without considering existing relationships. Click here for translation Benchmark - cost I SA - Gd 530-19 (8)

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation France vs ST Dupont 1092183260

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

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. Part 1 – Click here for translation Part 2 – Click here for translation Putusan Nomor

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory on sales of blueberries (2.56%) did not cover the costs of consumption of materials and energy, third party services, depreciation and other costs, which resulted in a loss for 2012. (PLN 218,838.03), and losses for 2011 and 2013. The application of excessive fruit purchase prices from the Company’s shareholders (4 persons running fruit farms and 1 farm owner), with family, personal and capital ties, also resulted in the Blueberry Factory taking out 6 loans from it’s shareholders for the total amount of PLN 877,697.70. in 2012. The average gross margin of the Blueberry Factory when selling goods (blueberries) in 2012 was 2.2%. Meanwhile, unrelated entities, selected in the course of the proceedings, which were involved in the purchase and sale of blueberries, having the relevant certificates necessary to sell fruit abroad, had gross margins ranging from 3.5% to 21.87%. The tax authorities held that the average gross margin in comparable transactions was 11.35% and PLN 2.27 per kilogram. The tax authorities determined the Blueberry Factory’s corporate income tax liability for 2012 at PLN 22,114, instead of the declared loss (PLN 218,838.03). The Court of first instance agreed with the tax authorities that there were capital, personal and family ties between these entities. In the opinion of the court, all the conditions referred to in Art. 11.1 of the Polish Act on Public Offering, which authorises the determination of the income and tax payable by way of estimation, had been fulfilled. The Court also considered the pricing method used by the authorities – resale prices – to be appropriate. The comparability analysis took into account both the type and quality of fruit traded (the fact of holding certificates). The average margin applied by independent entities was calculated. In estimating the cost of blueberry fruit purchased by the Company, favourable assumptions were made, as the basis for the estimation was the margins applied by entities (fruit producer groups) which purchased blueberry fruit, holding only the G-certificate and applying the lowest margins among the surveyed entities. The comparability analysis also took into account, among others, such factors as the certificates held, type of recipients of the goods (domestic and foreign), type of entity, production process, technologies used, type and time of transactions. The Court also deemed it appropriate that DUKS issued a provision under Art. 179.1 of the Polish Corporate Governance Act, which excluded information on entities conducting business competitive to the Company. The Blueberry Factory filed a complaint against the decision. The Supreme Administrative Court considered that the appeal was justified and therefore had to be granted. The gist of the dispute in the case at hand is to assess whether, in fact, the procedure for estimating income [Article 11 of the Act] was carried out correctly, as claimed by the authority and accepted by the Court of First Instance, or, as the applicant argues in cassation – with a breach of the provisions of the Act and the Regulation – which is linked to the authority’s analysis of the comparability of transactions. “All this allows us to conclude that, although the OECD Transfer Pricing Guidelines do not contain standards of generally applicable law (Article 87(1) of the Polish Constitution), when interpreting the provisions governing the prerequisites for the use of transfer pricing and the general conditions for determining income by means of estimation (Article 11(1) to (3) of the Act), the indications of those guidelines should be taken into account as a kind of “set of good practices” and a point of reference for choosing the right interpretative direction.” “In the light of the above, contrary to what the WSA suggested, the aforementioned guidelines will be relevant to the assessment of the assessment method used by the authority and, in particular, of its implementation.” The Court of first instance did not sufficiently consider the proceedings conducted by the authorities – in particular with regard to the comparability analysis. It was principally assumed that the Company’s business model was the basis for its market strategy – which in its opinion was to generate losses in order to maximise profits of its shareholders. At the same time, despite arguments consistently raised by a party in the course of proceedings, the court did not address issues regarding comparability factors. First of all, the key issue in this case, namely that the party has the status of an agricultural producer group. This, in turn, raises other relevant issues: – the specific nature of the entity, the principles and essence of the group’s operation, the scope of the objectives it should pursue, the strategy of producer groups – the use of aid measures, the issue and importance of the Recognition Plan, the issue of the group’s market strategy during the recognition period. The Supreme Administrative Court referred the case back to the Court of first instance for reconsideration. Poland II FSK 1665-16 en Poland II FSK 1665-16

