“Airline S.A.” claimed various expenses as deductible payments for intra-group services, arguing that these costs were essential and necessary within the corporate group. However, the tax authorities determined that “Airline S.A.” had not provided sufficient documentation to demonstrate that the services were actually rendered. “Airline S.A.” appealed to the Tax Court, contending that under transfer pricing principles—specifically the OECD Guidelines for Intra-Group Services—the key questions should be whether the services were indeed provided and whether the charges were at arm’s length. Judgment The Tax Court dismissed the appeal and ruled in favor of the tax authorities. The Court held that the central issue was not compliance with transfer pricing rules, but rather the absence of concrete evidence that the claimed expenses were actually incurred. To qualify as deductible, taxpayers must substantiate that the transactions took place and provide reliable documentation proving both the provision of the services and the corresponding payments. Click here for English Translation Click here for other translation ...

In FY 2013, Stefanutti Stocks Kenya Limited, a Kenyan subsidiary of a South African company, had deducted salary costs amounting to Kshs 46,391,512.00 in respect of expatriates provided by its South African affiliated company due to lack of local resources. According to the tax authorities, the salary costs were not sufficiently substantiated to qualify as expenses wholly and exclusively incurred in the production of income and, on this basis, disallowed deductions for the reported costs. On appeal, the Tax Appeal Tribunal initially upheld the position of the tax authorities in a 2021 decision. However, Stefanutti Stocks Kenya Limited appealed to the High Court, which ruled in 2023 that the Tribunal had failed to determine whether the salary expenses were allowable under section 15. The High Court remitted the matter back to the Tribunal to deal specifically with this issue. Judgment of the Tribunal On re-examination of the matter, the Tribunal found that although Stefanutti Stocks Kenya Limited claimed that the salary costs were for expatriates provided by its South African subsidiary due to a lack of local resources, it failed to provide any substantiating evidence. The only documents provided were intercompany invoices and a credit note, which were insufficient to demonstrate that the claimed expenses were wholly and exclusively incurred in the production of income. Key supporting documents – such as employment contracts, expatriate assignments or work permits – were not provided either at the objection stage or at the hearing. Furthermore, the transfer pricing documentation submitted was dated 2016, which was after the relevant tax period and therefore irrelevant. The Tribunal emphasised that tax law places the burden of proof on the taxpayer and reiterated that the evidence must be both competent and relevant. As Stefanutti Stocks Kenya Limited had failed to meet this standard, the Tribunal concluded that the tax authorities had been justified in disallowing the salary expenses. The Tribunal dismissed the appeal and upheld the tax assessment. Click here for translation ...

“Dairy Distributor S.A.” produces a variety of dairy products and sells to consumers in the Greek market products produced in its own factory or by other Group companies. For the rights to use the trademarks and know-how for its production and sales activities, “Dairy Distributor S.A.” had entered into a trademark licence agreement and a know-how licence agreement with a related party in the Netherlands and until 2017 paid a royalty for the use of trademarks of 2% on net sales and a royalty for the use of know-how of 2% on net sales of locally produced products. In 2018, “Dairy Distributor S.A.” was changed from a limited risk distributor to a full risk distributor and was now also required to pay royalties for know-how on net sales of products that it did not produce itself. Following an audit for FY2018 – FY2022, the tax authorities disallowed deductions for these additional royalty payments, concluding that these did not comply with the arm’s length principle or qualify as payments for genuine know-how rights. The authorities also disallowed the deductions for these payments as intra-group services, as they found no evidence that these services conferred a distinct, additional benefit to the local entity – particularly as it already possessed the expertise needed to sell the products. “Dairy Distributor S.A.” appealed to the Directorate of Dispute Settlement. Decision The Directorate rejected the appeal and confirmed the tax assessment issued by the tax authorities. Click here for English translation Click here for other translation ...

Sofia Med AD is a manufacturer of a wide range of rolled and pressed copper and copper alloy products. It was subject to a tax audit in which the tax authorities challenged several aspects of its tax reporting, including transfer pricing adjustments on intercompany transactions. The dispute concerned the deductibility of intermediary fees, the application of the arm’s length principle, and the classification of certain payments as taxable under withholding tax rules. Intercompany Transactions and Transfer Pricing Adjustments The tax authorities audited Sofia Med’s pricing methods for transactions involving related entities. The company had used different pricing approaches over the years — first linking intermediary service fees to tonnes of production sold, then shifting to a percentage of net sales revenue. The authorities found that this methodology failed to ensure a reliable comparability analysis, as required under both Bulgarian regulations and OECD transfer pricing guidelines. Applying the CUP method, the tax authorities adjusted the company’s financial results, arguing that the transfer pricing policies did not adequately reflect market conditions. Intermediary Fees and Economic Substance Sofia Med had paid commission and agency fees to STEELMET (Cyprus) for market research and customer identification services. The tax authorities disallowed part of these expenses, asserting that no intermediary role had been contractually established for certain sales transactions. The court upheld the tax authorities’ position, concluding that a portion of the claimed service fees did not meet the criteria for tax deductibility. Regarding other fees classified as intra-group service payments, the court applied OECD guidelines, emphasizing that a service must provide an economic or commercial benefit. The Administrative Court annulled the assessment and the tax authorities appealed to the Supreme Administrative Court. Judgment The Supreme Administrative Court overturned the decision of the Administrative Court and largely upheld the transfer pricing adjustments, confirming that the tax authorities correctly applied the arm’s length principle. The court found that Sofia Med failed to provide a sufficient comparability analysis to justify its pricing methodologies for related-party transactions. The disallowed deductions for intermediary services and intra-group payments remained in place. The court found that the supporting documentation was insufficient to demonstrate that STEELMET’s activities improved Sofia Med’s business position. Given that the company reported financial losses during the audited years, the authorities determined that these payments facilitated intra-group profit shifting rather than legitimate business operations. However, the court ruled that some of the tax liabilities were time-barred under Bulgarian law, leading to a partial annulment of the additional taxes assessed. Click here for English translation Click here for other translation ...

A German group distributor (“A” GmbH) marketed its foreign parent’s original pharmaceuticals during 2006–2010. Under German health-care rules, domestic pharmacies must source part of their inventory from lower-priced parallel importers, so A’s promotional efforts on the German marked inevitably boosted the sales of those independent importers -and, indirectly, benefited the group -without A being compensated for this contribution. On audit the tax authorities treated this uncompensated contribution as a hidden profit distribution, increasing A’s taxable income by the estimated value of the economic advantage provided by A to the group. An appeal was filed with the Nuremberg Finance Court which in 2021 annulled the tax assessment, finding no proof that an independent distributor would have earned a higher margin under comparable circumstances. The tax authorities then filed an appeal with the Federal Fiscal Court (BFH). Judgment The BFH set aside the decision of the Finance Court. It held that a hidden profit distribution can arise not only from direct transfers but also from expense savings for the shareholder; here the parent gained by avoiding marketing costs that A bore. The lower court had therefore erred when it dismissed the possibility of a prevented asset increase merely because parallel imports reduced the group’s overall margin. The BFH stressed that A’s bonus payments to sales staff, which were calculated partly on turnover generated by parallel-imported products, indicate that an arm’s-length distributor would have sought reimbursement. It also faulted the lower court for rejecting market studies and for accepting a six-to-six-and-a-half-percent net margin as implicitly covering parallel-import remuneration without analysing A’s full functional and risk profile. Although Section 1 of the Foreign Tax Act overlaps with the hidden-profit rules in Section 8 KStG, the BFH confirmed that the hidden-distribution framework could still be applied because no stricter adjustment potential arose under the transfer-pricing statute. Because key factual findings were missing—particularly the size of the parent’s economic advantage and the portion of A’s sales-force bonuses attributable to parallel imports—the case was remanded to the Finance Court. On remand the court must establish an arm’s-length charge, at minimum equal to the proportion of sales-force remuneration linked to parallel-import turnover, and add an appropriate markup that reflects the weight of parallel imports in the group’s German sales. Excerpts in English 9. “The FG justifies its assumption by stating that the profit margin for the original products imported into Germany through parallel trade is lower than for medicinal products sold directly through A in Germany (see on this aspect, see also Nientimp/Schwarz/Stein, Ubg 2015, 699; Heidecke/Sauer/Naumann, Internationale Wirtschaftsbriefe IWB 2022, 481). However, the FG fails to take into account that A’s marketing activities are unavoidably in the economic interest of the group as a whole in terms of their (unintended but not impossible) effect on parallel imports (see Grotherr, Ubg 2022, 576, 580 et seq.; Krüger, DStR 2022, 2109, 2112 et seq.; Fammels, IWB 2022, 722; Wendel, Jahrbuch der Fachanwälte für Steuerrecht 2014/2015, 823, 827; see also Reiß, Die Problematik von Verrechnungspreisen im Hinblick auf Parallelimporte [The problem of transfer pricing with regard to parallel imports], IIFS [ed.], Hamburger Hefte zur internationalen Besteuerung [Hamburg Journal on International Taxation], issue 225 [2023], p. 12 et seq.), since, according to the findings of the FG, the parent company also benefited from the parallel imports by supplying the original products to the parallel importers (see also Reiß, loc. cit., p. 47 [‘second distribution channel of the group’]). This is not altered by the fact that the group’s overall profit would have been higher if the medicinal products had been sold domestically solely through the plaintiff and thus without parallel importers (see again Wendel, ibid., 823, 827 et seq.). The assumption of the lower court is therefore legally incorrect. 10. bb) Furthermore, the assumption of the lower court that A, through its marketing activities, provided services to the parent company which (admittedly) ‘were also indirectly reflected in domestic sales in the form of parallel imports sold’ but that this advantage should not be remunerated is not free from legal errors. Insofar as the FG justifies this by stating that A had no ‘leverage’ over the parent company to demand remuneration for this and that a third party would also not have had a promising negotiating position in this respect, this is not supported by corresponding findings. 11. In the opinion of the Senate, it is precisely the ‘arm’s length remuneration’ of A’s sales representatives, including the turnover from parallel imports, which, according to the FG’s assessment, suggests that passing on these costs would be in line with arm’s length principles (see also Grotherr, Ubg 2022, 576). The lower court did not adequately address this aspect. Nor does the FG’s reference to ‘various aspects … of the respective remuneration’ negate the connection demonstrated with the total domestic turnover of the group’s original products (see also Reiß, loc. cit., p. 20), even if the net margin of A was intended, as the FG states, ‘primarily’ for distribution ‘via the sales channel established within the group’. 12. In this context, the FG also failed to sufficiently examine the proportion of bonuses for parallel imports in the total remuneration of the sales representatives. However, the amount of this proportion could possibly allow conclusions to be drawn about the behaviour of a diligent and conscientious manager (see also Grotherr, Ubg 2022, 576, 582 et seq. and 585). The higher this proportion, the greater the economic necessity for A to receive appropriate remuneration for the expenses incurred. 13. cc) The lower court also failed to examine how high the economic advantage of the parent company from the parallel imports could have been. The amount of this advantage may in turn allow conclusions to be drawn about the conduct of a prudent and conscientious manager, even of a company belonging to a group. This is because the greater the economic advantage for the receiving parent company, the more likely it would have been willing to remunerate this advantage accordingly (general principle of a so-called benefit test – see ...

“NAILS KtF” is a member of a group engaged in the development, manufacture and sale of artificial nail materials. It sells products to related parties and pays a fee to a related party for the use of trademarks and know-how related to the products. It had also paid a related party in Cyprus for certain services. Following an audit, the tax authorities issued an assessment relating to the pricing of the royalty transaction, the sale of goods and penalties relating to tax evasion through reclassification and lack of documentation for the services. “Nails KtF” filed an appeal, which ended up in the Supreme Administrative Court. Among the arguments put forward by “Nails KtF” in the appeal was the fact that the tax authorities had used an external expert to determine the arm’s length royalty rate, which “Nails KtF” argued was a delegation of power in violation of administrative rules. Judgment The Supreme Administrative Court upheld parts of the first instance court’s decision to impose a 200% tax penalty for wilful tax evasion. It found that the company had falsely accounted for transactions, including fictitious invoices and disguised employment relationships, in order to obtain unjustified tax benefits. However, the Court annulled the part of the judgment relating to the appointment of experts by the tax authority during the administrative procedure. It found procedural irregularities, including insufficient justification for the use of experts and inadequate reasoning by the tax authority and the lower court. The court ordered the court of first instance to conduct a new procedure on this issue, clarifying the legality of the expert evidence and ensuring a proper consideration of the applicant’s arguments. Click here for English translation Click here for other translation ...

The case concerns a number of expenses claimed by “Airline S.A.” as deductible payments for intra-group services, in particular aircraft leasing and related costs, which the company argued should be deductible under the transfer pricing rules. “Airline S.A.” claimed that these costs were essential and necessary expenses within an airline group, emphasizing that it is common for one member of the group – usually the one with the stronger financial capacity – to contract services with third parties and then sublease or subcontract them to related entities. According to the company, this arrangement reflects common practices in the airline industry, where expenses such as aircraft rentals, turbine maintenance, line maintenance, and software costs are often handled centrally and then passed on to operating subsidiaries. The tax authority’s audit did not dispute the general practice of intra-group services or their business logic; rather, the authority concluded that the taxpayer had not provided sufficient documentation to prove that the services were actually provided to the taxpayer. The tax authorities emphasized that the transfer of these costs must be supported by specific evidence of the reality of each transaction – in particular, the hours of aircraft use (the so-called “block hours”), the details of the subleases, and the separate billing for each entity within the group. Although “Airline S.A.” provided contracts, Excel files, and certain flight logs, the Service found inconsistencies and gaps in the records that made it impossible to validate how the charges were calculated and reconciled with actual usage. It also found that “Airline S.A.” did not demonstrate compliance with the payment method requirements for the transactions in question. On this basis, an assessment of additional taxable income was issued. “Airline S.A.” appealed to the Tax Court, arguing that under transfer pricing principles, in particular the OECD Guidelines for Intra-Group Services, the relevant issues should be whether the service was actually provided and whether the amount charged was at arm’s length. Judgment The Tax Court dismissed the appeal and ruled in favor of the tax authorities. The court agreed with the tax authorities that the issue was not whether the costs complied with the transfer pricing rules. Rather, the core issue was the lack of concrete evidence that each claimed expense was actually incurred by “Airline S.A.”. To justify a deduction under the Income Tax Act, taxpayers must show that the claimed transactions actually occurred and that they can prove both the provision of the service and the corresponding payment through reliable documentation. Click here for English Translation Click here for other translation ...

9 September 2024, the Peruvian tax authority – SUNAT – issued guidance on the qualification of services, transfer pricing methods for services and the application of the “benefit test”. Click here for English translation ...

Following an audit concerning corporate income tax for 2017, the tax authority concluded that GASTRO MLAD s.r.o. had improperly claimed advertising expenses for social events and online banners. The authority found that the costs had been inflated through a chain of intermediaries without any added value, which suggested the underlying purpose was to reduce the company’s tax base. The authority considered that these transactions had been created primarily for the purpose of minimizing taxes and applied the arm’s length principle, and adjusted the company’s taxable income. In an appeal to the Supreme Administrative Court, GASTRO MLAD s.r.o. argued that its contractual arrangements were legitimate and that the authority had failed to prove any intent to minimize taxes. Judgment The court upheld the assessment issued by the tax authoritieis. It held that GASTRO MLAD s.r.o. had not adequately demonstrated a proper business rationale for the increased advertising costs and agreed with the tax authority’s methodology in comparing market prices for similar advertising services. Excerpt in English “20. The tax administrator applied the arm’s length method under the provisions of Section 18(2)(a) of the Income Tax Act. In accordance with the application rules of the arm’s length method, the tax administrator compared the price of advertising services between the dependants (the applicant and LOYS MEDIA GROUP s.r.o. or Varjar s.r.o. ) with a comparable arm’s length price agreed between independent persons (the organisers of the social events and their contractual partners AMADEUS Group s.r.o. and S&P HOLDING, s.r.o. or APA – Art Production Agency, s.r.o. and Varjar s.r.o.). Since there was a difference between the prices compared, the tax administrator replaced the price agreed between the dependants with an independent market price that would have been used by independent persons in comparable legal relationships. 21. There is no merit in the applicant’s claim that it is not possible to compare prices at the beginning and at the end of a chain of trade (in other words, that the benchmarks for the conditions of the compared transactions set out in section 18(1) of the Income Tax Act have not been respected). For the determination of the tax base of a dependent person under section 17(5) of the Income Tax Act using the arm’s length method under section 18(2)(a) of the Income Tax Act, the comparison of the price at the beginning and at the end of the chain of trade is in accordance with the conditions laid down in section 18(2)(a) of the Income Tax Act, the comparison of the price at the beginning and at the end of the chain of trade is in accordance with section 18(2)(a) of the Income Tax Act. 1 of the Income Tax Act, provided that the suppliers of the taxable person (the applicant) in the transactions under scrutiny have not added any value which justifies a substantial increase in the price for the performance of the (advertising) services as compared to comparable transactions between independent persons selected by the tax authorities. In the present case, since the applicant’s suppliers in the audited transactions did not add any value to justify such a substantial increase in the price of the advertising services compared with comparable transactions between selected independent persons, the Court of Cassation concludes that, in the present case, the tax authorities were justified in using the price found at the beginning of the arm’s length chain and that, therefore, the use of the arm’s length price method was lawful and in accordance with the arm’s length principle. 22. The Income Tax Act does not oblige the tax administrator to follow a particular method set out in section 18(2) or (3) of that Act, but allows him to choose (or a combination of) the most appropriate method consistent with the arm’s length principle, which is the result of his sound discretion. If the tax administrator duly justifies its administrative discretion applied in the choice of the method and the tax subject (the applicant) disagrees with the choice but does not indicate what other method the tax administrator should have applied, the tax administrator does not have to justify, as part of its administrative discretion, why it did not test the other method. 23. The applicant has also failed to carry its burden of proof in relation to establishing that the costs of the advertising banners for which it paid Webnet Solution Ltd. were actually incurred for the purposes of earning, securing and retaining income. The tax authority also reached doubts about these costs by its own evidence, when it found that Webnet Solution s.r.o. should have paid for the placement of the banners to Wanding s.r.o., Justify s.r.o. and Holandica s.r.o., which, however, were not the owners of the websites under examination and therefore could not have rented the websites out to anyone else. The funds received by these companies from Webnet Solution s.r.o. were usually withdrawn the following day by their managing director from their bank account in cash withdrawals. These doubts were also not dispelled by the applicant, as a result of which he did not bear his own burden of proof in the tax proceedings and, therefore, according to the Court of Cassation, the tax authorities lawfully increased his tax base in accordance with the Income Tax Act for the inclusion of the disputed costs in tax expenses.” Click here for English translation Click here for translation ...

