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 ...

Unilever Ghana Limited (UKL) filed an appeal with the High Court against an assessment of additional taxabel income issued by the tax authorities in 2019 on the following grounds. a) That the Respondent did not use a transfer pricing method as required by the Transfer Pricing Regulations, 2012 (LI 2188) in examining the Appellant Transfer Pricing Returns. b) That the Respondent misinterpreted, misunderstood and misapplied the OECD Transfer Pricing guidelines to arrive at a liability of Six Million, Two Hundred and Thirty-Six Thousand, Two Hundred Ghana Cedis (GHq:6,236,200.00) on the Advertising, Marketing and Promotion expenses incurred by the Appellant. c) That had the Respondent properly applied the OECD guidelines, the Appellant would not have been liable to pay tax on the Advertising, Marketing and promotion expenses. Judgment of the Court The High Court dismissed the appeal due to lack of statutory jurisdiction. “…I do not need to go further in this judgment than to dismiss the appeal on the grounds that the order granting leave to the Appellant to appeal against the objection decision was void. Therefore, the appeal has not properly invoked the jurisdiction of this court for the merits to be considered. The effect, is that the Appeal filed on 17th March, 2021 fails and same is dismissed. Consequently, the Respondent objection decision dated 19th September 2019 will continue to stand.” ...

LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media. Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base. The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly. Decision of the Regional Court The Regional Court ruled in favour of the tax authorities on the pricing issue. Excerpts “37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions, and if that difference is not satisfactorily substantiated, the taxpayer’s tax base is adjusted by the difference found. The concept of connected persons is defined in paragraph (b)(5) of the same provision as meaning that, for the purposes of this Act, connected persons are otherwise connected persons who have formed a legal relationship principally for the purpose of reducing the tax base or reducing a tax loss. 38. The applicant argued that a finding that the price obtained differs from the normal price is not sufficient to conclude that there are connected persons, otherwise the question of otherwise connected persons would be superfluous. At the same time, the applicant’s knowledge of that unreasonable increase must be established. He also argued that there was no profit on the part of the applicant, since he had actually spent the sums on advertising and the savings in the form of a reduced tax base were much smaller in relation to the costs incurred. 39. The Regional Court did not find any merit in this objection in its previous judgment. It has reached the same conclusion now. It did not consider it necessary to await the decision of the Extended Chamber in Case No 2 Afs 132/2020-56 of 22 December 2021 on the question whether ‘the finding of a significantly increased price of the subject-matter of the contract compared to the normal price without a satisfactory explanation of the difference is a sufficient condition for concluding that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss, or whether other facts in the conduct of the taxpayer indicating the unusual nature of the commercial transaction must be proved by the administration’. The reason for this is that the tax authorities based their conclusion that the parties were connected not only on the finding of an exorbitant price but also on other circumstances which suggest that the transaction was unusual. In its previous judgment, the Regional Court did not deal with them in detail, as it relied on the view, held by case law at the time, that the finding of an exorbitant price without a satisfactory reason was sufficient for the conclusion of connected persons within the meaning of Section 23(7)(b)(5) of the Income Tax Act (e.g. Supreme Administrative Court judgments of 13 June 2013, no. 7 Afs 47/2013-30, 28 January 2021, no. 3 Afs 393/2019-43 or 20 August 2021, no. 2 Afs 313/2019-43). The Court therefore found the applicant’s objection with regard to them irrelevant. In view of the question submitted to the Extended Chamber, its irrelevance is no longer apparent and the Regional Court will comment on them below, but there is no reason to wait for the decision of the Extended Chamber; even if it were to prevail that the definition of connected persons includes, in addition to the exorbitant price, the presence of such facts in the conduct of the tax entity as to indicate the unusual nature of the transaction, that could not have a favourable effect on the applicant’s procedural success in the case now under consideration. 40. In the case at hand, the tax authority raised doubts about the claimed costs, finding that the total costs incurred by the applicant’s suppliers PRESSTEX and PAMBROKE for advertising and promotional services for the year 2013 for the applicant amounted to CZK 56 104, while the applicant booked costs of CZK 6 000 000, representing 107 times the price paid by the suppliers PRESSTEX and PAMBROKE. The tax administrator’s doubts were also raised by other “non-standard circumstances” mentioned in the Tax Audit Report on pages 23-25, which are: – a change in the contractual terms, as the documents on the performance of the subject matter of the contract were delivered to the applicant after the end of the contractual relationship – discrepancies between the contract and the invoice and between the photographic documentation and the invoice (different size of the banner, failure to indicate advertising in the Golf Arena Ostrava, invoicing for advertising services even for months when no matches were played) – the applicant’s failure to comply with the payment terms – failure to verify the effectiveness of advertising costs – non-standardisation of the applicant’s suppliers PRESSTEX and PAMBROKE (non-contactability of PRESSTEX, virtual headquarters, cash withdrawals of large sums, company without a statutory body) – the failure to verify the price quotation, since the applicant accepted the price proposed by PRESSTEX without further investigation of the more advantageous quotation, even though the applicant could have recognised the overestimation of the price because it has long been active in the sports and business environment. 41. On the basis of the foregoing, the tax administration found that there was a relationship between the applicant and PRESSTEX and PAMBROKE corresponding to Article 23(7)(b)(5) of the Income Tax Act, and the defendant agreed with its assessment (see paragraph 90 of the contested decision). 42. The ...

