A Czech real estate company, AHI Oscar, had deducted the cost of intra-group services received from a related foreign service company. The price of the services had been calculated at a flat rate of 75% of the wages of the employees providing the support services, plus overhead costs. The tax authority found that the overhead costs included in the calculation did not correspond to the actual costs and excluded these costs from the calculation. According to the tax authority, it was irrelevant to consider the arm’s length principle under Section 23(7) of the ITA. AHI Oscar appealed to the Municipal Court, which upheld the tax authority’s assessment. AHI Oscar then appealed to the Supreme Administrative Court. Judgement of the Court. The Supreme Administrative Court overturned the decision of the Municipal Court. It was undisputed that AHI Oscar had actually incurred the declared costs and received the services from the related foreign service company. According to the court, the tax authority’s position on the taxpayer’s obligation to prove the actual basis of calculation is not supported by Section 24(1) of the ITA. However, this does not mean that the service charge should automatically be a fully deductible expense. Given the facts, it was therefore necessary to apply the transfer pricing rules under section 23(7) of the ITA, which the tax administrator did not do. As the case concerned 2012 and the 10-year general limitation period for tax assessment had expired, there would be no further assessment of the arm’s length amount from a transfer pricing perspective. Click here for English Translation Click here for other translation ...

The tax authorities had issued a tax assessment disallowing the deductibility of intra-group service costs charged to Gru Comedil s.r.l. because, in the opinion of the tax authorities, the company had not provided sufficient documentation and proof of the benefits of the alleged services received (management services). Gru Comedil, and later the tax authorities, appealed the decision, which eventually reached the Supreme Court. Judgment The court overturned the tax authorities’ assessment and ruled in favour of Gru Comedil s.r.l. Excerpts in English “According to an approach widely shared by this Court, in the matter of so-called intra-group costs, in order for the consideration paid to the parent company or to the company entrusted with the service for the benefit of another subsidiary to be deductible by the company receiving it, it is necessary that the subsidiary derives an actual utility from the remunerated service and that this utility is objectively determinable and adequately documented (Court of Cassation, n. 26/01/2023, n. 26/01/2023, n. 1795, followed by many others, including recently Supreme Court, n. 1921, 06/07/2021, n. 1919). 30/01/2023, no. 2689; Cass. 27/01/2023, no. 2599; Cass. 04/03/2020, no. 6820; Cass. 14/12/2018, no. 32422; Cass. 04/10/2017 no. 23164; Cass. 23/11/2015, no. 23027; Cass. 18/07/2014, no. 16480; Cass. 21/12/2009, no. 26851), even if those costs do not directly correspond to revenues in the strict sense (Cass. 05/12/2018, no. 31405; previously Cass. 01/08/2000, no. 10062). Moreover, the administrative practice (C.M. no. 32/9/2267 of 22 September 1980) that, beyond the flat-rate percentage of the costs charged by the parent company to the subsidiaries, subordinates the deductibility of costs deriving from contractual agreements on services to the actuality and inherent nature of the expense to the business activity carried out by the subsidiary and to the real advantage derived by the latter (Cass. 11/11/2015, no. 23027); it should be noted that the same circular expressly specifies that the control on the utility (and on the inherence) is prejudicial to the assessment of the normal value (and therefore the appropriateness of the consideration). This approach is in line with the OECD guidelines, according to which, on the subject of intra-group provision of services, it is necessary to proceed to the so-called. benefit test, i.e., to verify whether the activity in question confers on the enterprise an advantage aimed at improving its economic or commercial position (OECD Guidelines, 18 July 2010, Chapter VII), and with the rigorous approach, on the subject of OECD-derived arbitrages, of which there is ample – and not contradicted – trace in the sectional jurisprudence (Cass. 06/07/2021, no. 19001). The existence of the cost, its pertinence and usefulness, and finally its determinability are therefore different issues and all preceding its adjustment according to the normal value.” (…) “The first complaint relates to the profile of inherence, which must be understood as set out in the preamble;  On this point, it is untrue that the CTR did not assess the existence of a benefit for the company, holding instead explicitly that the management fees charged by the foreign parent company to the Italian subsidiary are deductible where they result from a written agreement containing the details of the services and specifying a congruous allocation criterion, << more if the subsidiary’s organisational structure does not appear to be suitable for the performance on its own of the services received from controllante>>, correctly pointing out that the inherent nature did not derive from a connection between costs and revenues but it was necessary to assess whether the former were functional to the business activity. The second objection, relating to the possible presence of non-deductible cost items, is inadmissible because it does not relate to the specific rationale of the decision on this point, the CTR having expressly pointed out the groundlessness of this objection since <<non is a mere reversal of costs incurred by the parent company on behalf of Gru Comedil but the cost of a management service whose quantification must be objectively determinabile>>. The third ground of appeal is unfounded, in that the CTR did not attribute any effect of reliance to the independent auditors’ report, indeed expressly stating that it did not even determine a relative presumption of the truthfulness of the records, and recalling this Court’s orientation according to which expenses and other negative components (costs) are allowed as deductions, if and to the extent that they are charged to the profit and loss account for the year in which they are incurred, which, which, especially when it is a matter of ascertaining facts that cannot be analytically proven, constitutes, as part of the financial statements, a relevant source of information and may be verified by the tax authorities in accordance with the criteria of congruity and consistency, also taking into account the auditor’s report, itself a relevant means of proof, because of the public control profiles and the auditor’s civil and criminal liability, and may only be rebutted by producing documents demonstrating the auditor’s error or breach (Cass. 12/03/2009, no. 5926; Cass. 26/02/2010, no. 4737). Above all, however, the CTR did not at all use the auditor’s report as the sole source of its own conviction, attributing overall relevance to the entire compendium of evidence produced by the company, and in particular acknowledging the examination of the cost-sharing agreement, the invoices issued by the parent company, the statements of account, the specifications of the criteria for the allocation of corporate charges the auditing firm’s annual report and also the auditing firm’s certification and the accounting records, which, according to the defence, had been produced with the indication of the name of each employee to whom the disputed services were to be referred, evidently in order to overcome the first, and indeed only, explicit ground of dispute contained in the notice of assessment. After examining these documents, the CTR, with reasons, albeit concise, that were certainly sufficient and consistent, found that they showed the nature of the services rendered, the allocation criteria, and the reality of the costs incurred by the parent company, making ...

The subject-matter of the dispute was deduction of cost for the advertisement on Czech Television. The advertisements had been resold by a chain of entities, with the prices for the individual advertisements being multiplied in relation to the prices charged by Czech Television. The Second Chamber of the Supreme Administrative Court referred the case to the Extended Chamber for a ruling on the question whether the finding that the price of the subject-matter of the contract was significantly higher than the normal price, without a satisfactory explanation of the difference, is a sufficient condition for the conclusion that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss pursuant to Section 23(7)(b)(5) of Act No 586/1992 Coll. on Income Taxes, or whether the tax authorities must prove other facts in the conduct of the taxpayer which indicate that the transaction is unusual. Furthermore, according to the Second Chamber, there was a contradiction in the case-law of the Supreme Administrative Court concerning the relationship required for an adjustment to be issued under the arm’s length provision in Section 23(7)(b)(5) of the Income Tax Act. Decision of the Supreme Administrative Court The Extended Chamber of the Supreme Administrative Court did not agree that there was a contradiction in the case law, and refered the case back to the Second Chamber. Excerpts “The Second Chamber submits that there is a conflict between the VJB PARTNER II judgment and the D.D.D. SERVIS OPAVA I judgment on the question whether the finding of the existence of a significantly increased price of the subject matter of the contract compared to the normal price without a satisfactory explanation of the difference is sufficient to prove a relationship between otherwise related persons under Section 23(7)(b)(5) of the Income Tax Act, or whether other non-standard facts must be proved by the tax administrator. However, the Full Court concludes that, at least for the moment, it is not clear whether this issue is relevant to the assessment of the appeal in the present case, for the reasons set out below.” “[26] It thus follows from the above that the subject matter of the dispute in the present case, which is intertwined with the administrative and judicial proceedings, is in particular the questions whether the administrative authorities have sufficiently justified the conclusion that the complainant was part of otherwise connected persons pursuant to section 23(7)(b)(5) of the Income Tax Act and whether the tax authorities must prove that the complainant knowingly engaged in a contractual relationship intended to reduce the tax base or increase the tax loss.” “[38] There is no inconsistency between the VJB PARTNER II judgment and the D.D.D. SERVIS OPAVA I judgment. The case before the Second Chamber also differs from the case dealt with in the judgment in D.D.D. SERVIS OPAVA I. The subject-matter of the dispute is, first of all, the question of the reviewability of the conclusions of the defendant and, consequently, of the Regional Court as to whether the complainant can be regarded as an otherwise connected person. At the same time, the complainant was, in most of the advertisements under examination, part of a longer chain of entities in which services were resold. However, the First Chamber based its conclusion on the fact that the complainant was not part of a chain. At the same time, the complainant argues that the tax authorities must prove that the chain was established mainly for the purpose of reducing the tax base or increasing the tax loss and that the entity knowingly joined it. However, the referring Chamber did not dispute the premise of the EWE judgment that the subjective aspect is not relevant. The question of price was only expressly raised in the appeal, together with the other objections to the judgment of the Regional Court. [39] The Second Chamber must therefore first consider whether the defendant’s decision and the judgment under appeal are reviewable. If it concludes that it is, it must then consider on what grounds the administrative authorities and the Regional Court regarded the applicant as a person otherwise connected. If that ground is merely the increased cost of the transaction and if it finds a conflict in the preliminary ruling or wishes to depart from it, it may refer the case back to the Grand Chamber for a decision. Alternatively, it may refer the case to the extended Chamber if it concludes that it wishes to depart from the EWE judgment as regards knowledge of the taxpayer’s involvement in a chain of companies and whether the existence of the chain is material. In such a case, it will be for the ECJ to give proper reasons for its different legal opinion. [40] In the absence of jurisdiction, it is not for the extended Chamber to address the question whether, in the absence of a chain of entities, the fact that there has been an increase in price over the normal price is sufficient to conclude that there is a concentration of persons under s 23(7)(b)(5) of the Income Tax Act. [41] Since the Extended Chamber found that it did not have jurisdiction to rule on the matter, it referred the case back to the Second Chamber without considering the merits of the question referred to it.” Click here for English Translation Click here for other translation ...

The tax authorities had notified the companies GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. of four notices of assessment, relating to the tax periods from 2002 to 2005, as well as 2011. The assessments related to the signing of a leasing contract, concerning a real estate complex, between GKN Driveline Firenze s.p.a. and the company TA. p.a. and the company TAU s.r.l.. A property complex was owned by the company GKN-Birfield s.p.a. of Brunico and was leased on an ordinary lease basis by the company GKN Driveline Firenze s.p.a. Both companies belonged to a multinational group headed by the company GKN-PLC, the parent company of the finance company GKN Finance LTD and the Italian parent company GKN-Birfield s.p.a., which in turn controlled GKN Driveline Firenze s.p.a. and TAU s.r.l. GKN Driveline Firenze s.p.a. expressed interest in acquiring ownership of the real estate complex; the real estate complex, however, was first sold to TAU s. s.r.l. and, on the same date, the latter granted it to the aforesaid company by means of a transfer lease. Further negotiated agreements were also entered into within the corporate group, as the purchase of the company TAU s.r.l. was financed by the company GKN Finance LTD, at the instruction of GKN- PLC, for an amount which, added to its own capital, corresponded to the purchase price of the property complex. The choice of entering into the transferable leasing contract, instead of its immediate purchase, had led the tax authorities to suggest that this different negotiation had had, as its sole motivation, the aim of unduly obtaining the tax advantage of being able to deduct the lease payments for the nine years of the contract while, if the property complex had been purchased, the longer and more onerous deduction of the depreciation allowances would have been required. The office had therefore suggested that the transaction had been carried out with abuse of law, given that the transfer leasing contract had to be considered simulated, with fictitious interposition of TAU s.r.l. in the actual sale and purchase that took place between GKN Driveline Firenze s.p.a. and GKN Birfield s.p.a. The companies filed appeals against the aforesaid tax assessments, which, after being joined, had been accepted by the Provincial Tax Commission of Florence. The tax authorities then appealed against the Provincial Tax Commission’s ruling. The Regional Tax Commission of Tuscany upheld the appeal of the tax authorities, finding the grounds of appeal well-founded. The appeal judge pointed out that the principle of the prohibition of abuse of rights, applicable also beyond the specific hypotheses set forth in Art. 37bis, Presidential Decree no. 600/1973, presupposes the competition of three characterising elements, such as the distorted use of legal instruments, the absence of valid autonomous economic reasons and the undue tax advantage. In the case at hand, the distorted use of the negotiation acts was reflected in the fact that the leasing contract had been implemented in a parallel and coordinated manner with a plurality of functionally relevant negotiation acts in a context of group corporate connection in which each of these negotiation acts had contributed a concausal element for the purposes of obtaining the desired result. In this context, it was presumable that the company TAU s.r.l., which had been dormant for a long time and had largely insufficient capital, had been appropriately regenerated and purposely financed within the same group to an extent corresponding to the cost of the deal and that, therefore, the leasing contract had been made to allow GKN Driveline Firenze s.p.a. to obtain the resulting tax benefits. The appeal court nevertheless held that the penalties were not applicable. GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission, in a different composition. Excerpts “The judgment of the judge of appeal moves promiscuously along the lines of the relative simulation of the agreements entered into within the corporate group and the abuse of rights, with overlapping of factual and legal arguments, while it is up to the judge of merit to select the evidentiary material and from it to derive, with logically and legally correct motivation, the exact qualification of the tax case. In the case in point, the trial judge reasoned in terms of abuse of rights, assuming that the leasing transaction was carried out in place of the less advantageous direct sale, in terms of depreciation charges, but, in this context, he also introduced the figure of relative simulation, which entails a different underlying assumption: that is, that the leasing transaction was not carried out, since the parties actually wanted to enter into a direct sale. Also in this case, no specification is made, at the logical argumentative level, of the assumptions on the basis of which the above-mentioned relative simulation was deemed to have to be configured. Having thus identified the legal terms of the question, the reasoning of the judgment does not fully develop any of the topics of investigation that are instead required for the purposes of ascertaining the abuse of rights, both from the point of view of the anomaly of the negotiating instruments implemented within the corporate group and of the undue tax advantage pursued, while, on the other hand, it appears to be affected by intrinsic contradiction, because it is based simultaneously on both categories, abuse of rights and relative simulation, so that it is not clear whether, in the view of the appeal court, the tax recovery is to be regarded as legitimate because the leasing transaction was aimed exclusively at the pursuit of a tax saving or because that undue tax advantage was achieved through the conclusion of a series of fictitious transactions, both in relation to the financing and to the aforementioned leasing transaction in the absence of any real transfer of immovable property. In conclusion, the sixth plea in law ...

At issue was VAT and tax deduction for costs of media and advertising space that EVEREST allegedly purchased from Koukni and Concept s.r.o. and Concept s.r.o.. A tax assessment was issued to EVEREST based on (1) failure to prove the receipt of the supply of “media and advertising space” to the declared extent and (2) denial of the claimed right to deduct VAT as the tax administrator found that EVEREST knew or should have known that it had engaged in VAT fraud by participating in those arrangements. An appeal was filed by EVEREST claiming that various legal formalities had not been observed by the tax authorities i.e. the tax administrator was not competent to issue the decision at all, the decision suffers from defects which render it manifestly internally inconsistent or legally or factually unworkable; the decision is issued on the basis of another void decision issued by the tax administrator; EVEREST was not a related party in relation to Koukni and Concept for the purpose of creating illegal tax optimisation. Decision of the Regional Court The Court decided in favor of the tax authorities and dismissed the appeal of EVEREST. Excerpts (in English) “The applicant alleges each of those grounds. However, in neither case did the Court find that her plea of nullity was well-founded.” “The case-law of the Court of Justice of the EU has repeatedly dealt with VAT fraud. It shows that a situation where a taxable person claims a deduction fraudulently (or abusively) is an exception to the principle that, if the substantive and formal conditions for entitlement to a deduction are met, the taxable person is entitled to the deduction (see, for example, Case C-371/08, CJEU v. Czech Republic [2006] ECR I-1753, paragraph 1). Judgments of the Court of Justice of 21.6.2012, Mahagében and Dávid, Joined Cases C 80/11 and C 142/11, paragraph 41, or of 28.7.2016, Giuseppe Astone, C 332/15, paragraph 50). However, the mere existence of fraudulent conduct is not sufficient to deny a deduction. The right to a deduction is not affected if one of the preceding or subsequent supplies in the chain of supplies was affected by tax fraud, unless the taxable person knew or could have known this (see, for example, judgment of the Court of Justice of 6 July 2006, Axel Kittel and Recolta, Joined Cases C 439/04 and C 440/04, paragraphs 45 and 49). It is therefore necessary to examine the existence of tax evasion and, if it is established, it must be shown that the taxable person knew or should have known of the evasion in order to be denied the right to deduct the tax.” “Also irrelevant is the applicant’s contention that it did not benefit from the disputed transactions but, on the contrary, profited from them. As the Court has already explained above, the right to deduct may be denied not only in a situation where the taxable person himself has committed the evasion, but also where the taxable person knew or ought to have known that he was engaged in a transaction which is part of a VAT evasion by acquiring goods or services and, by his participation in the chain, made such transactions possible, even though he himself did not directly benefit from them. In other words, a taxable person who knew or ought to have known that his purchase was part of a VAT fraudulent transaction must be regarded as participating in that tax fraud, irrespective of whether he benefits from the subsequent sale of goods or use of services in the context of the taxable transactions which he has carried out at the exit (see, for example, the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct). Bonik, cited above, paragraph 39; Kittel and Recolta, cited above, paragraph 56; and Mahagében and Dávid, cited above, paragraph 46). Nor can the expert opinion of Prof. Ing. Hótová, which concerned only the fictitious transactions between the applicant and Ebko. Its conclusions are therefore not transferable to the transactions now under examination. Indeed, in its reply, the applicant admitted that it partly agreed with the defendant as regards the applicability of that expert opinion in that it concerned fictitious transactions, but nevertheless stressed that it did not know and could not have known of the dishonest conduct of its business partners (see paragraph 60 above). The question of the applicant’s knowledge of its involvement in the fraud has already been dealt with in detail by the Court above.” Click here for English Translation Click here for other translation ...