“Eswatini Distributor Ltd. is a wholly owned subsidiary of a South African multinational. It had paid its South African parent for various intra-group services – management fees – and deducted these payments from its taxable income. According to Eswatini Distributor Ltd, these costs were legitimately claimed and provided and invoiced by its parent company on arm’s length terms. Following an audit, the tax authorities disallowed part of the tax deduction for the payments and issued an assessment. The main reasons for the assessment were that there was no evidence that the costs had actually been incurred some of the costs were duplicative in nature, and some fell into the category of shareholder activity, and finally that Distributor Ltd. used inappropriate allocation keys for some of the fees. The tax authorities also claimed that the payments constituted tax avoidance and were therefore disallowed under the anti-avoidance provisions (Section 65 of the ITO). Dissatisfied with the assessment, Eswatini Distributor Ltd. filed an appeal with the Revenue Appeals Tribunal, arguing that the mere absence of a service contract on which the services were based (evidence) should not automatically lead to the conclusion that the said services were not provided. It also submitted that the decision of the tax authorities to disallow the deduction of those costs on the ground that they met the requirements of Section 65 of the ITO, namely that they “have the effect of avoiding or deferring liability to any tax, duty, levy or income”, was incorrect and that, on the contrary, the deductions were perfectly legitimate as costs incurred by the Appellant as a result of the services provided to it by its parent company. Judgment  The Tribunal dismissed the appeal and upheld the tax authorities’ assessment. Extracts “The Appellants’ closest attempt to detailing the benefit that the services provide can be found in paragraph 6.2 of the objection letter and paragraph 5(b) of their Appeal letter, where they state that; “…note that the profits made by the subsidiary prior to management fees, was approximately SZL28,5 million (which represents a margin on sales of 29%. This margin is inordinately high, and certainly would not have been achieved by the subsidiary on its own if it was a standalone, business operating independently. more specifically, this margin does not consider all the processes performed and costs incurred by the head office in South Africa that gave rise to RATE/IT012/23 achieving the sales value and profits that it actually achieved.” “…a distinguishing factor that identifies a shareholder activity is that the activity should be in “pursuit” of the ownership interest. This means that the activity must have the overall aim to further that interest. Such furtherance could be the protection of that interest, developments of that interest etc. The ultimate outcome therefore of the service must be one that benefits that interest.” “Noteworthy in this regard is, unlike most jurisdictions of the world Eswatini has not developed a comprehensive General Anti-Avoidance Rule (“GAAR”) which is a rule developed to better decode and guide a countries anti-avoidance enquiry. Further, there is barely any jurisprudential guidance in this regard for Eswatini.” ...

A Czech real estate company, AHI Oscar, had deducted the cost of intra-group services received from a related foreign service company. The price of the services had been calculated at a flat rate of 75% of the wages of the employees providing the support services, plus overhead costs. The tax authority found that the overhead costs included in the calculation did not correspond to the actual costs and excluded these costs from the calculation. According to the tax authority, it was irrelevant to consider the arm’s length principle under Section 23(7) of the ITA. AHI Oscar appealed to the Municipal Court, which upheld the tax authority’s assessment. AHI Oscar then appealed to the Supreme Administrative Court. Judgment of the Court. The Supreme Administrative Court overturned the decision of the Municipal Court. It was undisputed that AHI Oscar had actually incurred the declared costs and received the services from the related foreign service company. According to the court, the tax authority’s position on the taxpayer’s obligation to prove the actual basis of calculation is not supported by Section 24(1) of the ITA. However, this does not mean that the service charge should automatically be a fully deductible expense. Given the facts, it was therefore necessary to apply the transfer pricing rules under section 23(7) of the ITA, which the tax administrator did not do. As the case concerned 2012 and the 10-year general limitation period for tax assessment had expired, there would be no further assessment of the arm’s length amount from a transfer pricing perspective. Click here for English Translation Click here for other translation ...

The tax authorities had issued a tax assessment disallowing the deductibility of intra-group service costs charged to Gru Comedil s.r.l. because, in the opinion of the tax authorities, the company had not provided sufficient documentation and proof of the benefits of the alleged services received (management services). Gru Comedil, and later the tax authorities, appealed the decision, which eventually reached the Supreme Court. Judgment The court overturned the tax authorities’ assessment and ruled in favour of Gru Comedil s.r.l. Excerpts in English “According to an approach widely shared by this Court, in the matter of so-called intra-group costs, in order for the consideration paid to the parent company or to the company entrusted with the service for the benefit of another subsidiary to be deductible by the company receiving it, it is necessary that the subsidiary derives an actual utility from the remunerated service and that this utility is objectively determinable and adequately documented (Court of Cassation, n. 26/01/2023, n. 26/01/2023, n. 1795, followed by many others, including recently Supreme Court, n. 1921, 06/07/2021, n. 1919). 30/01/2023, no. 2689; Cass. 27/01/2023, no. 2599; Cass. 04/03/2020, no. 6820; Cass. 14/12/2018, no. 32422; Cass. 04/10/2017 no. 23164; Cass. 23/11/2015, no. 23027; Cass. 18/07/2014, no. 16480; Cass. 21/12/2009, no. 26851), even if those costs do not directly correspond to revenues in the strict sense (Cass. 05/12/2018, no. 31405; previously Cass. 01/08/2000, no. 10062). Moreover, the administrative practice (C.M. no. 32/9/2267 of 22 September 1980) that, beyond the flat-rate percentage of the costs charged by the parent company to the subsidiaries, subordinates the deductibility of costs deriving from contractual agreements on services to the actuality and inherent nature of the expense to the business activity carried out by the subsidiary and to the real advantage derived by the latter (Cass. 11/11/2015, no. 23027); it should be noted that the same circular expressly specifies that the control on the utility (and on the inherence) is prejudicial to the assessment of the normal value (and therefore the appropriateness of the consideration). This approach is in line with the OECD guidelines, according to which, on the subject of intra-group provision of services, it is necessary to proceed to the so-called. benefit test, i.e., to verify whether the activity in question confers on the enterprise an advantage aimed at improving its economic or commercial position (OECD Guidelines, 18 July 2010, Chapter VII), and with the rigorous approach, on the subject of OECD-derived arbitrages, of which there is ample – and not contradicted – trace in the sectional jurisprudence (Cass. 06/07/2021, no. 19001). The existence of the cost, its pertinence and usefulness, and finally its determinability are therefore different issues and all preceding its adjustment according to the normal value.” (…) “The first complaint relates to the profile of inherence, which must be understood as set out in the preamble;  On this point, it is untrue that the CTR did not assess the existence of a benefit for the company, holding instead explicitly that the management fees charged by the foreign parent company to the Italian subsidiary are deductible where they result from a written agreement containing the details of the services and specifying a congruous allocation criterion, << more if the subsidiary’s organisational structure does not appear to be suitable for the performance on its own of the services received from controllante>>, correctly pointing out that the inherent nature did not derive from a connection between costs and revenues but it was necessary to assess whether the former were functional to the business activity. The second objection, relating to the possible presence of non-deductible cost items, is inadmissible because it does not relate to the specific rationale of the decision on this point, the CTR having expressly pointed out the groundlessness of this objection since <<non is a mere reversal of costs incurred by the parent company on behalf of Gru Comedil but the cost of a management service whose quantification must be objectively determinabile>>. The third ground of appeal is unfounded, in that the CTR did not attribute any effect of reliance to the independent auditors’ report, indeed expressly stating that it did not even determine a relative presumption of the truthfulness of the records, and recalling this Court’s orientation according to which expenses and other negative components (costs) are allowed as deductions, if and to the extent that they are charged to the profit and loss account for the year in which they are incurred, which, which, especially when it is a matter of ascertaining facts that cannot be analytically proven, constitutes, as part of the financial statements, a relevant source of information and may be verified by the tax authorities in accordance with the criteria of congruity and consistency, also taking into account the auditor’s report, itself a relevant means of proof, because of the public control profiles and the auditor’s civil and criminal liability, and may only be rebutted by producing documents demonstrating the auditor’s error or breach (Cass. 12/03/2009, no. 5926; Cass. 26/02/2010, no. 4737). Above all, however, the CTR did not at all use the auditor’s report as the sole source of its own conviction, attributing overall relevance to the entire compendium of evidence produced by the company, and in particular acknowledging the examination of the cost-sharing agreement, the invoices issued by the parent company, the statements of account, the specifications of the criteria for the allocation of corporate charges the auditing firm’s annual report and also the auditing firm’s certification and the accounting records, which, according to the defence, had been produced with the indication of the name of each employee to whom the disputed services were to be referred, evidently in order to overcome the first, and indeed only, explicit ground of dispute contained in the notice of assessment. After examining these documents, the CTR, with reasons, albeit concise, that were certainly sufficient and consistent, found that they showed the nature of the services rendered, the allocation criteria, and the reality of the costs incurred by the parent company, making ...

Following an audit the tax authority issued an assessment where they denied deductions of interest paid on an intra group loan and expenses for  intra-group services. In the opinion of the tax authorities, the loan was an economically irrational transaction that should not be recognised for tax purposes. With regard to the intra-group support services, the tax authority considered that they could not be recognised as a deductible expense because the documents and explanations provided did not support that an independent entity would have purchased and paid for the described services. Not satisfied with the assessment issued by the tax authorities, W.W.P.H. sp. z o.o. appealed to the Administrative Court. Judgment of the Administrative Court The Administrative Court ruled in favour of W.W.P.H. sp. z o.o. and sent the case back to the tax authorities for reconsideration. According to the court, at the time of the transactions in 2017, there was no legal basis for disregarding controlled transactions under Polish arm’s length provisions. A legal basis for disregarding economically irrational transactions was later established for FY 2019 and forward. Excerpts in English “Of key importance for the resolution of the present case is the judgment of the Supreme Administrative Court of 3 August 2023, ref. no. II FSK 181/21 overturning the judgment of the Court herein dated 15 September 2020, ref. no. I SA/Bd 390/19 and the decision of the appellate authority, issued against the applicant in an identical case, albeit concerning corporate income tax for 2014. The arguments contained in the aforementioned judgment of the Supreme Administrative Court are decisive for the correct resolution of the present case. It should be noted that, pursuant to Article 170 of the A.P.S.A., a final judgment binds not only the parties and the court which issued it, but also other courts and other state authorities, and in cases provided for in the law, also other persons.” “It must be emphasised that the provisions of Article 11 of the A.P.C. do not create abuse of rights or anti-avoidance clauses. They only allow a different determination of transaction (transfer) prices. Thus, the essence of the legal institution regulated in Article 11 of the A.l.t.p. is not the omission of the legal effects of legal transactions performed by the taxpayer or a different legal definition of these transactions, but the determination of their economic effect expressed in the transaction price, ignoring the impact of institutional links between counterparties (cf. judgments of the NSA of: 18 November 2020, ref. no. II FSK 1949/18; 9 December 2021, ref. no. II FSK 2360/20). It is, therefore, a legal institution with strictly defined characteristics and capable of exerting only the effects provided for in the provisions defining it. Meanwhile, the application of any provisions allowing the tax authorities to interfere in the legal relations freely shaped by taxpayers must be strictly limited and restricted only to the premises defined in these provisions, as they are of a highly interferential nature. Any broadening interpretation of them, as a result of which legal sanction could be obtained by interference of public administration bodies going further than it results from the grammatical meaning of the words and phrases used in the provisions establishing such powers, is unacceptable.” “Despite the fact that the contracting parties were related to each other, and that the company became a subsidiary of other entities as a result of the disposal of shares in its capital, the tax authorities resolved the case beyond the authority arising from the shaping legal order of Art. 11(1) of the A.p.d.o.p. This provision only authorised them to determine the conditions (prices) of these transactions differently – and thus to replace the prices specified in the parties’ agreements (transactions) with such prices that would correspond to hypothetical conditions (prices) agreed by unrelated entities.” “The reasoning adopted by the authority corresponds to the hypothesis of the norm of Article 11c(4) of the A.P.C., in force since 1 January 2019. This provision provides for the possibility for the authority to determine the taxpayer’s income or loss without taking into account the economically irrational transaction undertaken by related parties. In 2017, the provisions indicated could not be applied. Neither did the then-applicable Article 11 of the A.P.D.O.P. constitute this legal basis. This provision regulated the issue of transfer prices, i.e. transaction prices applied between entities related by capital or personality. In this provision, the legislator highlighted the arm’s length principle (also referred to as the arm’s length principle), requiring that prices in transactions between related parties be determined as if the companies were operating as independent, arm’s length entities and conducting comparable transactions under similar market and factual circumstances. When the transaction under scrutiny deviates from those concluded between independent entities under comparable circumstances, the tax authority may require a profit adjustment if other circumstances indicated in Article 11 of the A.l.p. also occur. Article 11(1) of the A.P.C. cited in the contested decision therefore only entitled the amount of deductible costs to be adjusted, but did not provide a basis for disregarding them. The legal standard deriving from this provision involved an assessment of the terms of the transaction while recognising their validity for the purpose of estimating revenue.” “Reconsidering the case, the tax authority will be obliged to consider, first of all, whether the amount of interest was determined in a manner corresponding to market conditions and to focus its considerations on this circumstance in the context of Article 11(1) et seq. of the A.p.d.o.p. In addition, the authority will be obliged to assume, in the context of the provisions of Art. 14k § 1 and art. 14m § 1 and 2 Op, as well as allegations concerning deprivation of legal protection of the company resulting from the individual interpretation issued on 9 November 2012 by the competent authority, that the occurrence of the circumstances provided for in art. 11 par. 1 of the A.p.d.o.p. did not constitute a premise for assessing the applicability of art. 15 par. 1 of the A.p.d.o.p.” “On the other hand, it ...

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 which was later dismissed by the Tax Appellate Tribunal. An appeal was then filed with the High Court, which remaned the case for a reexamination by the Tax Appellate Tribunal, holding that “….the finding of the Tribunal that no evidence was filed to be unsustainable (order dated 11.07.2023 in ITA No. 629/2017 para 8). In this regard, the ld. A.R. submitted that it is apparent from the material on record that the Assessee has received the administrative services as well as technical knowhow. Except for AY 2006-07, the issue of TP adjustment pertaining to administrative services has not arisen in any of the subsequent assessment years.” Judgment by the Tax Appelate Tribunal on reexamination “The ld. AO while passing giving effect to above Tribunal order, he has not sustained any TP adjustment u/s 92CA of the Act for the AY 2008-09. Being so, in our opinion, if there is no TP adjustment in earlier year or subsequent assessment year on these issues, there cannot be any TP adjustment on these two issues in Assessment year 2006-07 and payment for technical know-how in assessment year 2007-08. With these observations, we remit the entire disputed issue/issues to the file of ld. AO for fresh consideration. “ ...

