Tag: Distribution

A payout of cash or property from a corporation to a shareholder.

OECD releases the report on Amount B of Pillar One

On 19 February 2024, the OECD/G20 Inclusive Framework on BEPS released the report on Amount B of Pillar One, which provides a simplified and streamlined approach to the application of the arm’s length principle to baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries. Drawing from existing principles in the OECD Transfer Pricing Guidelines, Amount B provides a simplified and streamlined pricing framework that determines a return on sales for eligible distributors. This framework is expected to reduce transfer pricing disputes, compliance costs, and enhance tax certainty for tax administrations and taxpayers alike. Low-capacity jurisdictions facing limited resources and data availability will especially benefit from the administrative simplification provided by Amount B. The report, which introduces two options for implementation for jurisdictions that opt into the simplified and streamlined approach from January 2025, describes the circumstances under which a distributor is within scope of Amount B including cases where it also performs certain non-distribution activities, such as manufacturing. It also sets out the activities that may exclude a distributor from the scope of the simplified and streamlined approach, such as the distribution of commodities or digital goods. The report is released in line with the July 2023 Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, with further work on the interdependence of Amount B and Amount A under Pillar One to be undertaken prior to the signing and entry into force of the Multilateral Convention. The inclusion of the Amount B guidance into the OECD Transfer Pricing Guidelines is accompanied by conforming changes to the Commentary on Article 25 of the OECD Model Tax Convention. The conforming changes signpost specific language relating to tax certainty and the elimination of double taxation included in the report on Amount B and are intended to ensure optionality is preserved in all dispute resolution mechanisms for non-adopting jurisdictions. In particular, the amendments to the Commentary on Article 25 direct States and taxpayers to have regard to and follow specific directions within the report on Amount B where relevant to issues being considered under mutual agreement and MAP arbitration procedures. The conforming changes were prepared by Working Party 1, approved by the Inclusive Framework and will be submitted shortly for approval to the OECD Council prior to publication. Pillar One - Amount B ...

France vs SAS Arrow Génériques, September 2023, Court of Administrative Appeal, Case No 22LY00087

