SAS Itron France (a manufacturer and distributor of water, electricity and gas meters) was the subject of a tax audit for the financial years 2012 and 2013, which resulted in an assessment. The tax authorities considered that the transfer pricing applied by the group had resulted in an understatement of taxable income in France and a transfer of profits to a Hong Kong-based distributor of the group. An appeal was filed by SAS Itron France and in a ruling handed down on 2 December 2021, the Administrative Court annulled the assessment. The tax authorities filed an appeal against this ruling. Judgement of the Court The Administrative Court of Appeal dismissed the appeal and decided in favor of SAS Itron France. Excerpt in English “…In order to calculate the transfer price to be set by SAS Itron France in its relations as a producer with its group distributors, the tax authorities followed the profit-sharing method defined at group level, applicable to relations between its various entities, and, after a functional analysis of the company and taking into account the respective contribution of the producer and distributor to the costs and risks for each of the eight functions defined and for each of the three main product lines (water-gas-electricity), it finally retained a distribution of the margin between producers and distributors of 53% and 47% respectively for the “gas” product line and 51% and 49% for the other two lines. By comparing the respective turnover of SAS Itron France as a producer and that of the group’s foreign distributors relating to sales of SAS Itron France products, it estimated that the respondent’s turnover as a producer, determined by applying a cost-plus method with margin rates differentiated according to product category, ranging from 14% to 35%, showed that SAS Itron France’s profit was insufficient in relation to the overall margin sharing targets (producer and seller) mentioned of 51% or 53%, constituting an advantage within the meaning of Article 57 of the General Tax Code. It also noted that no correction, as provided for by the transfer pricing method at group level, had been implemented. In the absence of any alleged quid pro quo, and despite the adjustments determined on appeal in respect of the benefits granted to SAS Itron France by certain group companies and the neutralisation of benefits granted to distributors in an amount of less than 30,000 euros, the tax authorities consider that they have demonstrated the undervaluation of transfer prices to the detriment of the company as a producer, and the undue reduction in its tax base. 5. However, it appears from the investigation that, in order to reconstitute the transfer prices between SAS Itron France as a producer and its other partners, distributors, in the Itron group, the tax authorities used, on the one hand, the margin of the distributing entities after deducting the sale price of SAS Itron France’s products, without taking into account the distributor’s own operating expenses (cost of discounting ; commissions paid to agents; rebates and discounts; product shipping costs; insurance costs incurred in transporting products; customs duties; product packaging costs), even though these expenses contribute to the distributors’ share of the Group’s net margin to which they should be entitled. On the other hand, it deducted their direct expenses from the margin of the manufacturing entities, including SAS Itron France, to which the gross margin rates mentioned in the previous point apply under the cost plus method. Without calling into question the parameters used by SAS Itron France to determine its transfer prices as a producer (costs used and margin rates mentioned, determined within an arm’s length interval), it thus carried out a comparison of different margins, gross for the distributing entities and net for the producing entities. If, as stated in point 3 of this judgment, the existence of a shortfall in the net margin accruing to the producer, compared with the net margin target assigned to it under the profit split method defined at group level, is likely to give rise to a presumption of the existence of an advantage granted by the producer to the distributors within the meaning of Article 57 of the General Tax Code; in the present case, as its criticism of the calculation of the net margins of SAS Itron France was unfounded, the administration did not establish the existence of such an advantage. 6. Furthermore, although the tax authorities maintain that SAS Itron France’s documentation setting out the group’s transfer pricing policy requires adjustments to be made in the event of a significant difference between the transfer price resulting from this method and the economic reality, such adjustments, as the respondent points out, are provided for only in exceptional circumstances and under a procedure that derogates from the cost-plus method. According to appendix 5 of the document on the group’s transfer pricing method provided by SAS Itron France, they are lawful only in the presence of an exceptional flow of a regular amount, i.e. over a period of time, and if three conditions are met: existence of new markets or invitations to tender; existence of a turnover exceeding 10% of the distributor’s revenue; existence of a variation in the distributor’s turnover of at least 500,000 euros. In this respect, it is not clear from the investigation that exceptional circumstances of the kind mentioned above arose during the period in dispute, requiring an adjustment to the margin charged by Itron France. Consequently, the tax authorities have not provided any evidence that the adjustments should have been made in order to justify the appropriateness of the method used and the resulting transfer prices. 7. In view of the foregoing, the plea that the pricing method defined at group level was wrongly disregarded in favour of the cost-plus method applied by SAS Itron France has no bearing on the outcome of the present dispute.” Click here for English translation Click here for other translation ...

SAS CFEB Sisley, the head of the Sisley group, which specialises in high-end cosmetic products, was the subject of an accounting audit covering the 2012 and 2013 financial years. At the end of the audit CFEB Sisley was notified of a proposed assessment, as the tax authorities considered that the pricing applied by the group led to a transfer of profits, within the meaning of Article 57 of the General Tax Code, to several of its subsidiaries established in Asia. However, later on the tax authorities limited the assessment to a single subsidiary, based in Hong Kong. A appeal was filed by CFEB Sisley and in a ruling handed down on 2 December 2021, the Montreuil Administrative Court, discharged the taxes resulting from the assessment. According to the court the selection of internal comparables provided by the company showed gross margins equivalent to those achieved by its subsidiary. The tax authorities had therefore not established that the prices charged by the company to its subsidiary were lower than those charged by comparable independent businesses. The authorities then filed an appeal against this ruling. Judgement of the Administrative Court of Appeal The CAA dismissed the appeal of the authorities and decided in favor of CFEB Sisley. Excerpts in English “In order to question CFEB Sisley’s transfer pricing policy and consider that it constituted an indirect transfer of profits abroad, in the form of a reduction in the purchase prices at which products are resold to its subsidiaries, the French tax authorities carried out a comparison of gross and net margins with the selection of external comparables produced by the company, reduced to six companies after excluding one. Even after being restated by the authorities, this selection of external comparables shows significant differences between the companies, revealing that the sector is marked by considerable disparity, and that the gross margin achieved by Sisley Hong-Kong Ltd remains well within the range of gross margins achieved by companies, recognised by the authorities as comparable, established in Asia. With regard to the net margin, although the margin achieved by the subsidiary established in Hong Kong is significantly higher than the third quartile in the range calculated on the basis of the same selection of external comparables, the authorities have not established that this method would be more relevant in the circumstances of this case, more relevant than the gross margin method and of such a nature, on its own, as to establish that the prices invoiced by CFEB Sisley are lower than those charged by comparable companies operating normally, when, moreover, CFEB Sisley itself records a significant net margin. Consequently, and without it being necessary to rule on the validity of the selection of internal comparables subsequently produced by CFEB Sisley, the administration did not provide the proof required of it of a practice falling within the scope of Article 57 of the General Tax Code.” Click here for English translation Click here for other translation ...