Mylan Pharmaceuticals is engaged in the business of trading pharmaceutical products in both domestic and export markets. It also provides business support services and research and development activities to other group companies. Following an audit, the tax authorities issued a notice of assessment which partially disallowed deductions for advertising and promotional expenses for the launch of new products. Mylan appealed to the Principal Commissioner of Income Tax where the assessment was subsequently overturned. The tax authorities then appealed to the Income Tax Appellate Tribunal. Judgement of the ITAT The Income Tax Appellate Tribunal allowed the appeal and set aside the decision of the Commissioner of Income Tax. Excerpts “It has been held in various decisions that for invoking jurisdiction u/s 263 of the I.T. Act, the twin conditions namely, (a) the order is erroneous and (b) the order is prejudicial to the interest of the Revenue must be satisfied. However, in the instant case, the order may be prejudicial to the interest of the Revenue, but it cannot be said to be erroneous since the Assessing Officer, after conducting necessary inquiries by calling for information and having gone through the details furnished by the assessee has taken a possible view. Merely because the learned PCIT does not agree with the view taken by the ITA 122/Hyd/2022 Assessing Officer, the order cannot be said to be erroneous or not a possible one. Under these circumstances, since one of the twin conditions i.e. the order is not erroneous is not satisfied, therefore, we hold that the learned PCIT is not justified in invoking jurisdiction u/s 263 of the I.T. Act. Accordingly, the order of the PCIT passed u/s 263 of the I.T. Act is set aside and the grounds raised by the assessee are allowed.” ...

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, ...