SAS Arrow Génériques is in the business of distributing generic medicinal products mainly to the pharmacy market, but also to the hospital market in France. It is 82.22% owned by its Danish parent company, Arrow Groupe ApS, which is itself a wholly-owned subsidiary of the Maltese company Arrow International Limited. In 2010 and 2011, SAS Arrow Génériques paid royalties to its Danish parent, Arrow Group ApS, and to a related party in the UK, Breath Ltd. According to the French tax authorities, the royalties constituted a benefit in kind granted to Arrow Group ApS and Breath Ltd, since SAS Arrow Génériques had not demonstrated the reality and nature of the services rendered and had therefore failed to justify the existence and value of the consideration that it would have received from the payment of these royalties, which constitutes an indirect transfer of profits to related companies. On appeal, the Administrative Court decided in favour of SAS Arrow Génériques. The tax authorities appealed the decision to the Court of Administrative Appeal. Judgement of the Court The Court of Appeal dismissed the appeal of the tax authorities and upheld the decision of the first instance court in favour of SAS Arrow Génériques. Excerpt 5. It is common ground that SAS Arrow Génériques is not dealing at arm’s length with Arrow group ApS, a Danish company that held 82.22% of its shares during the period under review, and the UK company Breath Ltd, which is also 100% owned by Arrow group ApS. The proposed rectifications of 26 December 2013 and 19 December 2014 addressed to SAS Arrow Génériques for the years 2010 and 2011 show that during the period under review it paid royalties of 5% of net sales to Arrow group ApS for the sub-licensing of intellectual property rights relating to the technical files used to file marketing authorisations in France, which were themselves licensed to Arrow group ApS by its parent company, Arrow International Limited, a company incorporated under Maltese law. SAS Arrow Génériques also paid royalties, on similar terms, to the UK company Breath Ltd. In order to challenge the full amount of the royalties paid by SAS Arrow Génériques to Arrow Group ApS and Breath Ltd, the tax authorities took the view that the royalties in question constituted a benefit in kind granted to Arrow Group ApS and Breath Ltd, since the audited company had not demonstrated the reality and nature of the services rendered and had therefore failed to justify the existence and value of the consideration that it would have received from the payment of these royalties, which constitutes an indirect transfer of profits to related companies. However, it is clear from the investigation, as the Court held, that the royalties in question were in return for Arrow Group ApS and Breath Ltd making available to the applicant the technical files necessary for the submission of marketing authorisation applications for its business. Contrary to what the Minister maintains on appeal, the investigation did not show that SAS Arrow Génériques had the material and human resources necessary to produce these technical files itself, which required the assistance of various professionals and the performance of clinical tests, or that it used subcontractors to do so. The fact noted by the authorities that certain molecules for which the technical files essential to the company’s business had been compiled were not held in any capacity whatsoever by Arrow International Limited, Arrow group ApS or Breath Ltd, and in particular that certain molecules were not included in their list of intangible assets, is not sufficient in itself to call into question the existence of these technical files and the services rendered by Arrow group ApS or Breath Ltd, given that this entry may fall into another category of expenditure or may be the result of an error in the entry in the accounts of these molecules and the related technical files. In addition, SAS Arrow Génériques argues, without being contradicted, that the rights attached to certain files were not acquired but leased or subleased from third parties by Arrow International Limited before being licensed and then sub-licensed. Finally, if the Minister maintains that the added value created by SAS Arrow Génériques is based on the development of its commercial network and that the royalties paid deprive it of the return on investment to which it would be entitled as a result of the activity it undertakes, such an argument does not call into question the existence of services rendered by Arrow Group ApS or Breath Ltd in return for the royalties at issue but, where applicable, only the excessive nature of the royalties paid, which therefore do not constitute an advantage in kind granted by a company established in France to a company established outside France. In addition, the Minister did not produce any evidence in his defence comparing the prices charged by the said affiliated companies with those charged by similar companies operating normally in order to establish whether the amount of the royalties paid was excessive. It follows that the Minister for the Economy, Finance and Recovery is not entitled to argue that, in the judgment under appeal, the Administrative Court of Lyon wrongly held that the payment of the royalties at issue by SAS Arrow Génériques could not be regarded as an advantage in kind granted by a company established in France to a company established outside France and that the full amount of the royalties could not therefore be reintegrated into its taxable profits on the basis of the provisions of Article 57 of the General Tax Code. 6. It follows from the foregoing that the Minister for the Economy, Finance and Recovery is not entitled to maintain that it was wrongly that, by Articles 1 to 7 of the contested judgment the Lyon Administrative Court reduced the taxable income of SAS Arrow Génériques for corporation tax purposes by an amount of 4,865,767 euros in respect of the 2010 financial year and consequently discharged SAS Arrow Génériques in ...

Czech Republic vs. Eli Lilly ÄŒR, s.r.o., August 2023, Supreme Administrative Court, No. 6 Afs 125/2022 – 65

Eli Lilly ÄŒR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ÄŒR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ÄŒR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ÄŒR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ÄŒR was profitable, despite selling the products at a loss. Eli Lilly ÄŒR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. An appeal was filed with the Administrative Court by Eli Lilly, but the Court dismissed the appeal and decided in favour of the tax authorities. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The appeal of Eli Lilly was again dismissed and the decision of the administrative court – and the assessment of additional VAT upheld. “The complainant’s objections were not capable of overturning the conclusion that the supply of marketing services and the supply of the distribution (sale) of medicines were provided to different entities and that, in the eyes of the average customer, they were not one indivisible supply.” Click here for English Translation Click here for other translation Czech vs Eli Lilly Cr August 2023 6 Afs 125-2022 - 59 ...