Following an audit of Intralot S.A., the tax authorities issued an adjustment to its taxable income, where intra-group services provided by a related company in Cyprus – Intralot International Ltd. – had been disallowed. Intralot S.A. disagreed with the adjustment and filed an appeal, which was later dismissed by the Administrative Court of Appeal. Judgment of the Court The Supreme Administrative Court allowed the appeal and remanded the case to the Administrative Court of Appeal for further examinations. Excerpt “Because the Administrative Court of Appeal in the present case examined the judgment affected by the aforementioned ground of appeal on the basis of the erroneous understanding that proof of expenditure incurred abroad is legally possible only on the basis of invoices bearing the content required by the provisions of Article 12 of the VAT Code. That judgment, however, is not in accordance with the findings of the abovementioned decisions of the Council of State, which the appellant company relies on in support of its argument under Article 53(3) of Regulation No 40/94. 18/1989, in which the provisions of Article 24 of the Code of Fiscal Data (Decree 99/1977), which are identical to the applicable provision of Article 15 of the Code of Books and Data (Decree 186/1992), were interpreted. Accordingly, that plea is well founded, as is the plea in law relied on in the present appeal, since, as stated above, the rules laid down in Article 12 of the VAT Code are not applicable. invoices are not the sole means of proving expenditure incurred abroad, which may be proved by other means, taking into account the circumstances of the particular case, circumstances which the Administrative Court of Appeal did not examine in this case. Consequently, the judgment under appeal cannot be set aside and the case, which requires clarification as to its substance, must be referred back to the Administrative Court of Appeal for a new and lawful decision, which will examine the issues relating to the raising before it of the abovementioned unanswered essential plea in law – the plea in law raised in the application.” Click here for English translation Click here for other translation ...

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

Institute of International Research España S.L. belongs to the international group Informa Group Brand, of which Informa PLC, a company listed on the London Stock Exchange, is the parent company. In 2006 it had entered into a licence agreement (“for the use of the Licensed Property, Copyright, Additional Property Derived Alwork, the Mark and Name of the Licensor for the sale of Research and Dissemination Services”) under which it paid 6.5% of its gross turnover to a related party in the Netherlands – Institute of International Research BV. Furthermore, in 2007 it also entered into a “Central Support Services Agreement” with its parent Informa PLC according to which it paid cost + 5% for centralised support services: management, finance, accounting, legal, financial, fiscal, audit, human resources, IT, insurance, consultancy and special services. Following an audit, the tax authorities issued assessments of additional income for the FY 2007 and 2008 in which deductions of the licence payments and cost of intra-group services had been disallowed. Not satisfied with the assessment, Institute of International Research España S.L. filed an appeal. Judgment of the Audiencia Nacional The Court decided in favor of Institute of International Research España S.L. and annulled the assessment issued by the tax authorities. Excerpts “The paid nature of the assignment of the use of the trademark in a case such as the one at hand is something that, in the opinion of the Chamber, does not offer special interpretative difficulties. We refer, for example, to the Resolution of the Central Economic-Administrative Court of 3 October 2013 (R.G.: 2296/2012), in which the presumption of onerousness contained in art. 12. 2 of Royal Legislative Decree 5/2004, of 5 March, approving the revised text of the Non-Resident Income Tax Law, to a case of assignment of the use of certain trademarks made in the framework of a complex services contract by a non-resident entity to an entity resident in Spain and in which the reviewing body declared that: “the importance of the trademark is such (and more so the ones we are now dealing with) that it would be difficult to understand in the opinion of the Inspectorate a purely “instrumental” transfer of use of the same and much less free of charge, as the claimant claims”. The differences found by the contested decision, between the case analysed in that decision and the case at issue here, do not affect the above statement. As the complaint states in this respect, ‘it is clear that this rejection of the entire cost of the use of the trademark and the other items included in the licence agreement is not market-based because the IIR group would simply not allow any third party to benefit from using its trademark to provide services without any consideration in return’. Finally, the fact that the appellant did not pay any amount for the assignment of the use of the trademark to the trademark proprietor until the licence agreement does not justify that it should not have paid it, referring on this point to what has just been reasoned. Nor can the signing of the licence agreement be considered sufficient proof, in the manner of the precise and direct link according to the rules of the human standard of proof of presumptions (art. 386.1 of Law 1/2000, of 7 January, on Civil Procedure), that by that circumstance alone it should be ruled out outright that the licence agreement has not brought any benefit or advantage to IIR España or improved its position and prestige with respect to the previous situation.” “It remains, finally, to examine the effective accreditation (or not) of the reality of these complementary services related to the assignment of the use of the trademark. Following the reasoning of the contested decision, in general terms, there would be four reasons why the justification of the reality of those services cannot be admitted. First, the invoices issued by IIR BV refer to the services provided by the parent company in a very generic manner, which makes it impossible to know the benefit or utility received in each case by the Spanish company. Moreover, the way in which these services are valued -simply referring to the turnover of the subsidiaries- does not take into account any rational criteria. Secondly, IIR España has not substantiated the nature of the alleged services received from its Dutch parent company and their differentiation from management support costs. Thirdly, IIR Spain had already been using the brand name ‘IIR’ since its acquisition by the group in 1987 without it being established that it paid a fee for this. Lastly, the Transfer Pricing Report does not serve as evidence of the nature of the costs and their valuation.” “In the Chamber’s view, we are faced with a question of proof. The tax authorities have not considered the reality of the complementary services to be proven (but not the transfer of the use of the trademark, as explained above) and the plaintiff considers that this evidentiary assessment is erroneous in light of the documents submitted to the proceedings. The Board’s assessment of the evidence adduced by the appellant (both in administrative proceedings and in the application) is favourable to the appellant’s arguments, i.e. that it is sufficient evidence to prove the reality of the ancillary services arising from the licence agreement.” “In the light of this documentation, we consider that the reality of the services ancillary to the assignment of the use of the trademark deriving from the licence agreement is sufficiently justified. It is true that, as the Administration basically states in its response, the intensity or completeness of the different services provided in relation to what is set out in the licence agreement can be discussed, but this debate is not exactly the same as the one we are dealing with here, which consists of deciding whether the additional services in question were actually provided or not. In the Board’s view, the documentary evidence cited above proves that they were and that the licence agreement ...

A. Romania S.R.L. had purchased gas and strategy consulting services from related parties. The tax authorities issued an assessment where part of the deduction for these costs had been denied by application of the arm’s length principle. The court of first instance ruled in favor of A S.A and an appeal was then filed by the tax authorities with the High Court. Judgment of High Court The court set aside the decision issued by the court of first instance and remanded the case for reconsideration. Excerpts in English “The High Court finds that none of the contested additional tax liabilities was genuinely analysed by the court of first instance, as no logical-legal reasoning proper to the judge was set out, but the expert report carried out in the case was taken ad litteram as grounds for the judgment delivered. The adoption took place not only as regards the conclusions on the objectives of the expert’s report, which are explicitly stated in the grounds, but also as regards the specific analysis of each of the additional obligations referred to in the contested acts, the broad recitals being in reality a complete reproduction of the expert’s report. Nor did the court of first instance state the reasons for rejecting the defences of the defendant authorities which issued the contested administrative tax acts, as set out in the statement of objections (which reiterated the arguments of the additional taxation found in the contested acts) or in the objections to the expert’s report. The objections concerned specific points which required a response from the court. Taking the arguments of the experts appointed in the case without passing them through the filter of one’s own reasoning shows that the trial judge did not effectively examine the case and does not meet the requirements of Article 425(2)(b) of the EC Treaty for a statement of reasons. (1)(b) of the Code of Civil Procedure. The failure to provide a statement of reasons is also revealed by the uncritical assumption of the expert’s conclusions, as will be exemplified below. Thus, as regards the deductibility of expenses incurred for the purchase of natural gas for technological consumption, the tax authority accepted that this type of expenditure falls within the category of deductible expenses under Article 21 of the old Tax Code, as it is an expense incurred for the purpose of obtaining taxable income from the activity of natural gas distribution. However, the tax inspectorate established that the purchase price of natural gas paid by the complainant to its affiliate EER exceeded the cost level recognised by ANRE when basing the natural gas distribution tariff. The defendant tax authorities pointed out that the difference in price/expenses, not accepted by ANRE in the justification of the tariff, is not reflected in the income recorded by the defendant DEGR, since the condition of deductibility in Article 21 of the old Tax Code is not met. The argument also went to the effect that the gas price agreed with the affiliate EER contained a management fee, not specific to a normal business environment, which operates on economic principles. The expert’s report, taken from the grounds of the judgment, refers exhaustively to aspects which go beyond the specific issue in dispute (namely, the partial non-recognition of the deductibility of the expenditure, in so far as it exceeds the cost element taken into account by ANRE when basing the distribution tariff used by the claimant in its taxable income-generating activity), arguing that the expenditure on gas intended for technological consumption falls within the category of deductible expenditure, in accordance with Article 21 of the Tax Code, and that the claimant complied with the consumption rule. The only reference to the gas purchase price factor is that the limitation imposed by ANRE is a tariff regulation and not a fiscal one. The court did not give an adequate answer to the essential question in dispute, namely whether the expenditure exceeding the cost element of gas for technological consumption recognised by ANRE in the basis of the distribution tariff satisfies the condition that it be expenditure incurred for the purpose of generating taxable income, as required by Article 21 of Law No 571/2003 on the Fiscal Code. In that context, account must of course also be taken of the applicant’s position that the tax authority could not intervene in that way in respect of the purchase price, which could be adjusted only by means of a transfer price check. (…) As regards the consultancy costs invoiced by ERO which were still considered non-deductible, the tax inspection body pointed out that the consultancy services related to: corporate affairs and energy market strategy, public relations and corporate responsibility strategies, labour protection strategies, and that an independent company would not have used such services, as it had its own specialist staff/members of the board of directors who were required to provide such activities. It was pointed out that some of the natural persons providing the services were either employees of the applicant or members of the applicant company’s board of directors, and that the tax analysis related to the activities corresponding to the services provided, correlated with the duties of the functions within the applicant company. The experts established the following: the services were provided on the basis of a contract, the claimant has supporting documents proving that the services were actually provided, the claimant company is the only one who can assess the appropriateness of the purchase of those services, the expenses in question fall within the type of general, deductible expenses. It is noted that, taking the position of the experts, the court did not give the necessary response to the tax authority’s defences, previously indicated, subsumed by the application of the provisions of Article 11 of the Tax Code on transactions between related persons, together with the related methodological rules. In a different context, the applicant also considered unlawful the non-deductibility for the purposes of calculating income tax of expenses in the amount of RON 610 ...

STOCK Plzeň-Božkov, s. r. o. had deducted costs for production consultancy services, financial services and internal support services allegedly received from related parties. The tax authorities disallowed deduction of the costs for tax purposes on the basis that the evidence provided by STOCK regarding the nature and pricing of the services was insufficient. Judgment of the Supreme Administrative Court The Court ruled in favour of STOCK in relation to the production consultancy services. The tax authority’s requirement that the company document each individual ‘piece of advice’ and quantify the benefits in minute detail was unreasonable. According to the Court, it is sufficient to explain how the production services were provided and what benefits the company derived from them. The Court agreed with the tax authority’s conclusions regarding the financial services. STOCK did not document the conditions of withdrawal or the amount of credit granted to group companies. Furthermore, it did not prove that the part of the consultancy price allocated to it, calculated as the ratio between the drawdown and the total credit provided to the group, was correct. In addition, it was not even clear from the documents what the service specifically related to. The court also agreed with the tax authorities on the internal support services. The documents, witness statements and e-mails provided by STOCK were not sufficient to prove that the services had been received. Click here for English Translation Click here for other translation ...

Italien fashion group, Dolce & Gabbana s.r.l. (hereinafter DG s.r.l.), the licensee of the Dolce&Gabbana trademark, entered into a sub-licensing agreement with its subsidiary Dolce&Gabbana Industria (hereinafter DG Industria or Industria) whereby the former granted to the latter the right to produce, distribute and sell products bearing the well-known trademark throughout the world and undertook to carry out promotion and marketing activities in return for royalties. DG s.r.l., in order to carry out promotion and marketing activities in the U.S.A., made use of the company Dolce&Gabbana Usa Inc. (hereinafter DG Usa) with contracts in force since 2002; in particular, on March 16, 2005, it entered into a service agreement whereby DG Usa undertook to provide the aforesaid services in return for an annual fee payable by DG s.r.l.; this consideration is determined on the basis of the costs analytically attributable to the provision of the agreed services in addition to a mark up, i.e. a mark-up, determined in a variable percentage based on the amount of the cost. In order to verify the fairness of the consideration, the parties have provided for the obligation of analytical reporting as well as an amicable settlement procedure through an auditing company. Lastly, DG s.r.l., DG Usa and DG Industria entered into another agreement, supply agreement, whereby DG Industria appointed DG Usa as its distributor for the USA in mono-brand shops, DG Usa committed to DG s.r.l. to adapt the shops to its high quality standards functional to increasing brand awareness, and DG s.r.l. committed to pay a service fee. The service contribution was recognised in relation to the costs exceeding a percentage of the turnover realised through the mono-brand sales outlets. In the course of an audit, the Italian Revenue Agency made the following findings in relation to the tax year 1 April 2004 to 31 March 2005: first, it denied the deductibility from the taxable income for IRES and IRAP purposes of part of the fees paid by DG s.r.l. to DG USA under the service contract and precisely: a) of the costs of certain services (in particular, it recognised the costs for commercial sales, executive consultant, advertising Madison sales, advertising all others and not the others), because, provided that these were generic services, falling within the normal activity of the reseller of goods, remunerated by the resale margin, and that the reimbursable costs were defined generically, without provision of a ceiling, a reporting method and prior approval by DG s.r.l., it pointed out that it could only recognise the costs rendered in the interest >>also of the parent company<<; b) the portion corresponding to the chargeback of the mark-up, referring to Revenue Agency Circular No. 32/80 on intra-group services, where it provides that the mark-up in favour of the service provider is recognisable only where the services constitute the typical activity of the service provider and not for those services rendered by the parent company that have no market value or are attributable to the general management or administrative activity of the parent company; secondly, it denied the deductibility of the consideration paid by DG s.r.l. to DG Usa under the supply agreement, pointing out that the costs to be considered for the purposes of the contribution would be generically identified, there would be no obligation of adequate reporting or prior approval, which would in fact transfer to DG s.r.l. the risk of substantial inefficiencies of DG Usa, a risk that no independent third party would have assumed, and that the party had not adequately demonstrated that the costs corresponded to the normal value of the costs inasmuch as the documentation produced, relating to other fashion groups, concerned persons who were also owners of the mark, directly interested in its development and promotion. DG s.r.l. brought an appeal before the Provincial Tax Commission of Milan, which rejected it. An appeal was then brought before the Regional Tax Commission of Lombardy which was likewise rejected. In particular, the Regional Tax Commission, for what is relevant herein rejected the preliminary objections (failure to contest the recovery by means of a report; insufficiency and contradictory motivation); reconstructed the subject matter of the dispute, pointing out that the Agency had contested some costs of the service agreement, excluding their inherent nature; for the costs deemed inherent, it had recalculated the amount, excluding the mark-up; for the supply agreement, it had re-taxed the costs, excluding their deductibility due to lack of inherent nature in relation to the service agreement, it confirmed that the costs for the excluded services were not inherent, because: a) DG Usa also carried out activities pertaining to the retailer DG Industria, distributor of Dolce&Gabbana branded products in the U.S. and the costs were connected to this marketing activity; b) the correlation deducted by the company between the costs recharged to DG s.r.l. and the revenues that the latter obtains as a result of the royalties paid by DG Industria, because the costs connected to services intended to increase sales are those of the retailer and not of the licensee of the trademark, to which are inherent only the costs intended to increase the prestige of the trademark itself; c) the costs incurred in the interest of both DG s.r.l. and DG Usa is not relevant and the only cost items recognisable in favour of the former are those pertaining exclusively to its relevance; d) for the purpose of proving congruity, the expert’s report by Prof. Lorenzo Pozza and the certification by Mahoney Cohen & company were irrelevant, since they were mere opinions that were not binding on the administration; (e) the mark up was not deductible since the services rendered by DG USA were rendered in the interest of both DG s.r.l., licensee of the mark, and DG Industria, reseller, and it was not possible to take into consideration the actions of the latter in favour of Itierre s.p.a., reseller and therefore different from DG s.r.l.; (f) the recharging of costs to DG s.r.l. was formally obligatory in the antero but largely ...

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

“TM Licensee AG” was active in the marketing, sale and financing of luxury real estate in Switzerland and abroad. In 2015, an agreement was made whereby “TM Licensee AG” would pay a licence fee equalling 10% of its net sales for the use of trademarks owned by a group company in Liechtenstein. The tax authority increased “TM Licensee AG”‘s taxable profit by CHF 655,228, asserting the existence of a deemed dividend for the excessive part of the licence payments. An appeal was filed by “TM Licensee AG”, but it was rejected by the district court, and a further appeal was then filed with the Federal Supreme Court. Judgment The Federal Supreme Court dismissed the appeal of “TM Licensee AG” and ruled in favour of the tax authorities. The court stated that the burden of proof rests with the tax authorities. However, if the tax authorities prove disproportionate conduct, it is up to the taxpayer to prove that the transaction was at arm’s length. According to the court,”TM Licensee AG” failed to prove that the royalty payments were at arm’s length. Click here for English translation Click here for other translation ...

A controlled taxpayer generally will not be considered to obtain a benefit where that benefit results from the controlled taxpayer’s status as a member of a controlled group. A controlled taxpayer’s status as a member of a controlled group may, however, be taken into account for purposes of evaluating comparability between controlled and uncontrolled transactions ...