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 ...

Quaker Italia Srl is a non-exclusive distributor of Quaker products in Italy – lubricating oils and greases. It also carries out a minor manufacturing activity. An assessment was issued by the tax authorities in 2012 regarding the remuneration received for the distribution activities in FY 2007. The Tax authorities considered that the documentation provided by the company was contradictory and incomplete, and therefore recalculated the income using a (partially) different method (TNMM in the modified resale price version, instead of TNMM in the modified cost-plus version). This resulted in additional taxable income in the amount of Euro 1,180,447.00. A complaint was filed by Quaker with the Provincial Tax Commission. The Provincial Commission confirmed the legitimacy and effectiveness of the tax assessment. An appeal was then filed with the the Regional Tax Commission (CTR) of Lombardy. The Regional Tax Commission rejected the appeal and confirmed the first instance decision. An appeal was then filed by Quaker with the Supreme Administrative Court. Quaker contested the decision of the Regional Commission due to the absence of sufficient statement of reasons in the judgment. According to Quaker, the Regional Commission merely declared that it agreed with the arguments put forward by the Provincial Commission, without expressing its own assessment of the facts of the case and the grounds of appeal. In the appeal Quaker also claimed that the decision of the Provincial court should be considered null and void because of the irreconcilable conflict between the grounds and the operative part of the appeal. Judgement of the Supreme Administrative Court The Court upheld the grounds of appeal put forward by Quaker and remanded the case to the Regional Tax Commission for a new ruling. Excerpt “As a preliminary remark, it is worth mentioning that Quaker Italia Sri states that “the transfer pricing policy adopted by the Company, as well as its profitability in the fiscal year 2007, had to be considered at market values” (rie., p. 27), and the premise appears to be acceptable, adding, for the sake of clarity, that the expression “market values” appears to be equivalent, in the case at hand, to “normal value”, or “competition price”, expressions also used by the appellant in its argument. Now, the company decided to adopt the TNMM method of calculation in the modified Cost Plus version, and the tax authorities instead used the same TNMM method, but in the version of the modified resale price method. The stated reason for the Tax Administration’s choice is that the TNMM Cost Plus looks at company productivity, while the TNMM resale price method turns its attention to distribution activity, which Quaker Italia Sri carried out with great preponderance. The appellant opposes, however, that ‘the OECD Guidelines require auditors to follow, as far as possible, the method adopted by the company (rie., p. 32), and furthermore criticises the choice of the Tax Revenue Office to have carried out every assessment in consideration of the distribution activity, totally neglecting the production activity, which was also carried out by the company. It is also worth noting that, in its counter-affidavit, the Tax Administration reiterated the reasons why the calculation method adopted by the company led, in its opinion, to results deemed unreliable, and why it was therefore necessary to adopt a different one (counter-affidavit, p. 14). (…) 6.4. Indeed, in its decision, the CTR illustrates the objections made by the Revenue Agency to the taxpayer during the assessment, and reconstructs in extreme synthesis the course of the proceedings. It then examines with adequate breadth the main appeal brought by the Office in relation to the penalties, and the reasons why it considers it appropriate to uphold the annulment ruling made by the court of first instance. Only in the final part does the CTR then state that it adheres for the remainder to the ruling of the CTP, whose “reasoning was clearly explained both with regard to the adjustment of the costs, the subject of the contested act, and with regard to the non-application of the penalties. The appeals lodged by the parties do not in the least affect the contents and conclusions of the judgment under appeal” (CTR judgment, p. 5). 6.5. The criticisms put forward by the taxpayer appear well-founded. In fact, the judge is not precluded from proposing a reasoning per relationem, but it is nevertheless his duty to illustrate the reasons that lead him to consider correct and acceptable what was decided by another judge. This Court has already had occasion to clarify that “on the subject of tax proceedings, it is null and void, for breach of Articles 36 and 61 of Legislative Decree No. 546 of 1992, as well as of Article 118 disp. att. c.p.c., the judgment of the Regional Tax Commission which is completely devoid of any illustration of the objections raised by the appellant to the decision at first instance and of the considerations which led the commission to disregard them, and which merely gave reasons ‘per relationem’ to the judgment under appeal by mere adherence to it since, in that way, it remains impossible to identify the ‘thema decidendum’ and the reasons underlying the decision, and it cannot be held that agreement with the contested grounds was reached by examining and assessing the groundlessness of the grounds of appeal. (Applying this principle, the Court of Cassation annulled the judgment under appeal that had confirmed the first instance decision by merely referring to the content of that ruling and to the defence writings of one of the parties, in an entirely generic manner and without explaining the logical juridical path followed to reach its conclusions)”, Cass. sez. V, 5.10.2018, no. 24452 (conf. Cass. sez. VI V, 16.12.2013, no. 28113), and it did not fail to specify that “for the purposes of the sufficiency of the reasoning of the judgment, the judge cannot, when examining the facts of evidence, limit himself to stating the judgement in which his assessment consists, because this is the only “static” content of the complex motivational statement, ...

