The tax authorities had issued an assessment in which the value of shares transfered between related parties had been adjusted by application of the arm’s length principle. The assessment was appealed to the Administrative Court, which upheld the assessment. An appeal was then filed with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the judgement issued by the Administrative Court and decided in favour of the tax authorities. Excerpt “It should be remembered here that at the time of the facts the law did not provide for the use of any method, although there were already some guidelines from the OECD to this effect, and the Tax and Customs Authority researched and used a methodology close to the “comparable price” of the sale of shares closest to a shareholder to the company, making reference to the fact that this shareholder tried to sell the shares on the market. In its appellate submissions and conclusions, the appellant puts forward arguments for its dismissal based on the unreliability of the values thus obtained, giving reasons for not taking into account the values set in the deal with the shareholder M…, concluded in the same year, 1997, namely due to the animosity of relations between this partner, the company and the members of the management bodies, but the truth is that it does not effectively rule out the fact that the shareholder had previously tried to sell the shares in a fully competitive market or that this had an influence on the price reached. In fact, although the Appellant emphasises the differences between the deals concluded, the first with the shareholder M…and the others at issue here, with the Carreira C…and M… families, the truth is that both acquired their own shares and for very different amounts, but it is true that, contrary to what the Appellant argues, the objects of the deals are in themselves comparable: the sale of shares. Therefore, the judgement under appeal does not deserve censure when it disregards the values ascertained in the expert report carried out more than 25 years after the facts, in a context of significant time lagsand which uses the equity method and validates the result calculated using the methodology used by the Tax and Customs Authority, for the reasons described above. In fact, in addition to not really calling into question the conclusions and methods used by the Tax and Customs Authority, the figures found in the expert’s report are not intended to replace the reasoning behind the corrections it made, nor to lead to new formulas for determining the tax base. The truth is that the factual situation described in the STA judgement cited by the Appellant is very different from the case under consideration in the present proceedings, since in addition to the fact that the existence of relationships different from those that would normally be agreed between independent peopleIn addition, the values that served as the basis for the contested settlement were not corrected on the basis of the application of the coefficient of monetary correction to the acquisition price of shares. Thus, and with greater assertiveness or development, we cannot see how the interpretation accepted violates the principle of taxing companies on their real income (article 104/2 of the Constitution), given that the law, in the aforementioned article 57/1 CIRC, allowed the Tax Authority to make corrections to the declaration [see conclusion Y) of the pleadings on appeal]. In fact, this is not about the presumption of veracity enjoyed by the Impugnant’s and now Appellant’s accounts, but rather about preventing the erosion of the tax base and tax avoidance through price manipulation by verifying the existence of special relationships between the people involved in the deal with the ability to influence the conditions and the way in which the price was determined. The Appellant is therefore wrong on these points.” Click here for English translation. Click here for other translation ...

The order relate to the admissibility of two expert reports that Blackberry Limited wanted to submit in an appeal filed with the tax court concerning an assessment of approximately $17.1 million of FAPI (for research and development services received from US affiliates) and a reduction of the US corporate tax paid by US affiliate corporations when determining the FAT deduction. The first report contained an opinion on the development of international tax principles in Canada and the second report contained an opinion firstly, on alternative hypothetical transfer pricing structures and secondly, on the policy ramifications of a “hypothetical” model receiving similar treatment as that which the Appellant received from the Minister. The tax authorities held, that the reports were irrelevant, unnecessary and prejudicial and therefore inadmissable. Order of the Tax Court The Court ruled in favor of the tax authorities. “The two-step test for determining expert evidence admissibility was initially articulated by the Supreme Court of Canada (“Supreme Court”) in Mohan and subsequently clarified in White Burgess. The Supreme Court’s direction may be summarized below: 1. Threshold admissibility: This step consists of four questions: is the evidence logically relevant; is it necessary to assist the trier of fact; are there other exclusionary rules; and is the expert properly qualified. 2. Gatekeeper function / Residual discretion to exclude: This step is a cost-benefit analysis of the help and harm of the evidence. Does the probative value outweigh potential prejudice, confusion, and prolonged court time? This can be thought of as an application of the general exclusionary rule.”.  According to the Court the expert reports did not pass the test, but in the order the Court states that “Both Dr. Mintz and Mr. Rolph will have their inadmissible opinions otherwise placed before the Court, just not in the form of expert evidence. Dr. Mintz will be heard through the authentic, unvarnished Technical Report he helped author 24 years ago. Mr. Rolph will be heard through the introduction in argument and submissions by Appellant’s counsel of the analogous “hypotheses” and conclusions he has provided in Section 3 of his report.” ...