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company of the group and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. In 2015 the Administrative Court of Appeal ruled in favor of Reca Quimica due to formal grounds. However, the assessment was allowed to be issued again in accordance with the guidelines set out in the ruling. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the Judgement of the Administrative Court of Appeal, except for allowed claims in respect of the award of damages and interest, which was annulled. The Courts considered that the the authorities had made an error in motivating the adjustment on a presumed basis determination, without complying with the legal requirements established for this type of tax determination. Furthermore, they said that if transfer prices had been determined, the authorities should have applied the adjustment according to one of the methods established by the OECD on a certain basis, and not on a presumed basis. The judicial decision commits, in our opinion, a mistake. The five OECD methods are to determine whether or not there is transfer pricing. These methodologies are designed to examine whether prices between related parties are adjusted or not, to transactions in comparable circumstances between independent parties. But once it has been determined that there are transfer prices, what is appropriate is precisely to adjust them to prices under competitive conditions. The new price must then be set by the authorities, so that it is the basis for determining the corresponding tax obligations.” Excerpts “…this Chamber endorses the Court’s decision, insofar as it ruled that this discrepancy did not allow the use of the presumed basis method. Likewise, it considered, “…this allegation is fallacious, since using a margin in sales to related companies abroad different from that used in sales to other companies is not a true accounting irregularity or defect”. This is due to the fact that the accounting of the plaintiff could not be qualified as omissive, irregular and contradictory, since the taxpayer did not fail to provide information on its transactions, but rather, based on its reality, reported a different, -minor- profit in the transactions carried out with its related companies abroad (regardless of their normality), then the Administration should have applied the method of certain basis, via transfer prices.” “Hence, there is no doubt that what the Administration should have done was to determine, -by using transfer prices- whether the price at which it sold to its related companies abroad was dissimilar to the market price, but never to use, as it did, the estimate based on a presumptive basis. For, as explained above, the plaintiff provided in her declaration information on the price at which she sold to her related companies abroad. According to the OECD (Organisation for Economic Co-operation and Development), there are five approved transfer pricing mechanisms, namely, first, the comparable free price method. Second, the resale price method. Third, the cost plus method. Fourth, the net transaction margin method; and fifth, the profit split method. With regard to this point, Executive Decree no. 37898-H of 5 June 1998 is currently in force in the legal system. 37898-H of 5 June 2013, and at the time of the facts that are of interest in the sub-lite, Interpretative Guideline no. 20-03 was in force, -with support in regulations 8 and 12 of the TC-. The legality of that Guideline was ratified by the Constitutional Chamber since its decision no. 2012-04940 of 15 hours 37 minutes on 18 April 2013. Consequently, the Court rightly stated: “…-based on what was indicated by the Chamber and taking into account the erga omnes binding effect of the constitutional jurisprudence (article 13 of Law 7135)- there is no contradiction between the transfer pricing methodology and the application of the economic reality principle of paragraphs 8 and 12 of the CNPT, nor is there any impediment to resort to the former even in the absence of an express legal rule that incorporates it into the Costa Rican legal system”. Thus, in this case, contrary to what was argued by the Administration, none of the assumptions established in canon 124 of the TC were met, so as to empower it to apply the presumptive basis methodology (article 125 ibid); on the contrary, according to the information provided by the plaintiff in its tax return, what was relevant was the application of the transfer pricing methodology, through any of its five mechanisms, so as to arrive at the correct determination of the tax liability. By not doing so, it is clear, as the judges ruled, that the Administration acted illegally, given that it should have applied the certain base method, which, since it was dealing with a transfer pricing case, should have been examined in accordance with the technical regulations of the OECD, which was feasible in accordance with the legal system in force at that time. Therefore, the complaint should be rejected.” Click here for English translation Click here for other translation Purto Rica vs RECA QUÍMICA 2017

The Finnish tax authorities had made a transfer pricing adjustment to a Finnish marketing and sales subsidiary with continuous losses. The tax authorities had identified a “hidden” services transaction between the Finnish subsidiary and an unidentified foreign group company. The Administrative Court ruled in favor of the tax authorities. The adjustment was not considered by the Court as a recharacterisation. Reference was made to TPG 2010, paragraphs 1.34, 1.42 to 1.49, 1.64, 1.65 and 1.70 to 1.72. Click here for translation Finland vs Loss Corp 29 December 2017 Administrative Court 17-0979-4