Tiger Flex was a fully fledged footwear manufacturer that was later restructured as a contract manufacturer for the Gucci Group. It had acquired goodwill which was written off for tax purposes, resulting in zero taxable income. The tax authorities disallowed the depreciation deduction. It found that the acquired goodwill had benefited the group as a whole and not just Tiger Flex. Tiger Flex filed an appeal with the Regional Tax Commission. The Regional Tax Commission decided in favour of Tiger Flex. The tax authorities then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission in a different composition. Excerpt “It is not disputed that the Tiger and Bartoli factories were profitable assets, endowed with productive and earning capacity. What is disputed, however, is the recorded purchase value which, legally spread over the decade, anaesthetises any contributory capacity, resulting in repeatedly loss-making activities. Hence the various censures on the quantitative, qualitative and inherent deductibility of such costs.” (…) “In the present case, an asset in surplus and capable of producing income was transformed into a loss-making asset with the entry of a depreciation value capable of absorbing its profits; whence the repeated conduct of the loss-making activity legitimised the Office to recover taxation, disallowing a cost that it considered to be to the advantage of the group and not inherent (solely) to Tiger Flex, recalculating it in its amount, with reversal of the burden of proof to the taxpayer who was unable to give a different answer, re-proposing the payment value entered in the balance sheet. On the other hand, the board of appeal imposed the burden of proof of inherence and consistency on the Office, whereas it had long been held that the breach of the precept set forth in Article 2697 of the Civil Code It has long been held that a violation of the precept set forth in Article 2697 of the Italian Civil Code occurs when the judge has attributed the burden of proof to a party other than the one that was burdened by the application of said provision, whereas, where, following an incongruous assessment of the preliminary findings, he erroneously held that the party burdened had discharged such burden, since in this case there is an erroneous assessment of the outcome of the evidence, it can be reviewed in the court of legitimacy only for the defect referred to in Article. 360, no. 5, c.p.c. (Court of Cassation no. 17313 of 2020). And finally, with regard to the assessment of income taxes, the burden of proof of the assumptions of the deductible costs and charges competing in the determination of the business income, including their pertinence and their direct allocation to revenue-producing activities, both under the provisions of Presidential Decree No. 597 of 1973 and Presidential Decree No. 598 of 1973, and Presidential Decree No. 917 of 1986, lies with the taxpayer. Moreover, since the tax authorities’ powers of assessment include the assessment of the appropriateness of the costs and revenues shown in the financial statements and returns, with the denial of the deductibility of a part of a cost that is disproportionate to the revenues or to the object of the business, the burden of proof of the inherent nature of the costs, incumbent on the taxpayer, also relates to the appropriateness of the same (see Court of Cassation V, no. 4554/2010, followed, e plurimis, by no. 10269/2017). The judgment under examination did not comply with this principle, which, finally, in its last paragraph, performs a sort of “resistance test”, i.e. that even if the burden of proof is placed on the taxpayer, it remains undisputed that after a number of years commensurate with the economic effort made, the balance sheet profit was achieved. This is not the profile of the decision, since the Office disputes precisely that for many years there was repeated loss-making conduct, Tiger Flex having taken on burdens not (exclusively) its own, but for the benefit of the entire Gucci group, so that – if ritually distributed – they would have enabled correct profitable conduct, with the consequent discharge of tax burdens.” Click here for English Translation Click here for other translation ...

Cidiverte S.p.A. is an Italian distributor of video-games. Following an audit, the tax authorities issued Cidiverte S.p.A an assessment of additional income resulting from a reduction of the pricing of costs it had paid to its Italian sister company. Appeals were filed by Cidiverte with the local and regional courts, but the objections were dismissed by reference to a previous judgement of the Supreme Court in href=”https://tpcases.com/italy-vs-take-two-interactive-italia-s-r-l-2012-supreme-court-no-119492012/”>Case no. 11949/2012 concerning disallowed costs in the same group. An appeal was then filed by Cidiverte with the Supreme Court. Judgement of the Court The Supreme Court set aside the decision of the regional court and refered the case back to the court, in a different composition, for further examinations. Excerpts “Therefore, without prejudice to the principles of law on the burden of proof set out in the Supreme Court’s judgment, the referring court should have examined the allegations of the parties in order to ascertain whether they had properly discharged their burden and, therefore, first of all, whether the tax authorities had attached and proved the validity of the transfer price adjustment, with reference to the discrepancy between the agreed consideration and the normal value of the goods or services exchanged, taking into account the taxpayer company’s specific objections.” “In the case at hand, the administration has recovered for taxation the costs carried by the invoice issued at the end of the financial year, considering the transaction to be elusive, and has recalculated the costs previously accounted for according to the ‘normal value’, determined in the average sale price, purged of the contested mark-up, applied by the English supplier, controlled by the same parent company, to its Italian sister company, during the tax year examined. There is therefore no question of proof of the existence and relevance of the costs, but only of their non-correspondence to market value.” “Therefore, in the present case, the referring court completely failed to examine the study produced by the taxpayer company and, therefore, did not ascertain whether, in relation to the concrete characteristics of the case before it, as emerged without dispute from the documents before it, the criterion for determining the normal value adopted by the tax authorities was correct, in the light of the taxpayer company’s circumstantial allegations, and whether or not those allegations required further proof.” Click here for English translation Click here for other translation ...

Bavaria S.A. is part of the SABMiller group – a multinational brewing and beverage group – and in FY2013 the company had deducted costs related to various intra-group transactions – licences, cost of sales, procurement services, administrative services, technical support, other expenses (reimbursements to related parties), etc. Following an audit, the Colombian tax authorities disallowed the deduction of some of these costs. Deductions for investments in productive assets were also disallowed. This resulted in additional taxable income and an assessment was issued together with a substantial penalty. Judgement of the Supreme Administrative Court The Court partially upheld the assessment and partially annulled it. Excerpts “At this point it is necessary to clarify that, although the Administration alleges the violation of the arm’s length principle, insofar as it considers that no independent third party, in a comparable situation, would have paid the commission under the conditions carried out by Bavaria, the truth is that this assertion is only supported by the fact that the DIAN questioned whether SABMiller Procurement actually executed the functions that corresponded to it under the Global Supply Agreement. In fact, it should be noted that neither the censured act nor the opposition to the complaint challenged the validity of the supporting documentation provided by the plaintiff, which included information related to the operation carried out with SABMiller Procurement within the framework of the Global Sourcing Agreement. In other words, with the exception of the question of the performance of the duties, the DIAN did not provide any substantive reasons to support the infringement of the arm’s length principle. There is no evidence in the file to show that the remuneration in favour of the foreign related party was not paid on market terms and, consequently, there is no support for the defendant’s assertion that an independent third party would not have paid the commission. It is extremely important to remember that, for the purposes of questioning the remuneration paid by a taxpayer in favour of a foreign related party for non-compliance with the arm’s length principle, the DIAN must exercise the broad powers of inspection granted to it by articles 684 of the Tax Statute and, particularly, the third paragraph of article 260-2 ibidem. Note that the jurisprudence of this Section13 has warned that, if in the exercise of its functions, the Administration detects irregularities in the transfer pricing study, it is obliged to contradict it through a similar report that calculates the common profit margins in the market for comparable operations, agreed between independent parties, However, there are no such documents in the file.” “Chamber notes that there is no dispute between the parties as to the nature of the expenses in question, as both agree that they correspond to administration expenses incurred by the plaintiff in favour of its parent company abroad. Likewise, the parties agree that the payments made by the plaintiff to its parent company were not subject to withholding tax as they were foreign source income. In these circumstances, it is not possible to accept the deductibility requested by the plaintiff (i.e. administration and management expenses to the head office or offices abroad) in the light of Article 124 of the Tax Statute, since for this it was essential that the expense had been subject to withholding tax, as has been held by the jurisprudence of this Section and the Constitutional Court. The fact that the plaintiff was subject to the transfer pricing regime does not change this conclusion, which, it is reiterated, the withholding tax referred to in Article 124 is not a limitation, but a condition or condition of acceptance, against which there is no exclusion whatsoever for taxpayers subject to the aforementioned regime. Finally, it should be noted that, contrary to the plaintiff’s request, the deductibility of the disputed expenditure cannot be analysed in the light of Article 122 of the Tax Statute. This is because the rule regulates the deductibility of payments abroad, as a generic restriction and not subject to economic linkage for expenses incurred abroad to obtain income from national sources and for concepts other than administration expenses in favour of the parent company or offices abroad, which are the ones at issue in the specific case. In this respect, Article 124 expressly provides that “(…) Payments in favour of such parent companies or offices abroad for other different concepts are subject to the provisions of Articles 121 and 122 of this Statute”. (highlighted by the Chamber). The charge is not upheld. Consequently, the disallowance of $47,834,099,000 for administrative operating expenses for administrative services is maintained.” “The evidence in the case file shows that, under the CSA, Bavaria took as expenses the sum of USD4,720,084 and that it recorded invoiced expenses for technical assistance of USD16,472,000, equivalent to USD30,627,037,436, the latter being reported as technical assistance expenses with its foreign affiliate, SABMiller Latin America (Miami), in the supporting documentation. These figures total USD21,192,081, which does not exceed the figure of USD24,573,83 that would correspond to Bavaria under the CSA. In turn, in the Official Review Settlement, in order to conclude that Bavaria had been assigned a percentage greater than 34.4% (which is 87.5% of the 39.3%), the DIAN said that the plaintiff assumed expenses corresponding to USD30,097,400, as a result of adding the allocation of USD13,625,400 made by SABMiller Miami to Colombia with the USD16,472,000 invoiced by SABMiller Miami Bavaria itself. However, the truth is that this addition is not justified in the CSA criteria, and in the official assessment accused, there is no explanation, at least in summary, to justify this sum. It is not possible to reach the conclusion reached by the DIAN in the official assessment accused, according to which Bavaria assumed or recorded technical assistance expenses of USD30,097,851.” Click here for English translation Click here for other translation ...

In 2003, Watsons Personal Care Stores Holding Limited borrowed USD 36,842,335.00 from Watson Labuan in order to acquire a substantial number of shares in Watson Malaysia and in 2012, the Company borrowed another USD 1,276,000.00 from Watson Labuan to finance the acquisition of shares. According to the loan agreement the annual interest rate was 3% plus the London Interbank Offered Rate (LIBOR) and the principal amount was to be paid on demand by Watson Labuan. In 2013 the tax authorities (DGIR) requested information from Watsons Personal Care Stores Holding Limited relating to cross border transactions for transfer pricing risk assessment purposes and following an audit for FY 2010-2012 the tax authorities informed the Company that the interest would be adjusted under section 140A of the ITA (Malaysian arm’s length provision). Furthermore, the interest expenses paid would not be allowed as a deduction because the transaction as a whole would not have been entered into between unrelated parties. Watsons Personal Care Stores Holding Limited filed a complaint against the assessment and in a decision handed down in 2020 the Special Commissioners of Income Tax (SCIT) allowed the appeal and set aside the assessment of the tax authorities. The tax authorities then filed a Notice of Appeal against the decision with the High Court. Judgement of the Court The Court upheld the decision of the Special Commissioners of Income Tax and set aside the assessment issued by the tax authorities. Excerpts “20. Having read Rule 8 (1) and 8(2) of the TP Rules together, it is clear that while the DGIR has the power to disregard structures that differ from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the DGIR from determining an appropriate transfer price, if DGIR so chooses to disregard the structure under Rule 8(1), Rule 8(2) requires the DGIR to make the adjustment as it thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length.” (…) “36. In contrast I find that the DGIR has not put forward any evidence to refute the Company’s TP analysis, and there is no basis on which the DGIR would have concluded that the interest charged is higher than what would have been agreed between independent persons. Therefore, I view that the DGIR’s rejection of the comparables amounts to a bare denial, lacking in any evidence or basis as the SCIT had correctly held in its Grounds of Decision. 37. In the circumstances, the DGIR did not substantiate its allegations in any documentary form to show that the interest rate is not at arm’s length. What is available is only the TP Documentation prepared by the Company, which was entirely disregarded by the DGIR in coming to its Decisions. 38. I view that the SCIT’s decision is founded on a correct application of the law and inference of facts that are consistent with the primary facts and evidence of the case as the SCIT had set out in its Grounds of Decision dated 19.5.2021. 39. This court is of the view that the DGIR is utilizing section 140A of the ITA to disregard the transactions undertaken. Thus, the DGIR did not act within the powers conferred to it under the said section. 40. It is to be noted that section 140A of the ITA does not give the DGIR the power to disregard/ignore any transactions. Instead, section 140A clearly requires the DGIR to substitute the price in respect of the transaction to reflect an arm’s length price for the transaction where it has reasons to believe that the transactions were not carried out at arm’s length. 41. Therefore, I view that the SCIT correctly held that the DGIR’s failure to make any adjustments to the Loans or substitute an arm’s length rate is contrary to section 140A of the ITA: – [14] The Respondent also did not make any adjustments to the structure of the loan transactions or substitute the interest rate that would have been expected between an independent persons to the loan transaction between the Appellant and Watson Labuan as stipulated in Section 140A of the ITA and Rule 8(1) and (2) of the Income Tax TPR. The Respondent merely substituted the interest rate with 0% on the basis that no independent party would carry out such transaction. (See: page 11 of the Additional Record of Appeal (Enclosure 29)) 42. I find that the DGIR’s insistence that it can substitute a price with zero is misconceived and in effect, disregarding the transaction without substituting an arm’s length price. This shows that the DGIR failed to read Rule 8 of the TP Rules in its entirety. The DGIR only chose to apply Rule 8(1) of the TP Rules but failed to consider Rule 8(2). For ease of convenience Rules 8(2) is reproduced below: – “(2) Where the Director General disregards any structure adopted by a person in entering into a controlled transaction under subrule (1), the Director General shall make adjustment to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regards to the economic and commercial reality” (emphasis added) 43. The DGIR in its submissions attempts to argue that it ‘substituted’ the interest with 0% because no independent person or Company would enter into similar transaction. Therefore, the interest rate ought to be 0%. 44. I find that the DGIR’s arguments is devoid of merits for the following reasons: – 44.1 The test under Rule 8(2) is not whether an independent person would enter into a similar transaction. The test is a price which “… would have been adopted by an independent person dealing at arm’s length… ” The DGIR’s argument is legally inconsistent with the language of Rule 8(2); and 44.2 The language in Rule 8(2) notwithstanding, the DGIR has not provided any evidence to support its allegations that no commercial ...

LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media. Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base. The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly. Decision of the Regional Court The Regional Court ruled in favour of the tax authorities on the pricing issue. Excerpts “37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions, and if that difference is not satisfactorily substantiated, the taxpayer’s tax base is adjusted by the difference found. The concept of connected persons is defined in paragraph (b)(5) of the same provision as meaning that, for the purposes of this Act, connected persons are otherwise connected persons who have formed a legal relationship principally for the purpose of reducing the tax base or reducing a tax loss. 38. The applicant argued that a finding that the price obtained differs from the normal price is not sufficient to conclude that there are connected persons, otherwise the question of otherwise connected persons would be superfluous. At the same time, the applicant’s knowledge of that unreasonable increase must be established. He also argued that there was no profit on the part of the applicant, since he had actually spent the sums on advertising and the savings in the form of a reduced tax base were much smaller in relation to the costs incurred. 39. The Regional Court did not find any merit in this objection in its previous judgment. It has reached the same conclusion now. It did not consider it necessary to await the decision of the Extended Chamber in Case No 2 Afs 132/2020-56 of 22 December 2021 on the question whether ‘the finding of a significantly increased price of the subject-matter of the contract compared to the normal price without a satisfactory explanation of the difference is a sufficient condition for concluding that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss, or whether other facts in the conduct of the taxpayer indicating the unusual nature of the commercial transaction must be proved by the administration’. The reason for this is that the tax authorities based their conclusion that the parties were connected not only on the finding of an exorbitant price but also on other circumstances which suggest that the transaction was unusual. In its previous judgment, the Regional Court did not deal with them in detail, as it relied on the view, held by case law at the time, that the finding of an exorbitant price without a satisfactory reason was sufficient for the conclusion of connected persons within the meaning of Section 23(7)(b)(5) of the Income Tax Act (e.g. Supreme Administrative Court judgments of 13 June 2013, no. 7 Afs 47/2013-30, 28 January 2021, no. 3 Afs 393/2019-43 or 20 August 2021, no. 2 Afs 313/2019-43). The Court therefore found the applicant’s objection with regard to them irrelevant. In view of the question submitted to the Extended Chamber, its irrelevance is no longer apparent and the Regional Court will comment on them below, but there is no reason to wait for the decision of the Extended Chamber; even if it were to prevail that the definition of connected persons includes, in addition to the exorbitant price, the presence of such facts in the conduct of the tax entity as to indicate the unusual nature of the transaction, that could not have a favourable effect on the applicant’s procedural success in the case now under consideration. 40. In the case at hand, the tax authority raised doubts about the claimed costs, finding that the total costs incurred by the applicant’s suppliers PRESSTEX and PAMBROKE for advertising and promotional services for the year 2013 for the applicant amounted to CZK 56 104, while the applicant booked costs of CZK 6 000 000, representing 107 times the price paid by the suppliers PRESSTEX and PAMBROKE. The tax administrator’s doubts were also raised by other “non-standard circumstances” mentioned in the Tax Audit Report on pages 23-25, which are: – a change in the contractual terms, as the documents on the performance of the subject matter of the contract were delivered to the applicant after the end of the contractual relationship – discrepancies between the contract and the invoice and between the photographic documentation and the invoice (different size of the banner, failure to indicate advertising in the Golf Arena Ostrava, invoicing for advertising services even for months when no matches were played) – the applicant’s failure to comply with the payment terms – failure to verify the effectiveness of advertising costs – non-standardisation of the applicant’s suppliers PRESSTEX and PAMBROKE (non-contactability of PRESSTEX, virtual headquarters, cash withdrawals of large sums, company without a statutory body) – the failure to verify the price quotation, since the applicant accepted the price proposed by PRESSTEX without further investigation of the more advantageous quotation, even though the applicant could have recognised the overestimation of the price because it has long been active in the sports and business environment. 41. On the basis of the foregoing, the tax administration found that there was a relationship between the applicant and PRESSTEX and PAMBROKE corresponding to Article 23(7)(b)(5) of the Income Tax Act, and the defendant agreed with its assessment (see paragraph 90 of the contested decision). 42. The ...

Mylan Pharmaceuticals is engaged in the business of trading pharmaceutical products in both domestic and export markets. It also provides business support services and research and development activities to other group companies. Following an audit, the tax authorities issued a notice of assessment which partially disallowed deductions for advertising and promotional expenses for the launch of new products. Mylan appealed to the Principal Commissioner of Income Tax where the assessment was subsequently overturned. The tax authorities then appealed to the Income Tax Appellate Tribunal. Judgement of the ITAT The Income Tax Appellate Tribunal allowed the appeal and set aside the decision of the Commissioner of Income Tax. Excerpts “It has been held in various decisions that for invoking jurisdiction u/s 263 of the I.T. Act, the twin conditions namely, (a) the order is erroneous and (b) the order is prejudicial to the interest of the Revenue must be satisfied. However, in the instant case, the order may be prejudicial to the interest of the Revenue, but it cannot be said to be erroneous since the Assessing Officer, after conducting necessary inquiries by calling for information and having gone through the details furnished by the assessee has taken a possible view. Merely because the learned PCIT does not agree with the view taken by the ITA 122/Hyd/2022 Assessing Officer, the order cannot be said to be erroneous or not a possible one. Under these circumstances, since one of the twin conditions i.e. the order is not erroneous is not satisfied, therefore, we hold that the learned PCIT is not justified in invoking jurisdiction u/s 263 of the I.T. Act. Accordingly, the order of the PCIT passed u/s 263 of the I.T. Act is set aside and the grounds raised by the assessee are allowed.” ...

This case deals with VAT treatment of disallowed deductions for intra-group services. Following an audit, an adjustment of the taxable income was issued to “VAT Ltd.” by the tax authorities where intra-group services had been disallowed and VAT had been adjusted as a result. “VAT Ltd.” disagreed with the adjustment and filed an appeal. Judgement of the Tax Court The Tax Court upheld the assessment of the tax authorities. Click here for English translation ...