An activity is not considered to provide a benefit if the sole effect of that activity is either to protect the renderer’s capital investment in the recipient or in other members of the controlled group, or to facilitate compliance by the renderer with reporting, legal, or regulatory requirements applicable specifically to the renderer, or both. Activities in the nature of day-to-day management generally do not relate to protection of the renderer’s capital investment. Based on analysis of the facts and circumstances, activities in connection with a corporate reorganization may be considered to provide a benefit to one or more controlled taxpayers ...

If an activity performed by a controlled taxpayer duplicates an activity that is performed, or that reasonably may be anticipated to be performed, by another controlled taxpayer on or for its own account, the activity is generally not considered to provide a benefit to the recipient, unless the duplicative activity itself provides an additional benefit to the recipient ...

An activity is not considered to provide a benefit to the recipient if, at the time the activity is performed, the present or reasonably anticipated benefit from that activity is so indirect or remote that the recipient would not be willing to pay, on either a fixed or contingent-payment basis, an uncontrolled party to perform a similar activity, and would not be willing to perform such activity for itself for this purpose. The determination whether the benefit from an activity is indirect or remote is based on the nature of the activity and the situation of the recipient, taking into consideration all facts and circumstances ...

An activity is considered to provide a benefit to the recipient if the activity directly results in a reasonably identifiable increment of economic or commercial value that enhances the recipient’s commercial position, or that may reasonably be anticipated to do so. An activity is generally considered to confer a benefit if, taking into account the facts and circumstances, an uncontrolled taxpayer in circumstances comparable to those of the recipient would be willing to pay an uncontrolled party to perform the same or similar activity on either a fixed or contingent-payment basis, or if the recipient otherwise would have performed for itself the same activity or a similar activity. A benefit may result to the owner of intangible property if the renderer engages in an activity that is reasonably anticipated to result in an increase in the value of that intangible property. Paragraphs (l)(3)(ii) through (v) of this section provide guidelines that indicate the presence or absence of a benefit for the activities in the controlled services transaction ...

...

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

Rayonnages de France paid royalties and management fees to a related Portuguese company. Following an audit for FY 2010 – 2012 the French tax authorities denied tax deductions for the payments by reference to the the arm’s length principle. The court of first instance decided in favor of the tax authorities and Rayonnages de France then filed an appeal with the CAA of Douai. Judgment of the CAA The Court of appeal upheld the decision of the court of first instance and decided in favor of the tax authorities. Excerpt “However, as the Minister points out, in order to be eligible for deduction, the management services invoiced by VJ Trans.Fer to SARL Rayonnages de France must necessarily cover tasks distinct from those relating to the day-to-day management of the latter company, which were the responsibility of Mr B. as statutory manager of SARL Rayonnages de France, it being for the latter to determine, where appropriate, the remuneration to be paid to Mr B. in this connection. However, as the Minister points out, SARL Rayonnages de France, whose allegations tend to confirm that the management services invoiced by the company VJ Trans.Fer are the same as the tasks covered by its statutory management, does not provide any evidence to justify the provision of additional or even complementary services by this company, in a situation in which it is not disputed that SARL Rayonnages de France had, in the premises rented by it at the address of its registered office, the necessary means to enable it to keep its accounts and manage its invoicing, and that it had commissioned an accounting firm to assist it. Furthermore, it is not disputed that SARL Rayonnages de France no longer employed any employees after the transfer of its production activity to Portugal in July 2009, so that, as the Minister also points out, it cannot justify any need for management services in respect of the financial years ending in 2011 and 2012. As a result, SARL Rayonnages de France cannot be regarded as providing the proof, which is incumbent on it at this stage, of the existence of a consideration, effective and favourable to its own operation, for the sums it paid, during the two tax years in question, to the company VJ Trans.Fer as fees for management services, regardless of the assessment made by the Portuguese tax authorities as to the nature of those sums and even if they did not constitute additional remuneration for Mr B…. Consequently, C.. was entitled to consider the sums paid in this respect by SARL Rayonnages de France to the company VJ Trans.Fer, established in Portugal and placed under its control, as an indirect transfer of profits. Consequently, it was right to tax these sums in the hands of the company paying them, SARL Rayonnages de France, on the basis of the aforementioned provisions of Articles 57 and 39 of the General Tax Code.” Click here for English translation Click here for other translation ...

Sierra Spain Shopping Centers Services S.L.U. is part of a multinational group that manages shopping centres. Sierra Spain had deducted expenses for services rendered from a related party in Portugal. According to Sierra Spain, the services were related to strategic management and marketing. The tax authorities considered the expenses non-deductible and issued an assessment of additional taxable income. With respect to the strategic business management services, the tax authorities found that there was no contract between the parties. In addition, the authorities found the justification for the actual provision of services was insufficient. With regard to the marketing services, these were contracted by the Portugal-based entity to an external supplier and subsequently re-invoiced to the related parties receiving the service in Portugal, Brazil and Spain. The tax authorities considered that these services were shareholder costs and therefore not deductible in Sierra Spain. Sierra Spain appealed to the Tax Court, which upheld the assessment of the tax authorities. An appeal was then lodged with the National Court. Judgment of the Court The Court dismissed Sierra’s appeal regarding fees for management services, but ruled in favour of Sierra regarding fees for marketing services. According to the Court, Sierra had not provided sufficient supporting documentation for the management services. The Court considered that the invoices submitted were too general and that the description of the services in the invoices referred to an intercompany agreement that had not been provided. In addition, the Court considered that the internal correspondence submitted as evidence of the services provided only supported the existence of habitual and ordinary relations between the employees of the Spanish and Portuguese companies. Therefore, the requirements laid down in the Spanish legislation to support the deductibility of the management services had not been met. With regard to the expenses for marketing services, the Court stated. “Both the general purpose of the market studies (as described, for example, on p. 16 of the contested decision) and their content, in which the references to the activity carried on in Spain are of significant relevance, support the claimant’s assertion that the marketing services at issue would be subsumed under paragraph 7.14 of the OECD Guidelines, as intra-group services (specifically, as marketing assistance), and not under point 7.9 as shareholder costs (p. 31 of the complaint). Consequently, given the reality of the service, its relation to the Appellant’s activity and the utility or advantage it brings or may bring to its recipient, the deductibility of the expense incurred in 2008 for this specific item must be accepted. In order to consider the latter to be established, that is to say, that we are dealing with shareholder costs which would benefit the group and not the appellant, it is necessary to provide a statement of reasons and a greater effort of argument than that made in the present case by the Tax Inspectorate and by the contested decision. Thus, the reasons given by the tax authorities are not sufficient to establish that the basic and essential premise underlying the concept of shareholder costs is met, that is to say, that we are dealing with an activity for which the appellant entity has no need and which, therefore, it would not be prepared to pay if it were dealing with independent undertakings.” Click here for English translation Click here for other translation ...

It is expected that all cash pool participants will be better off than in the absence of the cash pool arrangement. Under prevailing facts and circumstances that could imply, for instance, that all cash pool participants would benefit from enhanced interest rates applicable to debit and credit position within the cash pooling arrangement compared to the rates that they would expect to obtain from borrowing or depositing cash outside of the pool. However, it is important to note that cash pool members might be willing to participate in cash pool arrangements to access benefits from the membership of the cash pool other than an enhanced interest rate like, for instance, access to a permanent source of financing; reduced exposure to external banks; or access to liquidity that may not be available otherwise ...

Determining the arm’s length interest rates for the cash pool intra-group transactions may be a difficult exercise due to the lack of comparable arrangements between unrelated parties. In this context, banking arrangements involving the cash pool leader, taking into account functional differences between the bank and the cash pool leader, and the options realistically available to the cash pool members may inform the identification of comparable interest rates in the transfer pricing analysis ...

Eventually, the remuneration of the cash pool members will depend upon the specific facts and circumstances and the functions, assets and risks of each of the pool members. Therefore, this guidance does not intend to provide a prescriptive approach for allocating the cash pooling benefits to the participating cash pool members in any given situation but rather lays down the principles that should guide that allocation ...

The remuneration of the cash pool members will be calculated through the determination of the arm’s length interest rates applicable to the debit and credit positions within the pool. This determination will allocate the synergy benefits arising from the cash pool arrangement amongst the pool members and it will generally be done once the remuneration of the cash pool leader has been calculated ...

While low value-adding intra-group services may provide benefits to all recipients of those services, questions may arise about the extent of the benefits and whether independent parties would have been willing to pay for the service or perform it themselves. Where the MNE group has followed the guidance of the simplified approach the documentation and reporting discussed in Section D.3 below, it should provide sufficient evidence that the benefits test is met given the nature of low value-adding intra-group services. In evaluating the benefits test, tax administrations should consider benefits only by categories of services and not on a specific charge basis. Thus, the taxpayer need only demonstrate that assistance was provided with, for example, payroll processing, rather than being required to specify individual acts undertaken that give rise to the costs charged. Provided such information outlined in paragraph 7.64 is made available to the tax administration, a single annual invoice describing a category of services should suffice to support the charge, and correspondence or other evidence of individual acts should not be required. With regard to low value-adding intra-group services that benefit only one recipient entity in the MNE group, it is expected that the benefits to the service recipient will be capable of separate demonstration ...

As discussed in paragraph 7.6, under the arm’s length principle an obligation to pay for an intra-group service arises only where the benefits test is satisfied, i.e. the activity must provide the group member expected to pay for the service with economic or commercial value to enhance or maintain its commercial position, which in turn is determined by evaluating whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. However, because of the nature of the low value-adding intra-group services discussed in this section, such determinations may be difficult or may require greater effort than the amount of the charge warrants. Tax administrations should therefore generally refrain from reviewing or challenging the benefits test when the simplified approach has been applied under the conditions and circumstances discussed in this section and in particular in conformity with the documentation and reporting discussed in Section D.3 below ...

It may be necessary to perform a functional analysis of the various members of the group to establish the relationship between the relevant services and the members’ activities and performance. In addition, it may be necessary to consider not only the immediate impact of a service, but also its long-term effect, bearing in mind that some costs will never actually produce the benefits that were reasonably expected when they were incurred. For example, expenditure on preparations for a marketing operation might prima facie be too heavy to be borne by a member in the light of its current resources; the determination whether the charge in such a case is arm’s length should consider expected benefits from the operation and the possibility that the amount and timing of the charge in some arm’s length arrangements might depend on the results of the operation. The taxpayer should be prepared to demonstrate the reasonableness of its charges to associated enterprises in such cases ...

These services may be available on call and they may vary in amount and importance from year to year. It is unlikely that an independent enterprise would incur stand-by charges where the potential need for the service was remote, where the advantage of having services on-call was negligible, or where the on-call services could be obtained promptly and readily from other sources without the need for stand-by arrangements. Thus, the benefit conferred on a group company by the on-call arrangements should be considered, perhaps by looking at the extent to which the services have been used over a period of several years rather than solely for the year in which a charge is to be made, before determining that an intra-group service is being provided ...

In general, no intra-group service should be found for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party. An exception may be where the duplication of services is only temporary, for example, where an MNE group is reorganising to centralise its management functions. Another exception would be where the duplication is undertaken to reduce the risk of a wrong business decision (e.g. by getting a second legal opinion on a subject). Any consideration of possible duplication of services needs to identify the nature of the services in detail, and the reason why the company appears to be duplicating costs contrary to efficient practices. The fact that a company performs, for example, marketing services in-house and also is charged for marketing services from a group company does not of itself determine duplication, since marketing is a broad term covering many levels of activity. Examination of information provided by the taxpayer may determine that the intra-group services are different, additional, or complementary to the activities performed in-house. The benefits test would then apply to those non-duplicative elements of the intra-group services. Some regulated sectors require control functions to be performed locally as well as on a consolidated basis by the parent; such requirements should not lead to disallowance on grounds of duplication ...

Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having the activity performed by a third party. Thus, in such a case, an intra-group service ordinarily would be found to exist. For example, an intra-group service would normally be found where an associated enterprise repairs equipment used in manufacturing by another member of the MNE group. It is essential, however, that reliable documentation is provided to the tax administrations to verify that the costs have been incurred by the service provider ...

The analysis described above quite clearly depends on the actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do or do not constitute the rendering of intra-group services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of services undertaken in MNE groups ...

Under the arm’s length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance or maintain its business position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm’s length principle ...

IAB Company had deducted fees paid for services to its parent, IAL. Following an audit the tax authorities denied these deductions as sufficient evidence had not been provided for provision of the services. An appeal was filed by IAB Company. Judgment of the High Court. The Court upheld the assessment of the tax authorities concerning management fees and dismissed the appeal of IAB Company in this regard. Excerpts from the judgment: “In a nutshell the issue here is whether or not the appellant received management services from IAL for the tax years 2010 to 2015. ” (…) “The authorities must not look at the matter from their own view point but that of a prudent business an – SA Builders Ltd v CIT (2006) 289 ITR 26 (SC).  Further, I agree with what was stated by Australia’s Full Federal Court on the function of the tax authorities and fiscal legislation.  In FC of T v BHP Billion Finance Ltd 2010 ATC 20169 at paragraph [18] the said court quoted with approval from Tweddle v FCT (1942) 180 CLR at 7 where WILLIAMS J staid that: “it is not suggested that it is the function of the Income Tax Acts or those who administer them to dictate to tax payers in what business they should engage or how to run their business profitably or economically.  The Act must operate upon the result of a tax payer’s activities as it finds them.  If a tax payer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interests and although it certainly would be better in the interests of the Commissioner if he did as: Toohey’s Ltd v Commissioner of Taxation (NSW) (1922) 22 SR (NSW) 432 at pp 44044,]” Further, in Income Tax case number (1847) 73 SATC 126 the court reminded the Commissioner of SARS after the latter had disallowed management and marketing fees paid by a subsidiary to its holding company that: “it is not for the court or the Commissioner to say, with the benefit of hindsight be disallowed on the basis that it was not strictly ‘necessary’, or that it was not as effective as it could have been.  If the purpose of the expenditure was to produce income, in the course of trade, and the expenditure was not of a capital nature, then that is sufficient.  Accordingly, the respondent was wrong in his assessment of these fees.”  In this said case the court accepted that, many a time a subsidiary is utterly dependent on its holding company for its effective functioning.  The holding company had used its muscle, as a long established public company, to raise capital for the tax payer and from the evidence it was clear the tax payer needed the management input of the holding company and received it.  It need the global vision and strategic advice of the cosmopolitan, internationally experienced team from the holding company.  The management service fees charged by the holding company to the subsidiary were held to be in line with the norm in the industry. I will now consider the evidence before me in light of the above principles.” (…) “Firstly, the determination is whether the conclusion of a contract for service necessarily means that the services had been rendered.  Put differently, the question is whether a payment made pursuant to the conclusion of service level contract amounts to incurring expenditure for purposes of deductions permissible in terms of s15 (2)(a) of the Act.  In my view, the signing of the service level contract is not sufficient for the appellant to incur obligation to pay management fees.  In the circumstances I have to determine the second issue i.e. whether in fact any services were rendered by IAL, and if so, what the services were and how much was charged in respect of services.  This two-stage inquiry is evinced by the splitting of the issues in the joint minute of the parties.  The first issue being the question management services were rendered by IAL and the second being a determination of the extent of such services. I am in agreement with the contention of the respondent that the execution of a service level agreement between the appellant and its holding company, IAL, does not amount to incurring any legal obligation in respect of management fees.  Like any other contract, the incurrence of a legal obligation depends on the performance by the parties of their obligations in terms of the contract.  There being no evidence that the appellant received specified services from IAL during the tax period under consideration (and if so the extent thereof) no legal obligation was incurred by the appellant in respect of management fees.” (…) “The Finance Director for appellant testified and his testimony remarkably contradicted that of the Group Finance Director of IAL on the fundamental premise upon which the notices in issue were raised.  He contended that the invoices were issued on the basis of services rendered and by implication suggested that if services were not rendered for any particular portion of the period concerned, the appellant would not be obliged to pay IAL.  In contradiction the Group Finance Director had testified that the rendering of a service was not a pre-requisite for the charge which IAL raised on a monthly basis to the appellant.  The evidence of these witnesses was therefore, mutually destructive.  The appellant’s Finance Director stated that the yearly fees were registered and agreed upon the commencement of the year.  He, however, had no documents as proof of such negotiations on the fees.  He did not provide any rational basis for the charge which was raised by IAL to the appellant.  He also admitted IAL exists for its own purposes and does not exist to provide service to the subsidiary only.  It was therefore, necessary to separate the functions ...

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

A German group distributor (“A” GmbH) marketed its foreign parent’s original pharmaceuticals during 2006–2010. Under German health-care rules, domestic pharmacies must source part of their inventory from lower-priced parallel importers, so A’s promotional efforts on the German marked inevitably boosted the sales of those independent importers -and, indirectly, benefited the group -without A being compensated for this contribution. On audit the tax authorities treated this uncompensated contribution as a hidden profit distribution, increasing A’s taxable income by the estimated value of the economic advantage provided by A to the group. An appeal was filed with the Nuremberg Finance Court which annulled the tax assessment, finding no proof that an independent distributor would have earned a higher margin under comparable circumstances. Click here for English translation Click here for other translation ...