SA SACLA, which trades in protective clothing, footwear and small equipment, was the subject of a tax audit covering the financial years 2007, 2008 and 2009. In 2008, Sacla had sold a portfolio of trademarks to a related party, Involvex SA, a company incorporated under Luxembourg law, for the sum of 90,000 euros. In a proposed assessment issued in 2011, the tax authorities increased Sacla’s taxable income on the basis of Article 57 of the General Tax Code, taking the view that Sacla had made an indirect transfer of profits in the form of a reduction in the selling price by selling a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime. The tax authorities had estimated the value of the trademarks at €20,919,790, a value that was reduced to €11,288,000 following interdepartmental discussions. In a February 2020, the Lyon Administrative Court of Appeal, after rejecting the objection of irregularity of the judgment, decided that an expert would carry out a valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation was to take into account an agreed exemption from the payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert’s report was filed on 8 April 2021 and, upon receipt of the report, SA SACLA asked the court to modify the judgment by considering that the value of the transferred trademarks should be set at between EUR 1.3 million and EUR 2.1 million and that the penalties for wilful infringement should be waived. By judgement of 19 August 2021, the court rejected SACLA’s request and set the value of the trademarks – in accordance with the expert’s report – at 5,897,610 euros. “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” SACLA then appealed to the Supreme Administrative Court, which by decision no. 457695 of 27 October 2022 set aside articles 3 and 6 of the judgement from the Administrative Court of Appeal and remanded the case for further considerations. “2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate. 3. It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment.” Judgement of the Administrative Court of Appeal The Court ruled as follows “…by selling on 19 October 2008 a set of trademarks held by it at a reduced price to Involvex, a company incorporated under Luxembourg law, had carried out an indirect transfer of profits. In a judgment of 10 October 2017, the Lyon Administrative Court, after finding that there was no need to rule on the claims for suspension of payment submitted at first instance, granted partial discharge of the additional corporation tax and social security contributions to ...

“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to 30 September 2017, which resulted in an assessment of additional taxable income. The transfer pricing issues identified by the tax authorities were the remuneration received by the Hungarian company for its manufacturing activities and excessive interest payments to a group company in Luxembourg. Judgement of the Supreme Court The Supreme Court set aside the judgment of the Court of Appeal and ordered the court to conduct new proceedings and issue a new decision. In its decision, the Court of Appeal had relied on an expert opinion, which the Supreme Court found to to be questionable, because there were serious doubt as to its correctness. Therefore, according to the order issued by the Supreme Court, the Court of Appeal may not undertake a professional assessment of the expert opinion that goes beyond the interpretation of the applicable legislation, nor may it review the expert opinion in the new proceedings in the absence of expertise. Excerpt “[58] In relation to the adjustment of the profit level indicator for manufacturing activities, the expert found that comparable companies do not charge taxes such as the local business tax and the innovation levy as an expense to operating profit, the amount of which distorts comparability, this is a clearly identifiable difference in the cost structure of the company under investigation and the comparable companies, so an adjustment should be made in accordance with the OECD guidelines and the Transfer Pricing Regulation, because the statistical application of the interquartile range restriction cannot be used to increase comparability. However, the Court of First Instance held that it was not disputed that, even if the interquartile range as a statistical method was used, it might be necessary to apply individual adjustments, but that the applicant had not provided the audit with a detailed analysis of the justification for the adjustment and had not provided any documentary evidence in the course of the two administrative proceedings to show how the adjustment applied served to increase comparability. However, the application for review relied on the contradictory nature of the reasoning in this respect, since, while the Court of First Instance criticised the lack of documentation to support the adjustment {Ist judgment, paragraph 34}, it shared the expert’s view that this would indeed require an investment of time and energy which taxpayers could not reasonably be expected to make {Ist judgment, paragraph 35}. [59] On the other hand, the judgment at first instance explained that the applicant had only carried out research in the course of the administrative proceedings into