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the price agreed between the related parties for advertising space was excessive and not determined in accordance with the arm’s length principle. ANITA B s.r.o. filed an appeal against the assessment. The Regional Court dismissed the appeal as unfounded by judgment of 26 October 2021, No. 62 Af 70/2019-48. The Court concluded that the tax authorities had established that the price agreed between ANITA B s.r.o. and its supplier (ELAPROMO) differed from the price that would have been agreed between unrelated parties. The Court upheld the method chosen by the tax authorities and concluded that ANITA B s.r.o. had failed to prove that the advertising costs claimed were justified in full. An appeal was then filed with the Supreme Administrative Court Judgement of the Supreme Administrative Court The court decided in favour of the tax authorities and upheld the decision from the Regional Court. Excerpt “[40] In its judgment of 26 March 2014, no. 9 Afs 87/2012-50, the Supreme Administrative Court explained that “[t]he purpose of the provision in question is to prevent the unwanted shifting of part of the income tax base between individual income taxpayers and to enable the sanctioning of abusive price speculation in business relations. It also concerns the so-called “profit shifting” between persons with different tax burdens, which usually occurs when such persons charge each other prices lower or higher than the prices used between independent persons in normal business relations, and the result of such transactions is an increase in costs or a decrease in sales for the company with the higher tax burden and a siphoning off of part of the profits to the company with the lower or zero income tax rate. It further summarised that ‘a material difference from normal prices occurs when sales are made too cheaply or purchases are made too expensively; in such cases, such a difference must always be satisfactorily documented’. [41] In that connection, the complainant pointed out that TOP Reklama was the exclusive purchaser of the advertising space, which significantly affected its subsequent bargaining position. However, that argument cannot be accepted. The Regional Court dealt with it in paragraph 29 of the judgment under appeal and the Supreme Administrative Court fully agrees with its view. That argument certainly cannot be regarded in the present case as satisfactory evidence of a price difference within the meaning of Article 23(7) of the ITA. As regards the argument concerning the importance and fame of the sports grounds in question, it cannot be accepted either, since any exclusivity is already included in the price at which SK Vodova Brno and FC Zbrojovka Brno lease the advertising space to TOP Reklama. The Supreme Administrative Court therefore has no other explanation than that the price was overestimated in order to obtain a tax advantage. [42] Furthermore, the complainant has repeatedly stated that it is an entrepreneur in the field of development, production and trade in sewing machines and cannot be required to have knowledge of the advertising market. However, this and subsequent arguments are again unhelpful as they do not explain the substantial difference from normal prices. At the same time, the Supreme Administrative Court reiterates at this point that it is irrelevant to the case whether the complainant was knowingly involved in the chain of connected persons. [43] In view of the foregoing, the tax administrator proved that the case involved related persons within the meaning of section 23(7)(b)(5) of the ITA, that the prices agreed between those persons differed from the prices that would have been agreed between independent persons in normal business relations under the same or similar conditions, and that the complainant did not specifically explain and document the difference between the agreed price and the normal price. In such a situation, the tax administrator was entitled to adjust the tax base by the difference between the above-mentioned prices in accordance with Article 23(7) of the ITA. [44] It can therefore be summarised that the Regional Court assessed the relevant legal issues correctly and based itself on the facts of the case duly established by the tax administration authorities. The grounds of appeal set out in Article 103(1)(a) and (b) of the Code of Civil Procedure were therefore not met.” Click here for English Translation Click here for other translation ...

73. Första is a consumer goods company organised and operating in country A. Prior to Year 1, Första produces Product Y in country A and sells it through affiliated distribution companies in many countries around the world. Product Y is well recognised and attracts a premium compared to its competitors, to which Första is entitled as the legal owner and developer of the trademark and related goodwill giving rise to that premium. 74. In Year 2, Första organises Company S, a wholly owned subsidiary, in country B. Company S acts as a super distributor and invoicing centre. Första continues to ship Product Y directly to its distribution affiliates, but title to the products passes to Company S, which reinvoices the distribution affiliates for the products. 75. Beginning in Year 2, Company S undertakes to reimburse the distribution affiliates for a portion of their advertising costs. Prices for Product Y from Company S to the distribution affiliates are adjusted upward so that the distribution affiliate operating profit margins remain constant notwithstanding the shift of advertising cost to Company S. Assume that the operating profit margins earned by the distribution affiliates are arm’s length both before and after Year 2 given the concurrent changes in product pricing and the reimbursement of advertising costs. Company S performs no functions with regard to advertising nor does it control any risk related to marketing the products. 76. In Year 3, the prices charged by Första to Company S are reduced. Första and Company S claim such a reduction in price is justified because Company S is now entitled to income related to intangibles. It asserts that such income is attributable to intangibles in respect of Product Y created through the advertising costs it has borne. 77. In substance, Company S has no claim to income derived from the exploitation of intangibles with respect to Product Y. It performs no functions, assumes no risk, and in substance bears no costs related to the development, enhancement, maintenance or protection of intangibles. Transfer pricing adjustments to increase the income of Första in Year 3 and thereafter would be appropriate ...

