Olympus Medical Systems India is a subsidiary of Olympus Corp and engaged in the import, sale and maintenance of medical equipment in India. For FY 2012 and 2013 the company reported losses. An transfer pricing audit was initiated by the tax authorities and later an assessment was issued. Since Olympus India had failed to provide audited financials of its associated enterprises to determine the overall profits of the group, it adopted the Resale Price Method using the Bright Line Test approach. An appeal was then filed by Olympus with the Tax Appellate Tribunal. Olympus India argued that the tax authorities was erroneous in adopting the Residual Profit Split Method in determining the arm’s length price of the AMP expenses and furthermore that the tax authorities could not make an adjustment without having information on the total profits of the group. Judgement of the Tax Appellate Tribunal The tribunal held that Olympus India should not benefit for non-cooperation in providing audited financials of associated enterprises. Olympus was obligated to submit the audited financials of the associated enterprises. Failure to do so could justify an assessment by applying the Residual Profit Split Method in the determination of the arm’s length price of the AMP expenses. Excerpts “The TPO has benchmarked using the Residual Profit Split Method. For applying the Residual Profits Split Method, it is incumbent upon the TPO first to combine profit from the international transaction of incurring AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. In order to work out the combined profit in the transaction the financials/profitability of the AE’s is very much essential. In the instant case, the Assessee has refused to submit the profitability of the AE’s, therefore the TPO has adopted the RPSM.” “In our opinion, the Assessee who is entering into the International transaction is duty bound to maintain and produce the same before the Department when it is asked to produce as per Section 92D of Income Tax Act R/w. Rule 10D and 92D of Income Tax Rules, 1962. If the assessee doesn’t provide the financials of its AE’s, the TPO/AO/DRP can very well invoke the provisions of Income tax Provisions of Income-Tax Act and the Rules framed there under to call for such records not only from the country of residence but also from any other country in cases of AE’s and decide the issue.” “In our opinion the TPO/Assessing Officer cannot apply wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non cooperation for providing the audited financials of AE.” “By following the above said binding decision in Assessee’s own case and also for the reasons mentioned above, we hold that the international transaction of AMP functions exists in the case of the Assessee and restore the issue to the TPO for following the direction of the Hon’ble Delhi High Court in the case of Sony Ericsson (supra) for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE’s or in the segregated manner, after taking into account appropriate comparables or applying of Resale price method or Cost Plus Method or Profit Split Method keeping in view the findings of the Hon’ble Delhi High Court. Needles to say that, the Assessee shall be given opportunity of being heard. Further Assessee is directed to provide all the relevant documents including the financials of its AE’s if required, failing to which the Authorities can act in accordance with law by invoking the relevant provisions.” ...

In other words, in this situation where the taxpayer will have an ongoing business relationship as supplier to the foreign associated enterprise that carries on an activity previously carried on by the taxpayer, the taxpayer and the foreign associated enterprise have the opportunity to obtain economic and commercial benefits through that relationship (e.g. the sale price of goods) which may explain for instance why compensation through an up-front capital payment for transfer of the business was foregone, or why the future transfer price for the products might be different from the prices that would have been agreed absent a restructuring operation. In practice, however, it might be difficult to structure and monitor such an arrangement. While taxpayers are free to choose the form of compensation payments, whether up-front or over time, tax administrations when reviewing such arrangements would want to know how the compensation for the post-restructuring activity was possibly affected to take account of the foregone compensation, if any, for the restructuring itself. Specifically, in such a case, the tax administration would want to look at the entirety of the arrangements, while being provided with a separate evaluation of the arm’s length compensation for the restructuring and for the post-restructuring transactions ...

It may be relevant in assessing the reliability of a valuation model to consider the purposes for which the valuation was undertaken and to examine the assumptions and valuation parameters in different valuations undertaken by the taxpayer for non-tax purposes. It would be reasonable for a tax administration to request an explanation for any inconsistencies in the assumptions made in a valuation of an intangible undertaken for transfer pricing purposes and valuations undertaken for other purposes. For example, such requests would be appropriate if high discount rates are used in a transfer pricing analysis when the company routinely uses lower discount rates in evaluating possible mergers and acquisitions. Such requests would also be appropriate if it is asserted that particular intangibles have short useful lives but the projections used in other business planning contexts demonstrate that related intangibles produce cash flows in years beyond the “useful life” that has been claimed for transfer pricing purposes. Valuations used by an MNE group in making operational business decisions may be more reliable than those prepared exclusively for purposes of a transfer pricing analysis ...

Small to medium sized enterprises are entering into the area of transfer pricing and the number of cross-border transactions is ever increasing. Although the arm’s length principle applies equally to small and medium sized enterprises and transactions, pragmatic solutions may be appropriate in order to make it possible to find a reasonable response to each transfer pricing case ...

It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, level of risk involved, and whether they are performed in a stable or changing environment. Such a practical approach would conform to a pragmatic risk assessment strategy or prudent business management principle. In practice, this means that it may be reasonable for a taxpayer to devote relatively less effort to finding information on comparables supporting less significant or less material controlled transactions. For simple transactions that are carried out in a stable environment and the characteristics of which remain the same or similar, a detailed comparability (including functional) analysis may not be needed every year ...