The issue in this case was whether tax administration could tax a “non-existent income” through the “deeming provisions” of s 98 of Zimbabwe’s Income Tax Act. A lease agreement and a separate logistical agreement had been entered by CRS Ltd and a related South African company, for the lease of its mechanical trucks, trailers and tankers for a fixed rental. The tax payer contended that the rentals in the agreements were fair and reasonable. The tax administration contended that they were outrageously low so as to constitute under invoicing and tax avoidance. The court ruled in favor of the tax administration. Excerps from the Judgement: “Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out- (a) was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or (b) has created rights or obligations which would not nonnally be created between persons dealing at arm’s length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and the Commissioner is of the opinion that the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement or reduction.” “Accordingly, I agree with Mr Bhebhe that the agreements had the stipulated effect of avoiding or reducing the appellant’s liability for income tax. The circumstances prevailing at the time the agreement was entered into or carried out In the hyperinflationary era, the appellant averred that it could not secure local contracts that would enable it to fully utilize all its assets. The local currency Jost value at an alarming rate. The pricing of transport services became a nightmare. The income derived from transport services could not sustain the local operations. It was faced with the spectre of liquidation and staff retrenchments. The effect of which was that its loyal and skilled manpower mainly consisting of approximately 110 drivers would lose their only source of livelihood for themselves and their families while the company mechanical horses and trailers would deteriorate through disuse. The appellant could not access the foreign currency required to purchase spare parts and fuel necessary to keep the local operations running.” “It is a notorious fact of commercial life that related parties enter into contractual amngements. I did not discern any abnormalities in the nature of the agreements nor in the identities of the signatories. There was however an admixture of the normal and abnormal in the manner in which the agreements were carried out. For starters, the appellant overemphasized the indisputable uniqueness of the manner in which the agreements were carried out. In the letter of 24 October 2013 at p 50.1 para 11 the external accountants for the appellant wrote that “the appellant’s position is unique in the transport regime of Zimbabwe and there is no other haulier which provides a similar service.” The same point was repeated in the letter of 6 December 2013 at p 45.1 in para 1.2 where the same accountants indicated that they “were unaware of any Zimbabwean company which operates in the same unique situation as the appellant.” “In assessing the information availed to the Commissioner by the appellant and to this Court by both the appellant and the Commissioner, I am satisfied the agreements were carried out in a manner which would not normally be employed in such transactions. In the light of the formulation of Trollip JA in Hicklin v Secretary for Inland Revenue, supra, it appears to me that the two parties were not acting at arm’s length.” “It was clear that each party derived tangible benefits from the agreements. The related party had the right to lease the equipment and the obligation to pay rentals and maintain the equipment. The appellant received a fixed rental. The obligation to meet the maintenance and running expenses was unique and abnonnal. The fixed rentals which negated the cost plus mark-up principle was abnormal and would not have been concluded by parties dealing at arm’s length.” “It seems trite to me that the purpose of a private company is to make a profit. The appellant is not a non-profit making organisation. The appellant was content with the untenable situation in which it made and continues to make losses without any prospects of ever making a profit. It seems to me that the fixed rental was deliberately designed to ensure that the appellant would remain viable enough to survive liquidation and costly retrenchments and at the same avoid or reduce its income tax liability.” “I am satisfied that the avoidance or reduction of income tax liability was one of the main purposes of the agreement (s).” “In my view, the transactions undertaken by the appellant fell into the all-embracing provisions of s 98. The respondent correctly invoked this provision in assessing the appellant to income tax in each of the four tax years in question.” “The appellant strongly argued against the alteration of the contract of lease concluded between the related parties by the respondent. While Mr Bhebhe conceded that the respondent did not have the legal authority to alter the contract of the related parties