Panama vs “Tech Distributor S.A.”, January 2023, Administrative Tax Tribunal, Case No TAT-RF-006 Expediente: 115-19

The tax authorities issued a transfer pricing adjustment of USD 1.4 million for FY2013, claiming that the remuneration of “Tech Distributor S.A.” had not been determined in accordance with the arm’s length principle. According to the tax authorities, there were inconsistencies between the amounts of controlled transactions reported in the transfer pricing documentation and the income tax return. The tax authorities also found that “Tech Distributor S.A.” had incorrectly included “other income” in the calculation of its operating margin for the purposes of applying the Transactional Net Margin Method (TNMM). Finally, some of the companies selected as comparables were rejected and “comparability adjustments” were also disregarded. After making these adjustments to the benchmark analysis, the profit margin of “Tech Distributor S.A.” was outside the interquartile range and therefore the profit was adjusted to the median. “Tech Distributor S.A. appealed to the Tax Tribunal. Decision of the Tax Tribunal The Tribunal dismissed the appeal and upheld the assessment of the tax authorities. According to the Tribunal, ‘other income’ should not be included in the calculation of the operating margin. The court also upheld the tax authorities’ rejection of some of the comparables and agreed that the comparability adjustments made by the company were incorrect. Click here for English translation Click here for other translation Panama TAT-RF-006 ...

Czech Republic vs. Eli Lilly ÄŒR, s.r.o., December 2022, Supreme Administrative Court, No. 7 Afs 279/2021 – 65

Eli Lilly ÄŒR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ÄŒR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ÄŒR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. At the same time, Eli Lilly ÄŒR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ÄŒR was profitable, despite selling the products at a loss. Eli Lilly ÄŒR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income and later similar assessments were issued for the following years. An appeal was filed with the District Court by Eli Lilly which was dismissed by the Court. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of Eli Lilly – annulled the judgement of the District Court and set aside the assessment of the tax authorities. “The Supreme Administrative Court found no reason to depart from the conclusions of the judgment in Case No 3 Afs 54/2020, even on the basis of the defendant’s additional arguments. Indeed, the applicant can be fully accepted that it is at odds with the reasoning of the Supreme Administrative Court and puts forward arguments on issues which are rather irrelevant to the assessment of the case. First of all, the defendant does not dispute in any relevant way that the disputed supplies were provided to two different entities (the distribution of medicines to the complainant’s customers and the provision of marketing services to Eli Lilly Export), and that the ‘average customer’ cannot perceive those supplies as a single supply. This conclusion does not in any way undermine the defendant’s reiteration of the complainant’s assertion at the income tax audit that, for the purposes of assessing the correctness of the transfer pricing set between the complainant and Eli Lilly Export in terms of section 23(7) of the Income Tax Act, the marketing service should be regarded as an integral part of the distribution of the medicines and cannot be viewed in isolation when assessing profitability. In terms of transfer pricing, the economic interdependence of the two activities was assessed, which was essential only to determine whether the profitability of each activity should be compared separately with entities carrying out only the relevant activity. However, the aggregate assessment of these activities in terms of Section 23(7) of the Income Tax Act, which involves offsetting profits and losses from different types of business activities and comparing profitability with entities performing a similar role (i.e. performing both marketing and distribution), does not necessarily mean that there is a single transaction for VAT purposes. This issue is assessed separately in accordance with the aspects of the VAT Act and the VAT Directive respectively. [32] Nor can the defendant’s other arguments, which it repeats in support of the conclusion that the provision of marketing services constitutes a supply incidental to the domestic sale of medicines, be accepted. It does not follow from the judgment in Case 3 Afs 54/202073 that the concept of ‘third party consideration’ cannot exist. The Supreme Administrative Court has not denied that the total value of the consideration received from the final customer for the purposes of determining the tax base may, in general, also include payments from third parties (see, for example, paragraphs 62 et seq. of the judgment referred to above). However, in the context of the present case, in the case of the distribution of pharmaceuticals, the Court held that the consideration for marketing services could not be regarded as part of the value of the consideration, since those services were not provided to ‘customers’ who were merely recipients of marketing information. The consideration for those services was not then spent on behalf of or for the benefit of the customers. As regards the defendant’s reference to the judgment of the CJEU in Firma Z, the conclusions expressed there concern a different factual situation and legal issue. The substantive issue was the offsetting of a reduction in the taxable amount of one supply against the taxable amount of another supply, which is excluded under the common VAT system. However, as noted above, in the present case the complainant does not supply any other supply to its customers at the same time as the pharmaceuticals. Therefore, if the conclusion of the tax administration were accepted, it would have received a higher amount of VAT than the amount paid for the supply which was the only supply received by the customer from the complainant (the pharmaceuticals). The complainant’s final, potential or immediate customers cannot be the recipients of a marketing service at all (see above). [33] Nor can the defendant’s view that the method of pricing the marketing services shows an ‘unquestionable link’ between the marketing services and the sale of medicines be accepted. In that connection, the defendant points out that the pricing of marketing services is not based solely on the costs of marketing, but also on the costs of distributing the goods (medicines). It therefore concludes that it is a payment by a third party (Eli Lilly Export) on top of the price of the medicines which the complainant sells at regulated prices. This argument of the defendant cannot stand. As a general rule, it is a matter for the parties to negotiate the price or the method of calculating it. Furthermore, ...