When undertaking a comparability analysis, there is no requirement for an exhaustive search of all possible relevant sources of information. Taxpayers and tax administrations should exercise judgment to determine whether particular comparables are reliable ...

One question that arises when putting the need for comparability analyses into perspective is the extent of the burden and costs that should be borne by a taxpayer to identify possible comparables and obtain detailed information thereon. It is recognised that the cost of information can be a real concern, especially for small to medium sized operations, but also for those MNEs that deal with a very large number of controlled transactions in many countries. Paragraph 4.28 and Chapter V contain explicit recognition of the need for a reasonable application of the requirement to document comparability ...

In order for the process to be transparent, it is considered a good practice for a taxpayer that uses comparables to support its transfer pricing, or a tax administration that uses comparables to support a transfer pricing adjustment, to provide appropriate supporting information for the other interested party (i.e. tax auditor, taxpayer or foreign competent authorities) to be able to assess the reliability of the comparables used. See paragraph 3.36 for a discussion of information available to tax administrations that is not disclosed to taxpayers. General guidance on documentation requirements is found at Chapter V of these Guidelines. See also the Annex II to Chapter IV “Guidelines for conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (MAP APAs)” ...

For the purpose of determining whether a Swiss Corporation had effektivly been managed from the Netherlands or had a permanent establishment in the Netherlands, the Dutch tax authorities send a request for information. The Swiss Corp was not willing to answere the request and argued that the request was disproportionate and that the concepts of “documents concerning decision-making with regard to important decisions” and “e-mail files” was and did not fit into the powers that an inspector has under Article 47 of the AWR. The court ruled in favor of the tax authorities. The court did not find the tax authorities’ request for information disproportionate. Article 47 of the Awr requires the provision of factual information and information that may be relevant to taxation with respect to the taxpayer (cf. Supreme Court October 20, 2017, ECLI: NL: HR: 2017: 2654). In the opinion of the court, the defendant remained within those limits with his request to claimant to provide access to the entire, original administration in the broadest sense (see 1.6). In addition, a broad range of starting points with regard to the subjective tax liability of the plaintiff also justifies a broad question in this case. The court passed the claim that requesting access to “documents concerning decision-making on important decisions” and “e-mail files” was open to multiple interpretations. However, in the view of the court, the mere circumstance that a request for information left some room for interpretation did not mean that it was not in accordance with the powers that the inspector has pursuant to Article 47 of the AWR. Click here for other translation ...

The Danish tax authorities were of the opinion that Microsoft Denmark had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. According to the Market Development Agreement (MDA agreement) concluded between Microsoft Denmark and MIOL with effect from 1 July 2003, Microsoft Denmark received the largest amount of either a commission based on sales invoiced in Denmark or a markup on it’s costs. Microsoft Denmark’s commission did not take into account the sale of Microsoft products that occurred through the sale of computers by multinational computer manufacturers with pre-installed Microsoft software to end users in Denmark – (OEM sales). In court, Microsoft required a dismissal. In a narrow 3:2 decision the Danish Supreme Court found in favor of Microsoft. “…Microsoft Denmark’s marketing may have had some derivative effect, especially in the period around the launch in 2007 of the Windows Vista operating system, which made higher demands on the computers. On the other hand, it must be assumed that also the recommendations of Microsoft products made by the multinational computer manufacturers under agreements between, among others, Dell and Microsoft Denmark’s American parent company, which, in return, gave discounts to computer manufacturers, may have had an effect on, among other things. sales of Package licenses in Denmark, whereby Microsoft Denmark, in its remuneration, benefited from this marketing effort. The significance of the various companies’ marketing efforts and the interaction between them has not been elucidated during the case, and we find it unlikely that Microsoft Denmark’s marketing had an effect on the sale of MNA OEM licenses in the US and other countries outside Denmark, which exceeded the importance of computer manufacturers marketing for the sale of package licenses, which were included in the basis for the remuneration of Microsoft Denmark. … Based on the above, we do not find that Microsoft Denmark’s remuneration for the company’s marketing efforts was not in accordance with the arm’s length principle.” Click here for translation ...

The Danish Tax Ministry and Microsoft meet in Court in a case where the Danish tax authorities had issued an assessment of DKK 308 million. The Danish tax authorities were of the opinion that Microsoft had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. In court, Microsoft required a dismissal with reference to the fact that Sweden, Norway and Finland had either lost or resigned similar tax cases against Micorosoft. The National Court ruled in favor of Microsoft. The decision was later confirmed by the Supreme Court. Click here for translation ...