Herbalife International India is a subsidiary of HLI Inc., USA. It is engaged in the business of dealing in weight management, food and dietary supplements and personal care products. The return of income for the assessment year 2006-07 was filed declaring Nil income. The Indian company had paid royalties and management fees to its US parent and sought to justify the consideration paid to be at arm’s length. In the transfer pricing documentation the Transactional Net Margin Method (TNMM) had been selected as the most appropriate method for the purpose of bench marking the transactions. The case was selected for scrutiny by the tax authorities and following an audit, deductions for administrative services were denied and royalty payments were reduced. Disagreeing with the assessment Herbalife filed an appeal. Decision of the Income Tax Appellate Tribunal The Tax Appellate Tribunal dismissed the appeal of Herbalife and upheld the tax assessment. Excerpts “The appellant had not filed any additional evidences to prove the administrative services/technical knowhow are actually received by the appellant and thus the assessee company had failed to discharge this onus of proving this aspect. Therefore, even as per the provisions of Indian Evidence Act, the presumption can be drawn that the assessee has no evidence to prove this aspect. Therefore, the AO/TPO was justified in adopting the ALP in respect of payment of administrative services and royalty at Nil. Thus, the grounds of appeal in ground Nos. 2 to 7 are dismissed. In respect of the other grounds of appeal, since we held that there was no proof of receipt of administrative services as well as technical knowhow which is used in the process of manufacturing activity, the question of bundling of transaction or aggregating all other transactions does not arise.” “Thus all the grounds of appeal relating to the royalty and administrative services have been dismissed. Then the only ground of appeal that survives is ground IT(TP)A No.1406/Bang/2010 IT(TP)A No.924/Bang/2012 relating to uphold of disallowance on account of doubtful advance written off of Rs.1,20,16,395/-. The brief facts surrounding this addition are as under:” India vs Herbalift Income Tax Appellate Tribunal

A Russian subsidiary of the Suzuki/Itochu group had been loss making in 2009. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were due to non-arm’s length transfer pricing within the group and excessive deduction of costs. Decision of the Court The Court decided in favor of the tax authorities and upheld the assessment. “In view of the above, the appeal court considers that the courts’ conclusions that the Inspectorate had not proved that it was impossible to apply the first method for determining the market price and that the Inspectorate had incorrectly applied the resale price method were unfounded.” “In this light, the courts’ conclusions that the Inspectorate incorrectly applied the second method of determining the market price are unfounded.” “In such circumstances, the Inspectorate’s conclusion on the overstatement of the purchase price of vehicles is based on the application of market data and made in compliance with Article 40 of the Tax Code. The courts had no grounds to satisfy the applicant’s claims for the recognition of the Inspectorate’s decision in this part.” “The rest of the judicial acts are lawful and justified. In accordance with Article 252 of the Tax Code recognizes expenses reasonable (economically justified) and documented costs, performed (incurred) by the taxpayer. Herewith, any expenses are considered as expenses on condition that they were incurred for the realization of activities aimed at receiving income.” An appeal filed by Suzuki to the Russian Supreme Court was later dismissed in December 2016. Click here for English Translation RUS vs Suzuki A40-111951-2012_20160802

L’oreal in India is engaged in manufacturing and distribution of cosmetics and beauty products. In respect of the distribution L’oreal had applied the RPM by benchmarking the gross margin of at 4o.80% against that of comparables at 14.85%. The tax administration rejected the RPM method on the basis that the L’oreal India was consistently incurring losses and the gross margins cannot be relied upon because of product differences in comparables. Accordingly, the tax administration applied Transactional Net Margin Method. L’oreal argued that the years of losses was due to a market penetration strategy in India – not non-arm’s-length pricing of transactions. The comparables had been on the Indian market much longer than L’oreal and had established themselves firmly in the Indian market. The Appellate Tribunal observed that L’oreal India buys products from its parent and sells to unrelated parties without any further processing. According to the OECD TPG, in such a situation, RPM is the most appropriate transfer pricing method. L’oreal India had also produced evidence from its parent that margin earned by the parent on supplies to L’oreal India was 2% to 4% or even less. The tax administration had not disputed these facts. The tax administrations statement, that the parent have earned higher profit, was not based on facts. The Tribunal found that profit earned by the parent was reasonable and hence there was no shifting of profits by L’oreal India to its parent. See also: India vs. Loreal 12 April 2012  and  India vs. Loreal 25 Oct. 2012 L'Oreal_India_P.Ltd,_Mumbai_vs_Assessee_on_4_May,_2016

