A Swiss company, A AG, paid two related parties, B AG and C AG, for services in the financial years 2015 and 2016. These services had been priced using the internal CUP method based on the pricing of services provided by B Ltd to unrelated parties. Following an audit, the tax authorities concluded that the payments made by A AG for the intra-group services were above the arm’s length price and issued a notice of assessment where the price was instead determined using the cost-plus method. According to the tax authorities, the CUP method could not be applied due to a lack of reliable data. Following an appeal the court of first instance ruled mostly in favor of the tax authorities. A AG then appealed to the Federal Administrative Court. Decision of the Court The Federal Administrative Court ruled in favour of A AG. According to the Court, the CUP method is preferred to other methods and other transfer pricing methods should not be applied in cases where data on comparable uncontrolled prices are available. Therefore, the tax authorities had not complied with the OECD transfer pricing guidelines. Click here for English translation Click here for other translation ...

Tomas Bodero S.A. added a 4% fee when re-invoicing goods purchased from unrelated manufacturers to its Panamanian subsidiary. The transfer pricing documentation stated that “this fee (4%) is very similar to the fee that brokers in the sector usually charge for brokering imports of goods, so it can be concluded that a market price is charged for the services that the parent company provides to the subsidiary”. Following an audit, the tax authorities issued a tax assessment which, among other adjustments to the taxable income, also adjusted the fee received from the subsidiary. The arm’s length fee for the service provided was set at approximately 26% of the purchase price. Appeals were filed by Tomas Bodero S.A. which ended up in the High Court. Judgement of the Court In regards of procurement fee, the Court ruled in favor of Tomas Bodero A.S. Excerpts “….the method used by the Inspectorate to calculate the transfer prices is sufficiently justified; the internal comparable method is the method which, in general and a priori, provides a greater degree of accuracy and legal certainty given that it is obtained from the prices established by the interested party. However, regardless of the objections raised by the appellant regarding the sampling used by the Inspectorate – limited to a single month of the financial year and including a single Latin American client – and the possible discrepancies as regards the correct identification of the goods, the fact is that the tax authorities have not at any time called into question the specific business/financial intermediation and management model developed between the Spanish parent company and the Panamanian subsidiary. …the Inspectorate [does not] question the fact that the goods are at no time at the physical disposal of the parent company, since the supplier’s dispatch is made directly in Latin America. …we must understand that the (higher) price compared by the Inspectorate, in addition to the commercial margin of the resale itself, includes the cost of intermediation of the independent agent, which is not the case with the (lower) price re-invoiced by the parent company to its filial, which acts as a commercial intermediary with the retailers in Latin America. In fact, in the only invoice compared by the Inspectorate issued directly by the plaintiff to a Latin American customer -FacVen/9758, dated 5 January 2015- the filial TB LATAM is listed as “agent”, whereas, as we said, in the invoices issued by the appellant to its filial the legend “re-invoicing” appears. In other words, we cannot consider logical or reasonable the criterion of the Inspectorate that the price invoiced by the appellant to retailers for resales with agent intermediation is comparable to the price re-invoiced directly by the parent company to its filial in an operation of mere financial intermediation and management -without the intervention of a commercial agent, a task carried out by the filial itself-, all of which leads us to annul the regularisation for this concept. Click here for English Translation Click here for other translation ...

Following the principles in Chapter I, an uncontrolled transaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the CUP method if one of two conditions is met: a) none of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the price in the open market; or, b) reasonably accurate adjustments can be made to eliminate the material effects of such differences. Where it is possible to locate comparable uncontrolled transactions, the CUP method is the most direct and reliable way to apply the arm’s length principle. Consequently, in such cases the CUP method is preferable over all other methods ...

Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm’s length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm’s length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where, taking account of the criteria described at paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred. See paragraphs 2.14-2.26 for a discussion of the CUP method ...

Following the principles in Chapter I, an uncontrolled transaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the CUP method if one of two conditions is met: a) none of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the price in the open market; or, b) reasonably accurate adjustments can be made to eliminate the material effects of such differences. Where it is possible to locate comparable uncontrolled transactions, the CUP method is the most direct and reliable way to apply the arm’s length principle. Consequently, in such cases the CUP method is preferable over all other methods ...

Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm’s length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm’s length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where, taking account of the criteria described at paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred. See paragraphs 2.14-2.26 for a discussion of the CUP method ...