At issue was whether or not a proportionate share of management and general administrative expenses incurred by the head office in Spain should be allocated to its PE in Algeria. The tax authorities (appelante) argued that, in general, these expenses cannot be individualised and, therefore, a proportional criteria should be used to determine the amount to be allocated to the Algerian PE. Compañía Española de Petróleos, S.A. argued that only management and general administrative expenses related to the purposes of the Algerian PE should be attributed to it. According to the company, the tax authorities had not carried out an appropriate analysis when examining what percentage of these expenses related to the Algerian PE. Judgement of the Supreme Court The Supreme Court decided in favor of Compañía Española de Petróleos S.A. Excerpts (English translation) “The tax authorities point out that in commercial groups there are activities and services that do not always generate transactions and consequent expenses in all the entities of the group, but which are useful and beneficial for them and their permanent establishments. From this perspective, certain corporate expenses are allocated to management and general administrative expenses (management of information systems, presidency, institutional relations, etc.), the costs of which should, in the Inspectorate’s opinion, be partially allocated to Algeria’s PE in a certain proportion. Once the total amount of expenditure corresponding to these cost centres has been quantified, the Inspectorate proceeds to calculate a percentage obtained by relating the net investment in Algeria to the total net tangible fixed assets recorded in the consolidated accounts of the commercial group. However, this method of allocating management and general administrative expenses has been rejected by this Court in respect of the appellant in relation to the financial years 2000 and 2004, in which the tax authorities allocated expenses for the same items using the same method as applied in the financial years in question.” “Contrary to what the appellant maintains, it does not follow from its wording that it is necessary to individualise the management and general administration expenses for each SOE, but rather that the Inspectorate will have to carry out a prior “selection” of the expenses in order to determine those which, being truly general and related to the purposes of the SOE, can be proportionally imputed to it. In other words, and in the terms used by the Court of First Instance in the judgment to which it refers, “it would be necessary to analyse these expenses more rigorously, to check which of them, because they are truly general, are suitable for being passed on and, once this need to pass them on has been determined, to then discuss the proportionality rule and on what magnitudes it would be admissible […]”. The problem, therefore, does not derive from the application of a proportionality criterion to determine the management and general administration expenses that can be charged to the PE, but rather from an earlier step, i.e. from the prior selection of the expenses, given that only those expenses which, it is reiterated, because they are truly general and related to the PE’s purposes, can be charged proportionally.” “In this regard, it should be recalled, on the one hand, that although the Commentaries to Article 7.3 (paragraph 3.27) of the OECD Model Convention and the Interpretative Commentaries thereto may be valid as interpretative criteria in relation to Article 7.3 of the Spanish-Algerian DTT, they are not valid in relation to Article 22 TRLIS, cited as being infringed, as the respondent in cassation points out. On the other hand, this Court has repeatedly stated that the OECD rules, models or comments that normally inspire the drafting of conventions – among the states whose governments belong to that organisation, presumably – are not normative sources that condition or bind our criteria, nor can they be invoked as infringed in cassation…” 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 JudgementThe 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 ...