Greece vs “Pharma Distributor Ltd.”, November 2022, Tax Court, Case No ΔΕΔ 3712/2022

Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the resale price method used by “Pharma Distributor Ltd” and instead applying the TNMM. An appeal was filed by “Pharma Distributor Ltd”. Judgement of the Tax Court The Court dismissed the appeal in part and allowed it in part. The tax authorities’ assessment was largely upheld in relation to sales activities, where it was found that the prices charged by “Pharma Distributor Ltd” were outside the interquartile range. In relation to the service activities, the Court found that the remuneration for these activities was within the arm’s length range and therefore annulled the assessment. Excerpts “In the light of the above, as regards the applicant company’s intra-group transactions Nos 1 to 4, there is a question of non-compliance with the arm’s length principle, since the ratio of net profit margin (partial result) to sales for the applicant company’s trading sector, for the tax period 01/01/2019-31/12/2019, amounts to 1.45%, i.e. it is outside the limits of the 1st (2.38%) and the 3rd quartile (7.11%) of the net profit margin to total sales ratios of the comparable companies in the sample. As regards the applicant’s intra-group transaction No 5, its pricing is in line with the principle of equidistance, as the ratio of net profit margin (partial result) to sales for the applicant’s industrial sector, for the tax period 01/01/2019-31/12/2019, amounts to 2.86%, i.e. it is within the limits of the 1st (2.21%) and the 3rd quartile (13.91%) of the net profit margin to total sales ratios of the comparable companies in the sample. Therefore, the following accounting difference is calculated for compliance with the arm’s length principle, which is added to the accounting differences of the financial year in application of article 50 of Law4172/2013.” Click here for English translation Click here for other translation Greece Case No 3712_2022 ...

TPG2022 Chapter VI paragraph 6.199

For example, a tested party engaged in the marketing and distribution of goods purchased in controlled transactions may have developed marketing intangibles in its geographic area of operation, including customer lists, customer relationships, and customer data. It may also have developed advantageous logistical know-how or software and other tools that it uses in conducting its distribution business. The impact of such intangibles on the profitability of the tested party should be considered in conducting a comparability analysis ...

TPG2022 Chapter VI paragraph 6.198

In a transfer pricing analysis where the most appropriate transfer pricing method is the resale price method, the cost-plus method, or the transactional net margin method, the less complex of the parties to the controlled transaction is often selected as the tested party. In many cases, an arm’s length price or level of profit for the tested party can be determined without the need to value the intangibles used in connection with the transaction. That would generally be the case where only the non-tested party uses intangibles. In some cases, however, the tested party may in fact use intangibles notwithstanding its relatively less complex operations. Similarly, parties to potentially comparable uncontrolled transactions may use intangibles. Where either of these is the case, it becomes necessary to consider the intangibles used by the tested party and by the parties to potentially comparable uncontrolled transactions as one comparability factor in the analysis ...

TPG2022 Chapter VI paragraph 6.196

This section provides supplemental guidance for applying the rules of Chapters I – III in situations where one or both parties to a controlled transaction uses intangibles in connection with the sale of goods or the provision of services, but where no transfer of intangibles or interests in intangibles occurs. Where intangibles are present, the transfer pricing analysis must carefully consider the effect of the intangibles involved on the prices and other conditions of controlled transactions ...