A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses on a reoccurring basis. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies and issued an assessment for FY 2009 – 2010 in the amount of 857 741 779 rubles. The assessment was partially  upheld by the Arbitration Court and then appealed to the Supreme Court. Decision of the Russian Supreme Court The Supreme Court dismissed the appeal lodged by HYUNDAI. “In checking the calculation of the market price of the goods, the court, having assessed whether the data given in the calculation of the market price for the acquisition of the vehicles corresponded to the data contained in the primary documents, came to the conclusion that the calculation presented by the inspectorate was justified. The court considered that the tax authority had made the calculation on the basis of the particular characteristics and sale of each particular car (according to the VIN). Under such circumstances, the court concluded that the taxpayer overstated the amount of costs to reduce income from sales for 2009 in the amount of 136 475 133 rubles, for 2010 – in the amount of 500 997 837 rubles. The cassation appeal contains no arguments related to the episode involving application of thin capitalization rules to interest on bank loans. In studying the arguments contained in the complaint, it was established that they were reduced to a review of the factual circumstances of the case established by the courts and could not be the subject of the Judicial Board of the Supreme Court of the Russian Federation, which in virtue of paragraph 1 of Part 7 of Art. 291.6 of the Arbitration Procedural Code of the Russian Federation with authority to review the circumstances established by the courts of lower instances. The courts have not committed any violations of the rules of substantive law or of the requirements of procedural law, which entail unconditional cancellation of the judicial acts.“ Click here for English Translation Rus vs Hyu 2016 A40-50654-2013_20160120

A Russian subsidiary of the Mazda Motors Group had been claiming losses. Following an audit the tax authorities concluded that losses for FY 2009, was due to overstatement of the purchase prices of Mazda cars. An assessment was issued where the pricing was determined using the Resale Price Method, resulting in additional income of 1,362,172,034 rubles. The Arbitration Court held in favor of the tax authorities and this decision was upheld by the Arbitration Court of Appeal. The decision was then appealed to the Supreme Court. The Supreme Court denied the appeal and upheld the decision of the Arbitration Court. Click here for English Translation RSC Mazda A40-4381-2013_20151014

A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses in fiscal years 2008 and 2009. In the opinion of the tax authority, losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies. Decision of the Russian Arbitration Court According to the court, the applied transfer pricing method is not applicable in the present case. A comparison with wholesalers in the Russian automotive market cannot be made, it said. The reason for this is the common sales strategy of automotive groups in Russia. Almost all non-Russian manufacturers distribute their automobiles through affiliated wholesale companies, which in turn purchase the vehicles from affiliated companies abroad. The only exceptions in this context are currently companies such as Volkswagen or BMW, which operate their own production facilities in Russia. Therefore, a reliable identification of comparable business transactions with regard to independent Russian importers is not possible. The second conclusion of the court refers to the negative market development caused by the financial crisis in 2008/2009. Accordingly, the economic development alone does not constitute a sufficient reason for the recognition of losses of a distribution company. With this assessment, the courts followed the opinion of the competent tax authorities in characterizing the local HYUNDAI sales companies as routine companies. A Russian sales company with a low risk level is generally entitled to a stable, positive remuneration. In this respect, the Russian Arbitration Court supported the view of the tax authorities that a local sales company would also not have to bear the losses caused by the financial crisis. In the opinion of the tax authorities as well as the court, the affiliated business partner abroad should have borne the losses instead of the Russian HYUNDAI company. The Court also stated that agreed contractual clauses that provide for increased costs for advertising and marketing without offering a correspondingly higher added value for the sales companies do not comply with the arm’s length principle. Click here for English Translation RUS vs Hyundai 2015 A40-50654-2013_20151014

A Russian subsidiary of the Mazda Motors Group had been claiming losses. In the opinion of the tax authority, the losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies. An assessment was issued where the pricing had been determined using the Resale Price Method. Decision of the Russian Arbitration Court “Having evaluated the arguments of the parties and the evidence presented in the case, taking into account the provisions of Art. 71 APC RF, the appeal court considers the conclusions of the court of first instance as motivated, consistent with the circumstances of the case and the requirements of the law.In the presence of these circumstances, the claims claimed by the company were rightly rejected by the court of first instance.Thus, the decision of the court is legal and justified, corresponds to the materials of the case and the current legislation, in connection with which it is not subject to cancellation. href=”https://tpguidelines.com/wp-content/uploads/Russia-vs-Mazda-Motor-Rus-Ltd-2014.htm”>Click here for English Translation Mazda A40-4381-2013_20150303