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. In 2020 the decision of the district court was upheld by the Tokyo High Court. The tax authorities then filed an appeal with the Supreme Court Decision of the Court The Supreme Court dismissed the appeal and set aside the assessment of the tax authorities. “The term “economic rationality” is used to refer to the economic rationality of a series of transactions. In examining whether or not the entire series of transactions lacks economic rationality, it is necessary to consider (i) whether the series of transactions is unnatural, such as being based on procedures or methods that are not normally assumed or creating a form that deviates from the actual situation, and (ii) whether there are other rational reasons for such a reorganisation other than a decrease in tax burden. (iii) Whether there are any business objectives or other reasons other than a reduction in the tax burden that would constitute a rational reason for such a reorganisation.” “However, the borrowings in question were made under an agreement to be used solely for the purchase price of the shares of the domestic corporations in question and related costs, and in fact the appellant acquired the shares and brought the domestic corporations under its control, and there is no indication that the amount borrowed was unreasonably high in relation to its intended use. In addition, the interest and repayment period of the loan were determined based on the expected profit of the appellant, and there is no evidence that the appellant is currently experiencing any difficulty in paying the interest on the loan. It is therefore difficult to say that the above points make the borrowing unnatural or unreasonable. (d) Considering the above circumstances as a whole, the borrowing in question cannot be said to be unnatural or unreasonable from an economic and substantive standpoint, i.e. to lack economic rationality. Therefore, the borrowing in question does not fall within the scope of Article 132(1) of the Corporate Tax Act, which states that “the borrowing is deemed to result in an unreasonable decrease in the corporate tax burden if it is permitted”.” Click here for English Translation Click here for other translation ...

In 2009-2011 Fortis Petroleum Norway AS (FPN) bought seismic data related to oil exploration in the North Sea from a related party, Petroleum GeoServices AS (PGS), for NKR 95.000.000. FBN paid the amount by way of a convertible intra-group loan from PGS in the same amount. FPN also purchased administrative services from another related party, Consema, and later paid a substantial termination fee when the service contract was terminated. The acquisition costs, interest on the loan, costs for services and termination fees had all been deducted in the taxable income of the company for the years in question. Central to this case is the exploration refund scheme on the Norwegian shelf. This essentially means that exploration companies can demand cash payment of the tax value of exploration costs, cf. the Petroleum Tax Act § 3 letter c) fifth paragraph. If the taxpayer does not have income to cover an exploration cost, the company receives payment / refund of the tax value from the state. On 21 November 2018, the Petroleum Tax Office issued two decisions against FPN. One decision (the “Seismic decision”) which applied to the income years 2010 to 2011, where FPN was denied a deduction for the purchase of seismic services from PGS and interest on the associated seller credit, as well as ordinary and increased additional tax (hereinafter the «seismic decision»), and another decision (the “Consema decision”) which applied to the income years 2011 and 2012 where, FPN’s claim for deduction for the purchase of administrative services from Consema for the income years 2011 and 2012 was reduced at its discretion, and where FPN was also denied a deduction for the costs of the services and a deduction for termination fees. Finally in regards of the “Seismic decision” an increased additional tax of a total of 60 per cent, was added to the additional taxation on the basis of the incorrectly deducted seismic purchases as FPN had provided incorrect and incomplete information to the Oil Tax Office. In the “Seismic decision” the tax office argued that FPN used a exploration reimbursement scheme to run a “tax carousel” In the “Consema decision” the tax office found that the price paid for the intra-group services and the termination fee had not been determined at arm’s length. An appeal was filed by Fortis Petroleum Norway AS with the district court where, in December 2020, the case was decided in favour of the tax authorities. An appeal was then filed with the Court of Appel Judgement of the Court of Appeal The court upheld the decisions of the district court and decided in favour of the tax authorities. The Court concluded that the condition for deduction in the Tax Act § 6-1 on incurred costs on the part of Fortis Petroleum Norway AS was not met, and that there was a basis for imposing ordinary and increased additional tax. The Court of Appeal further found that the administrative services and the termination fee were controlled transactions and had not been priced at arm’s length. Excerpts – Regarding the acquisition of seismic exploration Based on the case’s extensive evidence, and especially the contemporary evidence, the Court of Appeal has found that there was a common subjective understanding between FPN and PGS, both at the planning stage, during the conclusion of the agreement, in carrying out the seismic purchases and in the subsequent process. should take place by conversion to a subscription price that was not market-based. Consequently, seismic would not be settled with real values. This was made possible through the common interest of the parties. The parties also never significantly distanced themselves from this agreement. The Court of Appeal has heard testimonies from the management of PGS and FPN, but can not see that these entail any other view on the question of what was agreed. The loan was never repaid, and in the end it was converted to the pre-agreed exchange rate of NOK 167. In the Court of Appeal’s view, there is no other rational explanation for this course than that it was carefully adapted to the financing through 78 per cent of the exploration refund. The share value at the time of conversion was down to zero. The Court of Appeal agrees with the state that all conversion prices between 167 and 0 kroner would have given a share price that reflected the value in FPN better and which consequently had given PGS a better settlement. On this basis, the Court of Appeal believes that the conversion rate did not cover the 22 percent, and that there was a common perception that this was in line with the purpose of the establishment of FPN, namely not to pay “a penny” of fresh capital. The Court of Appeal has also emphasized that the same thing that happened in 2009 was repeated in 2010 and 2011. For 2009, the Oil Tax Office came to the conclusion that it was a pro forma event and a shift in financial risk. In 2010 and 2011, the same actors used the same structure and procedure to finance all costs from the state. It is thus the Court of Appeal’s view that there was a common understanding between the parties to the agreement that the real relationship within was different from that which was signaled to the tax authorities regarding sacrifice and which provided the basis for the deduction. Furthermore, in the Court of Appeal’s view, the loan transactions were not fiscally neutral. The seismic purchases constituted the only source of liquidity and were covered in their entirety by the state. In light of ESA’s decision from 2018 as an element of interpretation, such a loss of fiscal neutrality would indicate that when the company has thus not borne any risk itself, sacrifice has not taken place either. Even if the debt had been real, assuming a sale without a common interest of the parties, in the Court of Appeal’s view in a tax context it could not be decisive, as long as 22 ...

A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D. The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for. A complaint was filed by A S.A. with the Administrative Tribunal (CAAD). Judgement of the CAAD The complaint of A S.A was dismissed and the assessment upheld. Excerpts regarding the interest rate “Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this effort was unsuccessful. On the contrary, it seems to result from the request for arbitration award that the Claimant and its shareholders have immediately assumed that, given the financial situation that the country was still experiencing in 2014, any request for financing made by a newly created entity and without business expectations would be rejected outright by all banks. For that reason, the Claimant did not prove, nor could it, that the interest it contracted with its shareholders was more favourable to it than what the banks would demand from it. In short, it cannot but be stated that, in view of this, the Defendant could not assume any other position than to investigate whether the shareholders of the Claimant had taken advantage of the socio-financial context of the country to contract a fixed spread of 14%. … As the Respondent summarized very well in its allegations (no. 58) That is, if an independent bank agreed to provide financing to the Claimant, of similar amount and term to the shareholder loans, remunerated at an annual nominal interest rate (TAN) calculated according to the monthly average of the 6-month Euribor rate of the previous month, plus a spread of 3 percentage points, then nothing justifies that the partners require from the company a remuneration for the shareholder loans that includes a spread of 14 percentage points.” Excerpts regarding the services “But it was not only the formal issue that justified the position of the AT and that leads this Court to agree with it. The absence of material evidence that the work had been performed is further compounded by the fact that, during the inspection, the AT found invoices (which the Claimant has registered in its accounts under account “62213 – Specialized work”), issued by the accounting firm “H…, Lda, as well as other “Specialized work”, for services related to the execution and management of the contracts, issued by suppliers B… and I…, which indicates that entities other than D… were involved in the provision of services. The management services for the … and of …, which were ongoing in 2017, and whose invoicing started that year, were performed by B… and I… and not by D… . Thus, the association of all the facts necessarily leads to the non-deductibility of D…’s invoice, since it was up to the Claimant to prove that the work was performed by D… and it failed to do so. As recently decided by the South Administrative Central Court in its ruling of 27 May 2021 in case no. 744/11.1BELRA (available at www.dgsi.pt) I- Invoices are not only relevant documents for the purpose of exercising the right to deduct, but also relevant for the purpose of exercising the AT’s control powers. II- There is no hierarchy between the various requirements imposed on invoices. III- The CJEU has held that the right to deduct is admissible even if some formal requirements are not met by invoices, provided that the material situation is demonstrated. IV- The failure to scrupulously comply with the formalities required in terms of issuing invoices may not compromise the exercise of the right of deduction, provided that the substantive requirements have been complied with and that the AT has all the elements to substantively characterise the transaction, it being understood that the burden of proof will rest with the taxable person. V- As no documentary evidence has been submitted containing a content that enables the gaps in the invoices to be overcome, the right to deduct is not admissible. Therefore, as the Claimant has not complied with the provisions of nos. 3 and 4 of article 23 of the CIRC, by virtue of paragraph c) of no. 1 of article 23-A, the invoice for the provision of services in the amount of €30,000.00, which determines the correction of the taxable income in that amount, cannot be deductible.” “Based on these grounds, the Court decides to consider the request made by the Claimant as totally unfounded” Click here for English translation Click here for other translation ...

A SGPS S.A. is the parent company of Group A. In 2016, a subsidiary, B S.A., took a loan in a bank, amounting to 1,950,000.00 Euros, and incurred interest costs and Stamp Tax. However, the majority of the loan, an amount of €1,716,256.60, was transferred as an interest free loan to A SGPS S.A. The tax authorities issued an assessment related to costs incurred on the loan and deducted by B S.A. The tax authorities disallowed B S.A.’s deduction of the costs as they were not intended to protect or obtain income, and therefore did not meet the requirements for deductibility under the general provisions of the Tax Code; A complaint was filed by A SGPS S.A. with the Administrative Tribunal. According to A SGPS SA the tax authorities did not justify why it considered that the expenses incurred by B S.A. to an independent bank for a loan that was passed on to the parent company were not deductible. According to A SGPS SA, this was not an issue of requirements for deductibility , but rather a question of transfer pricing. Hence, the correct framework for an adjustment would be that of article 63 regarding pricing of controlled transactions and not the general provisions in Article 23 of the Tax Code. Therefore the tax authorities had erred in law. Judgement of the CAAD In regards of B S.A.s deductions of loan expenses, the complaint of A SGPS S.A was dismissed and the assessment upheld. According to the tribunal, expenses held by a subsidiary to grant a loan to a parent company could not be said to “protect or obtain income” of the subsidiary since it did not own the parent company. “…the basic rule of deductibility of expenses is stated in article 23, no. 1 of the IRC Code, which, in its normative hypothesis, contains the respective constitutive assumptions, of a substantive nature, requiring a connection between the expenses and the activity generating income subject to IRC. Note that this is not a requirement of a direct causal relation between expenses and income (see Judgments of the Supreme Administrative Court of 24 September 2014, Case No. 0779/12; of 15 November 2017, Case No. 372/16; and of 28 June 2017, Case No. 0627/16, of 28 June 2017 ). The latter judgement considers “definitively ruled out a finalistic view of indispensability (as a requirement for costs to be accepted as tax costs), according to which a cause-effect relation, of the type conditio sine qua non, between costs and income would be required, so that only costs for which it is possible to establish an objective connection with the income may be considered deductible”. The causal connection should be made between the expenses and the activity globally considered (going beyond the strict expense-income nexus), and the Administration cannot assess the correctness, convenience or opportunity of the business and management decisions of the corporate entities. As highlighted by the Judgment of the Supreme Administrative Court of 21 September 2016, Case No. 0571/13 “[t]he concept of indispensability of costs, to which article 23 of the CIRC refers, refers to the costs incurred in the interest of the company or supported within the scope of the activities arising from its corporate scope”. On the other hand, this construction requires a link of subjective imputation that is implicit in the relationship required between the expense and the activity. This link must be made with the specific activity of the taxpayer and not with any other activity, namely that of its partners or third parties. It is in this framework that the corrections under analysis are based and not on the transfer pricing regime (see article 63 of the IRC Code), or on the “anti-abuse” regime, for which reason the assessment of the latter does not belong here. The Court is limited to the knowledge of the reasons expressed in the contemporaneous grounds of the tax act and if a correction has several valid grounds, only those that have been invoked as grounds for the contested act may be assessed. In this case, the only basis of the addition to the taxable amount of the deducted financial costs respects to the non-compliance of the assumptions of article 23, no. 1 of the Corporate Income Tax Code. As the conditions that integrate the normative hypothesis are not met, one cannot but validly conclude, together with the Defendant, that the deduction is not admissible. This, without prejudice to the fact that the factual situation may possibly be subject to a concurrent framework in other rules, which, as said, it is not for us to assess if they are not part of the foundations of the tax acts. The point is that the legal-tax regime effectively applied is based on correct legal and factual assumptions. … Taking into account the criterion described, the granting of free loans by B…, S.A. to the parent company [the Claimant] does not appear susceptible of being regarded as an activity of management of a financial asset by the former, since it is not the latter that holds shares in the parent company, but the opposite. In effect, there is no asset of which B…, S.A. is the holder that underlies this financing operation to the parent company. Nor can the argument regarding the exercise of significant influence over management, usually measured (in relation to subsidiary companies) by a percentage holding of at least 20%, be invoked in these circumstances to judge that the interest in the investment has been verified. Here, the significant influence is exercised in the opposite direction, since the parent company holds 92% of the capital of the Claimant. Therefore, it is concluded that the non-interest bearing financing granted by B…, S.A. to the Claimant are not carried out within the scope of the activity of the former and in its economic interest, so, in agreement with the Defendant, the financial costs incurred do not pass the test of the necessary causal relation between the expenses incurred and the activity of ...

Sierra Spain Shopping Centers Services S.L.U. is part of a multinational group that manages shopping centres. Sierra Spain had deducted expenses for services rendered from a related party in Portugal. According to Sierra Spain, the services were related to strategic management and marketing. The tax authorities considered the expenses non-deductible and issued an assessment of additional taxable income. With respect to the strategic business management services, the tax authorities found that there was no contract between the parties. In addition, the authorities found the justification for the actual provision of services was insufficient. With regard to the marketing services, these were contracted by the Portugal-based entity to an external supplier and subsequently re-invoiced to the related parties receiving the service in Portugal, Brazil and Spain. The tax authorities considered that these services were shareholder costs and therefore not deductible in Sierra Spain. Sierra Spain appealed to the Tax Court, which upheld the assessment of the tax authorities. An appeal was then lodged with the National Court. Judgement of the Court The Court dismissed Sierra’s appeal regarding fees for management services, but ruled in favour of Sierra regarding fees for marketing services. According to the Court, Sierra had not provided sufficient supporting documentation for the management services. The Court considered that the invoices submitted were too general and that the description of the services in the invoices referred to an intercompany agreement that had not been provided. In addition, the Court considered that the internal correspondence submitted as evidence of the services provided only supported the existence of habitual and ordinary relations between the employees of the Spanish and Portuguese companies. Therefore, the requirements laid down in the Spanish legislation to support the deductibility of the management services had not been met. With regard to the expenses for marketing services, the Court stated. “Both the general purpose of the market studies (as described, for example, on p. 16 of the contested decision) and their content, in which the references to the activity carried on in Spain are of significant relevance, support the claimant’s assertion that the marketing services at issue would be subsumed under paragraph 7.14 of the OECD Guidelines, as intra-group services (specifically, as marketing assistance), and not under point 7.9 as shareholder costs (p. 31 of the complaint). Consequently, given the reality of the service, its relation to the Appellant’s activity and the utility or advantage it brings or may bring to its recipient, the deductibility of the expense incurred in 2008 for this specific item must be accepted. In order to consider the latter to be established, that is to say, that we are dealing with shareholder costs which would benefit the group and not the appellant, it is necessary to provide a statement of reasons and a greater effort of argument than that made in the present case by the Tax Inspectorate and by the contested decision. Thus, the reasons given by the tax authorities are not sufficient to establish that the basic and essential premise underlying the concept of shareholder costs is met, that is to say, that we are dealing with an activity for which the appellant entity has no need and which, therefore, it would not be prepared to pay if it were dealing with independent undertakings.” Click here for English translation Click here for other translation ...

IAB Company had deducted fees paid for services to its parent, IAL. Following an audit the tax authorities denied these deductions as sufficient evidence had not been provided for provision of the services. An appeal was filed by IAB Company. Judgement of the High Court. The Court upheld the assessment of the tax authorities concerning management fees and dismissed the appeal of IAB Company in this regard. Excerpts from the judgement: “In a nutshell the issue here is whether or not the appellant received management services from IAL for the tax years 2010 to 2015. ” (…) “The authorities must not look at the matter from their own view point but that of a prudent business an – SA Builders Ltd v CIT (2006) 289 ITR 26 (SC).  Further, I agree with what was stated by Australia’s Full Federal Court on the function of the tax authorities and fiscal legislation.  In FC of T v BHP Billion Finance Ltd 2010 ATC 20169 at paragraph [18] the said court quoted with approval from Tweddle v FCT (1942) 180 CLR at 7 where WILLIAMS J staid that: “it is not suggested that it is the function of the Income Tax Acts or those who administer them to dictate to tax payers in what business they should engage or how to run their business profitably or economically.  The Act must operate upon the result of a tax payer’s activities as it finds them.  If a tax payer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interests and although it certainly would be better in the interests of the Commissioner if he did as: Toohey’s Ltd v Commissioner of Taxation (NSW) (1922) 22 SR (NSW) 432 at pp 44044,]” Further, in Income Tax case number (1847) 73 SATC 126 the court reminded the Commissioner of SARS after the latter had disallowed management and marketing fees paid by a subsidiary to its holding company that: “it is not for the court or the Commissioner to say, with the benefit of hindsight be disallowed on the basis that it was not strictly ‘necessary’, or that it was not as effective as it could have been.  If the purpose of the expenditure was to produce income, in the course of trade, and the expenditure was not of a capital nature, then that is sufficient.  Accordingly, the respondent was wrong in his assessment of these fees.”  In this said case the court accepted that, many a time a subsidiary is utterly dependent on its holding company for its effective functioning.  The holding company had used its muscle, as a long established public company, to raise capital for the tax payer and from the evidence it was clear the tax payer needed the management input of the holding company and received it.  It need the global vision and strategic advice of the cosmopolitan, internationally experienced team from the holding company.  The management service fees charged by the holding company to the subsidiary were held to be in line with the norm in the industry. I will now consider the evidence before me in light of the above principles.” (…) “Firstly, the determination is whether the conclusion of a contract for service necessarily means that the services had been rendered.  Put differently, the question is whether a payment made pursuant to the conclusion of service level contract amounts to incurring expenditure for purposes of deductions permissible in terms of s15 (2)(a) of the Act.  In my view, the signing of the service level contract is not sufficient for the appellant to incur obligation to pay management fees.  In the circumstances I have to determine the second issue i.e. whether in fact any services were rendered by IAL, and if so, what the services were and how much was charged in respect of services.  This two-stage inquiry is evinced by the splitting of the issues in the joint minute of the parties.  The first issue being the question management services were rendered by IAL and the second being a determination of the extent of such services. I am in agreement with the contention of the respondent that the execution of a service level agreement between the appellant and its holding company, IAL, does not amount to incurring any legal obligation in respect of management fees.  Like any other contract, the incurrence of a legal obligation depends on the performance by the parties of their obligations in terms of the contract.  There being no evidence that the appellant received specified services from IAL during the tax period under consideration (and if so the extent thereof) no legal obligation was incurred by the appellant in respect of management fees.” (…) “The Finance Director for appellant testified and his testimony remarkably contradicted that of the Group Finance Director of IAL on the fundamental premise upon which the notices in issue were raised.  He contended that the invoices were issued on the basis of services rendered and by implication suggested that if services were not rendered for any particular portion of the period concerned, the appellant would not be obliged to pay IAL.  In contradiction the Group Finance Director had testified that the rendering of a service was not a pre-requisite for the charge which IAL raised on a monthly basis to the appellant.  The evidence of these witnesses was therefore, mutually destructive.  The appellant’s Finance Director stated that the yearly fees were registered and agreed upon the commencement of the year.  He, however, had no documents as proof of such negotiations on the fees.  He did not provide any rational basis for the charge which was raised by IAL to the appellant.  He also admitted IAL exists for its own purposes and does not exist to provide service to the subsidiary only.  It was therefore, necessary to separate the functions ...