LCN Group had deducted costs in its taxable income for marketing services provided by related parties – PRESSTEX MEDIA SE and TARDEM Media s.r.o. and PAPILIO. The claimed advertising costs from PRESSTEX in FY 2012 was produced and implemented by PAPILIO and subsequently invoiced to LCN Group, virtually unchanged, at a price 23 times higher than the price of the advertising, without the corresponding value added being justified. In relation to FY 2013, LCN Group claimed advertising costs from TARDEM in a similar pattern where the price was increased by up to 56 times. In both tax periods, LCN Group’s advertising/promotion costs were related to sporting events (gymnastics world cup, tennis tournament and golf tournaments). The tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. The Regional Court annulled the assessment. It argued that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. The tax authorities brought this decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court set aside the decision of the Regional Court and refered the case back to that court for further proceedings. The arm’s length price is the price applied between independent entities or, if no such data exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience. As regards the “commercial strength” of the parties, the Regional Court did not specify that concept, did not indicate what aspects should be taken into account in the context of that condition, or how that condition affects the prices for advertising services. With regard to the alleged lack of consideration of advertising capacity at the time the contracts were concluded, it may be noted that this aspect may be relevant in assessing the reasons for the difference in prices between the related parties and those agreed in normal commercial relations. However, the possible proof of this fact falls within the scope of the assessment of whether the tax payer has satisfactorily substantiated the price difference. The Regional Court did not deal with this issue. Click here for English Translation Click here for other translation ...

S GmbH was an Austrian trading company of a group. In the course of business restructuring, the real estate division of the Austrian-based company was initially separated from the “trading operations/brands” division on the demerger date of 31 March 2007. The trademark rights remained with the previous trading company, which was the parent company of the group, now M GmbH. On 25 September 2007, M GmbH transferred all trademark rights to a permanent establishment in Malta, which was set up in the same year, to which it also moved its place of management on 15 January 2008. Licence agreements were concluded between S GmbH and M GmbH, which entitle S GmbH to use the trademarks of M GmbH for advertising and marketing measures in connection with its business operations in return for a (turnover-dependent) licence fee. The tax authorities (re)assessed the corporate income tax for the years 2008 and 2009. The audit had shown that the licence fees were to be attributed in their entirety to S GmbH as the beneficial owner of the trade marks, which meant that the licence payments to M GmbH were also not to be recognised for tax purposes. S GmbH had created the trademark rights, which had been valued at a total value of €383.5 million in the course of its spin-off; the decisions regarding the use, creation, advertising and licensing of the trademark rights continued to lie with the decision-makers of the operational company advertising the revisions at the Austrian group location. The Maltese management was present at meetings with advertising agencies in Austria, but its activities did not actually go beyond support and administration. The aim of the chosen structure had been a tax-saving effect, whereby the actual taxation of the licence income in Malta had been 5%. A complaint filed by S GmbH was dismissed by the Bundesfinanzgericht. S GmbH then filed an appeal with the Verwaltungsgerichtshof. Judgement of the Court The Court dismissed the appeal of S GmbH and upheld the decision of the tax authorities Excerpts: “In the appeal case, the BFG found that the trademark rights had been created before the separation of the companies. No new trademarks had been registered during the audit period. The advertising line was determined by a two-year briefing of the group and was based on the requirements of the licensees. The brand managers of M GmbH participated in the process, but the decisions were made by the organs of the appellant, which spent over €56 million in 2008 and almost €68 million in 2009 on advertising and marketing.. In contrast, M GmbH had hardly incurred any advertising expenses, and its salary expenses were also disproportionate to the tasks of a company that was supposed to manage corporate assets of almost €400 million in trademark rights and to act as the (also economic) owner of these assets. The minimal salary expenditure, which amounted to a total of € 91,791.0 in 2008 and € 77,008.10 in 2009 and was distributed among eight persons (most of whom were part-time employees), could only be explained by the fact that all relevant trademark administration, maintenance and management tasks were, as in the past, handled either by group companies (by way of group-internal marketing activities) or by specialists commissioned by the group (trademark lawyer, advertising agency) and that M GmbH only acted in a supporting capacity. If, against this background, the BFG assumes, despite the formal retention of the legal ownership of the trademark rights, that the economic ownership of the trademark rights, which had already been created at that time, was also transferred to the appellant at the time of the spin-off, this cannot be seen as an unlawful act which the Administrative Court should take up. If, in the case at hand, the appellant nevertheless concluded licence agreements with M GmbH, the reason for this cannot have been the acquisition of the right of use to which it was entitled from the outset as the beneficial owner. The BFG was therefore correct in denying that the amounts paid by the appellant under the heading of “licence payments” were business expenses. …” Click here for English translation Click here for other translation ...