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

By judgment of 19 January 2021, the Administrative Court upheld an assessment for FY 2012-2017 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. The tax assessment resulted from disallowed deductions for Intra group services provided under a general administrative, legal and financial assistance contract of 22 October 2012 Costs invoiced for the preparation of consolidated accounts Expenses related to “Technical services” for which no explanations had been provided An appeal was filed by Central Hydroelectric de Bulgari EOOD with the Supreme Administrative Court in which the company stated that the decision of the Administrative Court was incorrect. Judgment of the Supreme Administrative Court The Supreme Administrative Court partially upheld the decision of the Administrative Court. Excerpts “The present Court of Cassation finds the judgment of the ACGC valid and admissible. The argument of the applicant that the same is inadmissible is unfounded in the part in which the RA was confirmed concerning the increase of its financial result for 2012 by an expense of BGN 188 924.92 for the reason “MECAMIDES technical services”, as well as by an expense of BGN 19 724.92 for a technical expertise under invoice No 13519637/12.04.2012 issued by EDF, France. By its appeal to the ACGC, CENTRAL HYDROELECTRIC DE BULGARI EOOD has appealed against the RA in the part confirmed by the decision of the adjudicating authority. Since the act was confirmed in its entirety in the part of the established corporate tax and interest liabilities for 2012 by the decision No 367/09.03.2020 of the Director of the EITD Directorate – Sofia, the first instance court correctly held that the appeal was also lodged against this part of the RA. The appellant has not explicitly specified the amount of the corporate tax liability and interest established by the RA as a result of the above-mentioned increases in the financial result for 2012 and has not stated that it does not contest the act in this part. The arguments in the cassation appeal that the administrative court committed material breaches of the rules of court procedure, consisting, according to the appellant, in the absence of its own reasoning and failure to consider the material breaches of the administrative procedure rules in the audit proceedings alleged in the appeal, are also unfounded.“ “The decision of the ACCC contains sufficiently substantial and detailed grounds to ensure effective cassation review and to enable the party adversely affected by it to defend itself. The fact that the court considered the defendant’s legal conclusions to be correct does not mean that it did not state its own reasons.” Click here for English Translation Click here for other translation ...

A. Romania S.R.L. had purchased services from A. Nederland BV and A. CZ Holding sro, and the costs of the services had been deducted for tax purposes. At issue was whether these services had actually been provided to the benefit of A. Romania S.R.L. and if so whether the costs were deductible under Romanian tax provisions. According to the tax authorities it was not possible to identify the services actually provided, as the documentation provided was only general data on the types of services invoiced, such as: group services, taxes and contributions, other group services. No supporting documents had been submitted to show that the services were actually provided. Furthermore, according to Romanian tax provisions – paragraph 41 of H.G. no. 44/2004 – the costs of administration, management, control, consultancy or similar functions are borne by the parent company and no remuneration can be claimed for these activities from the affiliated persons, thus the expenses are not deductible for tax purposes. Hence an assessment was issued where deductions of the intra-group service costs had been denied. The court of first instance set aside the tax assessment and concluded that without those services the applicant would not be able to operate in optimal parameters and would not be able to carry out its object of activity. Judgment of Supreme Administrative Court The Supreme Administrative Court set aside the decision issued by the court of first instance and decided in favor of the tax authorities. Excerpts “- A first criticism concerns aspects related to the non-deductibility of management, consultancy and similar services expenses, in the amount of RON 13,072,643, as well as the related VAT in the amount of RON 3,197,379. The High Court holds that between the appellant-claimant and the companies A. Nederland BV and A. CZ Holding sro concluded service contracts for the provision of group services to A. S.R.L. (of Romania). These contracts related to general management assistance, legal, tax, financial, accounting, HR support services, marketing, sales and purchasing services. Since there is an affiliation relationship between these companies, according to the provisions of Articles 11 and 21 of the Tax Code and point 48 of H.G. no. 44/2004 approving the methodological rules for the application of the Tax Code, the necessity of the purchase of the services, their actual provision, must be proven, and the deductibility of expenses is only possible if services are additionally provided to the affiliated persons or if the price of the goods and the value of the services provided take into account the services and administrative costs. Such expenses cannot be deducted by the Romanian subsidiary if the services would not have been used in the case of a self-employed person, and it is not sufficient simply to prove the existence of the services; the actual provision of the services must also be proved. In other words, the services contracted with the two companies (in the Netherlands and the Czech Republic) must be in addition to the affiliation relationship. The first court held that the services purchased from the two companies were provided and were necessary for the applicant, since it did not have support departments enabling it to carry out the specific activity. The High Court holds that the deductibility of expenses for management, consultancy and similar services depends on the existence of supporting documents leading to the conclusion that the services provided are not group-wide services, since they are deducted centrally or regionally through the parent company on behalf of the group as a whole and are not invoiced to the other companies in the group. These services have been highlighted in the documents on file as “group services”, without any supporting documents being submitted to show the nature of the service provided and whether they are in addition to those relating to the affiliation relationship. The first court, certifying the conclusions of the forensic expert’s report, pointed out that, on page x, the expert had set out the contractual framework and the services to which the Netherlands and Czech companies were committed. The expert also, analysing all the categories of services purchased, showed that they were actually provided and were necessary for the company. The High Court notes from all the evidence in the file that, although the services were provided, it is not known whether they were in addition to those relating to the affiliation relationship, and it has not been shown in concrete terms, for example, with regard to the HR support services, in terms of coordinating personnel policies, remuneration and promotion of training programmes. With regard to marketing, sales and purchasing services, it is not clear from the attached documents what the name, brand, logo, etc. services consisted of. From the content of the expert report, it appears that reports, emails, plane tickets, bus tickets, etc. are listed, in the annexes to the report supporting documents, invoices, receipts, sales statements, activity reports, projects, extracts from manuals, etc. are presented, but all this does not lead to the conclusion that the services were provided in addition to the affiliation relationship, especially as they represent data of a general nature. In conclusion, it is noted that the tax authorities were correct in finding that the expenditure on the abovementioned services was not deductible. As regards the VAT relating to those services, in so far as they have not been identified by documents showing that they were provided for the benefit of taxable transactions, in accordance with Articles 145-1471 of the Tax Code, the right to deduct cannot be granted. – The second criticism relates to the corporation tax on the adjustment of expenses following the reconsideration of the transfer pricing records for transactions with related parties. It is apparent from the documents in the file that the applicant, in order to substantiate the methods of establishing the transfer prices charged between the group companies, chose the net margin method (for services) and the price comparison method (for goods). The net margin method, according to the appellants-respondents, was not properly ...

S.C. A. had paid for intra group services in FY 2013 and 2014 and deducted the costs for tax purposes. The purchases of services were made on the basis of a management services contract concluded with related party C. S.A. and a production service contract, logistics service contract, product management service contract and service contract concluded with related party B. The tax authorities had issued an assessment where deductions for the costs had been denied. The court of first instance set aside the tax assessment. Judgment of Supreme Administrative Court The Supreme Administrative Court upheld the decision from the court of first instance and decided in favor of S.C. A. Excerpts “As regards the necessity of providing the services The High Court finds that the expert held, with regard to that aspect, that by the contracts concluded, C. S.A. and B. undertook to carry out for the applicant multiple and complex activities requiring the allocation of a large amount of time and human resources, the strategic decisions concerning the development of the product range, the most appropriate technology to be used, the identification of sources of financing for the acquisition of that technology, the quantities to be manufactured, the market segment to which they were addressed, the innovation part, the software part, being taken by the members of the management on the basis of the services provided by the business partners C. S.A. and B.. The expert stated that A. produced the product range developed by the product managers of C. S.A. in the quantities and at the request of the customers identified through the services provided by B. respectively C. SAU, using the manufacturing technology identified by B. for the plaintiff without any overlap between the services provided by B. respectively C. SAU with those provided by other suppliers or by the company’s own staff. The High Court finds that the manner in which the first instance assessed the evidence cannot be criticised in the context of the ground for annulment in Article 488(8) of the EC Treaty. (The appellants have not proved the existence of a misapplication of the law by the first instance when the expert evidence was administered or when its conclusions were assessed. On the other hand, the tax authority takes a contradictory position: it held as grounds for refusing the deductibility of expenses both the lack of proof of actual provision and the lack of proof of the necessity of the services; however, in the appeal, it is stated that the tax inspection authorities did not mention in the contested act that the intra-group management/consultancy services are not necessary for the activity which the company S.C. A. carries out, and as proof, of the total intra-group services of 64,781. 915 RON, recorded by the company in the period 2009-2014, the tax inspection bodies granted the right to deduct expenses in the total amount of 44,725,484 RON related to intra-group services of the nature specified by the company, which the company justified with documents, and did not grant the right to deduct expenses in the total amount of 20,056,431 RON related to intra-group services for which the company did not submit supporting documents showing that they were performed for the benefit of the contested company. The tax authority also certainly imputed to the applicant the lack of necessity of those services, but in the light of the analysis carried out by the tax authority, the first instance correctly rejected that criticism. With regard to the provisions of the OECD Guidelines (OECD Transfer Pricing Guidelines), the tax inspection authorities state in the Transfer Pricing File that the audited company does not demonstrate that “the transactions relating to management services and consultancy services have a real economic justification and that they would have been decided on the same conditions as between independent enterprises, within the framework of free competition”. It was argued that the cost-plus method is not appropriate for assessing compliance with the market value principle in the case of the provision of management services between B. and A., on the one hand, and in the case of the provision of consultancy services between C. and A., on the other, because the comparability of gross margins depends on the similarity of the functions performed, the risks assumed and the contractual terms, and the application of the net margin method is the most appropriate for assessing compliance with the market value principle of the costs incurred by A. in the purchase of management and consultancy services. However, no additional information was requested from S.C. A. on this point because, following the tax inspection, it was found that the audited company did not submit supporting documents showing that management, consultancy, assistance, production management, product management and logistics services in the amount of RON 20,056,430.90 were performed. The High Court finds that, according to the expert’s report, the price paid by the Company to the affiliates for the purchased services met the conditions to be considered within the market price range, in accordance with the transfer pricing legislation. Furthermore, in view of the provisions of paragraph 2.39 of Chapter II, lit. D).1 of the OECD Guidelines, which states that the cost plus method is probably most useful when semi-finished products are traded between affiliated companies, when affiliated companies have entered into joint arrangements for certain facilities or long-term sale and purchase agreements or when the transaction consists of the provision of services, the tax expert considered that the use of the cost plus method in respect of management services was justified. He also pointed out that the legislation does not stipulate a minimum percentage for the mark-up to be applied, but only that it exists, so that invoicing at cost plus a 10% mark-up is justified. As the respondent-claimant rightly pointed out, the cost-plus method was selected only in respect of management services, and the method of pricing for consultancy services was cost-plus billing with a 10% profit margin. Thus, in relation to consultancy services an additional analysis was ...

PT PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent, Press Kogyo Co. Ltd. Japan, and paid royalties for “use of IP”. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to said IP. 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 Tax Court ruled in favor of the tax authorities. According to a decision issued 4 December 2019 the existence and ownership to the Intellectual Property in question had not been sufficiently documented. An request for review was then filed with the Supreme Court. Judgment of the Supreme Court The Supreme Court dismissed the request and upheld the decision of the Tax court. “(…) Therefore, the object of the dispute in the form of tax credit correction on the Utilisation of Intangible Taxable Goods (BKP) from Outside the Customs Area (in connection with royalty fees) amounting to Rp39,776,916.00 which has been considered based on facts, evidence and application of law and decided with the conclusion that it is maintained by the Panel of Judges is correct and correct. Thus, the Panel of Judges of the Supreme Court is convinced and determined to reaffirm the decision a quo because in this case the issuance of the decision of the Appellant now the Review Respondent has been carried out based on the authority, procedure and legal substance in a measurable manner (rechtmatigheid van bestuur and presumption iustae causa) in the framework of the implementation of the General Principles of Good Government (AAUPB), especially the principle of legal certainty and the principle of accuracy because the input tax that can be calculated (FPN-JLN) amounting to Rp31.988,772.00 on the grounds that the existence and utilisation of the IP cannot be proven by the current Appellant and there is no economic benefit for the payment of royalties to the current Appellant, considering that the royalty payments were made by the current Appellant to Press Kogyo Co. Ltd (PK) of Japan which is a shareholder (65%) of the current Appellant (Affiliated Party). Moreover, royalty payments are essentially part of a financial instrument for the payment of a quo which is essentially a service, while in a legal instrument it is a position on Intellectual Property Rights (IPR). The OECD Transfer Pricing Guidelines state that to test the existence of royalty payment transactions on intangibles between related parties, it is necessary to test the willing to pay test (par 6.14), economic benefit test (par 6.15), product lifecycle consideration (par 1.50), identify contractual and arrangement for transfer of IP (par 6.16-6.19). In other words, the OECD Transfer Pricing Guidelines where in testing the existence of royalty payment transactions on intangibles between related parties must be carried out: a) Willing to pay test (Par 6.14), b) Economic benefit test (Par 6.15), c) Product life cycle consideration (Par 1.50), d) Identify contractual and arrangements for transfer of IP (Par 6.16- 6.19); That based on the OECD Guidelines a quo, there are five comparability factors in an effort to obtain reliable comparables, namely: (i) terms and conditions in the contract; (ii) FAR (function, asset and risk) analysis; (iii) products or services transacted; (iv) business strategy; and (v) economic situation; That in the application of the arm’s length principle to royalty transactions on intangible property, the OECD TP Guideline provides the following guidance: 6.23 “In establishing arm’s length pricing in the case of a sale or licence of intangible property, it is possible to use the CUP method where the same owner has transferred or licensed comparable intangible property under comparable circumstances to independent enterprises. The amount of consideration charged in comparable transactions between independent enterprises in the same industry can also be guided, where this information is available, and a range of pricing may be appropriate.” Based on the aforementioned considerations, the Panel of Supreme Court Justices concluded that whether or not the payment of royalties is justified, the real issue in the dispute is an evidentiary dispute, which is related to the existence of the IP and its beneficial value to the Reconsideration Applicant formerly the Appellant. In addition, the real recognition of the applicant which contradicts the fact that since the examination process until the commencement of the trial process, the Review Applicant could not show that the IP (intangible property) was recorded in the financial statements of Press Kogyo Co. Ltd. Japan (PK Japan), which can prove that Press Kogyo Co. Ltd. Japan (PK Japan) recognised the intangible asset. Moreover, in casu has a legal relationship with the decision of the tax court body that has Permanent Legal Force (BHT) in case register Number PUT-115599.15/2014/PP/M.XIIIB Year 2019 which was pronounced on Tuesday 19 February 2019 with the verdict “rejecting the Appellant’s appeal”. This means that the positive correction of royalty fees is maintained, so that royalty fees cannot be charged as a deduction from gross income in the calculation of Corporate Income Tax for 2014, Therefore, the Panel of Judges of the Supreme Court determined that the correction in this case is maintained and can have immediate tax consequences on VAT obligations and therefore the correction of the Appellant (now the Respondent for Judicial Review) in the case a quo is maintained because it is in accordance with the provisions of the applicable laws and regulations as stipulated in Article 29 along with the Explanation of Article 29 paragraph (2) of the Third Paragraph of the Law on General Provisions and Tax Procedures juncto Article 4 paragraph (1), Article 6 paragraph (1) and Article 18 paragraph (3) and paragraph (4) of the Income Tax Law juncto Article 9 paragraph (8) letter b of the Value Added Tax Law juncto Article 69 paragraph (1) letter e and Article 78 and Article 84 paragraph (1) letter h of the Tax Court Law ...

