Even in uncontrolled transactions, package deals may combine elements that are subject to different tax treatment under domestic law or an income tax convention. For example, royalty payments may be subject to withholding tax but lease payments may be subject to net taxation. In such circumstances, it may still be appropriate to determine the transfer pricing on a package basis, and the tax administration could then determine whether for other tax reasons it is necessary to allocate the price to the elements of the package. In making this determination, tax administrations should examine the package deal between associated enterprises in the same way that they would analyse similar deals between independent enterprises. Taxpayers should be prepared to show that the package deal reflects appropriate transfer pricing ...

While some separately contracted transactions between associated enterprises may need to be evaluated together in order to determine whether the conditions are arm’s length, other transactions contracted between such enterprises as a package may need to be evaluated separately. An MNE may package as a single transaction and establish a single price for a number of benefits such as licences for patents, know-how, and trademarks, the provision of technical and administrative services, and the lease of production facilities. This type of arrangement is often referred to as a package deal. Such comprehensive packages would be unlikely to include sales of goods, however, although the price charged for sales of goods may cover some accompanying services. In some cases, it may not be feasible to evaluate the package as a whole so that the elements of the package must be segregated. In such cases, after determining separate transfer pricing for the separate elements, the tax administration should nonetheless consider whether in total the transfer pricing for the entire package is arm’s length ...

Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables. See paragraphs 1.134-1.138 on business strategies. However, as discussed in paragraphs 1.149-1.151, these considerations will not explain continued overall losses or poor performance over time. Moreover, in order to be acceptable, portfolio approaches must be reasonably targeted as they should not be used to apply a transfer pricing method at the taxpayer’s company-wide level in those cases where different transactions have different economic logic and should be segmented. See paragraphs 2.84-2.85. Finally, the above comments should not be misread as implying that it would be acceptable for one entity within an MNE group to have a below arm’s length return in order to provide benefits to another entity of the MNE group, see in particular paragraph 1.150 ...

Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm’s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include: a) some long-term contracts for the supply of commodities or services, b) rights to use intangible property, and c) pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm’s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm’s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. See example 26 of the Annex I to Chapter VI ...

Heidelberg Cement India Ltd is engaged in the business of manufacturing of cement and sells them to its customers in India. A TNM method where all the transactions was combined had been used by the company for determining the arm’s length price of its controlled transactions as they were considered closely linked. Following an audit for FY 2010 2011, the Indian tax authorities issued an assessment of additional taxable income where the pricing of the transactions had instead been determined on a transaction by transaction basis. According to the tax authorities, technical know-how fees paid to the parent company were excessive. At issue before the High Court was whether the combined transaction approach as applied by the company or the transaction by transaction approach as applied by the tax authorities was the most appropriate method for determining the arm’s length pricing of the international transactions. Judgement of the High Court The court decided predominantly in favour of the tax authorities. Excerpt: “Under Section 92(1) of the Act, any income arising from ‘an international transaction’ was required to be computed having regard to arm’s length price. More than one transaction can be taken together for determination of arm’s length price only if they were closely linked. Aggregation of transaction or combined transaction approach is accepted practice for determination of arm’s length price, however, such aggregation of transaction can be allowed if they were linked with each other. As per the transfer pricing study report, the only statement made by the assessee is that the assessee is engaged in the business of manufacturing the cement which is its primary business activity and therefore, all the transactions relating to cement manufacturing activity should be bundled together for determination of their ALP applying TNMM as the most appropriate method. The services rendered by the AE are specifically mentioned in the agreement. Therefore, there is no reason that such services cannot be evaluated independently on standalone basis.” “The Tribunal also observed that it was the duty of the assessee to show with cogent evidence and factual analysis backed by economic reasoning and business that all the international transactions were originating from one source or they were independent or were part of package deal. Further, the TPO had not recorded any finding while 5 of 6 rejecting the claim of aggregating the transaction of the assessee. Accordingly, the Tribunal had rightly remanded the matter to the file of the TPO with a direction to the assessee to justify how international transactions were closely linked.” Click here for translation ...

