The tax authority found that P.sp. z o.o. had understated its income from sales to related parties in the P. Group. The tax authority selected three comparable independent wholesalers and established a range of profit margins between 4.02% and 6.24%. As P. sp. z o.o. had a profit margin of only 2.84% on its wholesale activities, an adjustment was made to the taxable income. A complaint was filed by “P. sp. z o.o.” with the Administrative Court, which was dismissed, and an appeal was then filed with the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The the Supreme Administrative Court, annulled the appealed decision in its entirety and ordered – when re-examining the case – the tax authority to follow the interpretation of the law made by the Supreme Administrative Court. In a very comprehensive judgment, the Court ruled on a wide range of issues, including Whether and how to take into account income received for other activities (marketing services) when determining the arm’s length income. The choice and application of transfer pricing methods The objectives and standards of a compability analysis and benchmarking study conducted by the tax authority The use of statistical methods (IQR) when the number of comparables in a benchmark is limited. Click here for English translation Click here for other translation ...

Acer Computer Ibérica S.A. (ACI) is part of the multinational ACER group, which manufactures and distributes personal computers and other electronic devices. Acer Europe AG (AEAG), a group entity in Switzerland, centralises the procurement of the subsidiaries established in Europe, the Middle East and Africa, and acts as the regional management centre for that geographical area. ACI is responsible for the wholesale marketing of electronic equipment and material, as well as in the provision of technical service related to these products in Spain and Portugal. ACI is characterized as a limited risk distributor by the group. At issue was deductibility of payments resulting from factoring agreements undertaken ACI with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Based on an interpretation of the limited risk agreement signed between ACI and its principal AEAG, the tax authorities disregarded the allocation of the risk – and hence allocation of the relevant costs – to ACI. The tax authorities considered that the financial costs arising from the relocation of cancelled orders, those arising from differences in the criteria for calculating collection and payment deadlines and those arising from delays in shipments are due to the application of incorrect criteria for the accounting and invoicing of certain transactions. It also considers that the assumption of those costs by ACI is in contradiction with its classification as a low-risk distributor and does not comply with the distribution of functions and risks between ACI and AEAG, which results from the distribution contract and the transfer pricing report. An assessment for FY 2006 – 2008 where the costs were added back to the taxable income of Acer Computer Ibérica S.A. was issued. Judgement of the Federal Court The court dismissed the appeal of Acer and upheld the tax assessment in which deductions for the costs in question had been disallowed. Excerpts “The interpretation of the contract terms which we uphold follows the above mentioned OECD Guidelines: In arm’s length transactions, the contract terms generally define, expressly or implicitly, how responsibilities, risks and results are allocated between the parties.” “However, it is irrelevant, in view of the foregoing on the assumption of risk, that ACI’s financing costs are higher than those of comparable undertakings (as the tax authorities maintain), since the refusal of deductibility is based on the fact that the costs claimed to be deductible are not borne by the appellant in accordance with the terms of the contract.” Click here for English Translation Click here for other translation ...

“Holding B.V.” is a holding company. The actual activity of the [X] group in the Netherlands – a wholesale trade in garden-related (gift) items – takes place in [X] B.V. The latter is included in a fiscal consolidation for corporate tax purposes with “Holding B.V.”. Customers of [X] B.V. are located in both the Netherlands and abroad (particularly in Western Europe, the United States and Canada). The products are purchased in China in particular and supplied direct by the producer to [X] B.V. or to its other customers. The procurement company – X Limited has an office and a showroom in Hong Kong, and employs a staff of five. The core activities of X Limited consist of quality control, logistics, product development, purchasing and sales. As remuneration for its activities, [X] B.V. pays a mark-up of 10% on the purchase price paid by X Limited to its Chinese suppliers. The tax authorities issued an assessment where the remuneration of the procurement company in Hong Kong was instead based on a cost plus method. Judgement of the Court The court rules that the transfer prices are not arm’s length. The ‘comparable uncontrolled price’ method advocated by the plaintiff is not accepted. The court followed the tax authorities in the cost-plus method, in which a cost surcharge of 10% was applied. The Court considers the following. The cup method as advocated by the plaintiff involves a comparison of the price charged for goods or services transferred in a group transaction with the price charged for goods and services transferred in a comparable free market transaction in comparable circumstances. The Court is of the opinion – as stated by the Respondent – that in view of the various functions which [X Limited] performs vis-à-vis the Claimant or third parties, there is no question in this case of a cup. A cup can therefore not serve as a basis for the transfer price so that another method should apply as a basis for determining the transfer prices. According to the defendant, the cost-plus method should be taken as a starting point. According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995-1999), the cost-plus method is based on costs incurred by the supplier of the goods or services in a group transaction for goods or services supplied to an associated purchaser. An appropriate cost-plus mark-up is then added to these costs in order to achieve an appropriate profit in view of the functions performed and the market conditions. The court is of the opinion that in view of the OECD Guidelines, the cost-plus method is a correct method for determining transfer prices in the present case. A cost-plus surcharge of 10% as defended by the defendant and further calculated in the statement of defence, has not been contested by the plaintiff and also does not appear unreasonable to the court. In view of all relevant facts and circumstances – considered together and in relation to each other – the Court is therefore of the opinion that the Defendant has made it plausible that the transfer price applied between the Claimant and [X Limited] is not based on business economics. In view of the fact that the cost supplement applied by the plaintiff is considerably higher than a transfer price that should be considered as arm’s length, the defendant has herewith also made it plausible that there is an intention to favour and awareness of this on the part of both parties. The arguments put forward by the claimant against this is of insufficient weight to conclude otherwise. Click here for English translation Click here for other translation ...