Delta Beverages Ltd, a subsidiary of Delta Corporation, had been issued a tax assessment for FY 2009, 2010, 2011, 2012, 2013 and 2014 where various fees for service, technology license of trademarks, technology and know-how paid to a group company in the Netherlands (SAB Miller Management BV) had been disallowed by the tax authorities (Zimra) of Zimbabwe resulting in additional taxes of US$42 million which was later reduced to US$30 million. An appeal was filed with the Special Court (for Income Tax Appeals) where, in a judgment dated 11 October 2019, parts of the assessment was set aside. Not satisfied with the result, an appeal (Delta Beverages) and cross-appeal (tax authorities) was filed with the Supreme Court. Judgement of the Supreme Court. The Supreme Court set aside the judgement of the Special Court (for Income Tax Appeals) and remanded the case for reconsiderations in relation to the issue of tax avoidance. Excerpts from the Supreme Court judgement regarding deductions for royalties paid for trademarks: “I respectfully agree with the reasoning of the court a quo. A product’s standing and marketability is enhanced by its trademark which has acquired a reputation and become desirable on the market. The trademarks in issue are of international repute. They in my view add value to the main appellant’s beverages and make it possible for the appellant to make an income from the trademarked products. It is apparent from the various agreements entered into between the franchisors and the holding company that what was being sought was to benefit from the reputation of the international brands and trademarks.” “In respect of the royalties the issue is whether or not the main appellant was a party to the agreements on the royalties, which were to be paid for or had ratified the agreements entitling it to claim its payments for them as deductions in its tax returns. A reading of the record establishes that the agreements in terms of which royalties were payable were entered into by Delta Corporation or its predecessors in title and there is no specific mention of the appellant. There is however mention of Delta Corporation’s subsidiaries. It is common cause that the main appellant is a subsidiary of Delta Corporation (Private) Limited.” “In any event, evidence on record establishes that the cross appellant’s main challenge cannot prevail because the Exchange Control Authority granted authority for the payment of those royalties. The record proves that on 19 August 2011, the exchange control authority granted authority to the holding company to pay royalties of up to 5 percent to the Dutch Company less withholding tax.” “Once it is established that the main appellant is the one which operated the beverages business and benefited from the contract between the Dutch company and the holding company, it follows that it lawfully deducted the royalties it paid to the Dutch company.” Excerpts from the Supreme Court judgement regarding deductions for technical services (calculated based on turnover) – tax avoidance: In determining this issue the court [Special Court (for Income Tax Appeals)] a quo commented on its perception that there might have been tax avoidance in the manner in which the technical services agreement was concluded between the parties. It commented that if the Commissioner had attacked the deduction of these services from the main appellant’s taxable income it would have been fatal to the main appellant’s claim. “The witness failed to explain why the Dutch company paid the South African entity that supplied the technical services to the appellant on its behalf on a cost plus mark-up basis but charged the local holding company on a percentage of turnover basis. Such a failure may have been fatal to the appellant’s case had the Commissioner disallowed the technical fees in terms of s 98 the Income Tax Act.” “It is apparent from the court a quo’s comments that it perceived that there might have been a case of tax avoidance by the main appellant’s holding company and the Dutch company. It is also apparent that it took no further steps to inquire into that possibility but proceeded to determine the appeal on other factors not connected to tax avoidance as if the appeal before it was an appeal in the strict sense. It thus left the issue of tax avoidance hanging as no further inquiry into it was made, nor did it make a decision on the issue.” “It is clear from the underlined part of the quotation that the issue of avoidance should be determined to enable the Commissioner or as in this case the Special Court to determine how the tax payer should be taxed. The determination of tax issues require clarity and incisiveness in decision making. This is because the law requires that those who should pay tax should do so and those who fall outside that requirement should not be taxed. There should be no room for those within the group which should be taxed escaping through failure by the Commissioner to net them in and if he fails the Special Court in the exercise of its full jurisdiction should net them in. … It is therefore my view that once the court a quo realised that there might be tax avoidance it should have exhaustively inquired into and made a determination on it. It should have sought to determine the correct position of the law instead of identifying a possible error by the Commissioner and allowing it to pass. Taxation is by the law and not official errors or laxity. …where a tax matter has been placed before the Special Court for adjudication a taxpayer should not escape liability simply because the Commissioner failed to invoke the appropriate taxing provision. In casu the omission by the court a quo to determine the issue of tax avoidance will have the effect of allowing the main appellant to get away with tax avoidance, if that can be proved on inquiry. That view is strengthened by the court a quo’s view that the failure by ...

Following an audit the tax authorities issued an assessment regarding interest payments on intra group loans and tax deductions for the costs for various services. An appeal was filed by the company. Judgement of the Tax Court The court upheld the assessment and decided in favour of the tax authorities. Click here for English translation ...

LCN Group had deducted costs in its taxable income for marketing services provided by related parties – PRESSTEX MEDIA SE and TARDEM Media s.r.o. and PAPILIO. The claimed advertising costs from PRESSTEX in FY 2012 was produced and implemented by PAPILIO and subsequently invoiced to LCN Group, virtually unchanged, at a price 23 times higher than the price of the advertising, without the corresponding value added being justified. In relation to FY 2013, LCN Group claimed advertising costs from TARDEM in a similar pattern where the price was increased by up to 56 times. In both tax periods, LCN Group’s advertising/promotion costs were related to sporting events (gymnastics world cup, tennis tournament and golf tournaments). The tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. The Regional Court annulled the assessment. It argued that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. The tax authorities brought this decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court set aside the decision of the Regional Court and refered the case back to that court for further proceedings. The arm’s length price is the price applied between independent entities or, if no such data exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience. As regards the “commercial strength” of the parties, the Regional Court did not specify that concept, did not indicate what aspects should be taken into account in the context of that condition, or how that condition affects the prices for advertising services. With regard to the alleged lack of consideration of advertising capacity at the time the contracts were concluded, it may be noted that this aspect may be relevant in assessing the reasons for the difference in prices between the related parties and those agreed in normal commercial relations. However, the possible proof of this fact falls within the scope of the assessment of whether the tax payer has satisfactorily substantiated the price difference. The Regional Court did not deal with this issue. Click here for English Translation Click here for other translation ...

X B.V., a private limited company established in the Netherlands, is part of a globally operating group (hereafter: the Group). In the years under review, the head office, which was also the top holding company, was located in the USA. Until 1 February 2008, the X B.V. was, together with BV 1 and BV 2, included in a fiscal unity for corporate income tax with the Interested Party as the parent company. As of 1 February 2008, a number of companies were added to the fiscal unity, including BV 3 and BV 4. X B.V. is considered transparent for tax purposes according to US standards. Its parent company is a company domiciled in the USA, as further described in 2.1.8 below. In 2006, BV 1 borrowed € 195,000,000 under a Euro Credit Facility (ECF), a head office guaranteed credit facility with a syndicate of sixteen banks. BV 1 contributed this amount in 2007 as share premium to BV 2. BV 2 paid the larger part of this amount as capital into BV 3. BV 2 and BV 3 have jointly paid the amount of (rounded off) € 195.000.000 into a newly established Irish holding company, Ltd 1. Ltd 1 used the capital contribution to purchase a company established in Ireland, Ltd 2 from a group company established in the United Kingdom for an amount of (rounded off) GBP 130.000.000. BV 3 (for 99 per cent) and BV 4 (for 1 per cent) jointly formed a French entity, SNC, on 28 November 2007. SNC is transparent for tax purposes under Dutch standards. For French tax purposes, SNC is a non-transparent group company. BV 3 sold its subsidiary, SA 1, on 6 December 2007 to SNC for €550,000,000, with SNC acknowledging the purchase price. On 12 December 2007, that claim against SNC was converted into capital. SA 1 merged with SNC on 15 January 2008, with SNC as the surviving legal entity. SNC acquired through the merger, inter alia, a bank debt of €45,000,000 to the Group cash pool managed by BV 2 with a bank (the Pool). This debt is the remainder of a loan taken out by SA 1 in 1998 for external acquisitions and which was refinanced from the Pool in 2004. BV 3 borrowed € 65,000,000 under the ECF on 6 February 2008 and on-lent this amount to SNC. SNC borrowed on the same day a total of € 240,000,000 under the ECF of which one loan of € 195,000,000 and one loan of € 45,000,000. SNC repaid the bank debt from the Pool with the loan of € 45,000,000. On 7 February 2008 it purchased Ltd 1, [F] NV and [G] from BV 3 for rounded € 255,000,000, financed by € 195,000,000 in ECF loans and the aforementioned loan from BV 3 of € 65,000,000, and further purchased an additional participation for rounded € 5,000,000. With the received € 255,000,000, BV 3 repaid its ECF debt of € 60,000,000. On 7 February 2008 it lent the remaining € 195,000,000 to BV 1, which repaid its ECF debt in February 2008. BV 2 sold the shares in a Moroccan and a Tunisian entity to SNC on 7 February 2008 against payment of € 5,088,000. BV 2 borrowed € 191,000,000 under the ECF to finance capital contributions in subsidiaries in Norway, Singapore and Switzerland, for external and internal purchase of shares in companies and for the expansion on 10 December 2008 with 8.71 percent (€ 12,115,000) of its 86.96 percent interest in [M] SpA indirectly held through a transparent Spanish SC of the English group companies [LTD 4] and [LTD 5] . On 29 May 2009, Luxco SA borrowed an amount of € 291,000,000 under the ECF. Luxco is a Luxembourg-based finance company that belongs to the Concern. Luxco on-lent that amount to BV 3 under the same conditions. In turn, BV 3 on-lent the same amount under the same conditions to SNC. With that loan, SNC repaid its ECF debt of € 240,000,000. It lent the remainder to its subsidiary [SA 2] in connection with the acquisition by SA 2 of [SA 3]. That acquisition took place on 25 May 2009 against acknowledgment of debt. SA2 repaid part of the loan from SNC with funds obtained from SA3. The remainder of the loan was converted into capital. On 24 June 2009, Luxco placed a public bond loan of € 500,000,000. Luxco used the net proceeds to provide a US dollar loan of € 482,000,000 to its US sister company [US] Inc (hereinafter: US Inc). US Inc is the parent company of the interested party. The currency risk has been hedged by Luxco with an external hedge. US Inc converted the funds from the Luxco loan into euros and subsequently granted a loan of € 482,000,000 to interested party on 1 July 2009. Interested party paid this amount into new shares in its indirect and affiliated subsidiary BV 5, as a result of which interested party obtained a direct interest of 99.996 percent in BV 5. From the paid-up funds, BV 5 provided two loans within the fiscal unity: a loan of € 191,000,000 to BV 2 and a loan of € 291,000,000 to BV 3. BV 2 and BV 3 used the funds obtained from these loans to pay off the ECF debt and the debt to Luxco, respectively. Luxco repaid its ECF debt on 1 July 2009. On 13 and 14 December 2010, BV 2 and BV 3 took out loans under the ECF amounting to € 197,000,000 and € 300,000,000 respectively. These amounts were equal to the principal and outstanding interest of their debts to BV 5. With the proceeds of these loans, BV 2 and BV 3 repaid their debts to BV 5. BV 5 distributed the net interest income as dividend and repaid € 482,000,000 of capital to interested party. Interested party repaid its debt to US Inc on 14 December 2010 (including outstanding interest). US Inc repaid its debt to Luxco on 14 ...

A. Romania S.R.L. had purchased services from A. Nederland BV and A. CZ Holding sro, and the costs of the services had been deducted for tax purposes. At issue was whether these services had actually been provided to the benefit of A. Romania S.R.L. and if so whether the costs were deductible under Romanian tax provisions. According to the tax authorities it was not possible to identify the services actually provided, as the documentation provided was only general data on the types of services invoiced, such as: group services, taxes and contributions, other group services. No supporting documents had been submitted to show that the services were actually provided. Furthermore, according to Romanian tax provisions – paragraph 41 of H.G. no. 44/2004 – the costs of administration, management, control, consultancy or similar functions are borne by the parent company and no remuneration can be claimed for these activities from the affiliated persons, thus the expenses are not deductible for tax purposes. Hence an assessment was issued where deductions of the intra-group service costs had been denied. The court of first instance set aside the tax assessment and concluded that without those services the applicant would not be able to operate in optimal parameters and would not be able to carry out its object of activity. Judgement of Supreme Administrative Court The Supreme Administrative Court set aside the decision issued by the court of first instance and decided in favor of the tax authorities. Excerpts “- A first criticism concerns aspects related to the non-deductibility of management, consultancy and similar services expenses, in the amount of RON 13,072,643, as well as the related VAT in the amount of RON 3,197,379. The High Court holds that between the appellant-claimant and the companies A. Nederland BV and A. CZ Holding sro concluded service contracts for the provision of group services to A. S.R.L. (of Romania). These contracts related to general management assistance, legal, tax, financial, accounting, HR support services, marketing, sales and purchasing services. Since there is an affiliation relationship between these companies, according to the provisions of Articles 11 and 21 of the Tax Code and point 48 of H.G. no. 44/2004 approving the methodological rules for the application of the Tax Code, the necessity of the purchase of the services, their actual provision, must be proven, and the deductibility of expenses is only possible if services are additionally provided to the affiliated persons or if the price of the goods and the value of the services provided take into account the services and administrative costs. Such expenses cannot be deducted by the Romanian subsidiary if the services would not have been used in the case of a self-employed person, and it is not sufficient simply to prove the existence of the services; the actual provision of the services must also be proved. In other words, the services contracted with the two companies (in the Netherlands and the Czech Republic) must be in addition to the affiliation relationship. The first court held that the services purchased from the two companies were provided and were necessary for the applicant, since it did not have support departments enabling it to carry out the specific activity. The High Court holds that the deductibility of expenses for management, consultancy and similar services depends on the existence of supporting documents leading to the conclusion that the services provided are not group-wide services, since they are deducted centrally or regionally through the parent company on behalf of the group as a whole and are not invoiced to the other companies in the group. These services have been highlighted in the documents on file as “group services”, without any supporting documents being submitted to show the nature of the service provided and whether they are in addition to those relating to the affiliation relationship. The first court, certifying the conclusions of the forensic expert’s report, pointed out that, on page x, the expert had set out the contractual framework and the services to which the Netherlands and Czech companies were committed. The expert also, analysing all the categories of services purchased, showed that they were actually provided and were necessary for the company. The High Court notes from all the evidence in the file that, although the services were provided, it is not known whether they were in addition to those relating to the affiliation relationship, and it has not been shown in concrete terms, for example, with regard to the HR support services, in terms of coordinating personnel policies, remuneration and promotion of training programmes. With regard to marketing, sales and purchasing services, it is not clear from the attached documents what the name, brand, logo, etc. services consisted of. From the content of the expert report, it appears that reports, emails, plane tickets, bus tickets, etc. are listed, in the annexes to the report supporting documents, invoices, receipts, sales statements, activity reports, projects, extracts from manuals, etc. are presented, but all this does not lead to the conclusion that the services were provided in addition to the affiliation relationship, especially as they represent data of a general nature. In conclusion, it is noted that the tax authorities were correct in finding that the expenditure on the abovementioned services was not deductible. As regards the VAT relating to those services, in so far as they have not been identified by documents showing that they were provided for the benefit of taxable transactions, in accordance with Articles 145-1471 of the Tax Code, the right to deduct cannot be granted. – The second criticism relates to the corporation tax on the adjustment of expenses following the reconsideration of the transfer pricing records for transactions with related parties. It is apparent from the documents in the file that the applicant, in order to substantiate the methods of establishing the transfer prices charged between the group companies, chose the net margin method (for services) and the price comparison method (for goods). The net margin method, according to the appellants-respondents, was not properly ...

S.C. A. had paid for intra group services in FY 2013 and 2014 and deducted the costs for tax purposes. The purchases of services were made on the basis of a management services contract concluded with related party C. S.A. and a production service contract, logistics service contract, product management service contract and service contract concluded with related party B. The tax authorities had issued an assessment where deductions for the costs had been denied. The court of first instance set aside the tax assessment. Judgement of Supreme Administrative Court The Supreme Administrative Court upheld the decision from the court of first instance and decided in favor of S.C. A. Excerpts “As regards the necessity of providing the services The High Court finds that the expert held, with regard to that aspect, that by the contracts concluded, C. S.A. and B. undertook to carry out for the applicant multiple and complex activities requiring the allocation of a large amount of time and human resources, the strategic decisions concerning the development of the product range, the most appropriate technology to be used, the identification of sources of financing for the acquisition of that technology, the quantities to be manufactured, the market segment to which they were addressed, the innovation part, the software part, being taken by the members of the management on the basis of the services provided by the business partners C. S.A. and B.. The expert stated that A. produced the product range developed by the product managers of C. S.A. in the quantities and at the request of the customers identified through the services provided by B. respectively C. SAU, using the manufacturing technology identified by B. for the plaintiff without any overlap between the services provided by B. respectively C. SAU with those provided by other suppliers or by the company’s own staff. The High Court finds that the manner in which the first instance assessed the evidence cannot be criticised in the context of the ground for annulment in Article 488(8) of the EC Treaty. (The appellants have not proved the existence of a misapplication of the law by the first instance when the expert evidence was administered or when its conclusions were assessed. On the other hand, the tax authority takes a contradictory position: it held as grounds for refusing the deductibility of expenses both the lack of proof of actual provision and the lack of proof of the necessity of the services; however, in the appeal, it is stated that the tax inspection authorities did not mention in the contested act that the intra-group management/consultancy services are not necessary for the activity which the company S.C. A. carries out, and as proof, of the total intra-group services of 64,781. 915 RON, recorded by the company in the period 2009-2014, the tax inspection bodies granted the right to deduct expenses in the total amount of 44,725,484 RON related to intra-group services of the nature specified by the company, which the company justified with documents, and did not grant the right to deduct expenses in the total amount of 20,056,431 RON related to intra-group services for which the company did not submit supporting documents showing that they were performed for the benefit of the contested company. The tax authority also certainly imputed to the applicant the lack of necessity of those services, but in the light of the analysis carried out by the tax authority, the first instance correctly rejected that criticism. With regard to the provisions of the OECD Guidelines (OECD Transfer Pricing Guidelines), the tax inspection authorities state in the Transfer Pricing File that the audited company does not demonstrate that “the transactions relating to management services and consultancy services have a real economic justification and that they would have been decided on the same conditions as between independent enterprises, within the framework of free competition”. It was argued that the cost-plus method is not appropriate for assessing compliance with the market value principle in the case of the provision of management services between B. and A., on the one hand, and in the case of the provision of consultancy services between C. and A., on the other, because the comparability of gross margins depends on the similarity of the functions performed, the risks assumed and the contractual terms, and the application of the net margin method is the most appropriate for assessing compliance with the market value principle of the costs incurred by A. in the purchase of management and consultancy services. However, no additional information was requested from S.C. A. on this point because, following the tax inspection, it was found that the audited company did not submit supporting documents showing that management, consultancy, assistance, production management, product management and logistics services in the amount of RON 20,056,430.90 were performed. The High Court finds that, according to the expert’s report, the price paid by the Company to the affiliates for the purchased services met the conditions to be considered within the market price range, in accordance with the transfer pricing legislation. Furthermore, in view of the provisions of paragraph 2.39 of Chapter II, lit. D).1 of the OECD Guidelines, which states that the cost plus method is probably most useful when semi-finished products are traded between affiliated companies, when affiliated companies have entered into joint arrangements for certain facilities or long-term sale and purchase agreements or when the transaction consists of the provision of services, the tax expert considered that the use of the cost plus method in respect of management services was justified. He also pointed out that the legislation does not stipulate a minimum percentage for the mark-up to be applied, but only that it exists, so that invoicing at cost plus a 10% mark-up is justified. As the respondent-claimant rightly pointed out, the cost-plus method was selected only in respect of management services, and the method of pricing for consultancy services was cost-plus billing with a 10% profit margin. Thus, in relation to consultancy services an additional analysis was ...

