Ferroli España, S.L.U. is a Spanish manufacturer manufacture of cookers and heaters. In FY 2010 and 2011 the company had various transactions with other companies in the Ferroli Group and reported negative profit margins on these transactions. According to the company this was due to the financial crises in Spain. Following an audit, the tax authorities issued a notice of assessment where the profit of Ferrolia had been adjusted resulting in additional taxable income. The TNN method had been used and profits were adjusted to the median. An appeal was filed by Ferroli. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since sufficient proof of such defects had not been established, the adjustment was reduced to the lower quartile (3 % ROS). Excerpts “We are therefore within the scope of point 3.61 of the OECD Guidelines, which states: “If the relevant terms of the controlled transaction (e.g. price or margin) are outside the arm’s length range determined by the tax administration, the taxpayer should be given the opportunity to argue how the terms of the controlled transaction satisfy the arm’s length principle, and whether the result falls within the arm’s length range (i.e. that the arm’s length range is different from that determined by the tax administration). If the taxpayer is not able to demonstrate these facts, the tax administration must determine the point within the arm’s length range to which to adjust the condition of the controlled transaction”.” “Well, the Central Economic-Administrative Court justifies the application of this rule in the following reasoning: “finding ourselves in a situation in which the margin used is out of range, and the reasons have not been accredited, we have to say that we consider it correct to apply the median or central tendency for the determination of the net operating margin between the company’s sales (in this sense, section 3.57 of the OECD Directives”. In the judgment of this Chamber and Section of 4 February 2021 (ROJ: SAN 416/2021, FJ 2.10), we have summarised the interpretative position on the conditions under which recourse to rule 3. 61 of the OECD Guidelines, as expressed in the judgment of 6 March 2019 (ROJ: SAN 1072/2019), in the following terms: “it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application”. In the aforementioned judgment of 6 March 2019 (ROJ: SAN 1072/2019, FJ 3), the improper application of the disputed rule by the Tax Administration was reasoned as follows: “In short, it seems to us that, in effect, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest interquartile range – 2.1% – it is appropriate, in effect, to carry out the corresponding adjustment. But the fact that this occurs does not, without more, allow the median to be applied in the terms provided for in rule 3.62, since the application of that rule is not justified by the fact of being outside the range of full competence, but rather by the existence of “defects in comparability”, which according to the arguments of the TEAC itself were not acceptable in 2008 and, by extension, neither would they be acceptable in relation to 2007″.” As we can see, the contested decision incurs in the same deficiency of reasoning that we appreciate in the precedent cited above, beyond the differences between the different factual assumptions being tried, as the Central Economic-Administrative Court considers the appeal to the median to be plausible due to the mere existence of a deviation from the range of full competence determined by the Tax Administration. The justification offered by the assessment agreement and which the respondent administration reiterates in its reply, that the margins obtained are too wide, is not sufficient to consider that the burden of reasoning and setting out the reasons that lead to the application of the median in accordance with the provisions of rule 3.61 of the OECD Guidelines, that is to say, due to the persistence of defects of comparability, has been fulfilled. The reasoning offered by the tax authorities that the margins are too wide, having accepted that in 2011 the arm’s length range is within an interquartile range between 3.60 and 6.90 per cent, is not considered sufficiently expressive of the reasons that would support the application of the median in the sense stated above. The plea on this point is upheld and the application of the lowest point of the arm’s length range determined by the tax authorities (3%) is considered appropriate, with the legal effects inherent in this statement.” Click here for English translation Click here for other translation Spain SAN_3400_2023 ORG NW ...

Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length. Following an audit, the tax authorities found that the company’s profit was outside the arm’s length range and issued an assessment of additional income for FY2014-2016. According to the tax authorities, Yazaki Bulgaria Ltd had not included all its costs when calculating its profit margin. Administrative Court Judgement The Administrative Court annulled the tax authority’s assessment and ruled in favour of Yazaki Bulgaria Ltd. Excerpt “It is undisputed in this case that the adjustments made by the appellant for comparability with the amounts of additional labour costs in individual years are as follows: For 2014, the reported operating loss of £2,192,845.67 was adjusted upwards to a net profit of £4,837,402.79 as a result of the elimination for comparability purposes of costs of £7,030,248. 46 leva; before adjustments a net profit margin of -1.02% is calculated and after adjustments the net profit margin indicator is +2.34% and falls above the lower quartile value which is 2.27; For 2015 – the reported net profit from operations of £4,086,310.44 has been adjusted upwards to a net profit of £11,832,352.26 as a result of eliminating for comparability purposes expenses of £7,746,041. 82 leva; before adjustments, the net profit margin is calculated at 1.43% and after adjustments, the net profit margin indicator is 4.26% and falls above the lower quartile value of 1.68%; for 2016 – the reported net profit from operations of £1,259,468.30 has been adjusted upwards to a net profit of £6,815,444.19 as a result of eliminating for comparability purposes expenses of £5,555,975. 89; Before adjustments, the net profit margin is calculated at 0.46% and after adjustments, the net profit margin indicator is 2.56% and falls above the lower quartile value which is 2.22% . In summary of the foregoing, the court finds that after the audited entity’s elimination of net profit comparability expenses, Y.B.’s net profit margin indicator falls within the interquartile range, and therefore, the conclusion that the company’s net profit margin indicator is below market values is not warranted. The adjustments made were to eliminate the effect of additional staff and training costs which affected the auditee’s net profit margin and, in the Court’s view, were consistent with the purpose of Article 4 N-9 of 14.08.2006 – to achieve a result that would have been achieved in an ordinary commercial or financial relationship between independent persons under comparable conditions. The additional costs have been recognized by the tax administration as actually incurred and are part of the costs taken into account in the declared financial result of the company. There is no basis for transformation of the financial result of the company, as done by the audit on the basis of Art, Article 16 and Article 78 of the Income Tax Act, since the net profit of the company falls within the market values when adjustments are made for comparability, i.e. there is no conduct on the part of the audited entity aimed at tax evasion. For the reasons set out above, the Court considers that the appeal should be upheld by annulling the contested revision act.” Click here for English Translation Click here for other translation Bulgaria vs YAZAKI BULGARIA LTD SAC No 22-2022 ...

Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors. An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant mark-up of 11.11 per cent, while in direct sales to end customers it had applied a mark-up of 32 per cent and in sales to dealers a mark-up of 25 per cent, 22 per cent and 20 per cent in the various years, and pointed out that these prices were perfectly comparable, since the products were of the same type, under conditions of free competition and at the same marketing stage; pointed out that the resale price criterion also corroborated these results as well as the profit comparison method, finding that Prinoth, in the years from 2007 to 2011, had suffered losses of approximately €4 million while the subsidiaries had made profits of approximately €20 million, which was not consistent with the choices of an independent operator Finally, the Court did not accept Prinoth’s defence that, due to the particular nature of the products and the marketing methods used, the only appropriate method was the cost-plus method, which was accepted by the first judges but not accepted because it led to completely different results, due to the erroneous data used, because in the master files and local files made available by Prinoth, the costs not relating to production were arbitrarily allocated. These considerations led it to conclude that the company had not met its burden of proof.” Prinoth S.p.A then filed an appeal with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court found the reasoning of the regional court lacking and remanded the case back to the Court in a different composition. Excerpt “5. On the other hand, the second and third pleas, to be dealt with together, are well founded. In fact, the aforementioned ruling is entirely anapodic, failing to explain in any way the reasons why the numerous and unambiguous factual elements, represented by the taxpayer company and already relied on in the judgments at first instance, have no impact on the concrete possibility of referring to them for the purpose of identifying the normal value in accordance with the criterion of the price comparison method, being instead potentially capable of affecting the actual comparability of the transactions. The company had in fact deduced, in support of the unusability of the price comparison criterion, and on the basis of its own use of the different cost-plus criterion, that in the intra-group transfers Prinoth did not carry out all the marketing, sales and after-sales activities, as well as after-sales assistance, entrusted to the subsidiaries; and, secondly, that of the risks, that in the intra-group transfers the subsidiaries took upon themselves the risks of inventory, fluctuations in the costs of raw materials and interest rates. Well, the judge cannot, when examining the arguments of the parties or the facts of evidence, limit himself to stating the judgement in which their assessment consists, because this is the only “static” content of the complex motivational statement, but he must also engage, all the more so in a complex case, in the description of the cognitive process through which he passed from his situation of initial ignorance of the facts to the final situation constituted by the judgement, which represents the necessary “dynamic” content of the statement itself (Cass. 20/12/2018, no. 32980; Cass. 29/07/2016, no. 15964; Cass. 23/01/2006, no. 1236). And such an anapodic and generic statement also results in a violation of the OECD Guidelines that allow the application of the price comparison method only in the presence of effectively comparable transactions, otherwise the necessary adjustments must be made. And for the purposes of the comparability of transactions, as seen above, the functions performed by the undertakings and the allocation of risks between the contractual parties play a decisive role, together with the identity of the product, which are capable of affecting the price of the transaction. The second and third pleas must therefore be upheld.” Click here for English translation Click here for other translation Italy vs Prinoth SPA 20221213 2022 n 36275 ...

Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method used by the company due to differences in the treatment of cost items and thus issues of comparability at a gross margin level. Instead, the tax authorities applied the TNMM. The profit was outside the interquartile range and an adjustment to the median was made. Transalliance lodged an appeal. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since such defects had not been established, the adjustment was reduced to the lower quartile. Excerpt “Of the points that are dealt with, the appellant focuses the discussion on the application of the median. In particular the Guidelines – 3.62 – state that “where the range comprises highly reliable and relatively equal results, it can be argued that any one of them satisfies the arm’s length principle. Where some defects in comparability persist, as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency that allow this point to be determined (e.g. median, measure or weighted mean, depending on the specific characteristics of the data) in order to minimise the risk of error caused by defects in comparability that persist but are not known or cannot be quantified”. Applying this rule, p. 109 of the Agreement states that “the normal practice in such cases is to use the median as the most significant value of the interquantile range, as it avoids the problems that extreme values cause in the calculation of the arithmetic mean”. The appellant – p. 120 of the agreement – argued that the administration could not apply the median “mechanically”, as such automatism is not required by the Guidelines. Therefore, it argued that it is sufficient to apply the “lower quartile of the interquartile range” instead of the median. To which the Agreement replied that ‘the preference for the median must be justified on statistical grounds: it is a robust statistic, which is not influenced by extreme values in the sample of purchasables’. Both the TEAC and the Abogacía del Estado insist on the argument. The Chamber’s position in this regard is described in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ) – the appeal was rejected by order of 14/11/2019 – and 4 February 2021 (Rec. 658/2017), which hold that “it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application”. This solution has been accepted in the Resolution of the TEAC of 23 November 2021 (4881/2019), which states, with a correct interpretation of the position of this Chamber, “that in order to resort to the median, there must be defects of comparability. In the event that such defects are not highlighted by the inspection, the adjustment would be made to the lower quartile”. Well, what the Inspectorate has done is to “automatically” apply the median -also the TEAC and the Abogacía del Estado-, without explaining and reasoning the concurrence of “defects of comparability”, a burden that corresponds to it and that the Chamber should not replace. This means that the lower inter-quantile range must be applied and not the median, as the appellant claims. On this point, the appeal is also upheld.” Click here for English translation Click here for other translation Spain vs Logistica SA SAN 5336-2022 - November 2022 ORG PDF ...

C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. Judgement of the Administrative Court The Court found that the TNMM was the most appropriate method to determine the company’s income in 2016, and that the comparability analysis was carried out in accordance with the regulations and data available to the authority. However, the tax authorities have wrongly determined the income of the complainant, by referencing to its entire activity, despite the fact that 5% of the transactions are not subject to regulation under Article 11(1)-(3) of the A.p.d.o.p. Because of this, the court repealed the decision of the first-instance authority and stated that when re-examining the case, the authority should take into account the position expressed in the court’s decision. Excerpt from the judgement regarding adjustments where the result is within the inter quartile range “It is also necessary to share the Applicant’s position regarding the use of the median average, well, the authority of first instance, which was accepted by the Appellate Body, stressed on page 151 of the issued decision that the statistical analysis conducted by it used positional measures, as the comparative analysis is an approximation of the prices used in transactions between unrelated parties. In order to determine the range of prices, statistical tools in the form of quartiles (…) were used to analyse the results, the analysis carried out assuming that the appropriate range of results is the interquartile area (first quartile, median, third quartile). Hence, according to the authority, in practice, the most common assumption is that the market values are those that fall between the value of the lower quartile and the upper quartile of the sample population. The inter-quartile range is used to define the rules generally applicable in the market. It should be noted here that the inter-quartile area for 2016, ranges from 1.61% to 3.89%, so since the market value of the EBIT(2) operating margin is already the value of the bottom quartile of 1.61%, and the estimation made is to determine the margin obtained in comparable transactions by independent entities – §18 of the MF Regulation (and such market transactions are already at the level of the bottom quartile), there is no legal basis for determining the market values of EBIT(2) using the arithmetic average of the median operating margin.” Click here for English Translation Click here for other translation I SA_Go 103_22 - Wyrok WSA w Gorzowie Wlkp. z 2022-06-09 ...

