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.
KHO2020-34