The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV. The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto. However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007. As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors on 22 September 2004 and paid to the insurance company managing the pension plan on 25 May 2005, and another contribution of EUR 132,074.67 on 31 July 2007, which was passed on to the Dutch parent company. The accounting expenses entered in the accounts by EPSON IBERICA in this connection amounted to EUR 2 709 972.88 (EUR 2 842 047.55 – EUR 132 074.67), which the entity entered off the books and which, consequently, were not deducted fiscally. In particular, the accounting expense computed in FY 2004 and 2005 for the amount of the commitment assumed (2.2 million euros) was not deducted in that year, in accordance with the provisions of Article 13.3 “Provision for risk and expenses”, of the Consolidated Text of the Corporate Income Tax Law However, when the beneficiary (Mr. Jose Augusto) of these contributions receives the amounts from the retirement plan, the corresponding contributions made are deductible at EPSON IBERICA. In 2009, Mr. Jose Augusto exercised his right to receive the benefits provided for in that pension plan and, therefore, the entity made a negative adjustment of EUR 2,709,972.89 in its tax return for that year, an adjustment which, in the Inspectorate’s opinion, should have amounted to only EUR 473,477.59, since not all the contributions made to the aforementioned pension plan were deductible. The contributions made after that date, which amounted to 263,174.45 euros (10 % of 2,631,744.41 euros). The remaining 90 % of the contribution from 1 January 2002 is deemed to have been made by the parent company in the Netherlands, EPSON EUROPE. – The settlement agreement acknowledges that the adjustment should have been bilateral, since the expenditure actually occurred, but considers this provision inapplicable because EPSON EUROPA is resident in the Netherlands, and Article 9 of Spain’s double taxation agreement with the Netherlands does not provide for bilateral adjustment. – In its tax return for 2010, EPSON IBERICA offset in full, for an amount of EUR 1 359 101.07, the negative tax base which it had claimed to have from the previous year (2009), but which it no longer had following the audit carried out. EPSON IBERICA did not agree with the aforementioned settlement agreements and the imposition of the penalty relating to the FY 2009 and 2010 and filed economic-administrative claims against them before the Central Economic-Administrative Court. The claims were resolved by the Central Economic-Administrative Tribunal on 4 February 2016, rejecting them. EPSON’s legal representatives then filed a contentious-administrative appeal against the above decision, which was processed under case number 314/2016 before the Second Section of the Contentious-Administrative Chamber of the National High Court, and a judgment rejecting the appeal was handed down on 22 February 2018. The appellant filed a writ requesting a supplement to the previous judgment, and the Chamber issued an order on 14 May 2018, in which it declared that there was no need to supplement the judgment. The High Court also decided in favour of the tax authorities, and this decision was then appealed by EPSON to the Supreme Tribunal. At issue before the Supreme Tribunal was whether or not the tax authorities should have taken into account the disallowed deduction – resulting in a higher income – when determining the arm’s length remuneration of EPSON IBÉRICA which was based on the transactional net margin method (TNMM). Judgement of the Court The Supreme Court dismissed the appeal of EPSON IBÉRICA and decided in favour of the tax authorities. Excerpt “The key issue in the present appeal is, in fact, the apportionment of costs between EPSON EUROPA and EPSON IBERICA. The judgment under appeal has chosen to consider the apportionment made by the tax inspectorate to be correct, in the light of the circumstances and the evidence in the proceedings. It is not an arbitrary assessment; it is coherent and reasonable and, therefore, we must abide by its result. The assessments under appeal are therefore in accordance with the law, and the adjustment sought by EPSON IBERICA is not appropriate. Lastly, there is nothing to be said in relation to the penalties, since that issue is not covered by the order for admission. In view of the foregoing, in circumstances such as those described, the answer to the appeal is as follows: ‘the Tax Inspectorate is not obliged to take into consideration the transfer pricing policy of the corporate group, in particular where it is based on the Transactional Net Margin Method (TNMM), when regularising transactions involving companies in the same multinational group, where it is not possible to make the relevant bilateral adjustment, in order to proceed to a full regularisation of the taxpayer’s situation.” Click here for English Translation Click here for other translation ...

The French company SMAP carries out activities in the area of advertising management and organisation of trade fairs. Following an audit of the company for FY 2008 to 2011 and assessment was issued where deduction of costs for certain intra group “services” had been denied, resulting in additional value added tax, corporate income tax surcharges, apprenticeship tax and business value added tax. The company held that the tax administration had disregarded fiscal procedures, and that the reality of the services – and deductibility of the costs – cannot be disregarded on mere presumptions. Decision of the Court The Appeal of SARL SMAP was rejected by the Court. “Firstly, the administration notes that by virtue of a Lebanese legislative decree n° 46 of 24th June 1983, companies governed by Lebanese law … carrying out their essential activities outside the national territory are considered as offshore companies and as such benefit from a privileged tax regime. In particular, Article 4 of this legislative decree exempts these companies from the tax on the annual profits of joint stock companies. As mentioned in point 6, the activities of APCOM, as they are only covered by the 2004 contracts signed with SMAP SARL, concern administrative and financial services and commercial representation activities for companies not domiciled in Lebanon, and are therefore subject to the provisions of the Legislative Decree No. 46 of 24 June 1983. By merely maintaining that the company APCOM paid taxes in Lebanon, without producing any documents in support of its allegations, the applicant did not usefully contest the elements put forward by the administration. The latter must, therefore, be regarded as establishing that APCOM benefits from a privileged tax regime in Lebanon. It was therefore not required to establish the existence of a link of dependence between the two companies.” “…the claimant has not produced any documents to establish the reality of the services that APCOM performs on behalf of SMAP. Finally, the APCOM supplier account opened in the accounts of SMAP SARL functions as a partner’s current account. A transfer of 25,982 euros to SMAP was also entered there under the heading “loan repayment”, without any explanation being given by the applicant. Under these conditions, the administration must be considered as having produced elements likely to establish that the sums paid by SMAP SARL to APCOM constituted pure generosity granted in an interest other than that of the applicant company.” “…in order to establish the link of dependence between the applicant company and SMAP EXPO SL, the administration relies on the circumstance that the two companies shared the same director. Moreover, it is clear from the terms of the two proposed corrections that the administration also noted that the Spanish company, a sister company to SMAP EXPO S.L., had been the applicant company’s director.” “SARL SMAP, which does not have the material and human resources necessary to carry out its activity of organising trade fairs in Spain, relies on those of the applicant company. In these circumstances, the administration must be considered as establishing the link of dependence between the applicant and SMAP EXPO SL.” “As stated in paragraph 7, there is no evidence to establish the reality of the services which would have been provided by SMAP EXPO SL to SMAP SARL. Moreover, the applicant does not contest the transfer of profits to SMAP EXPO SL.” “It follows from what has just been said in the preceding points that the plea alleging that the administration has disregarded the provisions of Article 57 of the General Tax Code must be dismissed.” “It follows from all of the foregoing that SMAP SARL is not entitled to argue that the Montreuil Administrative Court wrongly rejected its claims in the contested judgment”. Click here for English translation Click here for other translation ...

DIGITEX INFORMATICA S.L. had entered into a substantial service contract with an unrelated party in Latin America, Telefonica, according to which the DIGITEX group would provide certain services for Telefonica. The contract originally entered by DIGITEX INFORMATICA S.L. was later transferred to DIGITEX’s Latin American subsidiaries. But after the transfer, cost and amortizations related to the contract were still paid – and deducted for tax purposes – by DIGITEX in Spain. The tax authorities found that costs (amortizations, interest payments etc.) related to the Telefonica contract – after the contract had been transferred to the subsidiaries – should have been reinvoiced to the subsidiaries, and an assessment was issued to DIGITEX for FY 2010 and 2011 where these deductions had been disallowed. DIGITEX on its side argued that by not re-invoicing the costs to the subsidiaries the income received from the subsidiaries increased. According to the intercompany contract, DIGITEX would invoice related entities 1% of the turnover of its own customers for branding and 2% of the turnover of its own or referred customers for know-how. However, no invoicing could be made if the operating income of the subsidiaries did not exceed 2.5% of turnover, excluding the result obtained from operations carried out with local clients. Judgement of the Court The Audiencia Nacional dismissed the appeal of DIGITEX and decided in favour of the tax authorities. Excerpt “1.- The income derived from the local contracts for customer analysis and migration services corresponds to the appellant Group entities and designated as PSACs, i.e. to the same affiliates. Therefore, the taxpayer should have re-invoiced the costs of the project to these subsidiaries, according to the revenue generated in each of them. And this by application of the principle of correlation between income and expenditure set out in RD 1514/2007. The plaintiff should not be surprised by this consideration insofar as this was done, at least partially, in the financial year 2010, in which it already re-invoiced EUR 339 978.55. Consequently, it cannot be said that the defendant administration went against its own actions when it took the view that the plaintiff in 2009 should have recorded in its accounts an intangible asset of EUR 50 million, in view of what happened later, in 2010, when the contracts with the subsidiaries were concluded and the PSACs became PSACs. Therefore, it was the plaintiff itself that went against its own actions, acting differently between 2010 and 2011 when it came to allocating the costs derived from the intangible amortisation and the financial expenses of the loan contracted. 2.- Even if we were to admit that the services provided by the plaintiff have added value by incorporating both a trademark licence and know-how, this does not mean that such re-invoicing does not have to be carried out, when, as has been said, in 2009 DIGITEX INFORMATICA S.L was acting as PSAC under the mediation contract, but as a result of the new contracts entered into with the Latin American subsidiaries in 2010, this position as PSAC was assumed by the said subsidiaries present in the seven Latin American countries. As regards the method of determining the profit, it is appropriate to refer to the operating margin expressly contained in the contracts concluded by the plaintiff with the subsidiaries and not to the general margin determined by the plaintiff in accordance with folio 32 et seq. of the application (according to the final result of the profit and loss account), despite the reports provided by the appellant. And so it is that the latter cannot contradict itself by going against its own acts to the point of altering the literal nature of the contracts, even if it indicates that the will of the parties in the other to the contrary, in accordance with the provisions of Article 1281 of the CC.” Click here for English Translation Click here for other translation ...

A tax assessment had been issued for FY 2013 resulting in additional taxes of to CZK 227,162,210. At first the tax administration disputed that the applicant had purchased 1 TB SSDs for the purpose of earning, maintaining and securing income. It therefore concluded that the Starcom Internatioal had not proved that the conditions for tax deductions were met. On appeal, the tax administrator changed its position and accepted that all the conditions for tax deductions were met, but now instead concluded that Starcom Internatioal was a connected party to its supplier AZ Group Czech s.r.o. It also concluded that the transfer prices had been set mainly for the purpose of reducing the tax base within the meaning of Section 23(7)(b)(5) of the ITA. It was thus for the tax authorities to prove that Starcom Internatioal and AZ Group Czech s.r.o. (‘AZ’) were ‘otherwise connected persons’ and that the prices agreed between them differed from those which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. Judgement of the Regional Court The Court allowed the appeal and decided predominantly in favour of Starcom Internatioal. “It can therefore be summarised that for the application of section 23(7) of the ITA it is necessary to prove that they are related persons within the meaning of the Income Tax Act, while respecting the case law cited above. A further condition is that the tax authority must prove that the prices agreed between these persons differ from the normal prices that would have been agreed between independent persons in normal commercial relations under the same or similar conditions. It is then up to the taxable person (if he wishes to avoid adjusting the tax base) to explain and substantiate the difference found to his satisfaction.” “Since the applicant was fully successful in the proceedings, it was entitled to the costs of the proceedings, which the court ordered the defendant to pay, in accordance with Article 60(1) of the Civil Procedure Code. The applicant’s costs of the proceedings consist of the court fee paid for filing the action in the amount of CZK 3,000, as well as the lawyer’s fee in accordance with Decree No 177/1996 Coll. in the amount of CZK 3,100, pursuant to Article 7(5) in conjunction with Article 9(4)(d) of Decree No 177/1996 Coll, for three acts of legal service – preparation and acceptance of representation and drafting of the application and the reply to the defendant’s statement of defence, as well as three times the overhead allowance of CZK 300 for each of those acts of legal service pursuant to Article 13(4) of the Ordinance and VAT on those amounts, with the exception of the court fee paid pursuant to Article 57(2) of the Civil Procedure Code. The Court ordered the defendant to pay the costs reasonably incurred in the total amount of CZK 15 342 to the applicant’s representative pursuant to Section 149(1) of Act No 99/1963 Coll. of the Civil Procedure Code in conjunction with Section 64 of the Code of Civil Procedure.” Click here for English Translation Click here for other translation ...

Plastic Pipes s.p.a. produces and sells flexible plastic pipes, via foreign subsidiaries, to which it supplies the product to be resold to foreign customers and it operates abroad, selling the product directly to customers, also in foreign countries where it has a subsidiary. The tax authorities had issued a notice of assessment for FY 2006 claiming that Plastic Pipes s.p.a. had incurred (and deducted) marketing costs in the interest of its subsidiaries, without recharging their share of the expenses. The Court of first instance set aside the assessment of the tax authorities. Judgement of the Supreme Court. The supreme Court dismissed the appeal of the tax authorities. Excerps “…the burden of proof on the tax authorities is limited to providing evidence of the existence of the intra-group transaction and of the agreement of a consideration lower than the normal market value; the taxpayer who intends to contest the tax claim must instead provide evidence that the agreed consideration, or the lack of a consideration for the intra-group transaction, corresponds to the economic values that the market attributes to such transactions. On the other hand, it is not necessary for the tax authorities to provide further evidence that the intra-group transaction lacks a valid economic justification and that it resulted in a concrete tax saving…” “In the absence of proof – to be borne by the Office – of the deviation from normality, there is no basis for transfer pricing [adjustments].” Click here for English translation Click here for other translation ...

Weitian Technology Co. Ltd (AKA ProLight Opto Technology Corp), a Taiwanese company active in the global LED industry, claimed that factors affecting market prices had not been fully considered while determining the prices of products sold to its subsidiary in Shanghai, and that this had caused major losses in the subsidiary. To account for these losses, at the end of 2015, a year end adjustment was made, which was reported as a tax deductible sales allowance in the tax returns. The tax authorities denied the deduction. An appeal was filed by the company with the Supreme Administrative Court in 2019. Judgement of the Supreme Administrative Court The court dismissed the appeal. Deductions for the year end adjustment could not be allowed in this case for the following reasons: A year end adjustment is a mechanism provided to MNEs to achieve an arm’s-length result when the agreed terms and conditions pertaining to the price-relevant factors are changed. Documents must demonstrate the reasons for making the adjustment, the method for the adjustment, and the terms and conditions of the adjustment. Weiwei Technologies provided only internal approvals and debit notes. There were no documents showing conditions or terms, whether price-relevant factors had been concluded by both parties, or how the adjustment would occur for each transaction. Click here for English Translation Taiwan 109-661 Click here for other translation ...

Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Click here for English translation Click here for other translation ...

The Intevac group initially focused on designing and producing thin-film production systems for the manufacturing of hard disk drives (“HDD”). However, sometime in or around the mid-2000s, Intevac Asia Pte Ltd received a purchase order for a tool designed for the manufacturing of solar cells. Intevac Asia Pte Ltd did not possess the relevant R&D capabilities to develop such a tool and therefore entered into a Research and Development Services Agreement with Intevac US dated 1 October 2008 (“the RDSA”). The RDSA provided that Intevac US would undertake R&D activities in the US for the benefit of Intevac Asia Pte Ltd. In 2009, the management of the Intevac group decided to plan for the possibility that Intevac Asia Pte Ltd would expand its R&D capabilities in relation to non-HDD products. Accordingly, Intevac Asia Pte Ltd and Intevac US entered into a Cost-Sharing Agreement dated 1 November 2009 (“the CSA”), which superseded the RDSA. The purpose of the CSA was to allow Intevac Asia Pte Ltd and Intevac US to combine their R&D efforts and to share the costs and risks of their R&D activities. It differed from the RDSA in the following respects. (a) Under the RDSA, the Appellant was to acquire all beneficial and economic rights to the Intellectual Property (“IP”) developed in the performance of the RDSA. However, under the CSA, the Appellant and Intevac US would each acquire the right to exploit any IP and intangible property generated in the performance of the CSA within their respective sales territories. (b) The Appellant was the only party that would benefit from the outcome of the R&D activities carried out under the RDSA. However, under the CSA, both the Appellant and Intevac US had a direct stake in any R&D developed for the joint benefit of the parties. Under the new cost-sharing agreement, Intevac Asia Pte Ltd made payments to the U.S. company during FY 2009 and 2010 and claimed tax deductions for payments. Following an audit, the tax authority concluded that deductions for R&D expenses incurred under the cost-sharing agreement was governed exclusively by Section 19C until FY 2012, and that the payments made by the taxpayer under the cost-sharing agreement were not deductible under Section 14D. Hence an assessment was issued where the additional deductions was added back to the taxable income of Intevac Asia Pte Ltd. Judgement of the High Court The court decided in favour of the tax authorities. The R&D payments made to the U.S. parent did not qualify as deductible costs under Section 14D(1)(d). Click here for translation ...