Adidas India Marketing Pvt. Ltd. is engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Following an audit for FY 2016-2017, an assessment had been issued by the tax authorities where adjustments had been made to (1) advertising, promotion and marketing activities in Adidas India which was considered to have benefitted related parties in the Adidas group, (2) royalty/license payments to the group which was considered excessive and (3) fees paid by Adidas India to related parties which was considered “fees for technical services” (FTS) subjekt to Indian withholding tax. Following an unfavorable decision on the first complaint, an appeal was filed by Adidas with the Income Tax Appellate Tribunal. Judgement of the ITAT The Tribunal decided predominantly in favor of Adidas. Issues 1 and 2 was restored back to the tax authorities for a new decision in accordance with the directions given by the Tribunal, and issue 3 was set aside. India vs Adidas India Marketing Pvt. Ltd April 2022 ITA No.487-Del-2021 ORG ...

Consider the same fact pattern as described in Example 1, but in this case assume that under the guidance in Section D.2, comparable uncontrolled transactions can be identified showing that the arm’s length price of a comparable guarantee would be in the range of 1% to 1.5% ...

The need to adjust comparables and the requirement for accuracy and reliability are pointed out in these Guidelines on several occasions, both for the general application of the arm’s length principle and more specifically in the context of each method. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. Whether comparability adjustments should be performed (and if so, what adjustments should be performed) in a particular case is a matter of judgment that should be evaluated in light of the discussion of costs and compliance burden at Section C ...

There are various sources of information that can be used to identify potential external comparables. This sub-section discusses particular issues that arise with respect to commercial databases, foreign comparables and information undisclosed to taxpayers. Additionally, whenever reliable internal comparables exist, it may be unnecessary to search for external ones, see paragraphs 3.27-3.28 ...

Neopost Italia s.r.l. had paid service fees and royalties to its French parent. Following an audit, deductions for these intra-group transactions was adjusted by the tax authorities due to non compliance with the arm’s length principle and lack of documentation. However, for the purpose of determining an arm’s length remuneration a benchmark study had been performed by the tax authorities in which one of the comparables was not independent. The Court of Appeal upheld the decision of the tax authorities. Judgement of the Supreme Court The Supreme Court set aside the decision of the Court of Appeal and remanded the case to the court of first instance. In regards to the comparable company in the benchmark that was not independent, the Supreme Court found that: “it is entirely arbitrary, in comparing the two companies, to assert that the price charged by one of the two is the market price while the other is not”; this is a ruling that affects the unlawfulness of the method used by the Office (or, rather, the identification of the comparator), which is a prerequisite for the tax assessment.” In regards to the plea of “failure of the Court of Appeal to examine decisive facts of the case” the Supreme Court found that this was not grounds for setting aside a judgement: “…failure to examine the evidence does not in itself constitute a failure to examine a decisive fact if the historical fact relevant to the case was nevertheless taken into consideration by the court, even though the judgment did not take account of all the evidence. “…the reasoning, albeit brief, exists and is legitimately made by reference to the judgement of the first instance, while the impeachment does not even identify the historical fact whose examination was omitted by the appeal judge.” Click here for English translation Click here for other translation ITA vs NEOPOST Sept 2021 no 25025 ...