SNC Oakley Europe, a subsidiary of SAS Oakley Holding, which belonged to the American group Oakley Inc. until its takeover in 2007 by the Italian group Luxottica, carried on the business of distributing clothing, footwear, eyewear and accessories of the Oakley brand on European territory. Following the takeover SNC Oakley Europe in 2008 transferred its distribution activity on the French market to another French company, Luxottica France, and its distribution activity on the European market to companies incorporated in Ireland, Luxottica Trading and Finance and Oakley Icon, and deducted restructuring costs in an amount of EUR 15,544,267. The tax authorities qualified these costs as an advantage granted without consideration to its sister companies, constituting, on the one hand, an abnormal management act and, on the other hand, an indirect transfer of profits within the meaning of Article 57 of the General Tax Code on the grounds that its costs had not been re-invoiced to the Italian company, the head of the group, which had taken the initiative to reorganise the distribution activity. SAS Oakley Holding filed an appeal with the administrative Court which decided in favor of the tax authorities. Not satisfied with the result, an appeal was then filed with the CAA of Lyon. Judgement of the CAA The Court of appeal set aside the decision of the court of first instance and ruled in favor of SAS Oakley Holding. Excerpt “…On the basis of such considerations, and while it is up to the administration to assess whether the transactions in question correspond to acts of normal commercial management with regard solely to the company’s own interests, the administration, In such considerations, and whereas it is up to it to assess whether the transactions at issue correspond to acts of normal commercial management with regard to the company’s own interests alone, the administration, which did not have to rule on the appropriateness of SNC Oakley Europe’s choice to sell its business assets in order to retain only the activity of promoting distribution in the network of sports shops on the French market, establishes neither the existence of an abnormal act of management nor proof of the existence of a practice that falls within the provisions of Article 57 of the General Tax Code. 7. Furthermore, it appears from the investigation that, by deed dated March 19, 2008, SNC Oakley Europe sold to the Irish company Luxottica Trading and Finance Ltd the goodwill related to its distribution activity within the “optical” network on the European market, with the exception of the French market, for the sum of EUR 17,773,551.29. By deed dated April 29, 2008, it sold to the French company Luxottica France the goodwill related to its distribution activity within the “optics” network on the French market for an amount of EUR 1,222,525.59. Finally, by deed dated 30 June 2008, it sold to the Irish company Oakley Icon Ltd the goodwill related to its distribution activity within the “sports” network on the European market for the amount of 5,857,175.13 euros. The tax authorities do not dispute that these transfer prices were in line with the market price. However, the transfer of the business assets related to the activities that SNC Oakley Europe sold necessarily had as a counterpart, as it results from the transfer contracts, the assumption by this company of the costs related to the refusal of retailers, distributors and sales agents to transfer their contracts to the transferee companies as well as the costs related to the termination of the employees’ contracts, pursuant to the provisions of Article L. 122-12 of the French Labour Code, which are reproduced in the present report. 122-12 of the French Labour Code, taken over as of 1 May 2008 in Article L. 1224-1 of this code, which only requires the transfer of current employment contracts in the event of the transfer by an employer to another employer of an autonomous economic entity, retaining its identity, and whose activity is continued and taken over by the new employer. Thus, the administration cannot be considered, by the considerations related in point 6 above on the appropriateness of the restructuring, as demonstrating that the charges in dispute should not have been borne by SNC Oakley Europe. By justifying the increase by the fact that the latter did not claim any consideration or compensation “from the party that initiated the takeover and reorganisation of the business”, i.e. the Italian company Luxottica Group, it does not demonstrate either that any advantage was granted to the sister companies, the transferees of the business. 8. It follows from the foregoing that SAS Luxottica France, as successor to SAS Oakley Holding, is entitled to argue that the Grenoble Administrative Court, in the judgment under appeal, wrongly rejected its request for discharge of the additional corporate income tax assessed against it for the financial year ending in 2008 because of the reconsideration of the assumption of responsibility by SNC Oakley Europe for the costs associated with the sale of its business assets in the amount of EUR 15,544,267.” Click here for English translation Click here for other translation ...

30. The facts in this example are the same as in Example 9, except that the market development functions undertaken by Company S in this Example 10 are far more extensive than those undertaken by Company S in Example 9. 31. Where the marketer/distributor actually bears the costs and assumes the risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. A thorough comparability analysis identifies several uncontrolled companies engaged in marketing and distribution functions under similar long-term marketing and distribution arrangements. Assume, however, that the level of marketing expense Company S incurred in Years 1 through 5 far exceeds that incurred by the identified comparable independent marketers and distributors. Assume further that the high level of expense incurred by Company S reflects its performance of additional or more intensive functions than those performed by the potential comparables and that Primair and Company S expect those additional functions to generate higher margins or increased sales volume for the products. Given the extent of the market development activities undertaken by Company S, it is evident that Company S has made a larger functional contribution to development of the market and the marketing intangibles and has assumed significantly greater costs and assumed greater risks than the identified potentially comparable independent enterprises (and substantially higher costs and risks than in Example 9). There is also evidence to support the conclusion that the profits realised by Company S are significantly lower than the profit margins of the identified potentially comparable independent marketers and distributors during the corresponding years of similar long-term marketing and distribution agreements. 32. As in Example 9, Company S bears the costs and associated risks of its marketing activities under a long-term contract of exclusive marketing and distribution rights for the R watches, and therefore expects to have an opportunity to benefit (or suffer a loss) from the marketing and distribution activities it undertakes. However, in this case Company S has performed functions and borne marketing expenditures beyond what independent enterprises in potentially comparable transactions with similar rights incur for their own benefit, resulting in significantly lower profit margins for Company S than are made by such enterprises. 33. Based on these facts, it is evident that by performing functions and incurring marketing expenditure substantially in excess of the levels of function and expenditure of independent marketer/distributors in comparable transactions, Company S has not been adequately compensated by the margins it earns on the resale of R watches. Under such circumstances it would be appropriate for the country Y tax administration to propose a transfer pricing adjustment based on compensating Company S for the marketing activities performed (taking account of the risks assumed and the expenditure incurred) on a basis that is consistent with what independent enterprises would have earned in comparable transactions. Depending on the facts and circumstances reflected in a detailed comparability analysis, such an adjustment could be based on: Reducing the price paid by Company S for the R brand watches purchased from Primair. Such an adjustment could be based on applying a resale price method or transactional net margin method using available data about profits made by comparable marketers and distributors with a comparable level of marketing and distribution expenditure if such comparables can be identified. An alternative approach might apply a residual profit split method that would split the relevant profits from sales of R branded watches in country Y by first giving Company S and Primair a basic return for the functions they perform and then splitting the residual profit on a basis that takes into account the relative contributions of both Company S and Primair to the generation of income and the value of the R trademark and trade name. Directly compensating Company S for the excess marketing expenditure it has incurred over and above that incurred by comparable independent enterprises including an appropriate profit element for the functions and risks reflected by those expenditures. 34. In this example, the proposed adjustment is based on Company S’s having performed functions, assumed risks, and incurred costs that contributed to the development of the marketing intangibles for which it was not adequately compensated under its arrangement with Primair. If the arrangements between Company S and Primair were such that Company S could expect to obtain an arm’s length return on its additional investment during the remaining term of the distribution agreement, a different outcome could be appropriate ...