LCN Group s.r.o. had deducted costs in its taxable income for marketing services provided by related parties. Following an audit, the tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. Decision of the Regional Court The Regional Court annulled the assessment and decided in favor of the LNC Group. The court held that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. Click here for English Translation Click here for other translation ...

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

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 ...

For FY 2007, 2008 and 2009, JV had deducted expenses consisting in the payment for services pursuant to invoices issued by BP Property s.r.o. and TOP ZONEVIEW. The services consisted in the provision and implementation of an advertising campaign. Following an audit the tax authorities adjusted JV’s taxable income by the difference found, since pursuant to Article 23(7)(b)(5) of the Income Tax Act, the prices agreed differed from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. JV contested the decision of the tax authorities but the appeal was dismissed by the Regional Court. The Regional Court held that the applicant’s objection – that he did not know and could not have known about the chain because he had dealt only with the managing director of Property Praha or B.V. – was unfounded. Section 23(7)(b)(5) of the Income Tax Act does not require proof of active conduct of all the entities and unifying intent. It is sufficient that the defendant has proved and demonstrated, on the basis of the invoicing of the advertising campaign prices and the flow of funds, as well as the negotiation, provision, collection and payment of the amount in each tax period, that the applicant was involved in the chain and that there was a flow of funds in connection with the supply to the applicant. The applicant’s involvement in the chain of trade conferred an advantage on the applicant in that it reduced its tax base by substantially increasing its expenditure. The decision of the regional court was appealed by JV to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court dismissed the appeal of JC and decided in favor of the tax authorities. Excerpts “The Financial Office for the Central Bohemian Region, by letter dated 24 August 2015, asked the complainant to prove and document the difference between the price claimed in the tax costs and the price established by the tax administrator. In its statement of 31 August 2015, the complainant justified the difference in prices by the increase in the company’s turnover in subsequent tax periods and emphasised its choice of a corporate promotion strategy, the success of which can only be assessed ex post. The defendant did not consider the complainant’s allegations to be economically rational and proven and the reasons why the prices between otherwise related parties differed from the reference price to be substantiated… At the hearing before the Regional Court on 23 March 2018, the complainant only noted that ‘the advertisement had the desired effect’ (see Minutes of the hearing, sheet number 103 of the Court file). However, he did not explain in detail how this claim rationally justified the difference between the agreed price and the reference price and did not offer any evidence for his claims, although he could have done so…” “However, a null and void decision is not an ‘ordinary’ unlawful decision, but a ‘decision’ which, because of its defects, cannot be regarded as a decision of an administrative authority with public authority at all and which is not capable of producing public law effects. Whereas, in the case of ‘ordinary’ defects in administrative decisions, those decisions are regarded, in view of the application of the principle of the presumption of validity and correctness of administrative acts, as existing and capable of producing the relevant legal consequences and thus affecting the sphere of rights and obligations of their addressees, that principle does not apply in the case of void administrative decisions. The nature of the defects giving rise to the nullity also gives rise to the relevant legal consequences. The most serious defects are thus necessarily associated with the most serious consequences. Therefore, no one is obliged to respect and comply with a null and void administrative decision. It is regarded as if it did not exist at all and is therefore an irremediable legal nullity. Nullity cannot be cured even by the lapse of time.” (Judgment of the Enlarged Chamber of 13 May 2008, no. 8 Afs 78/2006 – 74). Pursuant to Article 109(4) of the Code of Civil Procedure, the Supreme Administrative Court is entitled to declare an administrative decision void of its own motion, i.e. even without an express cassation objection. However, it found that the contested decisions do not meet the characteristics described above, do not lack a legal basis or factual basis, do not lack jurisdiction or the most serious defects of jurisdiction, do not suffer from an absolute lack of form, do not contain an absolute mistake as to the addressee, do not contain a requirement of criminal or factually impossible performance, are not vague or meaningless, so that, according to the settled case-law of the Supreme Administrative Court, they cannot be considered null and void.” Click here for English Translation Click here for other translation ...