In 2009, Walmart acquired a majority in Distribución y Servicio D&S S.A., Chile’s leading food retailer. With headquarters in Santiago, Walmart Chile operates several formats including hypermarkets, supermarkets and discount stores. Following an audit by the tax authorities related to FY 2015, deduction of interest payments in the amount of CH$8.958,304,857.- on an “intra-group loan” was denied resulting in a tax payable of Ch$1,786,488,290. According to Wallmart, the interest payments related to debt in the form of future dividend payments/profit distributions. Decision of the Tax court “…this Court concludes that the claimant has not been able to prove the existence of a current account between Inversiones Walmart and Walmart Chile, nor has it been able to prove the appropriateness of the reduction in expenses in the amount of CH$8.958,304,857.- for interest paid to its related company, because it did not justify the need for such disbursement for the purpose of getting into debt in order to distribute profits among the partners, nor did it prove that such disbursement generates income subject to first category tax, as provided for in article 31 No. 1 of the LIR.In addition, the claimant also failed to prove that it was in a situation that would make the tax authority’s pronouncement in Official Letter No. 709 of 2008 applicable to it, pursuant to Article 26 of the Tax Code.That, due to the justifications mentioned above, which meet the criteria of consistency, reasonableness, sufficiency, clarity, and in general with the principles that enshrine healthy criticism, is that this judge has concluded that the complainant did not overturn the objections of the tax authority and, consequently, has not been able to prove the appropriateness of the reduction of the expenditure in question.It is therefore concluded that the contested assessment was issued in full compliance with the legal provisions governing the matter, which is why the Tax and Customs Court considers it appropriate not to proceed with the claim presented in the proceedings.” Click here for English translation ...

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle). In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to the relevant provocations that H1 A/S has not lifted the burden of proof that the payments of royalties to the group-affiliated company G1 SA, constitutes a deductible operating expense, cf. section 6 (a) of the State Tax Act. 4.5 and par. 4.6, the national court finds that the company’s royalty payment cannot otherwise be regarded as a deductible operating expense.” Adecco appealed the decision to the Supreme Court. The Supreme Court overturned the decision of the High Court and ruled in favor of Adecco. The Supreme Court held that the royalty payments had the nature of deductible operating costs. The Supreme Court also found that Adecco A/S’s transfer pricing documentation for the income years in question was not insufficient to such an extent that it could be considered equal to lack of documentation. The company’s income could therefore not be determined on a discretionary basis by the tax authorities. Finally, the Supreme Court did not consider that a royalty rate of 2% was not at arm’s length, or that Adecco A/S’s marketing in Denmark of the Adecco brand provided a basis for deducting in the royalty payment a compensation for a marketing of the global brand. Click here for translation ...

LCN Group s.r.o. had deducted costs in its taxable income for marketing services provided by related parties. Following an audit, the tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. Decision of the Regional Court The Regional Court annulled the assessment and decided in favor of the LNC Group. The court held that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. Click here for English Translation Click here for other translation ...

LCF Zimbabwe LTD manufactures cement and similar products from limestone extracted at a mine in Zimbabwe. It also manufactures adhesives and adhesive paints and decorative paints, construction chemicals and agricultural lime. It is a wholly owned subsidiary of a large European group, which manufactures and sells building and construction materials. The issues in this case concerned tax deductibility of “master branding fees”, consumable spare parts not utilised at the tax year end, quarry overburden expenses and computer software. Furthermore there were also the question of levying penalties. Judgement of the Tax Court The Court decided in favour of the tax authorities. Excerpts: “The corollary to the finding of indivisibility is that the disallowance by the Commissioner of the 1.5% master branding fees of US$ 863 252.70 in the 2012 tax year and US$ 1 140 000 in the 2013 tax year was correct while the split of the 2% rate in respect of the first franchise agreement was wrong. I will direct the Commissioner to deduct the amounts he added back to income on the basis that they constituted non-deductible master branding fees, the sum of US$ 212 356.13 from the 2009 tax year, US$ 312 636 from the 2010 tax year and US$370 913.85 from the 2011 tax year.” “Accordingly, the Commissioner correctly disallowed the deduction of the amortised quarry development costs of US$ 3 782 791 claimed by the appellant in the 2013 tax year.” “I, therefore, hold that the appellant improperly claimed for the deductions of the special initial allowances in each of the 3 years in question.” “In the exercise of my own discretion I would impose the same penalty as the Commissioner in the present matter. Accordingly, the 60% penalty imposed by the Commissioner stands.” Click here for translation ...

An Italian parent company “Lender SpA” had granted interest free loans to foreign subsidiaries. Lender SpA had also paid subsidiaries for services rendered. The Italian tax authorities held that interest should be paid on the loans and that the company had not sufficiently demonstrated the conditions to justify the deductibility of costs of services. The regional Court found in favor of the tax authorities and dismissed the appeal of Lender SpA. “For these loans, which took place on the initiative of the Managing Director and in the absence of a resolution of the Shareholders’ Meeting, the Company partly used its available liquidity and partly resorted to the credit market. In this situation, contrary to what was claimed by the company xxxxx, the principle established by the aforementioned art. 110, paragraph 7 of the Consolidated Income Tax Act should have been applied and, therefore, the Italian company should have valued the financing services provided to its foreign subsidiaries at the same price it would have charged to independent companies for similar transactions carried out under similar conditions in a free market. The arm’s length principle, established by the OECD treaties, applies to intra-group services, which also include loan agreements (see OECD transfer pricing Guidelines for Multinational Enterprises and Tax Administrations of 22 July 2010, paragraphs 7.14 and 7.15 of Chapter VII). According to the above mentioned guidelines, ‘payment for intra-group services should be that which would have been made and accepted between independent enterprises, in comparable circumstances’ and, in the case of financing, as in the present case, a remuneration must be present, through the provision of an interest rate.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money). The Inland Revenue Office, already in 1980, with Circular No. 32, had clarified that intra-group transactions, including loans, are subject to transfer pricing rules.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money).” “With regard to the deduction of costs for the provision of intra-group services (concerning administrative, tax, legal, commercial, financial, etc.), this T.R.C., agreeing with the decision appealed, notes that the taxpayer has not sufficiently demonstrated the conditions to justify the deductibility of the costs invoiced by the parent company xxxxx towards the subsidiary xxxxx, merely recalling an agreement between the aforementioned companies. In addition, the assessment activity revealed that, in the year under dispute: the xxxxx company increased the number of staff assigned to carry out the services invoiced by the parent company, hiring another four administrative employees (which were added to another four hired in 2012); it incurred significant costs for professional fees (equal to 949 euros).073, 19) and for legal expenses (equal to € 174,616.32); she availed herself of a tax consultant, to whom she paid about € 150,000.00 in 2013; for the preparation of the financial statements she was assisted by the xxxxx auditing firm; for legal affairs she availed herself of xxxxx. These circumstances are suitable to demonstrate that the company carries out independent and relevant administrative activities xxxxx.” Click here for English translation Click here for other translation ...

K. sp. z o.o. is a Polish company belonging to an international group. The main activity of K is local sale of goods purchased from a intra group supplier. K is best characterized as a limited risk distributor and as such should achieve an certain predetermined level of profitability as a result of its activities. In order to achieve the determined level of profitability, the group had established that, if the operating margin actually achieved by the distributor during a given period is less or more than the assumed level of profit, it will be adjusted. The year-end adjustment will not be directly related to the prices of goods purchased from the intra-group supplier and will be made after the end of each financial year. The Administrative Court decided that the year-end adjustment is not sufficiently linked to obtaining, maintaining or securing the company’s income. Hence the adjustment cannot be recognized as a deductible cost within the meaning of Article 15 Section 1 of the CIT Act. The decision of the Administrative Court was appealed to the Supreme Administrative Court by K. The Supreme Administrative Court upheld the result reached by the Administrative Court according to which year-end adjustments (for the years in question) was not recognised as tax deductible costs. “Although the assessment presented was lacking in the grounds of the judgment under appeal, the manner in which the case was decided by dismissing the application is correct.” Excerpts from the reasoning of the Supreme Administrative Court “The legal problem examined in this case relates to the use by the applicant company of a mechanism applied in economic practice, in group settlements, referred to as a ‘compensating adjustment’. Generally speaking, that mechanism consists in an upward (true-up) or downward (true down) adjustment of the price between the supplier and the distributor, depending on whether the latter obtains income from sales to third parties which exceeds or is less than the margin fixed in the agreement between those entities. In the present case, the essence of the dispute concerns the tax consequences, in terms of corporation tax, of offsetting the net operating margin downwards (true down), under an agreement concluded by the applicant with the controlling company (the supplier). That means that the applicant (distributor) transfers funds to the supplier at an amount corresponding to the excess of the margin set in the contract concluded previously by those entities. There is no doubt that those entities (supplier and distributor) constitute related companies within the meaning of the transfer pricing rules. However, in the case in question, the disputed problem does not concern the assessment of whether the settlements between the supplier and the distributor comply with the arm’s of lengh rules established in the interpretation of Article 11 of the CFR in force on the date of issue of the interpretation of Article 11 of the CFR, to what extent determining whether the downward adjustment of the operating margin described in the application may be recognised as a deductible cost within the meaning of Article 15(1) of the CFR. According to this provision, in the wording referring to the realities of the case, deductible expenses are costs incurred in order to obtain revenue from a source of revenue or to preserve or secure a source of revenue, except for the costs listed in Article 16(1). Since the definition of a legal deductible expense is of a general nature, each cost (including expenditure) incurred by a taxpayer should be subject to individual assessment, with a view to examining the existence of a causal link between its incurrence and the generation of revenue (a real chance of generating revenue) or preserving or securing the source of revenue. Exceptions – both positive and negative – may of course be provided for by the legislator. However, the Supreme Administrative Court, in its composition adjudicating on this case, is of the opinion that the cash transfer incurred by the appellant to the supplier does not meet the criteria set out in Article 15(1) of the Polish Code of Civil Procedure, and in the legal status in force before 1 January 2019 there was no specific provision in the Tax Act allowing for the cost settlement of transfer price adjustments.” BE AWARE! – the result of the decision – non deductibility of downward year-end adjustments – is only applicable in Poland for years prior to 2019 “On the other hand, in the legal status in force before 2019, a typical transfer pricing arrangement concerned settlements between related companies for the direct supply of goods or services. For the sake of order, it should be recalled that until the end of 2018 the legislator, both in the Corporate Income Tax Act, the Personal Income Tax Act and the Value Added Tax Act, did not use the term “transfer prices” but used the term “transaction prices”. The term “transfer prices” was commonly used in the judicature and the literature and there is no doubt that both concepts are related to the same subject matter. The notion of “transaction price” was defined in Art. 3.10 of the Act of 29 August 1997 – Tax Ordinance (Journal of Laws of 2018, item 800 as amended). According to this regulation, the transaction price was to be understood as the price of the subject of the transaction concluded between related entities within the meaning of the tax law regulations concerning personal income tax, corporate income tax and value added tax. “As a result, in the legal status prior to 2019, the margin adjustment, meaning in fact an adjustment of the Company’s profitability, made on the basis of the adopted transfer pricing policy, does not meet the prerequisites resulting from art. 15 section 1 of the Corporate Income Tax Act, and in particular the most important prerequisite, i.e. connection with income. The very nature of the income adjustment excludes that it is a fee for services provided by the supplier to the distributor.” “The situation has fundamentally changed as of 1 January 2019, due ...

A French subsidiary, SAS Groupe Lagasse Europe, of the Canadian Legasse Group had paid service fees to another Canadian group company, Gestion Portland Vimy. The French tax authorities held that the basis for the payments of service fees had not been established, and that there was no benefit to the French subsidiary. The payments constituted an indirect transfer of profits within the meaning of the ‘article 57 of the general tax code; Excerps from the judgement of the Court: “11. Under the terms of article 57 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “For the establishment of income tax due by the companies which are dependent or have control of companies located outside of France, the profits indirectly transferred to the latter, either by increasing or decreasing the purchase or sale prices, or by any other means, are incorporated into the results recognized by the accounts (…) “. These provisions, which provide for the taking into account, for the establishment of the tax, of the profits indirectly transferred to a foreign enterprise which is linked to it, establish, as soon as the administration establishes the existence of an arm’s length and from a practice included in their forecasts, a presumption of indirect transfer of profits which can usefully be opposed by the taxable business in France only if this provides proof that the benefits which it has granted have been justified by obtaining counterparties. 12. In addition, under the terms of article 39 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “1. The net profit is established after deduction of all charges, these comprising, subject to the provisions of 5, in particular: 1 ° General expenses of any kind (…) “. If, under the rules governing the allocation of the burden of proof before the administrative judge, applicable unless otherwise provided, it is in principle for each party to establish the facts which it invokes in support of its claims, evidence that only a party is able to hold can only be claimed from that party. It is therefore up to the taxpayer, for the purposes of the abovementioned provisions of the General Tax Code, to justify both the amount of the charges he intends to deduct from the net profit defined in Article 38 of the General Tax Code as well as the correction of their accounting entry, that is to say the very principle of their deductibility. The taxpayer provides this justification by producing all sufficiently precise elements relating to the nature of the charge in question, as well as to the existence and the value of the consideration which he has derived from it. … 14. Secondly, SAS GROUPE LAGASSE EUROPE and Gestion Portland Vimy (the service provider), signed, on May 17, 2005, a service agreement which provides that “the service provider undertakes towards the beneficiary, who accepts it, to provide its assistance and advice in the performance of the services listed below, it being specified that this list is not exhaustive “. The services provided by Gestion Portland Vimy to SAS GROUPE LAGASSE EUROPE are defined in article 2 of the agreement and concerned assistance and advice in the areas of commercial prospecting and marketing, IT, finance, business development for the subsidiaries of SAS GROUPE LAGASSE EUROPE and the general administration. 15. The tax authorities questioned the deductibility of the sums paid within the framework of the execution of this agreement to the company GPV by the SAS GROUPE LAGASSE EUROPE by noting that this company, which has no turnover that the “management fees” paid by its French and German subsidiaries, the companies LCetI and LCetI GmbH and for financial products that the dividends distributed by the company LCetI, achieved respective operating results of 604,239 euros and 1,394,256 euros during 2009 and 2010, due to the very high cost of the fees invoiced by the company GPV, up to 937,901 euros in 2009 and 1,237,526 euros in 2010, even though it partially invoiced these fees to its subsidiaries, without the reality of the services billed by GPV being really established. 16. If the applicant has produced a certain number of invoices issued by the company GPV and relating either to services of the nature of those provided for in the aforementioned agreement of May 17, 2005, or to travel or subsistence expenses which would have been exposed for the provision of these services, it does not however provide any information, such as, for example, diaries, meeting minutes, legal acts relating to the management and administration of the subsidiaries concerned or more generally any other document relating to the services in question, which would be such as to justify their actual performance. The materiality of these services is not more established by the certificate obtained from the tax services of the province of Quebec and the terms of the memorandum and the report written, after the period verified, by the consulting firm, “Cinq Mars Conseil “, Which only relate to the relationships maintained by SAS GROUPE LAGASSE EUROPE with its French subsidiary, the company LCetI without justifying the existence of services rendered for the benefit of this subsidiary by the company GPV and the assumption of responsibility of the cost of such services by SAS GROUPE LAGASSE EUROPE. In these conditions, the existence of a real counterpart to the sums paid by this company to the company GPV cannot be regarded as demonstrated. 17. Consequently, the tax authorities were right to regard the sums paid to the company GPV as having the nature of an indirect transfer of profits within the meaning of article 57 of the general tax code and the has been reintegrated into the taxable income of SAS GROUPE LAGASSE EUROPE in application of these provisions and those of article 39 of the same code.” Click here for translation ...

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions had been concluded between independent parties. SKAT does not consider it in accordance with section 2 of the Tax Assessment Act that during the period 2006 to 2009, H1 A/S had to pay royalty to G1 SA for the right to use trademark, “know-how intangibles” and “ international network intangibles ”. An independent third party, in accordance with OECD Guidelines 6.14, would not have agreed on payment of royalties in a situation where there is a clear discrepancy between the payment and the value of licensee’s business. During the period 2006 to 2009, H1 A/S did not make a profit from the use of the licensed intangible assets. Furthermore, an independent third party would not have accepted an increase in the royalty rate in 2006, where the circumstances and market conditions in Denmark meant that higher profits could not be generated. H1 A/S has also incurred considerable sales and marketing costs at its own expense and risk. Sales and marketing costs may be considered extraordinary because the costs are considered to be disproportionate to expected future earnings. This assessment takes into account the licensing agreement, which states in Article 8.2 that the termination period is only 3 months, and Article 8.6, which states that H1 A/S will not receive compensation for goodwill built up during the contract period if the contract is terminated. H1 A/S has built and maintained the brand as well as built up “brand value” on the Danish market. The company has contributed to value of intangible assets that they do not own. In SKAT’s opinion, an independent third party would not incur such expenses without some form of compensation or reduction in the royalty payment, cf. OECD Guidelines 6.36 – 6.38. If H1 A/S was not associated with the trademark owners, H1 A/S would, in SKAT’s opinion, have considered other alternatives such as terminating, renegotiating or entering into more profitable licensing agreements, cf. OECD Guidelines 1.34-1.35. A renegotiation is precisely a possibility in this situation, as Article 8.2 of the license agreement states that the agreement for both parties can be terminated at three months’ notice. The control of the group has resulted in H1 A/S maintaining unfavorable agreements, not negotiating better terms and not seeking better alternatives. In addition, SKAT finds that the continuing losses realized by the company are also due to the Group’s interest in being represented on the Danish market. In order for the Group to service the global customers that are essential to the Group’s strategy, it is important to be represented in Denmark in order to be able to offer contracts in all the countries where the customer has branches. Such a safeguard of the Group’s interest would require an independent third party to be paid, and the company must therefore also be remunerated accordingly, especially when the proportion of global customers in Denmark is significantly lower than in the other Nordic countries.“ Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle) . In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to ...

Delta Beverages LTD had been issued a tax assessment where various fees for service, technology license of trademarks, technology and know-how had been disallowed by the tax authorities (Zimra) of Zimbabwe. Among the issues contented by the tax authorities were technical service fees calculated as 1.5 %  of turnover. “The sole witness confirmed the advice proffered to the holding company’s board of directors in the minutes of 17 May 2002 that such an approach was common place across the world. This was confirmed by the approvals granted by exchange control authority to these charges. It was further confirmed by the very detailed 19 page Internal Comparable Analysis Report dated 5 October 2010 conducted by a reputable international firm of chartered  accountants, which was commissioned by the Dutch Company to assess internal compliance with the arm’s length principles in its transfer pricing policy for trademark royalties of its cross border brands. The commissioned firm looked at 20 comparative agreements, which were submitted to the Commissioner and summarised in ther 11 documents, and confirmed that the percentage of turnover approach was in vogue even amongst unrelated parties in the beverages industry worldwide.” On most issues – including the above – the court ruled in favor of Delta Ltd ...

A Spanish subsidiary, ARW Enterprise Computin Solution SA, had deducted intra-group management fees paid according to two service contracts with two french group companies – Distrilogie SA and DCC France Holding SAS. For an expense to be deductible it is required not only that invoice, account, payments have been imputed correctly, but also that the expense have been held for obtaining income and to the direct benefit of the subsidiary. The Spanish tax authorities found, that these requirements had not been sufficiently proved by Computin Solution SA and issued a tax assessment. Click here for other translation ...

A/S Norske Shell – an entity within the Dutch Shell group – had operations on the Norwegian continental shelf and conducted research and development (R&D) through a subsidiary. All R&D costs were deducted in Norway. The Norwegian tax authority applied the arms length principle and issued a tax assessment. It was assumed that the R&D expense was due to a joint interest with the other upstream companies in the Shell group. The Court of Appeal found that the R&D conducted in Norway also constituted an advantage for the foreign companies within the group for which an independent company would demand compensation. The resulting reduction in revenue provided the basis for determining the company’s income on a discretionary basis in accordance with section 13-1 of the Tax Act. The tax authorities determination of the amount of the income reduction had not based on an incorrect or incomplete fact, nor did the result appear arbitrary or unreasonable. The Court of Appeal concluded that the decision was valid and rejected the company’s appeal. The judgement has later been appealed to the Supreme Court, HR-2020-122-U. Click here for translation ...