26. The facts in this example are the same as in Example 8, except as follows: Under the contract between Primair and Company S, Company S is now obligated to develop and execute the marketing plan for country Y without detailed control of specific elements of the plan by Primair. Company S bears the costs and assumes certain of the risks associated with the marketing activities. The agreement between Primair and Company S does not specify the amount of marketing expenditure Company S is expected to incur, only that Company S is required to use its best efforts to market the watches. Company S receives no direct reimbursement from Primair in respect of any expenditure it incurs, nor does it receive any other indirect or implied compensation from Primair, and Company S expects to earn its reward solely from its profit from the sale of R brand watches to third party customers in the country Y market. A thorough functional analysis reveals that Primair exercises a lower level of control over the marketing activities of Company S than in Example 8 in that it does not review and approve the marketing budget or design details of the marketing plan. Company S bears different risks and is compensated differently than was the case in Example 8. The contractual arrangements between Primair and Company S are different and the risks assumed by Company S are greater in Example 9 than in Example 8. Company S does not receive direct cost reimbursements or a separate fee for marketing activities. The only controlled transaction between Primair and Company S in Example 9 is the transfer of the branded watches. As a result, Company S can obtain its reward for its marketing activities only through selling R brand watches to third party customers. As a result of these differences, Primair and Company S adopt a lower price for watches in Example 9 than the price for watches determined for purposes of Example 8. As a result of the differences identified in the functional analysis, different criteria are used for identifying comparables and for making comparability adjustments than was the case in Example 8. This results in Company S having a greater anticipated total profit in Example 9 than in Example 8 because of its higher level of risk and its more extensive functions. 27. Assume that in Years 1 through 3, Company S embarks on a strategy that is consistent with its agreement with Primair and, in the process, performs marketing functions and incurs marketing expenses. As a result, Company S has high operating expenditures and slim margins in Years 1 through 3. By the end of Year 2, the R trademark and trade name have become established in country Y because of Company S’s efforts. Where the marketer/distributor actually bears the costs and associated risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. Assume that the enquiries of the country Y tax administrations conclude, based on a review of comparable distributors, that Company S would have been expected to have performed the functions it performed and incurred its actual level of marketing expense if it were independent from Primair. 28. Given that Company S performs the functions and bears the costs and associated risks of its marketing activities under a long-term contract of exclusive distribution rights for the R watches, there is an opportunity for Company S to benefit (or suffer a loss) from the marketing and distribution activities it undertakes. Based on an analysis of reasonably reliable comparable data, it is concluded that, for purposes of this example, the benefits obtained by Company S result in profits similar to those made by independent marketers and distributors bearing the same types of risks and costs as Company S in the first few years of comparable long-term marketing and distribution agreements for similarly unknown products. 29. Based on the foregoing assumptions, Company S’s return is arm’s length and its marketing activities, including its marketing expenses, are not significantly different than those performed by independent marketers and distributors in comparable uncontrolled transactions. The information on comparable uncontrolled arrangements provides the best measure of the arm’s length return earned by Company S for the contribution to intangible value provided by its functions, risks, and costs. That return therefore reflects arm’s length compensation for Company S’s contributions and accurately measures its share of the income derived from exploitation of the trademark and trade name in country Y. No separate or additional compensation is required to be provided to Company S ...

When the distributor actually bears the cost of its marketing activities (for example, when there is no arrangement for the legal owner to reimburse the expenditures), the analysis should focus on the extent to which the distributor is able to share in the potential benefits deriving from its functions performed, assets used, and risks assumed currently or in the future. In general, in arm’s length transactions the ability of a party that is not the legal owner of trademarks and other marketing intangibles to obtain the benefits of marketing activities that enhance the value of those intangibles 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 functions performed, assets used, and risks assumed in developing the value of a trademark and other marketing intangibles from its turnover and market share when it has a long-term contract providing for sole distribution rights for the trademarked product. In such a situation the distributor’s efforts may have enhanced the value of its own intangibles, namely its distribution rights. In such cases, the distributor’s share of benefits should be determined based on what an independent distributor would receive in comparable circumstances. In some cases, a distributor may perform functions, use assets or assume risks that exceed those an independent distributor with similar rights might incur or perform for the benefit of its own distribution activities and that create value beyond that created by other similarly situated marketers/distributors. An independent distributor in such a case would typically require additional remuneration from the owner of the trademark or other intangibles. Such remuneration could take the form of higher distribution profits (resulting from a decrease in the purchase price of the product), a reduction in royalty rate, or a share of the profits associated with the enhanced value of the trademark or other marketing intangibles, in order to compensate the distributor for its functions, assets, risks, and anticipated value creation. Examples 8 to 13 in the Annex I to Chapter VI illustrate in greater detail the application of this Section B in the context of marketing and distribution arrangements ...

This case deals with arm’s length remuneration of a Greek Diary Distributor. Following an audit of “Diary Distributor Ltd.”, the Greek tax authorities determined that the prices paid to related parties for FY 2017 had been above the arm’s length price. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Diary Distributor Ltd.” Judgement of the Court The court dismissed the appeal of “Diary Distributor Ltd.” and upheld the assessment of the tax authorities Click here for English translation Click here for other translation ...

An adjustment for FY 2013 and 2014 had been issued to a pharmaceutical company in Panama “Pharma Distributor S.A” that resulted in an income adjustment of 19.5 million dollars, which in turn resulted in additional taxes of 2.4 million dollars. The resale price method had been used by Pharma Distributor S.A. to determine the market value of an asset acquired from a related entity that was sold to an independent entity. This method was rejected by the tax authorities based on the fact that the analysis presented by the taxpayer did not meet the requirements for application of the method. The tax authorities instead applied a TNMM. The tax authorities also rejected tax deductions for expenses purportedly paid for administrative services due to the absence of supporting documentation. Provisions of article 762-G “Administrative services received” in the Tax Code in Panama contemplates tax deductibility for such expenses exclusively when services have actually been rendered to the benefit of the recipient. Decision of the Court The Court held in favor of the tax authorities. The Court ratified the position of the tax authorities regarding the non-deductibility of the expense paid for administrative services. In addition, the Court’s resolution indicates inconsistencies and imprecision in the delineation of the transaction within the comparability analysis, selection and application of the Resale Price Method, concluding that the level of comparability presented in the supporting documentation would be inadequate for application of the method. It was also indicated that Pharma S.A assumed operating expenses in excess of those of simple distributors. Hence Pharma Distributor S.A. should be characterized as a fully-fledged distributor and be compensated for the additional functions performed and risks assumed. Due to these methodological inconsistencies, the Court agreed that the TNMM – as suggested by the tax authorities – was the more appropriate method in the case at hand. Click here for English translation Click here for other translation ...