“Drinks Distributor S.A.” was involved in purchase, sale and distribution of alcoholic beverages in Mexico. “Drinks Distributor s.a” had entered into a non-exclusive trademark license agreement with a related party for the sale of its product. Following a restructuring process, the related party moved to Switzerland. Following an audit the Mexican tax administration, determined that deductions for marketing and advertising costs related to brands and trademarks used under the licensing agreement, were not “strictly indispensable” and therefore not deductible, cf. requirement established by the Income Tax Law in Mexico. Drinks Distributor S.A on its side held that the marketing and advertising costs were strictly indispensable and that the tax deductions should be accepted. The dispute ended up in the Federal Court of Administrative Justice. Judgement: The Court determined what should be understood as “strictly indispensable“. To establish this concept the purposes of the specific company and the specific costs must first be determined – in particular that the costs are directly related to the activity of the enterprise the costs are necessary to achieve the aims of its activity or the development of this activity; in the absence of the costs, the commercial activity of the taxpayer will be hindered. “ADVERTISING AND PUBLICITY EXPENSES. THE DEDUCTION IS INAPPROPRIATE, AS THEY ARE NOT STRICTLY INDISPENSABLE FOR THE COMPANY SELLING PRODUCTS UNDER TRADEMARKS WHOSE USE AND EXPLOITATION WERE GRANTED TO IT BY MEANS OF A NON-EXCLUSIVE LICENSE AGREEMENT. Article 31, section I of the Income Tax Law provides that the deductions must comply with various requirements, including that they are strictly indispensable for the purposes of the taxpayer’s activity; the latter being understood to mean that said expenses are directly related to the activity of the company, that they are necessary to achieve the purposes of its activity or the development thereof and that if they do not occur they could affect its activities or hinder its normal operation or development. Therefore, in order to determine whether such expenditure satisfies that requirement, account must be taken of the aims of the undertaking and the specific expenditure itself. Therefore, if a company has as its object the sale of a certain product, and to this end has entered into a non-exclusive license agreement for the use and exploitation of intangibles, which grants it the use and exploitation of a brand name to sell this product; The latter is prevented from deducting advertising and publicity expenses, since, as it does not own the trademark it uses to sell its product, the aforementioned expenses – understood as the acts through which something is made known in order to attract followers or buyers through the means used to disseminate or spread the news of things or facts – are not strictly indispensable for the development of its activity, as they increase the value of the trademark for the benefit of a third party; That is to say, the owner of the trade mark, since they are not aimed at the article, but at positioning the trade mark on the market, in order to give it notoriety, fame and recognition among the consumer public.” Click here for English Translation Click here for other translation ...

In this case the court accepted the tax authorities’ procedure for determining the arm’s length price for advertising services, whereby the tax authorities took into account conditions such as the size of the advertising space, the type of event, the duration of the advertising, etc., when comparing controlled and uncontrolled transactions The appeal of JN Trans was dismissed by the court. Click here for English Translation Click here for other translation ...

