“Fertilizer B.V.” is part of a Norwegian group that produces, sells and distributes fertiliser (products). “Fertilizer B.V.” is the parent company of a several subsidiaries, including the intermediate holding company [C] BV and the production company [D] BV. The case before the Dutch Supreme Court involves two points of dispute: (i) is a factually highly effective hedge sufficient for mandatory connected valuation of USD receivables and payables? (ii) is the transfer prices according to the supply and distribution agreements between [D] and a Swiss group company (AG) at arm’s length? (i) Factual hedge of receivables and payables “Fertilizer B.V.” had receivables, forward foreign exchange contracts and liabilities in USD at the end of 2012 and 2013. It values those receivables and payables at acquisition price or lower value in use. It recognised currency gains as soon as they were realised and currency losses as soon as a receivable was valued lower or a debt higher. The court has measured dollar debts and forward contracts coherently, but not dollar debts against dollar receivables from a Brazilian subsidiary arising from corporate financing. The Court of Appeal does not consider a highly effective currency hedge (actual correlation) in itself sufficient for coherent valuation; in its view, this also requires a business policy connection between opposite currency positions, such as an intent of hedging or a business relationship between receivable and debt. The Secretary of State believes that the reality principle means that in the case of an actual 100% correlation, debts and receivables in the same currency should be measured coherently. With all the disputed receivables and payables being denominated in USD, the currency hedge is very effective, so they should be measured coherently. A-G Wattel believes that the reality of a highly effective currency hedge is that no foreign exchange risk is incurred as long as and to the extent that the hedge exists and that, therefore, the reality principle to that extent compels coherent valuation, irrespective of whether the entrepreneur intended hedging and irrespective of the existence or non-existence of prudential link between receivable and debt in the same currency. This, in his view, is in line with the case law on coherent valuation he has reproduced. He considers the cassation appeal of the State Secretary in both cases well-founded. (ii) Transfer pricing [D] produces fertiliser products and sells them to affiliated sales organisations. Transfer prices are based on the Transfer Pricing Master File (TP Master File) that says fully fledged producers like [D] are rewarded according to the comparable uncontrolled price (CUP). In 2008, it was decided to invest €400m by [D] in a plant, which was commissioned in early September 2011, enabling [D] to produce 39% more urea and fertiliser products (the surplus) than before. On 14 September 2011, following the commissioning of the new plant, [D] and AG entered into a Supply Agreement and a Distribution Agreement. AG is “related” to the interested party and to [D] within the meaning of Section 8 Vpb. Those agreements provide that AG buys the surplus for cost plus 5%, for five years, with tacit renewal. On that basis, [D] invoices 39% of its production at cost plus 5% to AG every month and remits the rest of its profit on the surplus to AG. According to the Inspector, this results in a monthly improper profit shift from [D] in the Netherlands to AG in Switzerland. The court did not find it plausible that a fully fledged profitable producer like [D] would cede its existing and proven excess profit capacity – which was only improved by the new plant – on a large part of its production to a third party in the market. The party making that claim will have to provide a business explanation for the fact that the agreements leave only 5% margin to the group’s proven much more profitable ‘best performing’ entrepreneur which continued to perform all the functions it was performing before, except (on paper) 39% production risk control, and for the fact that [D]’s substantial residual profit was henceforth transferred by it on a monthly basis to an affiliated acquirer of 39% production risk, with no significance to [D]’s original 61% production and no significance to the core functions required for [D]’s 39% surplus production. According to A-G Wattel, the Court of Appeal thus did not divide the burden of proof unreasonably or contrary to due process. Those who make remarkable contentions contrary to their own previous and 61% still held positions and contrary to their own TP Master File will have to provide an explanation. ‘The Court’s judgment implies, in the absence of sufficient explanation by the interested party, substantially (i) that a company that is unmistakably the most complex entity cannot be changed into a routine margin producer by mere contracting for an arbitrary percentage (39%) of its capacity while at the same time remaining fully fledged entrepreneur for the identical 61% remaining production and for the 39% surplus also effectively keeping everything as it was, and (ii) that neither can a Swiss group company which is not introduced to [D]’s production (processes), logistics, distribution and administration, and which is thus unmistakably the least complex entity, be turned into the true entrepreneur that [D] is by a mere contract for the same arbitrary percentage (39%) and also remains for that 39%, the less so as that contract is incompatible with the group’s TP Master File. Since, according to the Court, an unaffiliated entrepreneur would never agree to such a contract and, therefore, such contracts, according to it, are not concluded between unaffiliated parties, arm’s-length terms are difficult to conceive: no arm’s-length terms can be conceived for a non-existent transaction, so the situation without the said agreements must be assumed. A-G Wattel considers these judgments correct insofar as they are legal, factual and not incomprehensible. He therefore does not find incomprehensible the Court of Appeal’s conclusion that, for tax purposes, the situation without the two agreements should be assumed, which are not thereby disregarded, but ...

The principles set out in the foregoing paragraphs also apply in situations involving the performance of research and development functions by a member of an MNE group under a contractual arrangement with an associated enterprise that is the legal owner of any resulting intangibles. Appropriate compensation for research services will depend on all the facts and circumstances, such as whether the research team possesses unique skills and experience relevant to the research, assumes risks (e.g. where “blue sky” research is undertaken), uses its own intangibles, or is controlled and managed by another party. Compensation based on a reimbursement of costs plus a modest mark-up will not reflect the anticipated value of, or the arm’s length price for, the contributions of the research team in all cases ...