Following an audit of Oracle Technology Systems (Kenya) Limited, a distributor of Oracle products in Kenya, the tax authority issued an assessment for FY2015-2017 relating to controlled transactions. In assessing the income, the tax authority had used a CUP method instead of the TNMM. Dissatisfied with the assessment, Oracle Technology Systems (Kenya) Limited appealed to the Tax Appeals Tribunal on the basis that the return on its related party transactions was at arm’s length and did not require adjustment. Judgement of Tax Appeals Tribunal The Tribunal referred the case back to the tax authority for an appropriate reassessment. Excerpts “The question that arises is which method was the most suitable one. The OECD TP Guidelines state that the preferred method is CUP. But this only applies where there are appropriate comparables. Internal comparables are of course always preferred where they are reliable or can be reliably adjusted. From our understanding, the TP Policy implied that the reason internal comparables could not be used was due to differences in the functions of the independent distributors as compared with those of the Appellant. 127. We however note that during the hearing and in its submissions, the Appellant went out of its way to show that its functions are routine and not much different from those carried out by other distributors. The Appellant for example states in Paragraph 76 of its Statement of Facts as follows:- ‘The Appellant would like to note that the IT industry itself is a very competitive market and that the Appellant’s functional profile is not different from other value-added distributors in the same competitive market … ”  128. Similarly, the expert witness Dr Neighbour stated in his review of the Appellant’s role as a distributor as thus:- “In my experience, these are standard functions that would be expected of a typical distributor, i.e one that provides some local sales and marketing activity to support the sales as well as provision of customer support and services in respect of the distributed products … “ 129. The arguments offered by the Appellant seem to imply its functions are no different from any other distributor. This seems to contradict what its TP Policy suggests that the reasons it could not use the internal comparables was because the functions carried out by the Appellant and the  independent distributors were different and could not be reliably adjusted. 130. If indeed as the Appellant and its expert witness suggests its functions are routine and much in line with those of other distributors in the industry, we are at a loss as to why the internal comparables could not be used, and where such internal comparables were available why the CUP method which as both parties have admitted is the preferred method could not be used. (…) 132. It is unclear to the Tribunal both from the Appellant’s and the Respondent’s arguments and the documentation made available whether the Appellant is indeed a routine distributor as it averred during the hearing or if the services it offers are distinct as stated in the TP Policy. 133. Accordingly, we are of the view that the matter ought to be referred back to the Respondent to carry out a proper audit and in particular a functional analysis to determine what the exact functions of the Appellant are and if these are fundamentally different from those of independent distributors. Only then is it possible to determine the proper method to be applied.” ”] ...

“Petroleum Wholesale Corp” is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation and financial reports and other publicly available information, an assessment was issued for FY 2013 and 2014 resulting in additional taxes and surcharges of approximately $ 14 millions. Petroleum Wholesale Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities with a minor adjustment in the calculations for 2014. “…we consider that the Tax Administration adhered, in this case, to the powers conferred by law, and that there is no defenselessness, since it was verified that, in the course of the audit, several requests for information were made (as evidenced in the minutes of the proceedings in the background file), and then, in the governmental channel, after notification, the evidence requested by the plaintiff was admitted and practiced, in the first instance, having carried out the corresponding procedural stages.” “In view of the above, we consider that the taxpayer should have been consistent in the handling of the financial information used, and calculate the gross margin in accordance with the guidelines established in our legislation…” “In this sense, it is noteworthy that a method was chosen that weighs the margins, rather than the price of the product, when the part analysed is exclusively dedicated to the distribution of oil, a product that has a public market price, and in the Panamanian case, there is a suggested price for its purchase and sale to the consumer.” “Based on the calculations described in the previous point, no adjustment would be necessary to the calculation of the additional settlement for the period 2013, as it coincides with the work carried out by the tax authorities (see Table n.). 40 to sheet 309 of the background file). Therefore, we will only proceed with the adjustment of the taxpayer’s financial information for the 2014 period, specifically the cost of sales, in order to bring it to the median of the interquartile range, reflecting, for clarity, a comparative analysis of the adjustment made in the first instance, with the findings described in this resolution“ Click here for English translation ...

The Italian tax authorities had issued an assessment against a local distribution company of a multinational group, where the transfer pricing analysis conducted by the taxpayer had been disregarded. The tax authorities, carried out a new benchmark analysis based on the transactional net margin method (“TNMM”) and adjusted the company’s profitability to the median. Judgement of the Court The Court decided in favour of BI S.r.l. and cancelled the assessment. The Court stated that the profitability range calculated by the tax authorities goes, for the year 2013, from a minimum value of 1.40% to a maximum of 18.28%. The local distribution company had obtained a ROS/EBIT margin of 8.38%, and since the last percentage falls between the minimum and the maximum, the court set aside the assessment. In regards to the TP analysis performed by the tax authorities the Court stated: “The company had applied the CUP method, as it was considered the most direct and reliable method to apply the principle of free competition and, therefore, according to today’s appellant, this method had to be preferred to the application of any other method. The Office, on the other hand, considered the TNMM method more correct, thus arriving at ROS (return on sales) values that were totally different from those applied by the company for the three-year period 2010, 2011 and 2012. The office, by changing method, without any specific reason had settled on the percentage of the median. The office had taken refuge behind that percentage, without justifying in the notices of assessment why “The appellant’s objections on the issue of comparables are upheld, as the present company exercised, for the years in dispute, sales and routine functions, while the key role within the group was played by the company B.R.; the latter, as the “real entrepreneur” who was responsible for the fundamental decision-making fruitions, the definition of the various business strategies and, no less, the fruitions in the development and production area.” “B.I. was the sole distributor in Italy of a single supplier, to which it was linked by a shareholding relationship. The comparables compared by the Office did not adequately match the model of the company under examination, as the companies compared carried out production activities, operated in different sectors and distributed different products. This being the case, the office had identified competitors that were not comparable in terms of product sector, market and risk level. These obvious differences in distribution channels, type of goods or products sold or totally different local realities make the analysis carried out by the office unacceptable as a whole.” Click here for English translation Click here for other translation ...