BIOMERIEUX ESPAÑA SA is active in the business of clinical and biological analysis, production, distribution, training and technical assistance. Likewise, the provision of computer services and, in particular, the computer management of laboratories. Following an audit the tax authorities found that the controlled prices agreed for the acquisition of instruments and consumables between bioMérieux España and its related entities, bioMérieux SA and bioMérieux Inc, did not provided bioMérieux España with an arm’s length return on is controlled activities. A tax assessment was issued for FY 2008 on the basis af a thorough critical analysis of the benchmark study provided by the BIOMERIEUX, and detailed reasoning and analysis in regards to comparability and market developments. Judgement of the National Court The Audiencia Nacional dismissed the appeal of Biomerieux España SA and decided in favour of the tax authorities. Excerpts “As we already reasoned in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ), it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application. In our opinion, the Inspectorate, in this case, does reason and state the reasons.” “2008 was a year of outstanding economic results for the bioMérieux Group, as well as for bioMérieux Spain in terms of sales growth, according to the report. However, this situation of increased results for the Group is not reflected in the income statement of bioMérieux Spain’s distribution business, whose profitability fell from 8% in 2007 to 4.47% in 2008. This is not consistent either with the Group’s results or with the market remuneration for performing the same functions in 2007 and 2008, a market which has not been shown to have seen its margins of free competition reduced.” “It is true that, as stated in point 1.13 of the Guidelines, the objective sought by the rule is “to arrive at a reasonable approximation of what would be an arm’s length result based on reliable information. At this point, it should also be remembered that transfer pricing is not an exact science, but requires value judgements on the part of both the tax administration and taxpayers”. Precisely for this reason, the correct thing to do is to proceed as the inspectorate did, i.e. to ask the appellant to justify the price set and to analyse the reasonableness of the price obtained. In this sense, it is reasonable to require the appellant to keep the information regarding the criteria they have used to set the transfer price and the documentation that has justified them or, at least, to be able to precisely identify the sources from which they have obtained the information. This will allow for verification. In this sense, paragraph 3.3 of the OECD Guidelines “considers it good practice for a taxpayer that uses comparables to justify its transfer prices ( ) to provide the other interested party with the supporting information that allows it to assess the reliability of the comparables used”.” “All these reasons, assessed as a whole, lead us to conclude that the detailed analysis carried out by the Inspectorate allows us to conclude that the calculations made by the Inspectorate are closer to the purpose of the rule, that is to say, to the search for the price set at arm’s length, than those provided by the appellant.” “The applicant submits that the Spanish authorities have reached an amicable agreement with the French authorities and have fixed the agreed mark-up as market rate at 6,20 %. What is sought is to apply the same margin in relation to the US company, in respect of which there is no amicable procedure. The tax authorities opposes this argument, reasoning that the transfer price agreed with France in an amicable procedure is the result of a negotiation between sovereign entities involving considerations of international public law, and therefore its results cannot be extrapolated.” “The agreement obtained is an agreement that binds the negotiating States, but cannot extend its effects to relations with another State. The fact that the Kingdom of Spain, for reasons unknown to us, has reached an agreement with the Republic of France does not mean that the transfer price fixed by the Spanish administration is not correct, but simply that the States have given in on their respective claims and reached an agreement, the effects of which cannot be extrapolated.” Click here for English Translation Click here for other translation SAN_416_2021 ...

The materiality of the change in economically relevant circumstances created by the impact of government assistance available in a market may impose additional challenges to the comparability analysis. It may for example render it more difficult to apply the comparability analysis through the utilisation and/or the application of a particular transfer pricing method and search for comparable transactions, on the basis that comparability differences may be exacerbated due to variations in government assistance between comparables or between jurisdictions.40 For example, an uncontrolled transaction that might otherwise have been considered comparable to a particular controlled transaction might be considered not comparable by virtue of the fact that one of the transactions is subject to government assistance while the other is not. A revised strategy, and potentially the use of a corroborating transfer pricing methodology,41 may need to be applied in such cases to take account of the differences in comparability. See Chapter II of this guidance. 40 As the guidance in paragraph 2.143 of the OECD TPG indicates, the lack of comparables alone is insufficient to warrant the use of a transactional profit split. 41 In considering the use of more than one method, the guidance in paragraph 2.12 of the OECD TPG should be followed in any case ...

The most reliable approach in identifying reliable comparables will be to refer, where possible, to data regarding comparable uncontrolled transactions in the same or comparable geographic market between independent enterprises performing similar functions, assuming similar risks, and using similar assets ...

This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar restrictions or conditions. Otherwise, it might be necessary to adjust the period over which the comparison is performed (e.g. excluding the economic data corresponding to the three months where the taxpayer was unable to operate). Taxpayers and tax administrations should determine on a case-by-case basis the extent to which these adjustments are necessary in circumstances where the potential differences may not have a material impact on the comparability. In this respect, the guidance in paragraphs 3.50 to 3.52 of the OECD TPG is relevant ...

