An assessment was issued by the tax authorities in Israel where they had determined the income of eBay Israel based on the TNMM method using the operating margin as the profit level indicator. eBay Marketplace Israel Ltd. disagreed with the assessment and filed an appeal. Judgement of the District Court The court decided to return the case to the tax authorities for a reassessment. “…b. The new assessments will be issued on the basis of the assumption that the appellant is a Low risk distributor, as stipulated in the canceled assessments, but this while adjusting them for the profitability cycles relevant to managed sellers only. c. In addition, the new assessments must be adjusted for revised and updated transfer pricing work that you take into account the issues discussed above. This means: the “double” transactions of Israeli sellers and buyers must be reduced; Consideration must be given to the issue of double taxation considering the taxation that may be imposed for the same transaction in another country; The increase in transactions that originates from an increase in value must be considered the platform, which is not related to the activity of the business department as well as to the contribution of external bodies to the appellant; The various parameters for choosing the comparable companies must be re-examined; And finally, manual filtering should be performed as required…” Click here for English translation ...

Other factors listed in § 1.482-1(d)(3) also may be particularly relevant under the comparable profits method. Because operating profit usually is less sensitive than gross profit to product differences, reliability under the comparable profits method is not as dependent on product similarity as the resale price or cost plus method. However, the reliability of profitability measures based on operating profit may be adversely affected by factors that have less effect on results under the comparable uncontrolled price, resale price, and cost plus methods. For example, operating profit may be affected by varying cost structures (as reflected, for example, in the age of plant and equipment), differences in business experience (such as whether the business is in a start-up phase or is mature), or differences in management efficiency (as indicated, for example, by objective evidence such as expanding or contracting sales or executive compensation over time). Accordingly, if material differences in these factors are identified based on objective evidence, the reliability of the analysis may be affected ...

As with any controlled transaction, the accurate delineation of financial transactions requires an analysis of the factors affecting the performance of businesses in the industry sector in which the MNE group operates. Because differences exist among industry sectors, factors such as the particular point of an economic, business or product cycle, the effect of government regulations, or the availability of financial resources in a given industry are relevant features that have to be considered to accurately delineate the controlled transaction. This examination will take account of the fact that MNE groups operating in different sectors may require, for example, different amounts and types of financing due to different capital intensity levels between industries, or may require different levels of short-term cash balances due to different commercial needs between industries. Where the relevant MNEs are regulated, such as financial services entities subject to regulations consistent with recognised industry standards (e.g. Basel requirements), due regard should be had to the constraints those regulations impose upon them ...

As with any controlled transaction, the accurate delineation of financial transactions requires an analysis of the factors affecting the performance of businesses in the industry sector in which the MNE group operates. Because differences exist among industry sectors, factors such as the particular point of an economic, business or product cycle, the effect of government regulations, or the availability of financial resources in a given industry are relevant features that have to be considered to accurately delineate the controlled transaction. This examination will take account of the fact that MNE groups operating in different sectors may require, for example, different amounts and types of financing due to different capital intensity levels between industries, or may require different levels of short-term cash balances due to different commercial needs between industries. Where the relevant MNEs are regulated, such as financial services entities subject to regulations consistent with recognised industry standards (e.g. Basel requirements), due regard should be had to the constraints those regulations impose upon them ...