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

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

SNF was a member of a global group with headquarters in France. SNF bought polyacrylamides from group companies overseas, and sold them to unrelated end-users in various industries in Australia. From its incorporation in 1990 until 2004, SNF consistently returned losses. SNF was subject to a transfer pricing audit. Determinations were made under Division 13 of Part III of the Income Tax Assessment Act 1936 to adjust the consideration for the company’s international related party transactions to reflect an arm’s length amount. For the income years from 1997 to 2003, the Commissioner made determinations under ss136AD(3) and (4) of the Act as to the arm’s length price of the chemicals. The tax authorities issued notices of assessment in 2007, and subsequently disallowed the taxpayer’s objections to those assessments. Before the Court the commissioner submitted that the taxpayer was able to continue to trade, not because of the alleged price support, but because of an injection over the period of $31.2 million in share capital from its parent.  It was said that an independent distributer would not have continued to trade at a loss for 13 years to further a market penetration strategy for the benefit of an unrelated supplier. The unstated conclusion is that the losses were being generated by the excessive prices paid by the taxpayer. In response SNF produced evidence of sales by the overseas suppliers to third party purchasers, which it submitted established comparable uncontrolled prices (CUP) that were as high as or higher than the prices paid by SNF. The Court found that losses in SNF had not been caused by excessive prises paid for polyacrylamides bought from group companies – but instead unreasonably low levels of sales, by competition in the Australian market, by excessive stock losses and by poor management. Based on these findings the Commissioner’s appeal was dismissed with costs. Commissioner-of-Taxation-v-SNF-Australia-Pty-Ltd-2011-FCAFC-74-1-June-2011

The principal activity of Aventis Pharma is manufacturing of pharmaceutical products and the secondary activity is the wholesale of pharmaceutical products; In FY 2000 the company carried out various transactions with related companies and based on a transfer pricing study the company concluded that profits were consistent with those obtained by comparable independent parties. Following an audit the tax authorities issued an assessment of additional income. In dispute were: Granting of extraordinary discounts, Reclassification of operating expenses together with related and non-operating expenses, Use of loss making comparables. The Court decided in favour of Aventis “From the above, it appears that the challenges made by the tax authority to the choice of the firm Bentley Pharmaceutical Inc, are unsubstantiated because they are based on the accusation of other manufacturing activities that were not carried out by the aforementioned company but by related companies, at a time when the rule regarding the selection of comparable companies is Article 4(1) of the G.R. 702, which does not oppose the choice made, since it concerns the retention of information on comparable companies with an indication of the concepts and amounts adjusted in order to eliminate the differences; nor does it contradict the OECD recommendations, which could have been used as a substitute alternative. Under these conditions, the conclusion is that the criterion adopted by the tax authority to contest the selected company is not admissible. “ Click here for English Translation Argentina vs Aventis Pharma SA

The Bundesfinanzhof confirmed that losses incurred by a simpel distribution entity over a longer period of time trigger a rebuttable presumption in Germany that transfer prices have not been at arm’s length. A German company, Loss Distributor GmbH, imported goods from their Swiss sister company S-AG and had made continious losses over a period of time. The tax authorities found that the purchase prices paid to the S-AG had increased since 1989 and that the German company could not fully pass on the increased purchase price to its customers. Since at the same time the price of the Swiss franc had fallen since 1989, the purchase prices paid to the S-AG in the years of the dispute had been inflated and currency gains had been transferred to Switzerland in this way. A tax assessment was therefor issued. The German company appeal the assessment to the Bundesfinanzhof. The Federal Tax Court ruled in favor of the tax authorities. Click here for English translation Click here for other translation Bundesfinanzhof I R 22-04

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 decision is about a German distribution company of international groups, which is in a continual overall loss position. This case established an important principle that: ‘… an orderly and diligent manager will, for the corporation managed by him, introduce to the market and distribute a new product only if he can expect, based on a prudent and pre-prepared economic forecast, a reasonable overall profit within a foreseeable period of time with due consideration to the predictable market development’. This decision covered the market introduction of a new product by an already established company and stated that typically a market introduction phase, losses should not be accepted for longer than three years. A later Bundesfinanzhof decision from 15 May 2002 stated that a start-up loss phase can be substantially longer than 3 years based on facts and circumstances. Click here for English translation Click here for other translation Germany vs GmbH Feb 1993