It is up to the Tax Administration to prove the existence of transactions between related companies with clear discrepancies compared to transactions of the same kind on an independent market, while the taxpayer bears the burden of proving that the transactions took place for market values to be considered normal. This is the division of the burden of proof at the basis of the decision of the Milan Regional Tax Commission (CTR) rejecting the appeal lodged by the Tax Revenue Office. The taxpayer, in the case in question, has in fact fulfilled its burden by describing and documenting in the records that the functions and organization chart of the German subsidiary were such as to give an exhaustive account of the peculiarities of the latter and of the reliability of the CUP method (Comparable Uncontrolled Price Method) used. On the contrary, however, the comparables used by the Revenue Office to prove the validity of its assessment were incorrect because they had nothing to do with the products and activities carried on by the appellant. Excerpt “The taxpayer has in fact discharged its burden of proof. The Agency’s construction is based on erroneous assumptions: the first aspect not clarified is the fact that the Agency’s attention was focused only on the German subsidiary; the second aspect is that of the comparables. With regard to the first aspect, the Board of Appeal, in agreement with the trial judge, points out that the functions and organisation chart of the German subsidiary described and documented in the file are such as to give an exhaustive account of the particular nature of the German subsidiary and of the reliability of the CUP method used, both with regard to the rules of the market, guaranteed by the presence of independent German partners, and with regard to the actual performance of incisive and important functions, such as customer management, project management, tenders, and assistance services. As regards the second aspect, the use of comparables, the companies compared by the Agenzia delle Entrate do not deal with the same products or the same activities as the German affiliate: they even operate with different activity codes and in years far removed from the year 2010 in dispute. In light of these considerations and of anything else specified by the trial judge, whose ruling is fully shared, the appeal is dismissed.” Click here for English translation Click here for other translation Sentenza del 25_01_2019 n. 376 - Comm. Trib. Reg. per la Lombardia Sezione_Collegio 3 ...

Monsanto Chile – since 2018 a subsidiary of Bayer – is engaged in production of vegetable seeds and Row Crop seeds. The company uses its own local farmers and contractors, employs some 250 people and hires a maximum of 2,000 temporary workers in the summer months. It receives parental seed from global planners in the US and other countries and then multiplies these seeds in Chile on its own or third-party farms. The seeds are then harvested, processed and shipped to locations specified by global planners. Following an audit of FY 2009-2010 an adjustment was issued related to the profitability obtained in the operations of the “Production” segment (sale of semi-finished products to related parties) and “Research and Development” carried out on behalf of related parties abroad. The adjustment was determined by the tax authorities using the a Net Margin method. The tax authorities found that the income obtained under the production segment and in the research and development business line, did not provide a reasonable return to the local company, since in the production segment the operating margin over costs and expenses (ROTC) obtained by Monsanto Chile amounting to -5.87% was lower than the ROTC obtained by comparable companies which were in a range between 4.573% and 12.648%, with a median of 11.216%; and in the research and development segment the ROTC obtained by Monsanto Chile was -6.54%, whereas the arm’s length ROTC determined by the tax authorities was in a range between 7.93% and 12.48%, with a median of 10.21%. An assessment was issued in 2013 where an adjustment of $2,422,378,384 had been determined in regards to the production segment, and an adjustment of $38,637,909 had been determined in regards to the Research and Development segment, in total resulting in additional taxes of $862,958,963. Monsanto was of the opinion that the assessment was bared due to statues of limitations, and that the transfer pricing analysis conducted by the tax authorities in regards to both the production segment and the research and development segment was erroneous. Monsanto also held that the added fine was unfounded. Decision of the Tax court The decision of the Tax Court was largely in favour of the tax authorities. “That the claim filed in the main part of page 1 by Mr. Manuel Jiménez Pfingsthorn, RUT N°7.021.291-9, on behalf of MONSANTO CHILE S.A., is partially accepted, RUT N°83.693.800-3, against the Assessment N° 38, carried out on 28 August 2013, by the Large Taxpayers Directorate of the Internal Revenue Service, only insofar as the fine established in article 97 N°11 of the Tax Code is left without effect, as stated in recital 35°), being rejected for the rest. III. That the Director of the Large Taxpayers’ Directorate of the Internal Revenue Service shall arrange for administrative compliance with the above decision, for which purpose he must carry out a tax re-calculation.“ Following the decision of the tax court, an appeal has been filed by Monsanto Chile to the Court of Appeal where the appeal is still pending. Click here for English translation CH vs M14-9-0000002-3 ...

The need to adjust comparables and the requirement for accuracy and reliability are pointed out in these Guidelines on several occasions, both for the general application of the arm’s length principle and more specifically in the context of each method. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. Whether comparability adjustments should be performed (and if so, what adjustments should be performed) in a particular case is a matter of judgment that should be evaluated in light of the discussion of costs and compliance burden at Section C ...

There are various sources of information that can be used to identify potential external comparables. This sub-section discusses particular issues that arise with respect to commercial databases, foreign comparables and information undisclosed to taxpayers. Additionally, whenever reliable internal comparables exist, it may be unnecessary to search for external ones, see paragraphs 3.27-3.28 ...