30. The facts in this example are the same as in Example 9, except that the market development functions undertaken by Company S in this Example 10 are far more extensive than those undertaken by Company S in Example 9. 31. Where the marketer/distributor actually bears the costs and assumes the risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. A thorough comparability analysis identifies several uncontrolled companies engaged in marketing and distribution functions under similar long-term marketing and distribution arrangements. Assume, however, that the level of marketing expense Company S incurred in Years 1 through 5 far exceeds that incurred by the identified comparable independent marketers and distributors. Assume further that the high level of expense incurred by Company S reflects its performance of additional or more intensive functions than those performed by the potential comparables and that Primair and Company S expect those additional functions to generate higher margins or increased sales volume for the products. Given the extent of the market development activities undertaken by Company S, it is evident that Company S has made a larger functional contribution to development of the market and the marketing intangibles and has assumed significantly greater costs and assumed greater risks than the identified potentially comparable independent enterprises (and substantially higher costs and risks than in Example 9). There is also evidence to support the conclusion that the profits realised by Company S are significantly lower than the profit margins of the identified potentially comparable independent marketers and distributors during the corresponding years of similar long-term marketing and distribution agreements. 32. As in Example 9, Company S bears the costs and associated risks of its marketing activities under a long-term contract of exclusive marketing and distribution rights for the R watches, and therefore expects to have an opportunity to benefit (or suffer a loss) from the marketing and distribution activities it undertakes. However, in this case Company S has performed functions and borne marketing expenditures beyond what independent enterprises in potentially comparable transactions with similar rights incur for their own benefit, resulting in significantly lower profit margins for Company S than are made by such enterprises. 33. Based on these facts, it is evident that by performing functions and incurring marketing expenditure substantially in excess of the levels of function and expenditure of independent marketer/distributors in comparable transactions, Company S has not been adequately compensated by the margins it earns on the resale of R watches. Under such circumstances it would be appropriate for the country Y tax administration to propose a transfer pricing adjustment based on compensating Company S for the marketing activities performed (taking account of the risks assumed and the expenditure incurred) on a basis that is consistent with what independent enterprises would have earned in comparable transactions. Depending on the facts and circumstances reflected in a detailed comparability analysis, such an adjustment could be based on: Reducing the price paid by Company S for the R brand watches purchased from Primair. Such an adjustment could be based on applying a resale price method or transactional net margin method using available data about profits made by comparable marketers and distributors with a comparable level of marketing and distribution expenditure if such comparables can be identified. An alternative approach might apply a residual profit split method that would split the combined profits from sales of R branded watches in country Y by first giving Company S and Primair a basic return for the functions they perform and then splitting the residual profit on a basis that takes into account the relative contributions of both Company S and Primair to the generation of income and the value of the R trademark and trade name. Directly compensating Company S for the excess marketing expenditure it has incurred over and above that incurred by comparable independent enterprises including an appropriate profit element for the functions and risks reflected by those expenditures. 34. In this example, the proposed adjustment is based on Company S’s having performed functions, assumed risks, and incurred costs that contributed to the development of the marketing intangibles for which it was not adequately compensated under its arrangement with Primair. If the arrangements between Company S and Primair were such that Company S could expect to obtain an arm’s length return on its additional investment during the remaining term of the distribution agreement, a different outcome could be appropriate ...

26. The facts in this example are the same as in Example 8, except as follows: Under the contract between Primair and Company S, Company S is now obligated to develop and execute the marketing plan for country Y without detailed control of specific elements of the plan by Primair. Company S bears the costs and assumes certain of the risks associated with the marketing activities. The agreement between Primair and Company S does not specify the amount of marketing expenditure Company S is expected to incur, only that Company S is required to use its best efforts to market the watches. Company S receives no direct reimbursement from Primair in respect of any expenditure it incurs, nor does it receive any other indirect or implied compensation from Primair, and Company S expects to earn its reward solely from its profit from the sale of R brand watches to third party customers in the country Y market. A thorough functional analysis reveals that Primair exercises a lower level of control over the marketing activities of Company S than in Example 8 in that it does not review and approve the marketing budget or design details of the marketing plan. Company S bears different risks and is compensated differently than was the case in Example 8. The contractual arrangements between Primair and Company S are different and the risks assumed by Company S are greater in Example 9 than in Example 8. Company S does not receive direct cost reimbursements or a separate fee for marketing activities. The only controlled transaction between Primair and Company S in Example 9 is the transfer of the branded watches. As a result, Company S can obtain its reward for its marketing activities only through selling R brand watches to third party customers. As a result of these differences, Primair and Company S adopt a lower price for watches in Example 9 than the price for watches determined for purposes of Example 8. As a result of the differences identified in the functional analysis, different criteria are used for identifying comparables and for making comparability adjustments than was the case in Example 8. This results in Company S having a greater anticipated total profit in Example 9 than in Example 8 because of its higher level of risk and its more extensive functions. 27. Assume that in Years 1 through 3, Company S embarks on a strategy that is consistent with its agreement with Primair and, in the process, performs marketing functions and incurs marketing expenses. As a result, Company S has high operating expenditures and slim margins in Years 1 through 3. By the end of Year 2, the R trademark and trade name have become established in country Y because of Company S’s efforts. Where the marketer/distributor actually bears the costs and associated risks of its marketing activities, the issue is the extent to which the marketer/distributor can share in the potential benefits from those activities. Assume that the enquiries of the country Y tax administrations conclude, based on a review of comparable distributors, that Company S would have been expected to have performed the functions it performed and incurred its actual level of marketing expense if it were independent from Primair. 28. Given that Company S performs the functions and bears the costs and associated risks of its marketing activities under a long-term contract of exclusive distribution rights for the R watches, there is an opportunity for Company S to benefit (or suffer a loss) from the marketing and distribution activities it undertakes. Based on an analysis of reasonably reliable comparable data, it is concluded that, for purposes of this example, the benefits obtained by Company S result in profits similar to those made by independent marketers and distributors bearing the same types of risks and costs as Company S in the first few years of comparable long-term marketing and distribution agreements for similarly unknown products. 29. Based on the foregoing assumptions, Company S’s return is arm’s length and its marketing activities, including its marketing expenses, are not significantly different than those performed by independent marketers and distributors in comparable uncontrolled transactions. The information on comparable uncontrolled arrangements provides the best measure of the arm’s length return earned by Company S for the contribution to intangible value provided by its functions, risks, and costs. That return therefore reflects arm’s length compensation for Company S’s contributions and accurately measures its share of the income derived from exploitation of the trademark and trade name in country Y. No separate or additional compensation is required to be provided to Company S ...