TPG2022 Chapter VI paragraph 6.105

The need to consider the use of intangibles by a party to a controlled transaction involving a sale of goods can be illustrated as follows. Assume that a car manufacturer uses valuable proprietary patents to manufacture the cars that it then sells to associated distributors. Assume that the patents significantly contribute to the value of the cars. The patents and the value they contribute should be identified and taken into account in the comparability analysis of the transaction consisting in the sales of cars by the car manufacturer to its associated distributors, in selecting the most appropriate transfer pricing method for the transactions, and in selecting the tested party. The associated distributors purchasing the cars do not, however, acquire any right in the manufacturer’s patents. In such a case, the patents are used in the manufacturing and may affect the value of the cars, but the patents themselves are not transferred ...

Czech Republic vs. Eli Lilly ÄŒR, s.r.o., December 2019, District Court of Praque, No. 6 Afs 90/2016 – 62

Eli Lilly ÄŒR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ÄŒR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ÄŒR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ÄŒR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ÄŒR was profitable, despite selling the products at a loss. Eli Lilly ÄŒR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. Judgement of the Court The Court dismissed the appeal of Eli Lilly CR s.r.o. and decided in favour of the tax authorities. According to the court marketing services constituted partial supply that was part of the distribution activities and should have been considered, from the VAT perspective, a secondary activity used for the purpose of obtaining benefit from the main activity. Therefore, Eli Lilly CR s.r.o should have been paying VAT on income from the marketing services. “a customer purchasing medicinal products from the claimant is the recipient of a single indivisible supply (distribution and marketing),†“the aim of such marketing is certainly to increase the customer awareness of medicines distributed by the claimant, and, as a result to increase the marketability of these medicines†For Eli Lilly Export S.A., marketing was a secondary benefit. Eli Lilly CR s.r.o. was the owner of the products when the marketing services were provided. Eli Lilly Export S.A. was not the manufacturer of the products and did not hold the distribution license for the Czech market. Therefore, Eli Lilly Export S.A. could not be the recipient of the marketing services provided by Eli Lilly CR s.r.o. Hence, the payment received by Eli Lilly CR s.r.o. for marketing services was in fact “a payment received from a third personâ€. An appeal to the Supreme Administrative Court was filed on 14 February 2020 by Eli Lilly CR. Click here for English Translation Click here for other translation Czech vs Eli Lilly 2020 ...

Italy vs N. S.P.A., June 2018, Regional Tax Commission, Case No 07/06/2018 n. 2629/24

N. S.P.A. was issued a notice of assessment in regards of transfer pricing. The PLI initially taken into consideration by the tax authorities was the return on sales (ROS). The company observed that, since the uniform application of such a PLI to the amount of all revenues was not possible, it was necessary to take into consideration only the revenues deriving from intra-group transactions. At this point, the tax authorities, instead of simply requesting the income statement for these transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (return on assets: operating profit to total assets). An appeal was filed by N. S.P.A with the Provincial Tax Commission and in a judgement issued in 2015 the commission concluded that the tax authorities had failed to comply with its duty of fairness and that it had used a different method in the assessment without exploring the possibility of correcting the initial objection, thus completely nullifying the meaning of the anticipated cross-examination. An appeal was then filed by the tax authoritities with the Regional Tax Commission. Judgement of the Regional Tax Commission The Regional Tax Commission (CTR) upheld the decision of the Provincial Tax Commission and the annulment the contested notice of assessment. According to the Court, it is unlawful to replace the margin/profit level indicator used in the cross-examination phase (dispute report) with a different PLI in the assessment phase. Excerpt “…the Revenue Agency justifies the change of method used in the assessment in lieu of the method used in the contestation report with the lack of documentation offered by the company. However, this explanation does not justify the actions of the Revenue Agency. The PLI initially taken into consideration for the challenge to the audited company was the ROS (average operating result per unit of revenue). Having observed that this PLI could not be applied uniformly to the amount of all revenues, as it was necessary to take into consideration only the revenues deriving from intra-group transactions, the Revenue Agency, which had recognised the accuracy of the observation, instead of asking the company for the profit and loss account relative to intra-group transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (Return on Assets: operating profit on total assets) and, to calculate the total assets of intra-group transactions, selected a sample of 25 products considered most representative. In so doing, the Revenue Agency, on the one hand, failed in its duty of loyalty, completely nullifying the sense of the anticipated cross-examination, since it was carried out entirely using a different method from that used in the assessment, without exploring the possibility of correcting the initial contestation, inviting the taxpayer to produce the documentation specifically required and omitting a new contestation, on which the same company could present its observations. This constitutes a breach of the provisions of Articles 12(7) and 10 of Law 212/2000. The assessment, moreover, is null and void because the method chosen was applied inappropriately. First of all, an unrepresentative sample was used, because it was insufficient to demonstrate the transfer pricing applied by the company. The intra-group sales of the products examined by the Office are of the order of a few percentage points out of the total sales mentioned and, therefore, are not representative; in fact, the sample taken is too small to allow the presumptive reconstruction of the value of all the goods transferred intra-group.” Click here for English translation Click here for other translation Sentenza del 07_06_2018 n. 2629 - Comm. Trib. Reg. per la Lombardia Sezione_Collegio 24 ...