A Investment GmbH, acquired all shares of B in May 2012. To finance the acquisition, A Investment GmbH took up a bank loan with a interest rate of 4.78%, a vendor loan with an interest rate of 10% and a shareholder loan with an interest rate 8% from its parent company, Capital B.V. The 8 % interest rate on the shareholder loan was determined by A Investment GmbH by applying the CUP method based on external comparables. The German tax authority, found that the interest rate of 8 % did not comply with the arm’s length principle. An assessment was issued where the interest rate was set to 5% based on the interest rate on the bank loan (internal CUP). A Investment GmbH filed an appeal to Cologne Fiscal Court. The court ruled that the interest rate of the bank loan, 4.78%, was a reliable CUP for setting the arm’s length interest rate of the controlled loan. The vendor loan was considered irrelevant as the 10 % interests could have been influenced by other factors. With regard to the subordination of claims on the loan from Capital B.V., pursuant to Section 39 (1) (5) of the German Insolvency Act, neither the non-provision of collateral nor the subordination of the loans could justify a risk premium in the determination of the arm’s length interest. Implicit support within the group – at least for the loans from Capital B.V – was considered by the Court in this respect. The appeal of A Investment GmbH was dismissed by the Court. This decision is now appealed by A Investment GmbH to the Supreme Tax Court under file I R 62/17 and is pending. Click here for English translation Click here for other translation Finanzgericht Köln, 10 K 771-16 ...

The Platform for Collaboration on Tax (IMF, OECD, UN and the WBG) has published a toolkit for addressing difficulties in accessing comparables Data for Transfer Pricing Analyses. The Toolkit Includes a supplementary report on addressing the information gaps on prices of Minerals Sold in an intermediate form. PUBLIC-toolkit-on-comparability-and-mineral-pricing ...

A Japanese company entered into a transaction with a foreing group company to import English-language learning materials into Japan. The learning materials were then resold to Japanese customers. The Japanese tax authority found that the resale price method should be used for setting the arm’s-length price for the transaction. The arm’s-length price for the controlled transaction was the price at which the Japanese company resold the English-language learning materials to customers, minus a normal profit margin multiplied by the price. The “normal profit margin” in this case was found to be the weighted average ratio of gross margin to the total revenue for multiple transactions, where unrelated parties imported the same as the English-language learning materials, or goods of a similar sort, and then resold them to customers. The tax authority held that unrelated parties importing and selling learning materials should be considered comparable transactions, and appropriate adjustments could be made to account for difference. However, an important difference between the tested transactions and the comparables found by the tax authorities, was that a famous cartoon character featured in the learning materials in the controlled transaction, while the characters used for the comparable materials were not known to the public. The court held that, under the resale price method, the arm’s-length price was calculated based on the “normal profit margin” in similar transactions. The method is based on the comparability of the functions performed by the seller, focusing on the fact that the profit margin relating to the resale transaction has a close relation to the functions performed and risks assumed by the seller, rather than the type of inventory assets relating to the transaction. Therefore, it is important to ensure that no significant differences exists between the comparable transactions and tested transaction, in terms of the functions performed or risks assumed by the seller. When selecting comparable transaction, it is necessary to identify differences which may effect profit margins and if such differences is identified make appropriate adjustments. If the difference cannot be adjusted for the selected comparable transaction should be rejected. It was determined that the functions performed by the respective sellers in each transaction were not substantially different because both transactions were door-to-door sales by sales representatives, learning materials were developed and produced by respective suppliers, and the seller did not perform the manufacturing function. However, as the method and content of advertising and the compensation of sales representatives differed between these transactions, the differences in functions performed by the sellers, affecting the calculation of the normal profit margin, were deemed objectively obvious. Intangibles used in a transaction may impact various factors like sales price of inventory assets, gross revenue, advertisement expenses, sales expenses, negotiations with a seller and royalties. It is was difficult to measure the impact of these factors on the gross profit margins and therefore make an appropriate adjustment. The comparable transactions selected by the tax authority were rejected by the court as inappropriate, and the court ruled in the taxpayer’s favour. Click here for English Translation DIS13005 ...

A Japanese distributor “Banana Corp” imported Ecuadorian bananas from a group company for wholesale in Japan. The Japanese tax administration ruled that the amount of consideration paid by Japanese distributor had exceeded the arm’s length price and issued an assessment of additional tax and penalties for FY 1999 – 2004. At first Banana Corp brought the case before the regional court who decision in favour of the tax administration. Banana Corp appealed this decision to Tokyo High Court. Tokyo High Court dismissed the appeal and upheld the decision of the regional court. Click here for English Translation Click here for other translation Ban-Co-2013-084405_hanrei ...