CCompany A was active in the management and administration of trusts and companies; related advice and services. A held 99% of the shares in E, a Seychelles-based company. This subsidiary acted as a sub-contractor for company registrations and corporate affairs in the Seychelles. A and E had entered into a service contract dated 6 February 2009 under which the subsidiary provided these services to A. Following an audit, tax assessments were issued for the tax years 2009 – 2012, in which the tax authorities (AFC-GE) had attributed a percentage of 5% of E’s expenses as the maximum allowable remuneration for the activities of the subsidiary. The remainder was added back to A’s taxable income. An administrative appeal was lodged against these tax assessments, but the appeal was later dismissed in 2016. A then appealed to the Administrative Court (TPAI), which, by judgment of 18 December 2017, upheld A’s appeal and annulled the assessments and fines. The tax authorities appealed to the Court of Justice. Judgment of the Court The Court of Justice overturned the decision of the Administrative Court and ruled in favour of the tax authorities. Excerpt “6. a. Implementation of the arm’s length principle presupposes identification of the market value of the asset transferred or the service rendered. Where there is an open market, the prices on that market are decisive and allow for an effective comparison with the prices applied between associated companies (ATF 140 II 88 recital 4.2 and the references cited therein). b. If there is no free market allowing an effective comparison, then the method of comparison with a comparable transaction (or comparable price method) should be used, which consists of making a comparison with the price applied between third parties in a transaction with the same characteristics, i.e. taking into account all the decisive circumstances (BGE 140 II 88 recital 4.2; 138 II 57 recital 2.2; Federal Court ruling 2C_674/2015 of 26 October 2017 recital 7.2). This method corresponds to the comparable open market price method presented in the OECD principles (n. 2.13 et seq.). For this method to be applicable, the transaction with a third party or between third parties must be similar to the transaction under review, i.e. it must have been entered into in circumstances comparable to those of the transaction under review. However, the notion of “comparable transaction” is not easy to define. The relevance of the comparison with transactions concluded with third parties presupposes that the determining economic circumstances of these transactions are similar to those of the transaction under review (OECD principles, n. 1.33 et seq.). The comparability of transactions is determined according to their nature and in the light of all the circumstances of the particular case. If the relevant economic conditions differ from those of the transaction under review, adjustments must be made to eliminate the effects of these differences (OECD principles, 1.33 et seq.). However, it cannot be entirely ruled out that a comparable transaction would not have been concluded at the market price, since the formation of the price may be influenced by several factors, such as market conditions, contractual terms (for example, the existence of secondary services, the quantity of goods sold, payment terms), the commercial strategy pursued by the third-party purchaser or the economic functions of the parties. Nevertheless, the price charged in a comparable transaction is presumed to correspond to the market price; in the event of a dispute, the burden of proof to the contrary lies with the company (Federal Court ruling 2C_1082/2013 of 14 January 2015, para. 5.2 and the references cited). c. In the absence of a comparable transaction, the arm’s length price is determined using other methods, such as the cost plus method. This method consists in determining the costs incurred by the company providing the service, to which an appropriate margin is added in order to obtain an appropriate profit taking into account the functions performed and the market conditions (ATF 140 II 88 rec. 4.2 p. 94; judgment of the Federal Court 2C_11/2018 of 10 December 2018 recital 7.4). d. A concealed distribution of profits also presupposes that the unusual nature of the benefit was recognisable by the company’s governing bodies. This condition is presumed to have been met if the disproportion was clearly recognisable. In this respect, reference should be made to the case law and doctrine developed in private law concerning the imputation of knowledge of the corporate bodies to the legal person, which holds that this imputation does not apply in an absolute manner, but that it must only come into play for what is known to the body that is at least seized of the matter, or else when the information acquired by one body has not been passed on to another body, due to a defect in the organisation of the company (Federal Court ruling 2C_1082/2013 cited above, rec. 6.1 and references cited). 7. It is up to the taxing authority to establish the facts on which the tax claim is based or which increase it, whereas the taxpayer must allege and prove the facts which eliminate or reduce this claim, these rules also applying to proceedings before the appeal authorities (ATF 140 II 248 recital 3.5). In tax reminder and fine proceedings, the tax authority must prove that the assessment is incomplete (Federal Court ruling 2C_342/2017 of 12 April 2018, recital 4.1). In the area of services that can be valued in money, the tax authorities must prove that the company has provided a service and that it has not received any consideration or has received insufficient consideration. If the evidence gathered by the tax authorities provides sufficient indications of the existence of such a disproportion, it is then up to the taxpayer to establish the accuracy of his allegations to the contrary (ATF 138 II 57 rec. 7.1 p. 66; Federal Court ruling 2C_814/2017 cited above, para. 8.1.3). Moreover, once a fact is considered to be established, the question of the burden of proof no longer arises ...

The principles set out in the foregoing paragraphs also apply in situations involving the performance of research and development functions by a member of an MNE group under a contractual arrangement with an associated enterprise that is the legal owner of any resulting intangibles. Appropriate compensation for research services will depend on all the facts and circumstances, such as whether the research team possesses unique skills and experience relevant to the research, assumes risks (e.g. where “blue sky” research is undertaken), uses its own intangibles, or is controlled and managed by another party. Compensation based on a reimbursement of costs plus a modest mark-up will not reflect the anticipated value of, or the arm’s length price for, the contributions of the research team in all cases ...