TPG2017 Chapter VI paragraph 6.199

For example, a tested party engaged in the marketing and distribution of goods purchased in controlled transactions may have developed marketing intangibles in its geographic area of operation, including customer lists, customer relationships, and customer data. It may also have developed advantageous logistical know-how or software and other tools that it uses in conducting its distribution business. The impact of such intangibles on the profitability of the tested party should be considered in conducting a comparability analysis ...

TPG2017 Chapter VI paragraph 6.198

In a transfer pricing analysis where the most appropriate transfer pricing method is the resale price method, the cost-plus method, or the transactional net margin method, the less complex of the parties to the controlled transaction is often selected as the tested party. In many cases, an arm’s length price or level of profit for the tested party can be determined without the need to value the intangibles used in connection with the transaction. That would generally be the case where only the non-tested party uses intangibles. In some cases, however, the tested party may in fact use intangibles notwithstanding its relatively less complex operations. Similarly, parties to potentially comparable uncontrolled transactions may use intangibles. Where either of these is the case, it becomes necessary to consider the intangibles used by the tested party and by the parties to potentially comparable uncontrolled transactions as one comparability factor in the analysis ...

TPG2017 Chapter VI paragraph 6.196

This section provides supplemental guidance for applying the rules of Chapters I – III in situations where one or both parties to a controlled transaction uses intangibles in connection with the sale of goods or the provision of services, but where no transfer of intangibles or interests in intangibles occurs. Where intangibles are present, the transfer pricing analysis must carefully consider the effect of the intangibles involved on the prices and other conditions of controlled transactions ...

TPG2017 Chapter VI paragraph 6.105

The need to consider the use of intangibles by a party to a controlled transaction involving a sale of goods can be illustrated as follows. Assume that a car manufacturer uses valuable proprietary patents to manufacture the cars that it then sells to associated distributors. Assume that the patents significantly contribute to the value of the cars. The patents and the value they contribute should be identified and taken into account in the comparability analysis of the transaction consisting in the sales of cars by the car manufacturer to its associated distributors, in selecting the most appropriate transfer pricing method for the transactions, and in selecting the tested party. The associated distributors purchasing the cars do not, however, acquire any right in the manufacturer’s patents. In such a case, the patents are used in the manufacturing and may affect the value of the cars, but the patents themselves are not transferred ...

Czech Republic vs. ARROW International CR, a. s., June 2014, Supreme Administrative Court , Case No 7 Afs 94/2012 – 74