The tax authorities had not contested but have accepted the method (TNMM) used by the company to assess their transactions with related or affiliated parties, the dispute is therefore limited to certain aspects of the application of the methodology. Boehringer had used ROS indicator (operating profit margin) which the tax authorities accepted for the resale function but applied the ROTC indicator (profit margin on costs and expenses) for the manufacturing function. On the use of foreign comparables the tax court held in favor of the company and revoked the adjustment back to the authorities. Click here for English Translation Tribunal Fiscal de la Nación ...

In the Novartis Groupe France SA case, the court stated that if the tax administration intends to base the transfer pricing approach on prices used between other companies or a profit split, it must first demonstrate that the price used by the related companies does not comply with the arm’s-length principle. A search for comparable transactions must be performed. Click here for translation Novataris Groupe France 2008 Se also the later decision of October 2010. Click here for translation Novataris 2010 ...

The principal activity of Aventis Pharma is manufacturing of pharmaceutical products and the secondary activity is the wholesale of pharmaceutical products; In FY 2000 the company carried out various transactions with related companies and based on a transfer pricing study the company concluded that profits were consistent with those obtained by comparable independent parties. Following an audit the tax authorities issued an assessment of additional income. In dispute were: Granting of extraordinary discounts, Reclassification of operating expenses together with related and non-operating expenses, Use of loss making comparables. The Court decided in favour of Aventis “From the above, it appears that the challenges made by the tax authority to the choice of the firm Bentley Pharmaceutical Inc, are unsubstantiated because they are based on the accusation of other manufacturing activities that were not carried out by the aforementioned company but by related companies, at a time when the rule regarding the selection of comparable companies is Article 4(1) of the G.R. 702, which does not oppose the choice made, since it concerns the retention of information on comparable companies with an indication of the concepts and amounts adjusted in order to eliminate the differences; nor does it contradict the OECD recommendations, which could have been used as a substitute alternative. Under these conditions, the conclusion is that the criterion adopted by the tax authority to contest the selected company is not admissible. “ Click here for English Translation Argentina vs Aventis Pharma SA ...

In this case a Korean subsidiary, Photo Corp, sold photo paper, film, and other imports from overseas related parties to local stores. The Korean Tax Authority had applied the transactional net margin method (TNMM) to derive the arm’s length price. Six comparable companies had been selected and a tax assessment was issued based on the difference between the operating profit margin of the comparable companies and Photo Corp. Photo Corp disagreed with the assessment and filed an appeal claiming that the selected six companies were not comparable. The court found the tax authorities had applied the transaction net profit margin method without explaining why the traditional methods (CUP, RSM, CPM) could not be applied. The court also found that five of the selected comparables were retailers, and about ten times larger in terms of sales and company size than the tested party. In addition one of the selected companies manufactured products through separate research and development with the company’s affiliated research institutes and four of the selected companies sold high-end luxury goods to general consumers in department stores and other places. The court concluded that the six companies were not suitable for comparison in calculating the arm’s length price. The court refered the case back to the authorities with an order to re-examine the basis for applying a CUP-method. Translation of Korean 2006서1465 Korean 2006서1465 ...

The “Banana Group” is based in Ecuador and is engaged in the business of exporting Ecuadorian bananas. The Japanese distributor was part of the Banana Group. An Ecuadorian group company purchases bananas produced on plantations in Ecuador, exports and sells them to another intermediate group company, who in turn sells them to the Japanese distributor for wholesale in Japan. At issue was the arms length price of the bananas imported by the Japanese distributor. The tax administration held that the price paid for the bananas had been to high and issued an assessment for FY 1999-2004. The Japanese company disagreed and brought the case to court. Decision of the Court The Tokyo District court decided in favour of the tax administration and upheld the tax assessment. Click here for English translation Click here for other translation EB 082672_hanrei ...

In the case of Laboratorios Bagó S.A. the National Tax Court, rejected an appeal raised on the grounds that the use of information from third party companies by the tax administration violated the tax secrecy enshrined in Article 101 of Law No. 11,683. Decision of the Tax Court The Court stated that the information used by the tax administration to determine the market price was not covered by tax secrecy. The Court also considered that it was correct to have informed the company of the aforementioned information so that it could exercise its right to defense. Click here for English translation AG vs Bago 2006 ...