Montupet EOOD is a Bulgarian subsidiary in the French Montupet Group which specializes in the production of aluminum components for the automotive industry. In February 2016, the French Group became part of the Canadian LINAMAR Group, which specializes in the manufacture and assembly of components for the automotive industry. The French group and its production facilities (plants in France, Bulgaria, Northern Ireland, Mexico and Spain) retained their core business as part of one of LINAMAR’s five main business areas – light metal casting. Effective 01.01.2017, Montupet SAS and Montupet EOOD entered into a Services Agreement, which canceled a previous agreement of 21.12.2009 in the part concerning the corporate and management services provided. Pursuant to the new agreement, Montupet SAS undertakes to provide Montupet EOOD with business advisory services in various areas such as business strategy and development advice; financial strategy advice; legal advice; human resources strategy advice; pricing advice and price negotiations with global customers; supply chain management assistance and advice; marketing strategy advice; engineering and methods assistance and advice; technical advice; customer contact development. According to the new contract, the pricing mechanism for the services is based on a cost allocation key for the services provided. The revenue authority formed the conclusion that the majority of the services provided by the French company after 01.01.2017 were of a general administrative nature and did not differ significantly in their nature and/or volumes from the services provided to Montupet EOOD under the previous agreement of 21.12.2009. On the basis of the evidence available, no specific additional benefits for the Bulgarian company resulting from the services received in 2017 an going forward could be identified. Furthermore some of the services were not related to the activities of Montupet EOOD, but instead categorized as “shareholder activities” carried out wholly for the benefit of the parent company or other members of the group, which should not be recognised as intra-group services. The tax authorities also disregarded the evidence submitted concerning the market nature of the price of the services in question. An assessment was issued where the deductions for payments under the new service contract had been adjusted based on the arm’s length provisions. Montupet filed an appeal with the Administrative court which was dismissed. An appeal was then filed with the Supreme Administrative Court Judgment of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court. Excerpts “In the light of the evidence in the case, it is established that the performance of services was agreed between Montupet SAS and Montupet EOOD The NRA Transfer Pricing Manual (fiche 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. According to paragraph 7.5 of the OECD Transfer Pricing Manual for Multinational Enterprises and Tax Administrations (the “OECD Manual”), the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. Paragraph 7.6 of the OECD Guidance states that, under the arm’s length principle, whether an intra-group service is effectively performed where an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial benefit to improve its trading position. This can be determined by analysing whether an independent undertaking on comparable terms would have been willing to pay for the activity if it had been carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. In the instant case, it is apparent from the reasoning of the opinion rendered by the revenue authorities and the ultimate conclusion of the trial court that part of the income paid for the services constituted a disguised distribution of profits within the meaning of § 1(5)(b). “a” of the Tax Code and as such subject to taxation under the Tax Code. However, the contested decision does not set out any specific considerations in this respect, and there is no analysis of the type of services performed, the actual performance of those services, and the manner in which the remuneration for the services was priced. On the other hand, the conclusion of the revenue administration, which is fully accepted by the national court, that part of the income is not taxable under Article 195(1)(b) of the Code of Conduct. 1 of the Income Tax Act, as well as the impossibility of determining the exact amount of the income falling within the scope of Article 12 of the Income Tax Act is unjustified, as it remains unclear what part of the income earned should not be taxed under Article 195(1) of the Income Tax Act. 1 of the Income Tax Act, respectively do not fall within the scope of the DTT. In the course of the administrative appeal, as well as in the course of the court proceedings, the foreign company submitted evidence, including a list of corporate services for 2017, documentation of Linamar’s transfer pricing for fiscal 2017, a cost allocation statement, evidence of specific benefits received in relation to the services provided, as well as a statement of business trips made by employees of other companies in the Montupet Group in the city of Montupet. Ruse for 2017. Thus, the documents listed were not discussed by the first instance court, leaving unclarified the circumstances concerning the actual performance of the intra-group services, their direct and long-term effect and, accordingly, ...

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 ...

Following a restructuring in 2015, certain integration costs had been re-invoiced to Amilum Bulgaria EAD by its parent company, Archer Daniels Midland Europe B.V. The tax authorities denied tax deductions for a portion of these costs relating to implementation of a new accounting system. The payments for these costs was instead considered to be a hidden distribution of profits to the parent. An assessment was issued of additional taxable income and withholding taxes. A complaint was filed by Archer Daniels Midland Europe B.V. with the Administrative Court, which was dismissed. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court upheld the decision of the Administrative Court. Excerpts “Paragraph 7.6 of the OECD Guidelines states that, under the arm’s length principle, the question of whether an intra-group service is actually provided when an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial benefit to improve its commercial position. This can be determined by analysing whether an independent undertaking would, on comparable terms, be willing to pay for the activity if it were carried out for it by an independent undertaking or whether it would only carry it out with its own funds. According to paragraph 7.9 of the OECD Guide, in some cases an activity may be carried out within the group related to members of the group even if those members have no need for such activity (and would not be willing to pay for that activity if they were independent enterprises). Such an activity would be one that is carried out by a group member (usually the parent company or a regional holding company) solely because of its involvement with one or more other group members, i.e. as a shareholder. It is submitted that activity of this kind would not justify charging remuneration to the recipient companies. Paragraph 7.10 gives examples of what constitutes shareholder activities under the criterion presented in paragraph 7.6, and according to paragraph 7.10(b) these are costs related to the accounting requirements of the parent company, including consolidation of financial statements. Under this relevant legal regulation, the first instance court correctly held that the costs at issue under the management services contract were incurred by a member of the group, but that the main benefits thereof accrued to the owners of the capital of the Bulgarian company and not so much to the subsidiary, which bore them within the meaning of paragraph 7.6 of the OECD Guide, and that those costs were properly characterised as non-operating. Hidden profit distribution within the meaning of § 1, point 5, b. “a” of Art. “a” and “b”. According to the legal definition, in the present case the amount received need not be transformed into direct income or assets of the owners of the capital. There must be an amount unrelated in whole or in part to the activity carried on by the taxable person and the same must have accrued, been paid or distributed in any form to the shareholders or persons related to them. Whether wholly or partly, this amount should cover expenses which, in the ordinary course of business, would be incurred by the shareholder or associate without income accruing to him. Pursuant to § 1, item 5, b. “5 (a) of the RG of the Income Tax Act, the undisclosed distribution of profits constitutes a dividend subject to withholding tax on the basis of Art. 194(1) of the Income Tax Act. In the present case, the evidence in the case undisputedly establishes that the remuneration paid was for services to prepare a complete system copy of the IT systems/processes and transfer the accounting processes and data from the service registry in Lodz to the service centre in Poznan, Poland, and these costs were conditioned by the fact that there was a change in the ownership of the capital, as the ultimate owner of the capital of Amilum Bulgaria EAD, as of 1.11.2015, the only accounting service for Europe is provided by the office in Amumil, Europe. The Group’s accounts for ADM are held by the company’s head office in Poznań, Poland. In this sense, these are not costs that the Bulgarian group company would have incurred on its own, but are imposed by the new ultimate owner as a result of the capital change. In the light of the foregoing, the referring court was correct in finding unfounded the applicant’s argument that the activities of the second stage of the Milan project should be regarded as technical services from which the Bulgarian company alone derived benefit. The latter, by incurring the costs in question, is not receiving a new service other than that which it received when 50 % of the capital was owned by Tate & Lyle, it is paying to ensure that certain technical services, such as access to server space and accounting services, can be provided by persons appointed by the new owner of the capital. In this case, the benefit that Amilum Bulgaria EAD derived was from the accounting and IT systems access services themselves, but not from the copying and transfer services to another server. Therefore, it is correctly held that they are not related to the activity carried out by the Bulgarian company, but benefit the sole owner of its capital. The objections of the appelante for unreasonableness of the judgment are unfounded, since the forensic accounting expert opinion adopted in the case was not examined and assessed by the court in its entirety and the conclusions were wrongly ignored as irrelevant. The trier of fact correctly held that the answer to Interrogatory 4, indicating an increase in revenue from the sale of products and an increase in gross profit after Tate & Lyle’s distribution business began, did not help to clarify the legal issue in the case. The expert expressly points out in the answer to question No. 3 that the ...

“Stone” A SRL had bought stones/minerals from related parties and paid for certain services. Following an audit the tax authorities had issued an assessment, where the price paid for stones had been adjusted based on cost plus method and deductions for costs of services had been denied due to lack of benefit. The court of first instance upheld the assessment in regards of the profit adjustment related to purchase of stones, but set aside the assessment in regards of denied deductions for services. This decision was appealed to the Supreme Court by both “Stone” A SRL and the tax authorities. Judgment of Supreme Court The Supreme Court found the appeal unfounded and upheld the decision of the court of first instance. Excerpt “The appellant claimed that the court of first instance misapplied the OECD Guidelines (Organisation for Economic Co-operation and Development transfer pricing guidelines) in adjusting/deducing the expenses by the amount of RON 24 703 representing the value of the stone purchased in 2010 from E. S.R.L.. That criticism is also unfounded. It appears from the contents of the RIF that the tax authority proceeded, in accordance with Article 11 para. (2) (a) of Law No 571/2003, to adjust the expenses with the cost of the raw materials in question using the net margin method, after having verified the transfer price file in the form and with the explanations submitted by the applicant. The applicant considers that account should have been taken of the price of the stone purchased, which would have been of a higher quality than that supplied by other trading partners, to which transport costs were added. However, the party fails to recognise that such an argument had to be accompanied by appropriate evidence of the facts relied on, which in fact was not the case either in the administrative procedure or before the first instance. Even the technical expert appointed stated that he did not have access to the documents of E.S.R.L. in order to be able to carry out a comparative verification of the price charged in relation to the appellant applicant compared with the relationship with other business partners, limiting himself to assuming only that the transport of raw materials was also taken into account, although the High Court finds that such a circumstance is not apparent from Contract No x/2009 concluded between the companies.” “According to Article 11(11)(a) of Regulation No 17 (2)(b) of Law No 571/2003, in the context of a transaction between related Romanian persons, the tax authorities may adjust the amount of the income or expenses of any person, as necessary, to reflect the market price of the goods or services provided, based on the cost plus method, whereby the market price is established on the basis of the costs of the good or service provided by the transaction, increased by the appropriate profit margin. In the present case, however, the cost-plus method used and described by the appellant was not correctly applied, as the production costs were not separately identified by category of customer – affiliated and non-affiliated, so that the first instance lawfully and properly upheld the findings in the contested tax documents to the effect that the appellant did not provide a full justification of the transfer price, even after the submission of additional documents, following the request of the inspection bodies. Thus, it was precisely Article 11 of the Tax Code, Article 3(3)(a) and (b) of the Tax Code, which was given effect to. (1) Annex 3 of the MFP Order no. 222/2008 (“identification of three examples of transactions similar to those to be assessed”) and point 29 of the Methodological Norms for the application of Art. 11 of the Tax Code (“the net margin method involves calculating the net profit margin obtained by a person from one or more transactions with related persons and estimating this margin on the basis of the level obtained by the same person in transactions with independent persons […]”), relied on by the appellant, by selecting a sample of 3 comparable companies (taken into account under D. P.T.), operating in the same field as the appellant, taking into account the same indicators for the selected affiliated and non-affiliated persons and identifying examples of transactions similar to those to be estimated.” Click here for English translation Click here for other translation ...

At issue was deduction of VAT on purported costs incurred for intra-group services. Cost allocated to Rohm and Hass under a cost sharing agreement had been deemed non-deductible for VAT purposes by the Italien Tax Authorities, as the taxpayer had not been able to prove the effectiveness and relevance of these services. The Regional Tax Commission (C.t.r.) dismissed an appeal filed by Rohm and Hass. In particular, the court noted that Rohm and Haas had not proved “that the services, allegedly provided by the other subsidiaries, forming part of a single group, had in some way directly and positively influenced the company’s performance, reduced any costs, favoured the improvement of the production and marketing of products, or reduced costs previously assumed for similar services, or even that the provision of new services had, even on a provisional basis, increased the company’s potential“. Judgment of Supreme Court The Supreme Court upheld the decision of the Regional tax commission and dismissed the appeal filed by Rohm and Hass as unfounded. In order for intra-group cost to be deductible for VAT purposes, the taxpayer must prove that, a real service have been received which is objectively determinable and adequately documented. This burden of proof had not been lifted by the taxpayer. Excerpt “Moreover, the C.t.r. found that “the taxpayer has not proved that the services allegedly provided by the various subsidiaries had a direct and positive influence on the company’s performance, reduced any costs, favoured the improvement of the production and marketing of products, or reduced costs previously assumed for similar services, or even that the provision of the new services had, even on a provisional basis, increased the company’s potential”. Although the grounds of the judgment under appeal contain a reference (inappropriate as regards VAT) to the lack of proof of the economic advantages achieved by the taxpaying company, the decision is based essentially on the consideration that the company has failed to discharge its burden of proof, failing to prove both the reality of the costs ‘allegedly’ incurred and their direct connection with the business activity carried out in practice (for example, with reference to the type of business organisation and the production needs of the subsidiary) and with the subsequent commercial operations carried out. It should also be recalled that EU case law on the deductibility of VAT paid on overheads has underlined the need for an economic link between upstream and downstream supplies and, therefore, for proof that the expenditure concerned is part of the constituent elements of the price for all the taxable person’s products or services (Court of Justice, 29 October 2009, C-29/08, SKF, paragraph 57; Court of Justice, 22 October 2015, Case C-126/14, Sveda). As regards the unfoundedness of the tax claim, put forward by the applicant in its defence, in the light of the ius superveniens, this Court, in a substantially similar case concerning subjectively non-existent transactions involving the supply of scrap, subject to the effects of VAT and the reverse charge system, set out the following principle of law: “as regards VAT, supply transactions carried out under the reverse charge system (the so-called “reverse charge”) are not subject to VAT. “reverse charge”), even if carried out under the apparent observance of formal requirements, are non-deductible in case of violation of substantive obligations, where the correspondence, even subjective, of the invoiced transaction with the one actually carried out, with the consequent non-existence of the obligation to pay the tax indicated on the invoice” (see judgment no. 16679 of 09/08/2016; Section 5, Order no. 2862 of 31/01/2019 Rev. 652333-01). In the present case, too, although it is not disputed that the taxpaying company has duly carried out the reverse charge at its expense and made the transactions neutral, the absence of the substantive conditions, with regard to the proof of the effectiveness and pertinence of the costs, where established, would make the VAT relating to them non-deductible.” Click here for English translation Click here for other translation ...

It is expected that all cash pool participants will be better off than in the absence of the cash pool arrangement. Under prevailing facts and circumstances that could imply, for instance, that all cash pool participants would benefit from enhanced interest rates applicable to debit and credit position within the cash pooling arrangement compared to the rates that they would expect to obtain from borrowing or depositing cash outside of the pool. However, it is important to note that cash pool members might be willing to participate in cash pool arrangements to access benefits from the membership of the cash pool other than an enhanced interest rate like, for instance, access to a permanent source of financing; reduced exposure to external banks; or access to liquidity that may not be available otherwise ...

Determining the arm’s length interest rates for the cash pool intra-group transactions may be a difficult exercise due to the lack of comparable arrangements between unrelated parties. In this context, banking arrangements involving the cash pool leader, taking into account functional differences between the bank and the cash pool leader, and the options realistically available to the cash pool members may inform the identification of comparable interest rates in the transfer pricing analysis ...

Eventually, the remuneration of the cash pool members will depend upon the specific facts and circumstances and the functions, assets and risks of each of the pool members. Therefore, this guidance does not intend to provide a prescriptive approach for allocating the cash pooling benefits to the participating cash pool members in any given situation but rather lays down the principles that should guide that allocation ...

The remuneration of the cash pool members will be calculated through the determination of the arm’s length interest rates applicable to the debit and credit positions within the pool. This determination will allocate the synergy benefits arising from the cash pool arrangement amongst the pool members and it will generally be done once the remuneration of the cash pool leader has been calculated ...

In its tax return, SFS France had deducted commissions and fees paid to a related party in the UK. The tax authorities disallowed these deductions on the basis of the arm’s length principle set out in Article 57 of the French tax code, as they considered that SFS France had failed to demonstrate any benefit from these payments to its own operations. SFS France appealed and the case ended up before the Administrative Court of Appeal, which upheld the tax authorities’ position that it was for SFS France to prove that the commissions and fees paid had been offset by benefits to SFS France. The case was then appealed to the Supreme Administrative Court, which held that the presumption of a transfer of profits abroad, cf. Article 57 of the French General Tax Code, requires the tax authorities to prove (1) a non-arm’s length relationship with a foreign entity and (2) an indirect transfer of profits to that foreign entity. According to the Court, the tax administration had failed to prove the existence of an indirect transfer of profits abroad and, on this basis, the case was referred back to the Court of Appeal for reconsideration. Judgment of the Court of Appeal on reconsideration On reconsideration the Court of Appeal ruled in favour of the tax authorities and upheld the asssesment. Excerpt in English “9. Following the audit of the accounts of SFS, the authorities established that LM had no fixed assets and did not pay any staff other than its partners Mr B… and Mr A…, who also held the positions of manager and managing director of SFS France, respectively, as stated above; that these two individuals regularly travelled to London, the costs of which were borne by SFS France and not by LM; that, as revealed in a letter sent on 28 October 2014 by the general representative of Lloyd’s France SAS, SFS France was directly registered with the underwriters of Lloyd’s of London as an authorised business contributor authorised to place risks there; that SFS France, for its own business, maintained direct relations with Lloyd’s representatives, as evidenced by a trip to Reunion Island that it had organised for them in February 2006; the only documents attesting to the activity of Mr A… on behalf of LM consisted of issuing insurance certificates bearing an electronic signature; on the other hand, the complex administrative management of the insurance files subsequently placed with Lloyd’s underwriters required a large number of staff employed exclusively in France and not by LM. 10. In these circumstances, the administration must be regarded as having established that, even if it is neither supported nor, a fortiori, justified by the latter that the price of the services invoiced by the company LM were increased compared to those charged on the market where this company operated, the company SFS France, having nevertheless paid LM a fee without any real consideration, had thus made a profit transfer to its British subsidiary, achieved by means other than an excessive price, which the service was entitled to add back to the French company’s taxable income. It was therefore right that the administration, on the basis of the aforementioned Article 57 of the General Tax Code, should reincorporate the disputed commissions and fees paid in 2004, 2005 and 2006 by SFS France to LM.” Click here for English translation cases-com.translate.goog/wp-content/uploads/SFS-France-Jan-2020-CAA-Case-no-17BX03839-ORG.htm?_x_tr_sl=fr&_x_tr_tl=auto&_x_tr_hl=auto&_x_tr_pto=nui,se,elem”>Click here for other translation ...