When the distributor actually bears the cost of its marketing activities (for example, when there is no arrangement for the legal owner to reimburse the expenditures), the analysis should focus on the extent to which the distributor is able to share in the potential benefits deriving from its functions performed, assets used, and risks assumed currently or in the future. In general, in arm’s length transactions the ability of a party that is not the legal owner of trademarks and other marketing intangibles to obtain the benefits of marketing activities that enhance the value of those intangibles 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 functions performed, assets used, and risks assumed in developing the value of a trademark and other marketing intangibles from its turnover and market share when it has a long-term contract providing for sole distribution rights for the trademarked product. In such a situation the distributor’s efforts may have enhanced the value of its own intangibles, namely its distribution rights. In such cases, the distributor’s share of benefits should be determined based on what an independent distributor would receive in comparable circumstances. In some cases, a distributor may perform functions, use assets or assume risks that exceed those an independent distributor with similar rights might incur or perform for the benefit of its own distribution activities and that create value beyond that created by other similarly situated marketers/distributors. An independent distributor in such a case would typically require additional remuneration from the owner of the trademark or other intangibles. Such remuneration could take the form of higher distribution profits (resulting from a decrease in the purchase price of the product), a reduction in royalty rate, or a share of the profits associated with the enhanced value of the trademark or other marketing intangibles, in order to compensate the distributor for its functions, assets, risks, and anticipated value creation. Examples 8 to 13 in the Annex to Chapter VI illustrate in greater detail the application of this Section B in the context of marketing and distribution arrangements ...

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 ...

A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses on a reoccurring basis. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies and issued an assessment for FY 2009 – 2010 in the amount of 857 741 779 rubles. The assessment was partially  upheld by the Arbitration Court and then appealed to the Supreme Court. Decision of the Russian Supreme Court The Supreme Court dismissed the appeal lodged by HYUNDAI. “In checking the calculation of the market price of the goods, the court, having assessed whether the data given in the calculation of the market price for the acquisition of the vehicles corresponded to the data contained in the primary documents, came to the conclusion that the calculation presented by the inspectorate was justified. The court considered that the tax authority had made the calculation on the basis of the particular characteristics and sale of each particular car (according to the VIN). Under such circumstances, the court concluded that the taxpayer overstated the amount of costs to reduce income from sales for 2009 in the amount of 136 475 133 rubles, for 2010 – in the amount of 500 997 837 rubles. The cassation appeal contains no arguments related to the episode involving application of thin capitalization rules to interest on bank loans. In studying the arguments contained in the complaint, it was established that they were reduced to a review of the factual circumstances of the case established by the courts and could not be the subject of the Judicial Board of the Supreme Court of the Russian Federation, which in virtue of paragraph 1 of Part 7 of Art. 291.6 of the Arbitration Procedural Code of the Russian Federation with authority to review the circumstances established by the courts of lower instances. The courts have not committed any violations of the rules of substantive law or of the requirements of procedural law, which entail unconditional cancellation of the judicial acts.“ Click here for English Translation ...

A Russian subsidiary of the Mazda Motors Group had been claiming losses. Following an audit the tax authorities concluded that losses for FY 2009, was due to overstatement of the purchase prices of Mazda cars. An assessment was issued where the pricing was determined using the Resale Price Method, resulting in additional income of 1,362,172,034 rubles. The Arbitration Court held in favor of the tax authorities and this decision was upheld by the Arbitration Court of Appeal. The decision was then appealed to the Supreme Court. The Supreme Court denied the appeal and upheld the decision of the Arbitration Court. Click here for English Translation ...

A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses in fiscal years 2008 and 2009. In the opinion of the tax authority, losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies. Decision of the Russian Arbitration Court According to the court, the applied transfer pricing method is not applicable in the present case. A comparison with wholesalers in the Russian automotive market cannot be made, it said. The reason for this is the common sales strategy of automotive groups in Russia. Almost all non-Russian manufacturers distribute their automobiles through affiliated wholesale companies, which in turn purchase the vehicles from affiliated companies abroad. The only exceptions in this context are currently companies such as Volkswagen or BMW, which operate their own production facilities in Russia. Therefore, a reliable identification of comparable business transactions with regard to independent Russian importers is not possible. The second conclusion of the court refers to the negative market development caused by the financial crisis in 2008/2009. Accordingly, the economic development alone does not constitute a sufficient reason for the recognition of losses of a distribution company. With this assessment, the courts followed the opinion of the competent tax authorities in characterizing the local HYUNDAI sales companies as routine companies. A Russian sales company with a low risk level is generally entitled to a stable, positive remuneration. In this respect, the Russian Arbitration Court supported the view of the tax authorities that a local sales company would also not have to bear the losses caused by the financial crisis. In the opinion of the tax authorities as well as the court, the affiliated business partner abroad should have borne the losses instead of the Russian HYUNDAI company. The Court also stated that agreed contractual clauses that provide for increased costs for advertising and marketing without offering a correspondingly higher added value for the sales companies do not comply with the arm’s length principle. Click here for English Translation ...

A Russian subsidiary of the Mazda Motors Group had been claiming losses. In the opinion of the tax authority, the losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies. An assessment was issued where the pricing had been determined using the Resale Price Method. Decision of the Russian Arbitration Court “Having evaluated the arguments of the parties and the evidence presented in the case, taking into account the provisions of Art. 71 APC RF, the appeal court considers the conclusions of the court of first instance as motivated, consistent with the circumstances of the case and the requirements of the law.In the presence of these circumstances, the claims claimed by the company were rightly rejected by the court of first instance.Thus, the decision of the court is legal and justified, corresponds to the materials of the case and the current legislation, in connection with which it is not subject to cancellation. href=”https://tpguidelines.com/wp-content/uploads/Russia-vs-Mazda-Motor-Rus-Ltd-2014.htm”>Click here for English Translation ...

At issue was the existence of a basis for taking into account the deductibility of the costs of services, the costs related to the repurchase and destruction of products and the tax deductibility of royalty expenses charged between related parties. Judgment of the Court The Administrative Court concluded that “Buy/Sell Distributor” had failed to prove that the disputed services charged to it were actually supplied and necessary for it. As regards the costs relating to the redemption and destruction of the products, it held that “Buy/Sell Distributor” was not obliged to bear those costs in view of the functions it performed within the multinational company’s system and the risks it bore. The Court also held that there was no basis for treating the royalty payment as a tax deductible expense. Click here for English translation Click here for other translation ...