In the French Nestlé water case, the following arguments were made by the company: The administration, which bears the burden of proof under the provisions of Article 57 of the General Tax Code, of paragraphs 38, 39 and 42 of the Instruction 13 l-7-98 of 23 July 199 8 and case law, does not establish the presumption of indirect transfer of profits abroad that would constitute the payment of a fee to the Swiss companies A … SA, company products A … SA and Nestec SA. The mere fact that the association of the mark A … with the mark Aquarel also benefits company A … SA, owner of the mark A …, does not allow to prove the absence of profit and thus of consideration for NWE. The latter company also benefited from the combination of the two brands. Advertising alone are not enough to characterize an indirect transfer of profits abroad; in any case, the administration does not provide any quantified data and in particular no comparable study to assess the amount of the benefit that A … SA derives from the “co-branding” operation. In any event, and assuming that the Court considers that the administration has provided a presumption of proof of indirect transfer of profits abroad, it justifies that NWE benefited from an effective and sufficient counterpart in payment of the royalty to the company A … SA because the global economy of the royalty agreement perfectly respects the interests of the company NWE. The fee mainly pays for the use of the A brand, which has a value in the global agri-food market, of which bottled water is a sub-category; the European Commission notes in its decision of 22 July 1992 (Case No IV / M.190 -A …- Perrier) that the European bottled water market is extremely competitive. Only well-known brands can reasonably expect to survive in the medium to long term and, especially in France, it is important to associate bottled water with notions of health and healthy living during actions. Advertising; Although the A mark was not directly associated with the bottled water market at the time, it is recognized in the food industry as a quality brand, embodying health and lifestyle values, at a reasonable price and should, by associating it with the Aquarel brand, facilitate NWE’s access to the market. The Danone group also chose to join the Taillefine brand when it launched a new brand of water on the market. In this regard, the interview of the Chief Executive Officer of Perrier-Vittel, now A … Waters, carried out in 2001 on Group A’s strategy …, is taken out of context and can not be accepted by the Court. The fee also remunerates the costs of technical assistance and know-how under Article 26 of the contract, which is provided by A … Waters Management and Technology. Finally, the fee also remunerates the risks taken by the owner of the brand A … by associating the name A … with bottled water. The court ruled in favor of Nestlé. Click here for translation ...

Cheil Communications India Pvt. Ltd. is a subsidiary of a Korean based advertising agency, Cheil Communications. The Indian affiliate had excluded pass-through costs from its cost base when determining the arm’s length remuneration for its activities. The tax authority included the the pass-through costs in the cost base and issued an assessment for FY 2005-06 where these costs were also marked up. Judgement of the Tribunal The Tribunal annulled the assessment and ruled in favor of Cheil Communications India. Excerpt “(…)For performing the functions for and on behalf of associated enterprises, the assessee is remunerated by its associated enterprises on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular advertisement. It is also to be noted that advertising space (be it media, print or outdoor), has been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. We have gone through the invoices and purchase orders from third party vendors and find that they contain customers’ name, and all the terms of advertisement are finalized after taking the approval from the customers. The assessee simply acts as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendors is recovered from the respective customers or associate enterprises. In the event customer fails to pay any such amount to the advertisement agency, the bad debt risk is borne by the third party vendor and not by the advertising agency i.e. the assessee. It is, thus, clear that the assessee has not assumed any risk on account of non-payment by its customers or associated enterprises. At this stage a useful reference may be made to ITS 2009 Transfer Pricing Guidelines accepted by the OECD where it is laid down that when an associate enterprises is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may be not appropriate to determine arm’s length price as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type of cases, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. These guidelines are as under:- 3.41 In applying the transactional net margin method, various considerations should influence the choice of margin used. For example, these considerations would include how well the value of assets employed in the calculations is measured (e.g. to shat extent there is intangible property the value of which is not captured on the books of the enterprise) and the factors affecting whether specific costs should be passed through, marked up, or excluded entirely from the calculation. 41. In the proposed revision of Chapter I-III of the Transfer Pricing Guidelines issue don 9th September, 2009 – 9th January, 2010 by OECD, it has been provided in Para 2.134 as under:- “2.134 In applying a cost-based transactional net margin method, fully loaded costs are often used, including all the direct and indirect costs attributable to the activity or transaction, together with an appropriate allocation in respect of the overheads of the business. The question can arise whether and to what extent it is acceptable at arm’s length to treat a significant portion of the taxpayer’s costs as pass- through costs to which no profit element is attributed (i.e. as costs which are potentially excludable from the denominator of the net profit margin indicator). This depends on the extent to which an independent party at arm’s length would accept not to be remunerated on part of the expenses it incurs. The response should not be based on the classification of costs as “internal” or “external” costs, but rather on a comparability (including functional) analysis, and in particular on a determination of the value added by the tested party in relation to those costs.” 42. Further, OECD in ITS 2009 Transfer Pricing Guidelines has laid down as under:- “7.36 When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm’s length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of rending advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.” 43. In the light of these guidelines, it would be, therefore, clear that a mark-up is to be applied to the cost incurred by the assessee company in performing its agency function and not to the cost of rendering advertising space on behalf of its associate enterprises. We further find that the method adopted by the assessee while submitting ...