A French subsidiary, SAS Groupe Lagasse Europe, of the Canadian Legasse Group had paid service fees to another Canadian group company, Gestion Portland Vimy. The French tax authorities held that the basis for the payments of service fees had not been established, and that there was no benefit to the French subsidiary. The payments constituted an indirect transfer of profits within the meaning of the ‘article 57 of the general tax code; Excerps from the judgment of the Court: “11. Under the terms of article 57 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “For the establishment of income tax due by the companies which are dependent or have control of companies located outside of France, the profits indirectly transferred to the latter, either by increasing or decreasing the purchase or sale prices, or by any other means, are incorporated into the results recognized by the accounts (…) “. These provisions, which provide for the taking into account, for the establishment of the tax, of the profits indirectly transferred to a foreign enterprise which is linked to it, establish, as soon as the administration establishes the existence of an arm’s length and from a practice included in their forecasts, a presumption of indirect transfer of profits which can usefully be opposed by the taxable business in France only if this provides proof that the benefits which it has granted have been justified by obtaining counterparties. 12. In addition, under the terms of article 39 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “1. The net profit is established after deduction of all charges, these comprising, subject to the provisions of 5, in particular: 1 ° General expenses of any kind (…) “. If, under the rules governing the allocation of the burden of proof before the administrative judge, applicable unless otherwise provided, it is in principle for each party to establish the facts which it invokes in support of its claims, evidence that only a party is able to hold can only be claimed from that party. It is therefore up to the taxpayer, for the purposes of the abovementioned provisions of the General Tax Code, to justify both the amount of the charges he intends to deduct from the net profit defined in Article 38 of the General Tax Code as well as the correction of their accounting entry, that is to say the very principle of their deductibility. The taxpayer provides this justification by producing all sufficiently precise elements relating to the nature of the charge in question, as well as to the existence and the value of the consideration which he has derived from it. … 14. Secondly, SAS GROUPE LAGASSE EUROPE and Gestion Portland Vimy (the service provider), signed, on May 17, 2005, a service agreement which provides that “the service provider undertakes towards the beneficiary, who accepts it, to provide its assistance and advice in the performance of the services listed below, it being specified that this list is not exhaustive “. The services provided by Gestion Portland Vimy to SAS GROUPE LAGASSE EUROPE are defined in article 2 of the agreement and concerned assistance and advice in the areas of commercial prospecting and marketing, IT, finance, business development for the subsidiaries of SAS GROUPE LAGASSE EUROPE and the general administration. 15. The tax authorities questioned the deductibility of the sums paid within the framework of the execution of this agreement to the company GPV by the SAS GROUPE LAGASSE EUROPE by noting that this company, which has no turnover that the “management fees” paid by its French and German subsidiaries, the companies LCetI and LCetI GmbH and for financial products that the dividends distributed by the company LCetI, achieved respective operating results of 604,239 euros and 1,394,256 euros during 2009 and 2010, due to the very high cost of the fees invoiced by the company GPV, up to 937,901 euros in 2009 and 1,237,526 euros in 2010, even though it partially invoiced these fees to its subsidiaries, without the reality of the services billed by GPV being really established. 16. If the applicant has produced a certain number of invoices issued by the company GPV and relating either to services of the nature of those provided for in the aforementioned agreement of May 17, 2005, or to travel or subsistence expenses which would have been exposed for the provision of these services, it does not however provide any information, such as, for example, diaries, meeting minutes, legal acts relating to the management and administration of the subsidiaries concerned or more generally any other document relating to the services in question, which would be such as to justify their actual performance. The materiality of these services is not more established by the certificate obtained from the tax services of the province of Quebec and the terms of the memorandum and the report written, after the period verified, by the consulting firm, “Cinq Mars Conseil “, Which only relate to the relationships maintained by SAS GROUPE LAGASSE EUROPE with its French subsidiary, the company LCetI without justifying the existence of services rendered for the benefit of this subsidiary by the company GPV and the assumption of responsibility of the cost of such services by SAS GROUPE LAGASSE EUROPE. In these conditions, the existence of a real counterpart to the sums paid by this company to the company GPV cannot be regarded as demonstrated. 17. Consequently, the tax authorities were right to regard the sums paid to the company GPV as having the nature of an indirect transfer of profits within the meaning of article 57 of the general tax code and the has been reintegrated into the taxable income of SAS GROUPE LAGASSE EUROPE in application of these provisions and those of article 39 of the same code.” Click here for translation ...

A Spanish subsidiary, ARW Enterprise Computin Solution SA, had deducted intra-group management fees paid according to two service contracts with two french group companies – Distrilogie SA and DCC France Holding SAS. For an expense to be deductible it is required not only that invoice, account, payments have been imputed correctly, but also that the expense have been held for obtaining income and to the direct benefit of the subsidiary. The Spanish tax authorities found, that these requirements had not been sufficiently proved by Computin Solution SA and issued a tax assessment. Click here for other translation ...

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

A Polish subsidiary in a German Group had taken out a significant inter-company loan resulting in a significantly reduced income due to interest deductions. At issue was application of the Polish arm’s length provisions and the arm’s length nature of the interest rate on the loan. The tax authorities had issued an assessment where the interest rate on the loans had been adjusted and the taxable income increased. On that basis, a complaint was filed by the company to the Administrative Court. The administrative court rejected the complaint and ruled in favor of the tax authorities. An appeal was then brought before the Supreme Administrative Court. The Supreme Administrative Court rejected the appeal, although it did not share some of the conclusions and statements of the Court of first instance. The key issue in the case was to determine is whether the provisions of Art. 11 (Containing the Polish arm’s length provisions), allowing the authority to determine the income of the Company and the tax due without taking into account the conditions arising from existing relationships, including capital applies. Art. 11 paragraph 1 and paragraph 4. allows for the this provision to apply if three cumulative conditions are met: 1) the existence of connections between the parties referred to in art. 11 paragraph 1 points 1-3 or in para. 4 item 1 or 2 update; 2) the impact of these connections resulting in conditions that differ from those that would be agreed between independent entities; 3) the taxpayer’s failure to recognize income or income lower than would be expected if the above mentioned connections had not been there. The Supreme Administrative Court agreed that these cumulative conditions are met. The authority has made estimates of income on the basis of § 21 paragraph. 1 and 2 cited above. Regulation in the light of which it rules, if the taxpayer to provide an entity affiliated with the taxpayer loan ( credit ) or will receive such a loan ( credit ), regardless of their purpose and destiny, or also give or receive in any form of warranty or guarantee, the price of the market for this service are the interest or commission or other form of remuneration, which agreeing on for such a service, provided on comparable terms , entities independent ( paragraph. 1). The arm’s length interest rate is determined on the basis of the interest, that the entity would have to pay an independent party for obtaining a loan ( loans ) for the same period in comparable circumstances. However, according to the Supreme Administrative Court the inter group loan agreement differs from the typical loan agreements concluded by banks. The applicant does not conduct an economic activity identical to that of banks; With regard to the nature of the transaction applicant suffered much less risk of insolvency of a counter party, than borne by the bank in relation to the borrowers; The Company had a much greater possibility of controlling the situation of the financial and solvency of the counter party in the course of the duration of the contract than the bank in case of a contract of credit; The applicant does not bear the costs of verifying the ability of credit counter party and had the opportunity to immediately recover the funds provided in the framework of the agreement, which differ from the conditions defined by the parties of the contract of credit, concluded with the bank; The applicant does not incur other costs associated with granting and service the loan , which usually bear the banks; The applicant functioning in the group ‘s capital, implemented assumptions and tasks of economic different from those, which are the essence of the activities of entities operating on the market of services financial. Since comparable transactions between unrelated entities could not be established during the period under consideration, the CUP method was not applicable to the disputed contract. The Supreme Administrative Court states that the judgment under appeal meets the requirements provided for in art. 141 § 4 and fully enables its instance control, despite some shortcomings. The tax authority, while re- examining the case, is not bound within the meaning of the legal assessment contained in the fragment of the justification of the Administrative Court questioned by the Supreme Administrative Court. Instead, the legal assessment contained in this judgment is binding. Considering the, the Supreme Administrative Court dismissed complaint. Click here for translation ...

ARPTe Ltd had paid a subsidiary for management services and use of intangibles. The benefit of those payments were challenged by the tax authorities and an assessment was issued where these deductions had been denied. An appeal was filed with the tax court Judgment of the Tax Court The Court set aside the assessment of the tax authorities and decided in favor of ARPTe Ltd. According to the Court ARPTe Ltd had been able to provide sufficient evidence that the management services and intangibles provided by the subsidiary had actually benefited the company. “ Click here for translation ...

LG Electronic India has incurred advertisement and AMP expenses aggregating to Rs.6,89,60,79,670/- for the purpose of its business. The tax authorities undertook benchmarking analysis of AMP expenses incurred by LG Electronic India applying bright line test by comparing ratio of AMP expenses to sale of LG Electronic India with that of the comparable companies and holding that any expenditure in excess of the bright line was for promotion of the brand/trade name owned by the AE, which needed to be suitably compensated by the AE. By applying bright line test, the tax authorities compared AMP expenditure incurred by LG Electronic India as percentage of total turnover at 8.01% with average AMP expenditure of 4.93% of comparable companies. Since AMP expenses incurred by LG Electronic India  as percentage of sales was more than similar percentage for comparable companies, LG Electronic India had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE. The tax authorities also made an adjustment to the royalty rate paid to the parent for use of IP. Finally tax deductions for costs of intra-group services had been disallowed. The decision of the INCOME TAX APPELLATE TRIBUNAL In regards to the AMP expences the court states: “we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an international transaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted.” In regards to the royalty rate the court states: “we direct the TPO to determine the Arm’s Length royalty @ 4.05%” In regards to intra group services the court states: “we are of the opinion that once the assessee has satisfied the TNMM method i.e. the operating margins of the assessee are higher than those of the comparable companies [as mentioned elsewhere], no separate adjustment is warranted.” ...

Sociedad de Ahorro Homar Ltda. is a holding company and owns shares, receive dividends, participate as a partner, shareholder or co-owner in companies of any nature, and manage the assets acquired. In 2011 Ahorro Homar entered into a written contract with a related party, Málaga Asesorías e Inversiones Ltda., by virtue of which the latter undertook to provide accounting and administrative services. Málaga Asesorías e Inversiones Limitada issued 13 invoices to Ahorro Homar between the months of January and December 2011, for administrative services totalling $150,539,129, without any invoice for the most relevant amount issued in September 2011, for $112,229,837. The tax authorities found that the actual provision of these services had not been sufficiently proven by Ahorro Homar and disallowed the deduction. An appeal filed by Ahorro Homar was dismissed by both the court of first and second instance. Judgment of the Supreme Court The Supreme Court also dismissed the appeal and upheld the assessment issued by the tax authorities. Excerpt “In such conditions, taking into account the provisions of article 21 of the Tax Code which imposes on the taxpayer the obligation to prove and justify with all means of proof the expenses claimed as deductible under the provisions of article 31 of the Income Tax Law as well as the loss claimed, the court considered that this burden was not met since the evidence provided does not allow it to accurately determine the nature or type of each service rendered and its value and, with that information, to establish whether the payments made for them have been necessary to produce the claimant’s income. Likewise, the inconsistency of the information contained in the instruments described above prevents the true amount of the claimant’s tax loss from being established, all of which are essential to establish the appropriateness of the expenses deducted, the cause or origin of the loss for the year and, consequently, the relevance of the refund of the provisional payment for absorbed profits requested in form 22 for the 2012 tax year.” Click here for English translation Click here for other translation ...

Re-invoicing to a Office Depot France, by the controlling US company Office Depot Inc, of a part of the cost of an audit service, as it related to the internal control procedures of the French company. Office Depot France was audited for the period from 28 December 2003 to 31 December 2005, after which the administration notified it of a VAT reminder and a withholding tax on the re-invoicing by the US company Office Depot Inc. of a portion of the cost of an audit service relating to its own internal control procedures. The cost was not necessary for the operation of Office Depot France and thus not deductible. The charge in question corresponded to an indirect transfer of profits abroad. Click here for translation ...

In its tax return, SFS France had deducted commissions and fees paid to a related party in the UK. The tax authorities disallowed these deductions on the basis of the arm’s length principle set out in Article 57 of the French tax code, as they considered that SFS France had failed to demonstrate any benefit from these payments to its own operations. SFS France appealed and the case ended up before the Administrative Court of Appeal, which upheld the tax authorities’ position that it was for SFS France to prove that the commissions and fees paid had been offset by benefits to SFS France. The case was then appealed to the Supreme Administrative Court. Judgment The Supreme Administrative Court held that the presumption of a transfer of profits abroad, cf. Article 57 of the French General Tax Code, requires the tax authorities to prove (1) a non-arm’s length relationship with a foreign entity and (2) an indirect transfer of profits to that foreign entity. According to the Court, the tax administration had failed to prove the existence of an indirect transfer of profits abroad and, on this basis, the case was referred back to the Court of Appeal for reconsideration. (The case was later decided in favour of the tax authorities by the Court of Appeal in January 2020.) Click here for English translation Click here for other translation ...

“B-Production” is a subsidiary in a US multinational group and engaged in production and sales. “B-Production” pays services fees and royalties to its US parent. Following an audit, the tax authorities issued an assessment where deductions for these costs had been reduced which in turn resulted in additional taxabel income. An appeal was filed by “B-Production” with the Administrative court which in a judgment of June 2015 was rejected. An appeal was then filed by “B-Production” with the Supreme Administrative Court. In the appeal “B-Production” contested the findings of the Administrative Court that there was a hidden distribution of profits by means of the payment of management fees and duplication (overlapping) of the services at issue under the management contract and the other two agreements between the B-Production and the parent company. B-Production further argued that the evidence in the case refutes the conclusions in the tax assessment and the contested decision that the services rendered did not confer an economic benefit and in addition argues that the costs of royalties and the costs of engineering and control services under the other two contracts are not a formative element of the invoices for management services, a fact which was not considered by the court. Judgment of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities and dismissed the appeal of B-Production as unfounded. Excerpts “The dispute in the case concerned the recognition of expenses for intra-group services. The NRA Transfer Pricing Manual (Fact Sheet 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. In the present case, the costs in question relate to a contract for the provision of management services dated 26.11.2002, paid by the subsidiary [company], registered in the Republic of Bulgaria, to the parent company, [company], registered in the USA. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘the OECD Guidelines’) should therefore be taken into account in the analysis of those costs and, accordingly, in the interpretation and application of the substantive law. According to paragraph 7.5 of the OECD Guidelines, the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. In the present case, the dispute in the case relates to the answer to the first question, since it is apparent from the reasoning of the audit report, the revenue authorities and the ultimate conclusion of the court of first instance that the services did not confer an economic benefit on the domestic company and constituted a disguised distribution of profits within the meaning of section 1(5)(b) of the Act. “a” of the Tax Code. Therefore, the arguments in the cassation appeal for material breaches of the rules of court procedure – lack of instructions concerning the collection of evidence related to the amount of the price of the intra-group service and the allocation of the burden of proof to establish this fact – are irrelevant to the subject matter of the dispute. Paragraph 7.6 of the OECD Guidelines states that, according to the arm’s length principle, whether an intra-group service is actually performed when an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial advantage to improve its commercial position. This can be determined by analysing whether an independent undertaking would, on comparable terms, be willing to pay for the activity if it were carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. It is correct in principle, as stated in the appeal in cassation, that the analysis of intra-group services and their recognition for tax purposes is based on the facts and circumstances of each particular case. For example, the OECD Guidelines lists activities which, according to the criterion in point 7.6, constitute shareholding activities. According to paragraph 7.10, b. “b” of the OECD Guidance, expenses related to the accounting requirements of the parent company, including consolidation for financial statements, are defined as such. The evidence in this case established beyond a reasonable doubt that the management services covered by the contract at issue in this case included the compensation of a responsible financial and accounting manager, including cash flow planning and reporting, preparation of monthly, quarterly and annual reports (American Accounting Standards accounting. These activities, which there is no dispute that they were performed, fall within the definition of Section 7.10 for “shareholder activities.” The remaining activities included in management services, including the costs associated with the use of the software programs referred to in the expert report, are imposed by the parent company’s requirements for control and accountability of the subsidiary under the three sets of activities – managing director, production and finance. There is no merit in the objection in the cassation appeal that the management contract services do not duplicate the costs of the other two contracts. It is established from the conclusion of the FTSE that the costs of engineering and control services and royalties (know-how and patent) are not a formative element of the invoices for management services. The conclusion of the experts was based only on the fact that separate contracts had been concluded for the individual costs and not on an analysis of the elements that formed the fees. According to Annex 6 to the expert report, ...

While low value-adding intra-group services may provide benefits to all recipients of those services, questions may arise about the extent of the benefits and whether independent parties would have been willing to pay for the service or perform it themselves. Where the MNE group has followed the guidance of the simplified approach the documentation and reporting discussed in Section D.3 below, it should provide sufficient evidence that the benefits test is met given the nature of low value-adding intra-group services. In evaluating the benefits test, tax administrations should consider benefits only by categories of services and not on a specific charge basis. Thus, the taxpayer need only demonstrate that assistance was provided with, for example, payroll processing, rather than being required to specify individual acts undertaken that give rise to the costs charged. Provided such information outlined in paragraph 7.64 is made available to the tax administration, a single annual invoice describing a category of services should suffice to support the charge, and correspondence or other evidence of individual acts should not be required. With regard to low value-adding intra-group services that benefit only one recipient entity in the MNE group, it is expected that the benefits to the service recipient will be capable of separate demonstration ...