While some separately contracted transactions between associated enterprises may need to be evaluated together in order to determine whether the conditions are arm’s length, other transactions contracted between such enterprises as a package may need to be evaluated separately. An MNE may package as a single transaction and establish a single price for a number of benefits such as licences for patents, know-how, and trademarks, the provision of technical and administrative services, and the lease of production facilities. This type of arrangement is often referred to as a package deal. Such comprehensive packages would be unlikely to include sales of goods, however, although the price charged for sales of goods may cover some accompanying services. In some cases, it may not be feasible to evaluate the package as a whole so that the elements of the package must be segregated. In such cases, after determining separate transfer pricing for the separate elements, the tax administration should nonetheless consider whether in total the transfer pricing for the entire package is arm’s length ...

Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables. See paragraphs 1.114-1.118 on business strategies. However, as discussed in paragraphs 1.129-1.131, these considerations will not explain continued overall losses or poor performance over time. Moreover, in order to be acceptable, portfolio approaches must be reasonably targeted as they should not be used to apply a transfer pricing method at the taxpayer’s company-wide level in those cases where different transactions have different economic logic and should be segmented. See paragraphs 2.84-2.85. Finally, the above comments should not be misread as implying that it would be acceptable for one entity within an MNE group to have a below arm’s length return in order to provide benefits to another entity of the MNE group, see in particular paragraph 1.130 ...

Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm’s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include: a) some long-term contracts for the supply of commodities or services, b) rights to use intangible property, and c) pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm’s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm’s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. See example 26 of the Annex to Chapter VI ...

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. Judgement 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… ...

A tax assessments based on anti-avoidance doctrine “gjennomskjæring” were set aside. The case dealt with the benefits of a multi-currency cash pool arrangement. The court held that the decisive question was whether the allocation of the benefits was done at arm’s length. The court dismissed the argument that the benefits should accure to the parent company as only common control between the parties which should be disregarded. The other circumstances regarding the actual transaction should be recognized when pricing the transaction. In order to achieve an arm’s length price, the comparison must take into account all characteristics of the controlled transaction except the parties’ association with each other. While the case was before the Supreme Court, the Oil Tax Board made a new amendment decision, which also included a tax assessment for 2002. This amendment, which was based on the same anti-avoidance considerations, was on its own to the company’s advantage. Following the Supreme Court judgment, a new amended decision was made in 2009, which reversed the anti-avoidance decision for all three years. The Supreme Court concluded that in 2009 the tax authorities could also change the tax assessment for 2002, even though this tax assessment was not considered by the Supreme Court in 2008. The Court pointed out that the need for amendments pursuant to section 9-5 no. 2, litra a) of the Tax Assessment Act extends beyond the limits for the substantive legal force, cf, section 9-6 no. 5, litra e) of the Tax Assessment Act, and stated that if the tax authorities have solved a classification or allocation issue for a transaction in the same way for several income years, and there is a final and enforceable judgment for one of the years, the provision gives the tax authorities the right and obligation to also consider the tax assessments for the other years. In the specific case, the amendment for 2002 followed from the Supreme Court’s judgment for the two preceding income years, and the tax authorities then had the authority to consider the tax assessment for this year. Click here for translation ...

Two inter-company loans were provided to Statoil Angola by it’s Norwegian parent company, Statoil Norway ASA, and a Belgian sister company, Statoil Belgium (SCC). Statoil Angola only had the financial capacity to borrow an amount equal to the loan from Statoil Belgium. Hence, no interest was paid on the loan from Statoil Norway. The tax authorities divided Statoil Angola’s borrowing capacity between the two loans and imputed interest payments on part of the loan from Statoil Norway in an assessment for the years 2000 and 2001. The Supreme Court, in a split 3/2 decision, found that Statoil’s allocation of the full borrowing capacity of Statoil Angola to the loan from the sister company in Belgium was based on commercial reasoning and in accordance with the arm’s length principle. The Court majority argued that Statoil Norway – unlike Statoil Belgium – had a 100% ownership of Statoil Angola, and the lack of interest income would therefore be compensated by an increased value of it’s equity holding in Statoil Angola. Click here for translation ...