In other words, in this situation where the taxpayer will have an ongoing business relationship as supplier to the foreign associated enterprise that carries on an activity previously carried on by the taxpayer, the taxpayer and the foreign associated enterprise have the opportunity to obtain economic and commercial benefits through that relationship (e.g. the sale price of goods) which may explain for instance why compensation through an up-front capital payment for transfer of the business was foregone, or why the future transfer price for the products might be different from the prices that would have been agreed absent a restructuring operation. In practice, however, it might be difficult to structure and monitor such an arrangement. While taxpayers are free to choose the form of compensation payments, whether up-front or over time, tax administrations when reviewing such arrangements would want to know how the compensation for the post-restructuring activity was possibly affected to take account of the foregone compensation, if any, for the restructuring itself. Specifically, in such a case, the tax administration would want to look at the entirety of the arrangements, while being provided with a separate evaluation of the arm’s length compensation for the restructuring and for the post-restructuring transactions ...

It may be relevant in assessing the reliability of a valuation model to consider the purposes for which the valuation was undertaken and to examine the assumptions and valuation parameters in different valuations undertaken by the taxpayer for non-tax purposes. It would be reasonable for a tax administration to request an explanation for any inconsistencies in the assumptions made in a valuation of an intangible undertaken for transfer pricing purposes and valuations undertaken for other purposes. For example, such requests would be appropriate if high discount rates are used in a transfer pricing analysis when the company routinely uses lower discount rates in evaluating possible mergers and acquisitions. Such requests would also be appropriate if it is asserted that particular intangibles have short useful lives but the projections used in other business planning contexts demonstrate that related intangibles produce cash flows in years beyond the “useful life” that has been claimed for transfer pricing purposes. Valuations used by an MNE group in making operational business decisions may be more reliable than those prepared exclusively for purposes of a transfer pricing analysis ...

Small to medium sized enterprises are entering into the area of transfer pricing and the number of cross-border transactions is ever increasing. Although the arm’s length principle applies equally to small and medium sized enterprises and transactions, pragmatic solutions may be appropriate in order to make it possible to find a reasonable response to each transfer pricing case ...

It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, level of risk involved, and whether they are performed in a stable or changing environment. Such a practical approach would conform to a pragmatic risk assessment strategy or prudent business management principle. In practice, this means that it may be reasonable for a taxpayer to devote relatively less effort to finding information on comparables supporting less significant or less material controlled transactions. For simple transactions that are carried out in a stable environment and the characteristics of which remain the same or similar, a detailed comparability (including functional) analysis may not be needed every year ...

When undertaking a comparability analysis, there is no requirement for an exhaustive search of all possible relevant sources of information. Taxpayers and tax administrations should exercise judgment to determine whether particular comparables are reliable ...

One question that arises when putting the need for comparability analyses into perspective is the extent of the burden and costs that should be borne by a taxpayer to identify possible comparables and obtain detailed information thereon. It is recognised that the cost of information can be a real concern, especially for small to medium sized operations, but also for those MNEs that deal with a very large number of controlled transactions in many countries. Paragraph 4.28 and Chapter V contain explicit recognition of the need for a reasonable application of the requirement to document comparability ...

In order for the process to be transparent, it is considered a good practice for a taxpayer that uses comparables to support its transfer pricing, or a tax administration that uses comparables to support a transfer pricing adjustment, to provide appropriate supporting information for the other interested party (i.e. tax auditor, taxpayer or foreign competent authorities) to be able to assess the reliability of the comparables used. See paragraph 3.36 for a discussion of information available to tax administrations that is not disclosed to taxpayers. General guidance on documentation requirements is found at Chapter V of these Guidelines. See also the Annex to Chapter IV “Guidelines for conducting Advance Pricing Arrangements under the Mutual Agreement Procedure (MAP APAs)” ...

As has been said, the evidence to be produced will depend largely on the facts and circumstances of each particular case, and on the amounts of services rendered or costs allocated. In cases of minor importance, it may not be reasonable to require taxpayers to keep elaborate records and costly documentation, and tax authorities may find it sufficient to make an assessment of the appropriate charge as best as they can in the light of the available evidence ...

Especially in cases where an MNE’s central expenditure is allocated to the members on a broad basis it would be necessary for the taxpayer, in co-operation with other associated enterprises, to be prepared to submit information to the tax authorities about the structure and organisation of the MNE and about the functions and responsibilities of its respective members ...

What would be regarded as satisfactory evidence on these questions depends largely on the type of service rendered and on the circumstances of each individual case. Where a service payment is based on costs, adequate books and records must be maintained by taxpayers to permit verification of such costs. In the case of cost related allocation schemes, the enterprise could be expected to provide written service or cost allocation agreements defining as closely as possible the nature of the activities and costs included, as well as the method of remuneration. Where this seems necessary after the event, supporting evidence could, for example, include invoicing, individual evidence of cost incurred, records of time consumed, travel documentation and written evidence of the cost allocation agreement and evidence of the service flow over an appropriate period ...

A taxpayer has to produce satisfactory evidence to prove that a service has been performed, a cost incurred and a real benefit, whether actual or potential, received. To determine what is the underlying reality behind an intra-group service agreement or cost allocation arrangement is often therefore the crucial question for tax authorities when deciding whether or not to admit the deduction of a payment ...