As discussed in paragraph 7.6, under the arm’s length principle an obligation to pay for an intra-group service arises only where the benefits test is satisfied, i.e. the activity must provide the group member expected to pay for the service with economic or commercial value to enhance or maintain its commercial position, which in turn is determined by evaluating whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. However, because of the nature of the low value-adding intra-group services discussed in this section, such determinations may be difficult or may require greater effort than the amount of the charge warrants. Tax administrations should therefore generally refrain from reviewing or challenging the benefits test when the simplified approach has been applied under the conditions and circumstances discussed in this section and in particular in conformity with the documentation and reporting discussed in Section D.3 below ...

It may be necessary to perform a functional analysis of the various members of the group to establish the relationship between the relevant services and the members’ activities and performance. In addition, it may be necessary to consider not only the immediate impact of a service, but also its long-term effect, bearing in mind that some costs will never actually produce the benefits that were reasonably expected when they were incurred. For example, expenditure on preparations for a marketing operation might prima facie be too heavy to be borne by a member in the light of its current resources; the determination whether the charge in such a case is arm’s length should consider expected benefits from the operation and the possibility that the amount and timing of the charge in some arm’s length arrangements might depend on the results of the operation. The taxpayer should be prepared to demonstrate the reasonableness of its charges to associated enterprises in such cases ...

These services may be available on call and they may vary in amount and importance from year to year. It is unlikely that an independent enterprise would incur stand-by charges where the potential need for the service was remote, where the advantage of having services on-call was negligible, or where the on-call services could be obtained promptly and readily from other sources without the need for stand-by arrangements. Thus, the benefit conferred on a group company by the on-call arrangements should be considered, perhaps by looking at the extent to which the services have been used over a period of several years rather than solely for the year in which a charge is to be made, before determining that an intra-group service is being provided ...

In general, no intra-group service should be found for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party. An exception may be where the duplication of services is only temporary, for example, where an MNE group is reorganising to centralise its management functions. Another exception would be where the duplication is undertaken to reduce the risk of a wrong business decision (e.g. by getting a second legal opinion on a subject). Any consideration of possible duplication of services needs to identify the nature of the services in detail, and the reason why the company appears to be duplicating costs contrary to efficient practices. The fact that a company performs, for example, marketing services in-house and also is charged for marketing services from a group company does not of itself determine duplication, since marketing is a broad term covering many levels of activity. Examination of information provided by the taxpayer may determine that the intra-group services are different, additional, or complementary to the activities performed in-house. The benefits test would then apply to those non-duplicative elements of the intra-group services. Some regulated sectors require control functions to be performed locally as well as on a consolidated basis by the parent; such requirements should not lead to disallowance on grounds of duplication ...

Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having the activity performed by a third party. Thus, in such a case, an intra-group service ordinarily would be found to exist. For example, an intra-group service would normally be found where an associated enterprise repairs equipment used in manufacturing by another member of the MNE group. It is essential, however, that reliable documentation is provided to the tax administrations to verify that the costs have been incurred by the service provider ...

The analysis described above quite clearly depends on the actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do or do not constitute the rendering of intra-group services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of services undertaken in MNE groups ...

Under the arm’s length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance or maintain its business position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm’s length principle ...

BG Exploration and Production Ltd. had determined the remuneration for various services provided on an aggregated basis by applying the TNMM method using profit to sales as the Profit Level Indicator. The tax authorities found that a CUP method was the most appropriate method and that the various services provided should be priced separately. On that basis an assessment was issued. BG E&P filed a complaint and the Dispute Resolution Panel set aside the assessment. “Consequently, after verifying that assessee has demonstrated need for those services, benefit derived from those services, evidence of receipt of such services and submitting that those services are neither duplicative in nature and nor are share holder activities, the DRP directed the Ld. transfer pricing officer to delete the adjustment proposed with respect to the intragroup services of Rs. 3329766244/–, deserves to be upheld.” The tax authorities then filed an appeal with the Income Tax Tribunal. Judgment of the Tribunal. “The main issue under these objections is the rejection of TNMM as the most appropriate method used by the assessee. The assessee had benchmarked the intra group services using TNMM as the most appropriate method and it had earned a margin of 48.71%. All the international transactions relating to intra group services were clubbed together and assessee benchmarked the same under TNMM, In the provision of business support services, the assessee has used TNMM and had shown a margin of cost plus 12%. The payment of interest was benchmarked by obtaining quotations and corroborated by providing list of independent companies’ comparable payment of interest on ECBs.” “The Ld DR could not point out on any infirmity in the above submission of the assessee with respect to satisfaction of need, benefit, duplicity, or shareholder‟s activity test. We do not find any reason to deviate from our finding as the facts and circumstances leading to the dispute are identical. In view of this we dismiss ground No. 1, 2 and 3 of the appeal of the revenue.” The Tribunal decided… ...

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:” ...

The Court of Appeal upheld decisions of the High Court confirming the Commissioner of Inland Revenue’s disallowance of a $1,116,000 management fee for income tax purposes. The Court of Appeal dismissed Honk Land Trustees Limited’s (“HLT”) appeal on the following alternative grounds: (1) there was no satisfactory evidence to show that management services were in fact provided; (2) there was no sufficient nexus shown; and (3) in the event the management fees were deductible, they were nevertheless part of a void tax avoidance arrangement. Additionally, the Court of Appeal agreed that the Commissioner was entitled to impose abusive tax position shortfall penalties ...

In the case of Sté Property Investment Holding a French company deducted fees paid for management services provided by a foreign related company. The court indicated that, even if the recharge concerned fees charged by subcontractors of the foreign company, the French company could only deduct the fees if it could prove that the services provided were real, the services were not duplicates, and the price of the services complied with the arm’s length principle. Click here for translation ...

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

According to article 32, Section XVIII of the Mexican Income Tax Law, costs determined on a pro-rata basis and paid to non-residents are not deductible. In this case it is argued that the provision violates the non-discrimination provision included in Mexico’s income tax treaties. Supreme Court JudgmentThe Supreme Court concludes that the Mexican Income Tax Law must take into account the OECD transfer pricing guidelines, and that these guidelines under certain circumstances acknowledges pro rata cost allocations. On that basis pro rata costs are deductible in Mexico, where certain requirements are met. According to the Mexican Supreme Court, these requirements are: a) The corresponding transaction has been concluded in accordance with the transfer pricing rules (paragraphs 151 to 154 of this judgment). b) All documentation supporting the transaction is available so that its authenticity can be verified, as well as the amounts to which it amounted and that it is a strictly indispensable expense (structural deduction) that was made based on objective tax and accounting criteria and for real business reasons. c) There is a reasonable relationship between the expense incurred and the benefit received or expected to be received by the taxpayer participating in the expense. In other words, the contract and supporting documentation must be analysed to determine whether there is an adequate and reasonable relationship between the expense incurred and the benefit obtained, so that the benefit cannot unreasonably exceed that amount. Click here for English Translation ...

In the case of Sharp Semiconductor Indonesia the tax authorities had disallowed deductions for royalties paid by the local company to the Japanese Sharp Corporation. Judgment of the Tax Court The court decided predominantly in favour of the tax authorities. According to the court Sharp Semiconductor Indonesia had not been able to prove the existence of know-how, the existence of training provided, the value of intangible property owned by Sharp Corporation. Moreover, Sharp Semiconductor Indonesia only sells its product to related parties and royalty fees are first relevant once the product is sold to independent parties. Finally Sharp Semiconductor Indonesia was not able to prove the economic benefit it had received from the trademark “Sharp”. Click here for translation ...

In the case of Société Office Dépôt France SNC, a US company recharged a portion of audit costs to the French company. The court found that such costs were incurred in the interest of the US company only, and were accordingly not tax deductible in France. Click here for translation ...

At issue was the existence of a basis for taking into account the deductibility of the costs of services, the costs related to the repurchase and destruction of products and the tax deductibility of royalty expenses charged between related parties. Judgment of the Court The Administrative Court concluded that “Buy/Sell Distributor” had failed to prove that the disputed services charged to it were actually supplied and necessary for it. As regards the costs relating to the redemption and destruction of the products, it held that “Buy/Sell Distributor” was not obliged to bear those costs in view of the functions it performed within the multinational company’s system and the risks it bore. The Court also held that there was no basis for treating the royalty payment as a tax deductible expense. Click here for English translation Click here for other translation ...

A Czech company (the lessor) owned real estate and rented it to independent parties. An Austrian related company provided management and consulting services to the lessor The service fees significantly increased each year, although the income of the Czech company and the number of lease contracts were constant in the examined yearsThe tax authorities required that the taxpayer prove the actual provision of the services and their relationship to taxable income. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period.The legal question was: the scope of the burden of proof that rests with the taxpayer with respect to services received from related partyThe court ruled that: the taxpayer was obliged to prove the relationship of the expensed service fees to its taxable income. Tangible evidence of the provided services, including reports, correspondence and confirmation of business trips should be provided by the tax payer in order to prove the actual provision of the services. This case confirms the strong position of tax authorities when challenging the transfer prices of services. If the taxpayer does not meet the benefit test (proving that the services were actually rendered and incurred in relation to its taxable income), the entire service expense is non-deductible. Link to full original text: www.nssoud.cz ...

Gemplus India Pvt. Ltd. is a part of the Gemplus group, engaged in providing smart card solutions for the telecommunications industry, financial services industry and other e-businesses. The company entered into a intra group management services agreement for receipt of services in marketing and sales support, customer service support, finance, accounting and administration support and legal support. The tax administration found there was no clear proof that such services had actually been rendered. There was no specific benefit derived by the Indian company. Gemplus India Pvt. Ltd. had not established the benefit of these services and had already incurred expenses towards professional and consultancy services and employed qualified personnel in India for rendering similar services. The Appellate Tribunal decided the case in favour of Revenue. To satisfy the arm’s-length standard, a charge for intra group services or intangibles must at least meet the following conditions: • The need for intra group services or intangibles is established. • The intra group services or intangibles have actually been received. • The benefit from intra group services or intangibles is commensurate with the charge ...

A subsidiary company, which paid royalties for a licence of a trademark to its parent company, could not deduct part of the sums paid as a temporary increase of the royalties by one point because it could not justify the benefit from the use of the trademark. Click here for translation ...

The administration found that the reimbursement of a charge represented a transfer of profits abroad where the French company has not substantiated the benefit of the services which the French company could perform itself. Incomplete documents submitted by the company was not considered proof of the purported benefits. This analysis was confirmed by the French Administrative Court of Appeal. Excerpt “….Although it [the company] claims that the expenses in question were in the nature of services relating to technical assistance provided in its own interest, it does not establish this by means of the fragmentary and general documents that it produces, whereas it asserts, moreover, that the expenses that it reimbursed paid for the coordination of the general policy of the Borsumif Y group. .. in commercial, legal and financial matters between the various companies belonging to the group; that it does not justify either the existence of the financial counterpart that it alleges by producing documents attesting to the interventions of employees with financial institutions or the need for a guarantee from the parent company in the negotiation of loans that also concern a third company for years, some of which are moreover outside the period in dispute ; that consequently, it is rightly that the administration has, by application of the provisions of article 57 of the general tax code, reintegrated the sums in question into the profits of the limited company BORSUMIJ Y. .. FRANCE taxable for corporation tax for the years 1979 and 1980…”  Click here for English translation Click here for other translation ...

In the case of Vansthal France the tax authorities had disallowed a transfer pricing policy under which a 20%-40% mark-up was added to payments to a Swiss entity because in its capacity as a billing centre the Swiss entity assumed no risk. Judgment of the Court The Court ruled in favour of the tax authorities. Excerpt “Considering, on the other hand, that it results from the investigation that the MAD company re-invoiced the goods to the VANSTHAL FRANCE company after having increased the prices by 39% for the kitchen articles and 20% for the porcelain articles and collected the corresponding payments; that, since MAD did not perform any services for the applicant company, the department considered that the latter had performed an abnormal act of management by agreeing to pay for its purchases at an unreasonably high price with full knowledge of the facts and that the payment of the excess price resulted in a transfer of profits abroad to the Nyder group, on which the applicant is dependent; Considering that if the applicant company maintains that the over-invoicing was justified by the services rendered by the company VANSTHAL INTERNATIONAL in the field of management and accounting, it was up to the latter to invoice these ‘services’ and not to the company MAD whose link with the company Z… INTERNATIONAL is solely financial; that the production of the MAD company’s operating account by the applicant company, in the absence of any official Swiss supporting document, does not have any evidential force to enable the value of the services that the MAD company allegedly rendered to the applicant to be assessed; that since the concept of ‘goodwill’ is an element used to calculate the value of the securities representing the share capital of limited companies, the relationship between the acquisition of shares in the company Nyder B. V. and the mark-ups on the price of goods charged by MAD is not established; that, consequently, the applicant company does not justify the existence of a consideration for the mark-ups on the prices invoiced by the Swiss company MAD; Considering that it follows from all the above that SARL Z… FRANCE is not entitled to maintain that it was wrongly that, by the contested judgment, the administrative court of Lille rejected its request; Article 1: The request of SARL Z.. FRANCE is rejected.” Click here for English translation Click here for other translation ...

To discern what benefit a particular member of the group may derive from such services it will often be necessary to analyse in some degree the responsibilities and functions of the various members of the group as well as their performances and profits (perhaps over several years) so as to establish the relationship between the relevant services and the member’s activities and performance, and it may be necessary to consider not only the immediate impact of a management decision, but also its long-term effect. For example expenditure on preparations for a marketing operation might prima facie be too heavy to be borne by a member in the light of its current resources, but, taking into account the profit expectations from the operation, it may nevertheless be regarded as an arm’s length expense ...

The question of what part of the central co-ordination and control of the group carried out by the parent company is a service for which the other members should be expected to pay is a difficult one. Many elements of this activity might, however, be bought by an enterprise from an independent third party – for example detailed planning services for particular operations, emergency management or technical advice (trouble shooting), even in some cases assistance in day-to-day management, and in principle there need be no difficulty about allowing or requiring such services to be charged for ...

Where the services comprise, for example, the decision making activities of the top management of the parent company, it may be argued that they fall into the category of services provided by the parent company for its own benefit as shareholder and not for the benefit of the individual members of the group, although they may provide a benefit for one or other of these members. The indirectness or remoteness of the benefit will be a relevant factor in deciding whether or not this kind of service could properly be chargeable to members: the answer to the question whether the member would have bought the service had it been on offer from an independent third party may also be a relevant factor ...

The central co-ordination and control of the group is a ser vice which the parent company provides at least partly for itself and to some extent as shareholder of the subsidiaries, but this service will normally in fact benefit the individual members of the group, though it will not necessarily benefit them all equally, and may even provide a positive disadvantage to some in particular instances ...

There may be cases, however, where such expenditure is incurred in the provision of services which benefit a subsidiary. For example, the audit of a subsidiary might on rare occasions prevent duplication by fulfilling to some extent the audit requirements of the relevant national law in regard to that subsidiary. However, a claim that there was a benefit for a subsidiary in such circumstances as these would need to be well supported by evidence ...

Expenses incurred by a parent company in managing and protecting its. investments are incurred by the parent company as shareholder and would not be properly chargeable therefore to the other members of the group. Other expenses incurred by the parent company may also be distinguished as prima facie incurred solely for its benefit and similarly not properly chargeable to the other members of the group. These latter would include, for example, the cost of the parent’s audit of its subsidiaries, expenses incurred by a parent company in arranging meetings of its own shareholders and for consolidating the results of the members of the group, including the necessary auditing, and in providing finance for the extension of the group itself ...

It is comparatively easy to ascertain whether or not a benefit has been conferred by a service when the service meets the specific needs of a particular enterprise. Where costs are incurred by the central organisation on behalf of the group as a whole it will often be very difficult to determine whether a real benefit has accrued to the different members of the group. Generally speaking, an indirect or remote benefit to an associated enterprise would not justify a deduction for tax purposes. This, ordinarily, would also apply if a service merely duplicated a service being performed by the associated enterprise, or if the service is already being performed by a third party ...

When a parent company, or another company in a group maintains staff or equipment available to render specific ” on call ” services, of the kind described in paragraph 146, costs are incurred in the interest of associated enterprises and they could normally be charged for such services. However, the tax authorities in the country where a subsidiary is established may properly take account of the actual use made of the services that are available. In doing so it would be appropriate to look at the continuous stream of activities and the benefits received over a period of more than one year, as it may well happen that even if the services are not used in a given year they may be used intensively in another year ...

Any payment for services rendered between associated enterprises would be required or allowed for tax purposes only if a real benefit has accrued to the enterprise that has been charged for such services. In such cases it may be accepted that a real benefit has been conferred when the assistance was intended to serve the other enterprise, according to reasonable expectations at the time the service was rendered, even if the potential benefits anticipated are not realised in practice ...