“H-S Goods S.A.” was active in wholesale trade of heating and sanitary goods. The main supplier of the products was a related company from Germany, and the cusomers/recipients of the goods were both unrelated domestic companies and foreign related companies (in Latvia and Ukraine). Approximately 30 % of sales were to related parties. Sales prices for the controlled transactions, were determined based on the purchase prices from the supplier. “H-S Goods S.A.” argued that transactions with the related parties were not sale of goods, but rather provision of warehousing services on behalf of the related German supplier. For these services “H-S Goods S.A.” received a 5% margin. The tax authorities found that the activities and the fact that legal title to the goods was transferred to “H-S Goods S.A.”, meant that the transaction was in fact distribution of goods. Furthermore, the margins obtained by “H-S Goods S.A.” from sale of goods to unrelated customers was considerably higher than the 5% margins obtained from sales to related parties. A complaint was filed by “H-S Goods S.A.” with the Administrative Court which was unsuccessful. According to 2011 decision from the Administrative Court , the tax authorities had proven that the margin on goods sold to unrelated customers was considerably higher than the margin obtained from sales to related parties. The court also agreed that the activities of “H-S Goods S.A.” could not be considered warehousing services. An appeal was then filed by “H-S Goods S.A.” with the Supreme Administrative Court. Judgement of the Court The Court upheld the decision of the court of first instance. Excerpts “The Supreme Administrative Court held as follows: 7. the cassation appeal has no justified grounds. Pursuant to Article 174 of the P.p.s.a., a cassation appeal may be based on the following grounds: (1) infringement of substantive law through its misinterpretation or misapplication; (2) infringement of procedural provisions, if this infringement could have had a significant impact on the outcome of the case. The Supreme Administrative Court, in connection with Article 183 § 1 of the P.p.s.a., considers the case within the limits of the cassation appeal, taking into account ex officio only the invalidity of the proceedings. Binding of the Court to the grounds of the cassation complaint requires that they are correctly specified in the complaint itself. This means that it is necessary to cite the specific provisions of law which the court has violated, to substantiate the allegation of their violation and, if a violation of procedural law is alleged, to demonstrate additionally that this violation could have had a significant impact on the outcome of the case. As regards substantive law, it is necessary to demonstrate what the misinterpretation or misapplication by the court of first instance consisted of and what the correct interpretation or application of the substantive law provision should have been. Similarly, in the case of an infringement of procedural law, it is necessary to indicate the provisions of that law infringed by the court, what the infringement of those provisions consisted in and why that infringement could have had a significant impact on the outcome of the case. When the cassation appeal alleges both a violation of substantive law and a violation of procedural law, the last-mentioned allegation is examined first. Only after it has been determined that the state of facts adopted by the court in the appealed judgment is correct or has not been effectively challenged, may one move on to control the process of subsumption of the given state of facts under the provision of substantive law applied in the case. (cf. the judgment of the Supreme Administrative Court of 19 February 2008, II FSK 1787/06, unpublished). In the present case, the appellant only raises allegations of infringement of procedural provisions, since the content of the plea I named as the allegation of violation of substantive law in fact indicates only circumstances of procedural nature, such as: “erroneous assumption by the Court of First Instance that the most appropriate method of estimating income in transactions with related parties is the transaction margin method”. Meanwhile, a possible incorrect legal assessment of the factual state does not constitute a violation of substantive law and, as such, cannot constitute a cassation ground within the meaning of Article 174(1) of the A.P.S.A. An assessment of the legitimacy of the application of substantive law, i.e. Article 11(3) of the A.P.D.O.P. in conjunction with § 4(4), § 11(1) and (2) and § 12(1) and (2) of the Ordinance may only be made on the basis of correctly established facts. Incorrect application of the law consists of the so-called error in subsumption, which is expressed in the fact that the facts established in the case were erroneously deemed to correspond to the hypothetical state provided for by the legal norm, or that the established facts were erroneously not “drawn” under the hypothesis of a specific legal norm. Thus, the application of the substantive law is the correct reference of the substantive law norm to the established state of facts, i.e. the correct confrontation of the circumstances of the state of facts with the hypothesis of the legal norm and the submission of this state of facts to a legal assessment on the basis of the content of this norm. Hence, the defects raised by the author of the cassation complaint may be challenged only under the second ground of the cassation complaint – Article 174(2) of the Code of Civil Procedure.” “Allegation II, point 1 is not justified. Contrary to the arguments of the appellant, the court of first instance, following the guidelines contained in the judgment of the Supreme Administrative Court of 1 March 2011, correctly determined the nature of the transaction between the taxpayer and related entities. In particular, it referred to the amount of the established 5% margin, indicating at the same time that the margin imposed on goods intended for sale on the Polish market was on average 6 times higher than the established compensatory margin.” Click here for ...

“H-S Goods S.A.” was active in wholesale trade of heating and sanitary goods. The main supplier of the products was a related company from Germany, and the cusomers/recipients of the goods were both unrelated domestic companies and foreign related companies (in Latvia and Ukraine). Approximately 30 % of sales were to related parties. Sales prices for the controlled transactions, were determined based on the purchase prices from the supplier. “H-S Goods S.A.” argued that transactions with the related parties were not sale of goods, but rather provision of warehousing services on behalf of the related German supplier. For these services “H-S Goods S.A.” received a 5% margin. The tax authorities found that the activities and the fact that legal title to the goods was transferred to “H-S Goods S.A.”, meant that the transaction was in fact distribution of goods. Furthermore, the margins obtained by “H-S Goods S.A.” from sale of goods to unrelated customers was considerably higher than the 5% margins obtained from sales to related parties. A complaint was filed by “H-S Goods S.A.” with the Administrative Court. Judgement of the Court The Court dismissed the complaint. According to the court, the tax authorities had proved that the margin on goods sold to unrelated customers was considerably higher than the margin obtained from sales to related parties. The court also agreed that the activities of “H-S Goods S.A.” could not be considered warehousing services. Click here for English translation Click here for other translation ...

Hallmark Marketing Corporation was the exclusive wholesale distributor of Hallmark products in the US and had been granted a royalty-free licence to use the Hallmark trademark in the territory. Hallmark Marketing Corporation was characterised as a routine distributor and its income was determined using the TNMM method with Berry Ratio as the PLI. The New York Division of Taxation disagreed with the use of the Berry Ratio because Hallmark Marketing Corporation also performed manufacturing activities, brand protection functions and owned non-rutine intangible assets. Judgement of the Tax Appeals Commission The Tax Appeals Commission ruled in favour of Hallmark Marketing Corporation. According to the Commission, Hallmark Marketing Corporation was a limited-risk distributor and did not provide any valuable services or non-routine intangibles ...