In a public ruling, the General Tax Coordination Office in Brazil (COSIT) found that a transaction labled as a “cost sharing agreement” between a foreign group and its Brazilian subsidiary, was in fact a mere agreement for provision of services. COSIT pointed to the key characteristics of cost sharing agreements. These had been listed in a prior ruling from 2012: Segregation of costs and risks inherent in the development, production or acquisition of goods, services or rights; Consistent contribution by each entity with expected and effectively-received benefits by each entity; Identification of the benefit to each participant entity; Mandatory reimbursement of costs incurred with no mark-up; Advantages offered to all participating group entities; and Payments for support activities whether such activities were actually used. Click here for translation ...

In 2005 the tax authorities conducted an audit of Alliance One Tobacco T. Ltd and on that basis issued a notices of assessment for FY 2003 and 2004. In 2011 the tax authorities conducted another audit for the years of income 2009 and 2010 and issued an additional assessment. In the assessments, the tax authorities disallowed several corporate tax items relating to capital expenditure, inventory costs, loss of input stock and bad debt written off. Moreover, a significant transfer pricing adjustment was made on the price from Alliance One Tobacco to its sister company Alliance One International AGA. Judgement of the Court of Appeal The court ruled in favour of the tax authorities. “...in view of the reasons we have stated above with respect to the sole ground of appeal, we have to conclude that this appeal is bound to fail.” The court observed that: “In the circumstances, if the intention of the appellant from the outset was to challenge the assessment of the respondent in respect of the disallowed direct sales costs based on the issue of non-compliance of the respondent with section 97 (c) of the ITA, she would have indicated so directly in her statement of appeal at the TRAB and later at the TRAT to enable them to deliberate and decide upon that legal question. As that was not done and the issue before the TRAB or TRAT remained that of whether there was evidence on actual costs incurred on direct sales, the appellant was duty bound to prove through cogent evidence (supporting invoices) that the disallowance of the said costs was erroneous. Otherwise, we think that the TRAB and the TRAT cannot be blamed as the question which they were called upon to adjudicate required sufficient proof and the burden lied on the appellant as provided under section 18 (b) of the TRAA. In the event, we agree with the learned counsel for the respondent that the TRAT properly confirmed the decision of the TRAB on the issue of disallowance of the direct sales costs as no cogent evidence was tendered by the appellant to the contrary. We do not therefore, think, with respect, that the TRAT wrongly held against the appellant on this point as stated by her learned counsel.” Click here for translation ...

Telefónica brought before the Supreme Court of Peru the following issues related to a long lasting dispute with SUNAT – the Peruvian tax authorities: 1: Financial Charges – Carve Out 2: Withdrawal of assets of majority shareholder Telefónica del Perú S.A.A. 3: Depreciation of fixed assets transferred 4: Tax deduction for “Overhead” 5: Provision for doubtful debt collection The Supreme Court agreed with the tax authorities on issues 1 and 4 (carve out financial charges, related to the way in which they were financed; and the overhead tax deduction, which the tax authorities considered to be an incorrect application of accounting standards). The remaining three issues are still awaiting final determination. Click here for English Translation Click here for other translation ...

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. Decision of the Court The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. The case is now pending at the Tokyo High Court awaiting a final decision. Click here for English Translation ...

For FY 2007, 2008 and 2009, JV had deducted expenses consisting in the payment for services pursuant to invoices issued by BP Property s.r.o. and TOP ZONEVIEW. The services consisted in the provision and implementation of an advertising campaign. Following an audit the tax authorities adjusted JV’s taxable income by the difference found, since pursuant to Article 23(7)(b)(5) of the Income Tax Act, the prices agreed differed from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. JV contested the decision of the tax authorities but the appeal was dismissed by the Regional Court. The Regional Court held that the applicant’s objection – that he did not know and could not have known about the chain because he had dealt only with the managing director of Property Praha or B.V. – was unfounded. Section 23(7)(b)(5) of the Income Tax Act does not require proof of active conduct of all the entities and unifying intent. It is sufficient that the defendant has proved and demonstrated, on the basis of the invoicing of the advertising campaign prices and the flow of funds, as well as the negotiation, provision, collection and payment of the amount in each tax period, that the applicant was involved in the chain and that there was a flow of funds in connection with the supply to the applicant. The applicant’s involvement in the chain of trade conferred an advantage on the applicant in that it reduced its tax base by substantially increasing its expenditure. The decision of the regional court was appealed by JV to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court dismissed the appeal of JC and decided in favor of the tax authorities. Excerpts “The Financial Office for the Central Bohemian Region, by letter dated 24 August 2015, asked the complainant to prove and document the difference between the price claimed in the tax costs and the price established by the tax administrator. In its statement of 31 August 2015, the complainant justified the difference in prices by the increase in the company’s turnover in subsequent tax periods and emphasised its choice of a corporate promotion strategy, the success of which can only be assessed ex post. The defendant did not consider the complainant’s allegations to be economically rational and proven and the reasons why the prices between otherwise related parties differed from the reference price to be substantiated… At the hearing before the Regional Court on 23 March 2018, the complainant only noted that ‘the advertisement had the desired effect’ (see Minutes of the hearing, sheet number 103 of the Court file). However, he did not explain in detail how this claim rationally justified the difference between the agreed price and the reference price and did not offer any evidence for his claims, although he could have done so…” “However, a null and void decision is not an ‘ordinary’ unlawful decision, but a ‘decision’ which, because of its defects, cannot be regarded as a decision of an administrative authority with public authority at all and which is not capable of producing public law effects. Whereas, in the case of ‘ordinary’ defects in administrative decisions, those decisions are regarded, in view of the application of the principle of the presumption of validity and correctness of administrative acts, as existing and capable of producing the relevant legal consequences and thus affecting the sphere of rights and obligations of their addressees, that principle does not apply in the case of void administrative decisions. The nature of the defects giving rise to the nullity also gives rise to the relevant legal consequences. The most serious defects are thus necessarily associated with the most serious consequences. Therefore, no one is obliged to respect and comply with a null and void administrative decision. It is regarded as if it did not exist at all and is therefore an irremediable legal nullity. Nullity cannot be cured even by the lapse of time.” (Judgment of the Enlarged Chamber of 13 May 2008, no. 8 Afs 78/2006 – 74). Pursuant to Article 109(4) of the Code of Civil Procedure, the Supreme Administrative Court is entitled to declare an administrative decision void of its own motion, i.e. even without an express cassation objection. However, it found that the contested decisions do not meet the characteristics described above, do not lack a legal basis or factual basis, do not lack jurisdiction or the most serious defects of jurisdiction, do not suffer from an absolute lack of form, do not contain an absolute mistake as to the addressee, do not contain a requirement of criminal or factually impossible performance, are not vague or meaningless, so that, according to the settled case-law of the Supreme Administrative Court, they cannot be considered null and void.” Click here for English Translation Click here for other translation ...

According to the Tax Authorities, the content of Christian Fishbacher S.p.A’s contract with the Swiss parent of the Group, granting limited right of use of the trademark, did not justify a royalty of 3.5%, to which an additional 1.6% was added as a contribution to the investments for the promotion and development of the brand. The appellate judge held that exceeding the values taken as “normal” by the circular 32 of 09/22/1980 not it were justified in the light of the concrete elements of the case is that correctly the Office had re-determined the value of the services within 2%, following the aforementioned Circular, which incorporated the indications of the report drawn up by the OECD in 1979. The circular identifies three levels for assessing the normal value of royalties: the first, not suspected, up to 2%; the second from 2% to 5%, determined on the basis of technical data firm and to the content of the contract , in particular reference usefulness of the licensee; the third over 5% for exceptional cases, justified by the high technological level of the reference economic sector . The decision of the CTR does not appear to conflict with the art. 110, paragraph 7, Tuir . (nor with the Articles 39 and 40 Presidential Decree no.600/73), as the appellate judge held that subsist a series of elements which jointly considered competed to to form a painting circumstantial suitable to ascertain the ascertainment of the Office pursuant to Article 110 , paragraph 7 ; moreover it has assumed the percentages indicated in the circular n.32/1980 as objective parameter for the determination of the “normal value”, in the absence of evidence contrary or different provided by the tax payer. The solution adopted is in line with the principle, regarding the assessment of income taxes, according to which the burden of proof of the assumptions of the deductible costs and charges, competing to determine the business income, including their inherence and their direct attribution to revenue-generating activities lies with the tax payer (see Cass. 02/25/2010, n. 4554; Cass. 30/07/2002, n. 11240). Click here for English translation Click here for other translation ...

Acer Computer Ibérica S.A. (ACI) is part of the multinational ACER group, which manufactures and distributes personal computers and other electronic devices. Acer Europe AG (AEAG), a group entity in Switzerland, centralises the procurement of the subsidiaries established in Europe, the Middle East and Africa, and acts as the regional management centre for that geographical area. ACI is responsible for the wholesale marketing of electronic equipment and material, as well as in the provision of technical service related to these products in Spain and Portugal. ACI is characterized as a limited risk distributor by the group. At issue was deductibility of payments resulting from factoring agreements undertaken ACI with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Based on an interpretation of the limited risk agreement signed between ACI and its principal AEAG, the tax authorities disregarded the allocation of the risk – and hence allocation of the relevant costs – to ACI. The tax authorities considered that the financial costs arising from the relocation of cancelled orders, those arising from differences in the criteria for calculating collection and payment deadlines and those arising from delays in shipments are due to the application of incorrect criteria for the accounting and invoicing of certain transactions. It also considers that the assumption of those costs by ACI is in contradiction with its classification as a low-risk distributor and does not comply with the distribution of functions and risks between ACI and AEAG, which results from the distribution contract and the transfer pricing report. An assessment for FY 2006 – 2008 where the costs were added back to the taxable income of Acer Computer Ibérica S.A. was issued. Judgement of the Federal Court The court dismissed the appeal of Acer and upheld the tax assessment in which deductions for the costs in question had been disallowed. Excerpts “The interpretation of the contract terms which we uphold follows the above mentioned OECD Guidelines: In arm’s length transactions, the contract terms generally define, expressly or implicitly, how responsibilities, risks and results are allocated between the parties.” “However, it is irrelevant, in view of the foregoing on the assumption of risk, that ACI’s financing costs are higher than those of comparable undertakings (as the tax authorities maintain), since the refusal of deductibility is based on the fact that the costs claimed to be deductible are not borne by the appellant in accordance with the terms of the contract.” Click here for English Translation Click here for other translation ...

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. Part 1 – Click here for translation Part 2 – Click here for translation ...

Intracom Taiwan had deducted losses on intra-group receivables and management fees in its taxable income. These deductions had been partially denied by the Taiwanese tax administration due to lack of documentation and economic substance. Intracom brought the case to court. The Supreme Administrative court dismissed Intracom’s appeal and upheld the assessment. On the issue of deduction for bad debt the court states:“The Appellee’s request for such documents was in accordance with the law. However, the Appellant was unable to produce documents that met the statutory requirements, and from this point of view, the Appellee’s refusal to allow the recognition of the doubtful accounts could not be considered an error.(3) The appellant’s argument that the tax authorities should accept the recognition of doubtful debts as long as the appellant obtains the documentary evidence of the “foreign office certification” which proves the objective fact that “the debtor of the receivable has gone into liquidation” is clearly inconsistent with Article 94 of the R.O.C.“ On the issue of management fee the court states:“Under the aforesaid objective circumstance that “the authenticity and necessity of this management fee expenditure is highly doubtful” Click here for English Translation ...

The tax office responsible for B-AG informed the B GmbH in a letter dated 14 October 2009 that it intended to hold B GmbH liable for B-AG’s corporation tax debts pursuant to section 73 of the German Fiscal Code (AO). By way of an actual agreement, a proportionate liability amount for the corporation tax 2000 of B-AG i.L. of … € was agreed. A corresponding liability notice was issued on 17 June 2010. In its annual financial statements as at 31 December 2009, B GmbH formed a provision in the amount of … € due to the impending liability claim in accordance with § 73 AO. In its corporation tax return for the year in dispute (2009), it expressly pointed out that it considered the liability debts to be deductible under § 73 AO because they were not taxes within the meaning of § 10 No. 2 of the Corporation Tax Act (KStG). Following an audit, the tax authorities added the deferred amount back to B GmbH’s profit off-balance sheet in accordance with section 10 no. 2 KStG and amended the 2009 corporation tax assessment accordingly. An appeal was filed by B GmbH. Judgement of the BFH The BFH stated that expenses of a controlled company due to a liability claim for corporate tax debts of the controlling company pursuant to section 73 AO do not fall under the deduction prohibition of section 10 no. 2 KStG. They are to be qualified as vGA (hidden distribution of profits). Excerpts “17. a) In the case of a corporation, a vGA within the meaning of § 8 para. 3 sentence 2 KStG is to be understood as a reduction in assets (prevented increase in assets), which is caused by the corporate relationship, affects the amount of the difference pursuant to § 4 para. 1 sentence 1 EStG in conjunction with § 8 para. 1 KStG. § Section 8 (1) KStG (for trade tax in conjunction with Section 7 GewStG) and has no connection to an open distribution. For the majority of the cases decided, the senate has assumed that the inducement is due to the corporate relationship if the corporation grants its shareholder a pecuniary advantage which it would not have granted to a non-shareholder if it had exercised the diligence of a prudent and conscientious manager (constant case law of the senate, since the judgement of 16 March 1967 I 261/63, BFHE 89, 208, BStBl III 1967, 626). In addition, the transaction must be suitable to trigger an income for the beneficiary shareholder within the meaning of § 20, para. 1, no. 1, sentence 2 EStG (constant case law, e.g. Senate judgements of 7 August 2002 I R 2/02, BFHE 200, 197, BStBl II 2004, 131; of 8 September 2010 I R 6/09, BFHE 231, 75, BStBl II 2013, 186).” “20. aa) The prerequisite for a vGA is that the asset reduction is caused by the corporate relationship. The lower court correctly points out that the standard of the conduct of a prudent and conscientious manager of the corporation within the scope of the test of inducement merely serves to specify the main cases of application of § 8 para. 3 sentence 2 KStG, but other circumstances are not excluded from the scope of application of the vGA from the outset. As a result, when examining the inducement by the corporate relationship, the general dogmatics of the inducement principle must be applied (in this sense Weber, Ubg 2017, 206); according to established case law, it is sufficient for the facts of the vGA that the reduction in assets is partly caused by the corporate relationship (e.g. Senate rulings of 17 December 2017, p. 1). e.g. Senate judgements of 23 July 2003 I R 80/02, BFHE 203, 114, BStBl II 2003, 926; of 27 April 2005 I R 75/04, BFHE 210, 108, BStBl II 2005, 702; of 20 August 2008 I R 19/07, BFHE 222, 494, BStBl II 2011, 60). 21. bb) In the present case, the latter is to be seen in the fact that the plaintiff concluded a profit and loss transfer agreement with B-AG, which led to the establishment of the tax group relationship and thus also to the assumption of the liability risk under § 73 AO. The conclusion of a profit and loss transfer agreement with the controlling shareholder is always prompted by the corporate relationship. A prudent and conscientious manager of a corporation would not oblige the company vis-à-vis a third party outside the company to transfer its entire profit to the third party and, in addition, to assume the risk of being liable for the third party’s tax debts. The assumption of such an obligation by the controlled company can economically only be explained by the overriding group interest and consequently stems from the corporate relationship.” Click here for English translation Click here for other translation ...

A Taiwanese distributor in the Jat Health Corporation group had deducted amortizations and royalty payments related to distribution rights. These deductions had been partially denied by the Taiwanese tax administration. The case was brought to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The Appellant’s business turnover has increased from $868,217 in FY07 to $1,002,570,293 in FY12, with such a high growth rate, and the Appellant has to bear the increase in business tax, which is not an objective comparative analysis and is not sufficient to conclude that the purchase of the disputed supply rights was necessary or reasonable for the operation of the business.” Click here for English Translation ...

Herbalife International India is a subsidiary of HLI Inc., USA. It is engaged in the business of dealing in weight management, food and dietary supplements and personal care products. The return of income for the assessment year 2006-07 was filed declaring Nil income. The Indian company had paid royalties and management fees to its US parent and sought to justify the consideration paid to be at arm’s length. In the transfer pricing documentation the Transactional Net Margin Method (TNMM) had been selected as the most appropriate method for the purpose of bench marking the transactions. The case was selected for scrutiny by the tax authorities and following an audit, deductions for administrative services were denied and royalty payments were reduced. Disagreeing with the assessment Herbalife filed an appeal. Decision of the Income Tax Appellate Tribunal The Tax Appellate Tribunal dismissed the appeal of Herbalife and upheld the tax assessment. Excerpts “The appellant had not filed any additional evidences to prove the administrative services/technical knowhow are actually received by the appellant and thus the assessee company had failed to discharge this onus of proving this aspect. Therefore, even as per the provisions of Indian Evidence Act, the presumption can be drawn that the assessee has no evidence to prove this aspect. Therefore, the AO/TPO was justified in adopting the ALP in respect of payment of administrative services and royalty at Nil. Thus, the grounds of appeal in ground Nos. 2 to 7 are dismissed. In respect of the other grounds of appeal, since we held that there was no proof of receipt of administrative services as well as technical knowhow which is used in the process of manufacturing activity, the question of bundling of transaction or aggregating all other transactions does not arise.” “Thus all the grounds of appeal relating to the royalty and administrative services have been dismissed. Then the only ground of appeal that survives is ground IT(TP)A No.1406/Bang/2010 IT(TP)A No.924/Bang/2012 relating to uphold of disallowance on account of doubtful advance written off of Rs.1,20,16,395/-. The brief facts surrounding this addition are as under:” ...

A Russian subsidiary of the Suzuki/Itochu group had been loss making in 2009. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were due to non-arm’s length transfer pricing within the group and excessive deduction of costs. Decision of the Court The Court decided in favor of the tax authorities and upheld the assessment. “In view of the above, the appeal court considers that the courts’ conclusions that the Inspectorate had not proved that it was impossible to apply the first method for determining the market price and that the Inspectorate had incorrectly applied the resale price method were unfounded.” “In this light, the courts’ conclusions that the Inspectorate incorrectly applied the second method of determining the market price are unfounded.” “In such circumstances, the Inspectorate’s conclusion on the overstatement of the purchase price of vehicles is based on the application of market data and made in compliance with Article 40 of the Tax Code. The courts had no grounds to satisfy the applicant’s claims for the recognition of the Inspectorate’s decision in this part.” “The rest of the judicial acts are lawful and justified. In accordance with Article 252 of the Tax Code recognizes expenses reasonable (economically justified) and documented costs, performed (incurred) by the taxpayer. Herewith, any expenses are considered as expenses on condition that they were incurred for the realization of activities aimed at receiving income.” An appeal filed by Suzuki to the Russian Supreme Court was later dismissed in December 2016. Click here for English Translation ...