The applicant, ARROW International CR, a.s., seeks a judgment of the Supreme Administrative Court annulling the judgment of the Regional Court, and referring the case back to that court for further proceedings. The question of whether the applicant carried out business transactions in the tax year 2005/2006 with a related party (Arrow International, Inc., hereinafter referred to as ‘Arrow US’) in a manner which did not comply with the principles of normal business relations and whether, as a result, the applicant’s basis for calculating the corporate income tax rebate was unjustifiably increased and the special condition for applying the tax rebate under Article 35a(2)(d) of Act No 586/1992 Coll. was breached is decisive for the assessment of the merits of the present case, on income taxes, as in force until 31 December 2006 (‘the Income Tax Act’). Pursuant to Section 35(6) of the same Act, such an act has the effect that the entitlement to the discount ceases and the taxpayer is obliged to file additional returns for all tax periods in which the discount was claimed. The applicant was therefore also under that obligation in respect of the tax year 2002, for which it was additionally assessed by the decisions of the administrative authorities in the amount of CZK 7 505 031 (‘the tax’). According to the contents of the administrative file, the Financial Directorate concluded that the part of the applicant’s activities which consisted in the distribution of medical devices from the Arrow group to customers in the Czech Republic, whereby the goods distributed by the applicant were purchased from Arrow US, did not comply with the principles of normal business relations. On this distribution, the applicant achieved a gross profit margin of 171,45 % in the tax year 2005/2006, whereas other distributors of similar goods found by the tax authority achieved average gross profit margins ranging from 28,40 % to 80,60 %. In each case, the tax authorities found that the goods which the applicant had purchased for redistribution in the Czech Republic from Arrow US at a certain price had previously been sold by the applicant itself – as goods manufactured by it – to Arrow US at a higher price than the price at which it then bought them from Arrow US. Furthermore, the tax authorities found that the applicant’s gross profit margin in 2005/2006, the last period of the investment incentive, had increased significantly compared to the previous and subsequent tax periods, roughly three to four times. The Financial Directorate found that the distribution of Arrow medical devices in the Czech Republic was an activity separable from the applicant’s other activities (production of medical devices for the Arrow group or central purchasing of medical devices for the Arrow group from other manufacturers in the Czech Republic) from an economic point of view. The conclusion that the distribution of Arrow medical devices in the Czech Republic is separable from the applicant’s other activities was also reached by the Financial Directorate taking into account the fact that this activity is significantly less important for the applicant from an economic point of view than the other activities (the two types of distribution activities together accounted for only 6 % of the applicant’s total turnover, while the rest of the turnover was accounted for by the production of medical devices for the Arrow group). Thus, the Directorate of Finance treated the distribution of medical devices of the Arrow group in the Czech Republic as a separate activity for the applicant and as such assessed it separately in terms of the prices negotiated between the applicant and Arrow US in the context of that activity, which differed from the prices (and the gross profit margins based thereon) of other distributors of medical devices in the Czech Republic according to the criterion of the gross profit margins achieved therein. Thus, in considering whether the applicant had breached the special conditions for the application of the tax rebate pursuant to Article 35a(2)(d) of the Income Tax Act, the Financial Directorate considered only the prices (and the markups based thereon) achieved in the context of that one of the applicant’s activities, since it considered that it should be regarded as an economically relatively separate activity, not sufficiently linked to the applicant’s other activities and, on the contrary, separable from them in those respects. It therefore did not accept that the applicant’s activities should be considered as a whole (the sum of all their activities taken together) in the sense that, for the purposes of examining whether there has been a breach of the conditions of that provision, it is possible for significant profits from one activity to be offset by smaller profits from other activities, so that the overall profitability of the applicant’s business remains within the limits of what is normal for other comparable operators. The Regional Court agreed with those conclusions of the tax authorities and therefore dismissed the action brought by ARROW International CR, a.s. as unfounded. An appeal was then filed with the Supreme Administrative Court Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities. “In the present case, the tax authority bore its burden of proof to establish that the complainant’s business operations involved transactions with the persons referred to in section 23(7) of the Income Tax Act which, by their specific objectively identifiable features, appeared outwardly, on the basis of rational consideration, not to correspond to the economic principles of normal business relations. First of all, it established that the three types of activity of the applicant, which could be regarded as relatively independent of each other in terms of the conditions of their technical implementation (independent in the sense that, in principle, each of them could be carried out independently in such a way that – in the abstract – it could make economic sense in itself, and that none of them necessarily required, in itself, either for production or commercial reasons, legal or otherwise, to operate ...

India vs. Fulford (India) Limited, July 2011, Income Tax Appellate Tribunal

Fulford India Ltd. imported active pharmaceutical ingredients (APIs) from related group companies and sold them in India. The TNM method was used for determening transfer prices. The tax administration found the CUP method to be the most appropriate. Fulford India argued that the CUP method requires stringent comparability and any differences which could materially affect the price in the open market should be taken into consideration. In the pharmaceutical world, APIs whith similar properties may still be different in relation to quality, efficiancy, impurities etc. Therefore, the two products cannot be compared. In court, it was further explained that Fulford also performed secondary manufacturing functions, converting the APIs into formulations. Hence, Fulford could be descriped as a value added distributor. The Court concluded that the selection of the best method should be based on functional analysis and the characterisation of the transactions and the entities. The fact that Fulford had secondary manufacturing activities had not previously been explained to the tax authorities. Accordingly, the case was returned to tax administration for a revised assessment. Fulford_(I)_Ltd,_Mumbai_vs_Assessee ...

TPG1995 Chapter VI paragraph 6.39

The other question is how the return attributable to marketing activities can be identified. A marketing intangible may obtain value as a consequence of advertising and other promotional expenditures, which can be important to maintain the value of the trademark. However, it can be difficult to determine what these expenditures have contributed to the success of a product. For instance, it can be difficult to determine what advertising and marketing expenditures have contributed to the production or revenue, and to what degree. It is also possible that a new trademark or one newly introduced into a particular market may have no value or little value in that market and its value may change over the years as it makes an impression on the market (or perhaps loses its impact). A dominant market share may to some extent be attributable to marketing efforts of a distributor. The value and any changes will depend to an extent on how effectively the trademark is promoted in the particular market. More fundamentally, in many cases higher returns derived from the sale of trademarked products may be due as much to the unique characteristics of the product or its high quality as to the success of advertising and other promotional expenditures. The actual conduct of the parties over a period of years should be given significant weight in evaluating the return attributable to marketing activities. See paragraphs 1.49-1.51 (multiple year data) ...
Distribution, Marketing

TPG1995 Chapter VI paragraph 6.38

Where the distributor actually bears the cost of its marketing activities (i.e., there is no arrangement for the owner to reimburse the expenditures), the issue is the extent to which the distributor is able to share in the potential benefits from those activities. In general, in arm’s length dealings the ability of a party that is not the legal owner of a marketing intangible to obtain the future benefits of marketing activities that increase the value of that intangible will depend principally on the substance of the rights of that party. For example, a distributor may have the ability to obtain benefits from its investments in developing the value of a trademark from its turnover and market share where it has a long-term contract of sole distribution rights for the trademarked product. In such cases, the distributor’s share of benefits should be determined based on what an independent distributor would obtain in comparable circumstances. In some cases, a distributor may bear extraordinary marketing expenditures beyond what an independent distributor with similar rights might incur for the benefit of its own distribution activities. An independent distributor in such a case might obtain an additional return from the owner of the trademark, perhaps through a decrease in the purchase price of the product or a reduction in royalty rate ...
Distribution, Marketing

TPG1995 Chapter VI paragraph 6.37

As regards the first issue — whether the marketer is entitled to a return on the marketing intangibles above a normal return on marketing activities — the analysis requires an assessment of the obligations and rights implied by the agreement between the parties. It will often be the case that the return on marketing activities will be sufficient and appropriate. One relatively clear case is where a distributor acts merely as an agent, being reimbursed for its promotional expenditures by the owner of the marketing intangible. In that case, the distributor would be entitled to compensation appropriate to its agency activities alone and would not be entitled to share in any return attributable to the marketing intangible ...
Distribution, Marketing

TPG1995 Chapter VI paragraph 6.36

Difficult transfer pricing problems can arise when marketing activities are undertaken by enterprises that do not own the trademarks or tradenames that they are promoting (such as a distributor of branded goods). In such a case, it is necessary to determine how the marketer should be compensated for those activities. The issue is whether the marketer should be compensated as a service provider, i.e., for providing promotional services, or whether there are any cases in which the marketer should share in any additional return attributable to the marketing intangibles. A related question is how the return attributable to the marketing intangibles can be identified ...
Distribution, Marketing