Cartorama C.A. had been granted extensive credits by a related party Universal Paper S.A. The tax administration (SRI) claimed that no supplier would grant such credits to Cartorama given the company’s financial situation. Hence the loan was instead considered a equity contribution from Universal Paper S.A. and tax deductions claimed by Cartorama C.A. for interest payments for fiscal years 2005 and 2006 were disallowed. The Company disagreed with the assessment at brought the case to the court. The regional court held in favor of Cartorama C.A. and annulled the assessment, but this decision was then appealed by the tax authorities before the National Court. Judgment of the Court The National Court dismissed the decision of the regional court and confirmed the validity and legitimacy of the assessments issued by the Regional Director of the Internal Revenue Service. Click here for English Translation Click here for other translation ...

An intermediate Japanese holding company in the IBM group acquired from its US parent all of the shares of a Japanese operating company. The Japanese holdings company then sold a portions of shares in the operating company back to the issuing company for the purpose of repatriation of earned profits. These sales resulted in losses in an amount of JPY 400 billion which for tax purposes were offset against the operating company’s taxable income in FY 2002 – 2005. The Japanese tax authorities did not allow deduction of the losses resulted from the sales referring to article 132 of the Corporation Tax Act of Japan (general anti avoidance regulation). The tax authorities found that the reduction of corporation tax due to the tax losses should be disregarded because there were no legitimate reason or business purpose for the transactions. According to the authorities the transactions would not have taken place between independent parties and the primary purpose of the transactions had been tax avoidance. Decision of the Tokyo High Court The Court decided in favour of IBM and annulled the tax assessment. The Court held that the establishment of the intermediate holding company and the following share transfers should not be viewed as one integrated transaction but rather as separate transactions, and that each of these transactions could not be considered lacking economic reality. In 2016 the Supreme Court rejected the tax authorities’ petition for a final appeal. (The Corporation Tax Act of Japan was amended in 2010 and similar tax losses resulting from share repurchases between a Japanese parent and its wholly-owned subsidiary can no longer be claimed.) Click here for English Translation of the Tokyo High Court decision ...

In this case the court accepted the tax authorities’ procedure for determining the arm’s length price for advertising services, whereby the tax authorities took into account conditions such as the size of the advertising space, the type of event, the duration of the advertising, etc., when comparing controlled and uncontrolled transactions The appeal of JN Trans was dismissed by the court. Click here for English Translation Click here for other translation ...

The tax authorities had issued an assessment where deductibility of service costs charged to an Italien company had been disallowed for tax purposes, as the Italien company – according to the tax authorities – had not provided sufficient proof of the alleged benefits from the purported services received (marketing, telephone, EDP and legal, accounting and tax consultancy services). Judgement of the Supreme court. The Court dismissed the appeal of Alfa Gomma. Excerpts from the Judgement “By the second ground, alleging infringement of Article 2697 of the Civil Code, the appellant criticises the judgment of appeal in so far as it finds that Alfa Gomma Sud did not discharge its burden of proof, since the documentation produced does not make it possible to carry out an adequate check as to the existence, relevance and usefulness of the costs of the services charged by the parent company Alfa Gomma SpA. It submits that, in so doing, the court of second instance wrongly burdened the taxpayer with the burden of proving facts and legal relationships relating to other entities, since it was only required to offer evidence of the contractual source of the costs charged by the parent company and of their regular invoicing to the taxpayer subsidiary.” “In fact, the OECD Guidelines on the provision of intra-group services already state in §7.25 that “the allocation [of costs] may be based on turnover” and in §7.27 they clarify that, however, “when an indirect allocation method is used, the relationship between costs and services appears unclear and therefore it may be difficult to assess the benefit obtained”. The legitimacy of the administrative practice (Ministerial Circular No. 32/9/2267 of 22 September 1980) which justifiably subordinates the deductibility of costs deriving from contractual agreements on services rendered by the parent company (cost-share agreements) to the actuality and inherent nature of the expense to the business activity exercised by the subsidiary and to the real advantage derived by the latter, without the control requirements of the parent company, peculiar to its function as shareholder, being relevant in this regard. In such a perspective, it is not sufficient to show the contract concerning the services provided by the parent company to the subsidiaries and the invoicing of the fees, since those elements necessary to determine the actual or potential benefit obtained by the subsidiary receiving the service must specifically emerge.” “…In the present case, the services concretely provided to Alfa Gomma Sud remained in the appeal at the level of a purely abstract statement..” The Court ruled in favor of the tax administration. Click here for English translation Click here for other translation ...

Bayerische Hypo und Vereinsbank AG (HVB-AG), a banking institution under German law, set up a French branch under the name “HVB-AG Paris” and contributed ten million Deutschmarks to this structure. The French branch also took out loans from the company’s head office or from third-party companies Following an audit of the branch’s accounts, the tax authorities, after considering that these loans revealed an insufficiency of the contribution made by the head office, particularly in relation to the equity capital that the branch should have had if it had had legal personality, refused to allow the interest corresponding to the fraction of the loans deemed excessive to be deducted from the results taxable in France in respect of the branch’s activity and demanded that the company pay additional corporation tax for the financial year ending in 1994, together with increases In order to justify this reassessment, the tax authorities first argued, during the contradictory reassessment procedure, that the disputed interest characterized a transfer of profits to the German head office within the meaning of Article 57 of the General Tax Code, and then by way of substitution of a legal basis that the interest was not borne by an autonomous company carrying on the same or similar activities as the branch under the same or similar conditions and dealing with the company’s head office as an independent company within the meaning of the provisions of Article 209(I) of the General Tax Code in conjunction with the stipulations of Article 4 of the Franco-German tax treaty of 21 July 1959; In 2008, the Paris administrative court discharged the disputed tax assessment. This decision was then appealed by the tax authorities to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the administrative court and dismissed the appeal of the tax authorities. Excerpts “Considering, on the other hand, that there is no need, in order to interpret the stipulations of Article 4(2) cited above, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the stipulations in question; that, in the wording applicable to the facts of the case, these provisions must be understood as authorising the State of the branch to attribute to the branch the profits that the interested party would have made if, instead of dealing with the rest of the company, it had dealt with separate companies under ordinary market conditions and prices; that, on the other hand, these stipulations do not have the object or, consequently, the effect of allowing that State to attribute to the branch the profits which would have resulted from the contribution to the interested party of own funds of an amount different from that which, entered in the accounting records produced by the taxpayer, faithfully retraces the withdrawals and contributions made between the various entities of the company; that, in particular, the tax authorities cannot substitute for this latter amount the equity capital with which the branch should have been endowed, by virtue of the applicable regulations or with regard, in particular, to the outstanding risks to which it is exposed, if it had enjoyed legal personality; 7. Considering that it follows from this that the terms of Article 209(I) of the General Tax Code subjecting to corporation tax “profits the taxation of which is attributed to France by an international convention on double taxation” could not, any more than the terms and rules mentioned in point 3, have the effect of attributing to the French tax authorities the taxation of profits established in accordance with the disputed reassessments; 8. Considering that it follows from all the above that, without needing to rule on the objection raised by HVB-AG, the Paris Administrative Court of Appeal, which was not required to respond to all the arguments raised before it, sufficiently reasoned its decision and did not commit an error of law, nor did it distort the documents in the file submitted to it by ruling, after having dismissed the domestic law grounds on which the tax authorities intended to base the contested taxes, that the stipulations of Article 4 of the Franco-German tax treaty could not be usefully invoked for the same purpose; that, consequently, the Minister responsible for the budget is not entitled to request the annulment of the judgment he is challenging;” 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 ...

The Supreme Tax Court has held that the costs incurred by a taxpayer in connection with a tax treaty mutual agreement proceeding are not costs of earning the relevant income, but has left open a possible deduction as “unusual expenses”. A US resident realised a gain on the sale of a share in a GmbH. The German tax office sought to tax the gain, but the taxpayer objected on the grounds that it was taxable in the US under the double tax treaty. This tax office did not accept this objection, so a mutual agreement proceeding was initiated in an effort to clear the issue. Ultimately, the two competent authorities agreed to split the taxing right in the ratio 60:40 in favour of Germany. However, the taxpayer had incurred various consultancy and legal costs in the course of the process and these should, he claimed, be deducted from the taxable gain, as they would not have arisen without it. The tax office refused this, too. The Supreme Tax Court held that the costs at issue were not direct costs of making the capital gain. They were incurred in the course of resolving a dispute over the right to tax it and thus did not arise until after it had been made. Admittedly, without the gain, they would not have been incurred at all, although this connection was too remote to allow classification as direct costs. The court explicitly left the question open as to whether they might have been allowable against total income as “unusual expenses”, as that deduction is only available to German residents. Click here for English translation Click here for other translation ...

“Copper Corporation S.A.” had deducted intra-group service payments in it’s taxable income. The Peruvian tax authorities determined that the documentation provided by the company did not sufficiently support the actual provision of these services. Hence, tax deductions for the expenses was denied. The case was taken to the Tax Court The court dismissed the appeal and upheld the assessment issued by the tax authorities. Click here for English Translation ...

A holding company of an international Group was established in Spain and in it and in the Group’s operating entity, which was made dependent on it and with which it was fiscally consolidated, intra group loans were requested, for the acquisition of shares in other Group companies, which were mere asset relocations without any economic or business substance, with the sole objective of reducing taxation in Spain: Both in the Spanish holding company and in the operating entity, financial expenses were deducted as a result of that indebtedness, which lead to a drastic reduction in profits in the operating company and losses in the holding company, with the final result that this income remains untaxed. On this background an assessment was issued by the tax authorities where the financial expenses were disallowed under Spanish “fraud by law” provisions. As stated in Article 6.4 of the Civil Code: “Acts carried out under the protection of the text of a rule which pursue a result prohibited by the legal system, or contrary to it, shall be considered to have been carried out in fraud of law and shall not prevent the due application of the rule which it was sought to circumvent“. This, transferred to the tax sphere, is equivalent to the text of Article 24 of the LGT, in the wording given by Law 25/1995, of 20 July 1995 (applicable to the case in question), which states: “In order to avoid tax evasion, it shall be understood that there is no extension of the taxable event when tax is levied on events, acts or legal transactions carried out for the purpose of avoiding payment of the tax, under the cover of the text of rules issued for a different purpose, provided that they produce a result equivalent to that derived from the taxable event. Fraud of tax law must be declared in special proceedings in which the interested party is heard. 2. Events, acts or legal transactions carried out in fraudulent evasion of tax law shall not prevent the application of the evaded tax rule nor shall they give rise to the tax advantages that were intended to be obtained through them. 3. In the settlements made as a result of the tax evasion case, the tax rule that has been evaded shall be applied and the corresponding late payment interest shall be paid, without the imposition of penalties for these purposes alone“. Decision of the TEAC The TEAC confirmed the existence of fraud by law and upheld the assessment. All the actions are legal and real; there is no simulation, but from the set of all the circumstances, without proof that there is a substance and economic business reality, it is concluded that it is a simple exchange of shares within the Group, with the sole purpose of generating the financial expenses in the Spanish entities of the Group, all of which is declared in fraud of law, and the situation is regularised by not admitting the financial expenses involved. There are no international tax reasons for the alleged fraud of law (application of DTAs, infringement of Community Law, etc.) as the application of the concept of fraud of law should have been applied in the same way in the case of a Group with a national parent company and article 24 of the LGT, the provision from which the application of fraud of law derives, does not contain any distinction or restriction depending on whether residents or non-residents are involved. The rules on related-party transactions or transfer pricing do not apply, as it is not disputed that the transactions were carried out at market value; indeed, it is acknowledged that this was the case. It is from the set of circumstances analysed that the existence of fraud by law can be concluded. If it were possible to correct it through the mere application of a specific rule (either related-party transactions or thin capitalisation, etc.) we would no longer be dealing with a case of fraud by law. Click here for English translation Click here for other translation ...

The tax authorities had excluded from the tax deductible expenses claimed by Ing. V. K. an amount for the construction work on the grounds that it had failed to prove that the expenses in question were incurred in accordance with the provisions of Article 24(1) of the Income Tax Act. Ing. V. K. disagreed with the resulting assessment and lodged an appeal Ing. V. K. submitted that the expenditure claimed by it has been proven formally by impeccable invoices issued by existing entities and that it was established beyond doubt in the previous proceedings that it carried out its contracts through subcontracting companies, the implementation of which incurred expenditure. It maintains that the expenditure for the invoiced works was made on behalf of B.6 v.o.s. and that Mr I.S., who issued the invoices on behalf of that company, was authorised to act on its behalf by a power of attorney. According to Ing. V. K. neither the tax administrator nor the Regional Court accepted that fact on the ground that the invoices issued by B. were not entered in its accounts and the statutory body could not be contacted. Although the complainant proposed the taking of evidence to prove that Mr S. was the agent of B. at the time the contract was executed and that that company was the contact and business activity at that time, the administrative authorities of both instances and the Regional Court refused to take such evidence. However, the complainant considers that it fulfilled all the conditions laid down by law for the expenditure incurred to be recognised as expenditure within the meaning of Article 24(1) of the Income Tax Act. It further submits that it cannot be blamed for the fact that B. is not contactable and therefore requests the Supreme Administrative Court to set aside the contested judgment of the Regional Court and to refer the case back to it for further proceedings. By decision of 26 July 2006, No 4265/110/2006, the appeal was dismissed. An appeal was then filed by Ing. V. K. with the Supreme Administrative Court Judgement of the Supreme Administrative Court The Supreme Administrative Court did not find that any of the grounds of appeal raised were met, nor did it itself find any other defects referred to in Article 109(3) of the Code of Civil Procedure which it had to take into account of its own motion, and therefore dismissed the complaint as unfounded Expenses will be tax deductible only if the taxable entity proves without any doubt both their actual expenditure and that they were incurred in order to achieve, secure or maintain its taxable income. In the case of costs incurred for services, such costs may be considered tax deductible if the taxpayer is able to prove, in particular, the following: – the taxpayer actually received the services; – the services served the taxpayer to obtain, secure and maintain his taxable income; – the costs are directly and directly related to the taxable (and expected) income; – the costs are claimed in the tax year to which the services are temporally and materially related; – the amount of the costs is proportionate to the benefit derived from the services. Click here for English Translation Click here for other translation ...

B SA Limited was incorporated in South Africa 9 May 1924. C plc is the controlling shareholder of the company. On 24 October 1979 B SA Limited amended paragraph 1 of its memorandum of association by adding the following to it: The corporate name “B SA Limited” is adopted and used by permission of (C) Limited. On withdrawal of that permission B SA Limited will cease to use such name and will immediately change its corporate name and trading name so that neither includes the mark (B) or any trade mark, trade name, name or other mark of ownership belonging to (C) Company Limited, or any other trade mark, trade name, name or other mark of ownership likely to be confused therewith. During 1996 C plc decided that users of its licensed marks and the licensed marketing indicia should be required to pay a royalty. To this end it commissioned an independent company to determine the value of its licensed marks and licensed marketing indicia. This study identified the role played by the brand in the various business segments in which B SA Limited was involved. Based on this information calculation was made in respect of the profit actually generated by each segment which could be attributable to the licensed marks. Consequent upon the above B SA Limited made the following royalty payments during the relevant years of assessment: 1997 1998 1999 : : : R 40.190.000; R 45.150 000; and R 42.519.000. B SA Limited then claimed a deduction of the above amounts in calculating its taxable income in its Income Tax Returns for the years 1997, 1998 and 1999. The Revenue Service issued an assessment disallowing the deduction of the royalties in calculating the taxable income. B SA Limited objected and appealed against the disallowance of the deduction. The Court ruled as follows: The consideration paid in terms of the Trademark Licence Agreement enabled the Respondent to trade in its economic sphere with a valuable brand. The payments made were made with the purpose of maintaining and growing market share. The agreement was crucial as it is the foundation and pre-requisite of any entitlement to conduct the Appellant’s business in the manner and form that it conducts its business. The payments in issue are thus in substance a purchase price for a business which gave a substantial market share in the defined area, similar to a franchise agreement. The payments made to obtain these rights must therefore by its very nature be a capital expense. In the statement of agreed facts it is recorded that the price of (the products in which Appellant trades) are fixed. As a result, the only way that the Appellant can distinguish its products from its competitors is by its brand. Brand is thus the nucleus to secure and guarantee the Appellant a market share. Having regard to what I have said above I am satisfied that the expenditure incurred by the Appellant in paying for the licensed marks and the licensed marketing indicia are expenses which are capital in nature and the Respondent was thus entitled to disallow such expense as it properly did. B SA Limited’s appeal against the assessment was dismissed ...

Bosal is a company which carries on holding, financing and licensing/royalty related activities and which, as a taxpayer, is subject to corporation tax in the Netherlands. For the 1993 financial year, it declared costs amounting to NLG 3 969 339 in relation to the financing of its holdings in companies established in nine other Member States. In an annex to its declaration concerning that financial year, Bosal claimed that those costs should be deducted from its own profits. The inspector refused to allow the deduction sought, and the Gerechtshof te Arnhem (Netherlands), before which Bosal brought an action against the dismissal of its claim, confirmed the inspector’s position. It is in those circumstances that Bosal appealed on a point of law to the referring court. Taking the view that an interpretation of Community law was necessary in order to resolve the dispute before it, the Hoge Raad der Nederlanden decided to stay the proceedings and refer the following questions to the Court for a preliminary ruling: 1. Does Article 52 of the EC Treaty, read in conjunction with Article 58 thereof …, or any other rule of EC law, preclude a Member State from granting a parent company subject to tax in that Member State a deduction on costs relating to a holding owned by it only if the relevant subsidiary makes profits which are subject to tax in the Member State in which the parent company is established? 2. Does it make any difference to the answer to Question 1 whether, where the subsidiary is subject to tax based on its profits in the Member State concerned but the parent company is not, the relevant Member State takes account of the abovementioned costs in levying tax on the subsidiary? Judgement of the Court The court ruled in favor of Bosal. Not allowing deductions of costs related to participations in foreign subsidiaries is contrary to EC law. “Council Directive 90-435-EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, interpreted in the light of Article 52 of the EC Treaty (now, after amendment, Article 43 EC) precludes a national provision which, when determining the tax on the profits of a parent company established in one Member State, makes the deductibility of costs in connection with that company’s holding in the capital of a subsidiary established in another Member State subject to the condition that such costs be indirectly instrumental in making profits which are taxable in the Member State where the parent company is established.” Click here for text version ...

Kenco Restaurants was part of an intra-group cost-sharing arrangement and paid ‘management fees’ to a related service company. Following an audit, the tax deductions for the fees were adjusted by the tax authorities as the method used to calculate the fees was not in line with the arm’s length principle. Kenco Restaurants took the matter to court. Judgement of the Court. The Court upheld the decision of the tax authorities. Excerpt “We conclude that Petitioners’ allocations are not an arm’s-length charge because Petitioners provide no evidence of an independent transaction between unrelated parties in similar circumstances. Also, the facts support our conclusion that Petitioners were not dealing at arm’s length but were, instead, allocating their costs based on an ability to pay. Petitioners charged Wapak, a Restaurant Corporation, no management fee in 1990, but when its income increased in 1991 and 1992, so did its fees.5 GMK’s fees increased more than 900% between 1990 and 1992, and its share of the total fees increased by a factor of seven. However, no evidence was presented that there was a corresponding increase in Owner hours. In 1990, Kenco required special attention to rebuild the restaurant. Yet, in 1991, the fee allocated to it was higher than 1990. There is no claim that K-K required special attention in 1992, but its fee was higher in 1992 than in 1991. Perrysburg was charged $29,000 in 1990, $60,415 in 1991, and $42,700 in 1992, but Petitioners provided no explanation, in terms of services, that would account for these differences.” Click here for other translation ...