whether the countries of the undertakings used as comparators had a similar type of tax burden to the Hungarian local business tax, and the expert had referred in his expert opinion to the fact that the applicant had only identified this one difference when carrying out the comparative analysis, but, if a detailed analysis is carried out, each difference can be individually identified and quantified and it is for this reason that the OECD guidelines also allow a range of results to be taken into account, because it reduces the differences between the business characteristics of the associated enterprises and the independent companies involved in comparable transactions and also takes account of differences which occur in different commercial and financial circumstances. Thus, the expert did not share the expert’s view that, while the narrowing to the interquartile range includes differences that are not quantifiable or clearly identifiable, individual adjustments should always be applied in the case of clearly identifiable and quantifiable significant differences. Thus, the trial court took a contrary view to the expert on this issue. [60] Nor did the Court of First Instance share the expert’s view in relation to the interest rate on the intercompany loan granted to the applicant by its affiliate and did not accept the expert’s finding that the MNB’s interest rate statistics were an averaging of the credit spreads of the debtor parties involved in the financing transactions, on an aggregated basis and, consequently, the use of the MNB interest rate statistics is not in itself capable of supporting or refuting the arm’s length principle of the interest rate applied in intra-group lending transactions, whether long or short-term. Nor did it accept the method used and described by the applicant in the comparability field, since it did not consider that the applicant should have used an international database to look for comparative data, since comparability was questionable. Furthermore, it considered irrelevant the expert’s reference to the fact that the average loan interest rates in Hungary in 2016 were strongly influenced by the low interest rates on subsidised loans to businesses and criticised the fact that the expert did not consider it necessary to examine the applicant’s current account loans under the cash-pool scheme. [61] It can thus be concluded that the Court of First Instance, in its judgment, did not accept the reasoning of the private expert’s opinion and made professionally different findings from those of the expert on both substantive points. [62] The opinion of the appointed expert is questionable if a) it is incomplete or does not contain the mandatory elements of the opinion required by law, b) it is vague, c) it contradicts itself or the data in the case, or d) there is otherwise a strong doubt as to its correctness [Art. 316 (1) of the Civil Code]. The private expert’s opinion is questionable if a) the case specified in paragraph (1) is present [Art. 316 (2) a) of the Civil Code]. Section 316 of the Private Expert Act specifies and indicates precisely in which cases the expert’s opinion is to be considered as a matter of concern. Thus, the expert’s opinion is of concern if it is incomplete, vague, contradictory or otherwise doubtful. The latter case ...

HPI – CZ spol. s r.o. is a subsidiary in the Monier group which is active in the production, sales and services of roofing and insulation products. In June 2012 the Monier group replaced an existing cash pool arrangement with a new cash pool arrangement. The documents submitted show that on 1 April 2009 HPI concluded a cash pool agreement with Monier Group Services GmbH , which consisted in HPI sending the balance of its bank account once a week to the group’s cash pooling account – thus making those funds available to the other members of the group, who could use them to ‘cover’ the negative balances in their accounts. The companies that deposited funds into the cash pooling account received interest on these deposits at 1M PRIBOR + 3%; loans from the shared account bore interest at 1M PRIBOR + 3.75%. With effect from 1 June 2012, HPI concluded a new cash pooling agreement with a newly established company in Luxembourg, Monier Finance S.á.r.l. Under the new agreement, deposits were now remunerated at 1M PRIBOR + 0,17 % and loans at 1M PRIBOR + 4,5 %. HPI was in the position of a depositor, sending the funds at its disposal to the cash pooling account (but also having the possibility to draw funds from that account). Following an audit of HPI the tax authorities issued an assessment of additional income resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied by the parties in the previously cash pool arrangement from 1 January 2012 to 31 May 2012. HPI filed an appeal and in February 2022 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the tax authority’s view, which determined the arm’s length interest rate by taking it to be the rate agreed in the old cash pool arrangement from 1 January 2012 to 31 May 2012, was contrary to the meaning of section 23(7) of the Income Tax Act. According to the Court it was for the tax authority to prove that the prices agreed between related parties differed from those agreed in normal commercial relations. In the absence of comparable market transactions between independent persons, the tax authority may determine the price as a hypothetical estimate based on logical and rational reasoning and economic experience. However, according to the Court the tax authorities did not even examine the normal price for the period from 1 January 2012 to 31 December 2012 but merely applied the interest rate from the cash pooling agreement in force until 31 May 2012. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court decided in favour of HPI and upheld the decision from the Regional Court. Excerpt “….The applicant described the operation of the cash pool until 31 May 2012. Monier Group Services GmbH was the managing member and the applicant sent the balance of the account to the cash pool after assessing its cash flow. As from 1 June 2012, Monier Finance S.a.r.l. became the managing member and the balance was automatically sent to the cash pool account on a daily basis. The balance in the applicant’s bank account was thus zero every day. In the event of a negative balance, the applicant would balance the cash pool account. As regards the sharp drop in the interest rates in the cash pool, she stated that they were set according to the interest rates provided for deposits by local banks. In order to encourage members to join the cash pool, the managing member of the group offered them a rate equivalent to 1M EURIBOR or IBOR + 0,17 % (or 0,174 % in 2016). Thanks to the automatic sending of funds to the cash pool, the applicant saved approximately CZK 100-150 thousand per year in bank charges. In the end, the members set the rate as 1M PRIBOR + 0.17%. The 0,17 % corresponds to the margin of the banks, which, however, deducted it from the reference rate of 1M PRIBOR. The members of the cash pool thus obtained a rate 0.34% higher than the conventional banks. Thanks to the interest rate on a daily basis, the appreciation was higher, and this is what made the new contract from 1 June 2012 different from the original contract. Monier Finance acted as an “in-house bank” for the members of the Group and charged a premium in the form of higher interest for the risks associated with lending money to the members of the cash pool and administrative costs. [19] The tax authorities have not demonstrated a difference between the interest rate agreed between the applicant and the managing member of the cash pool on the one hand and the benchmark rate on the other. Nor did the tax authority prove the reference price (rate) and, on the contrary, required the applicant to explain the difference itself. In short, the applicant’s profit from the interest on the cash pool deposits had decreased, the tax authorities saw no reason for such a decrease and therefore considered the rate which was higher (the rate agreed until 31 May 2012) to be in line with the arm’s length principle. However, it completely refrained from establishing the price that would have been agreed between independent parties and instead asked the applicant to explain the decrease in the agreed interest rate. … —The tax administrator required the applicant to explain the difference between the rates, without having even ascertained the comparative rate itself. Indeed, the tax authorities merely assumed that the original cash pooling agreement provided for a deposit rate of 1M PRIBOR + 3 %. The fact that the new rate was significantly lower could be a ...

SA SACLA, which trades in protective clothing and footwear as well as small equipment, was subject of a tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the form of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert report was filed on 8 April 2021 and after receiving the report SA SACLA asked the court to change the judgment by considering that the value of the transferred trademarks should be set at a sum of between 1.3 and 2.1 million euros and that penalties for deliberate breach should be discharged. By judgement of 19 August 2021 the court dismissed the request filed by SACLA and determined the value of the trademarks – in accordance with the expert report – to be 5,897,610 euros. “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” An appeal was then filed by SACLA with the Supreme Administrative Court Judgement of the Supreme Court The Supreme Court set aside articles 3 and 6 of the Judgement from the Administrative Court of Appeal. “Article 3: The judgment of the Lyon Administrative Court of 10 October 2017 is reversed insofar as it is contrary to the present judgment. … … Article 6: The remainder of the parties’ submissions is rejected.” Excerpts “2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate. (3) It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment. (4) It follows from the foregoing that, without needing to rule on the other grounds of appeal, Articles 3 to 6 of the contested judgment should be set aside and, in the circumstances of the case, the State should be ordered to pay the sum of EUR 3 000 to Coverguards Sales under Article L. 761-1 of the Code of Administrative Justice.” Click here for English translation Click here for other translation ...

“Agri B.V.” is a Dutch subsidiary in an international group processing agricultural products. Following a restructuring in 2009 “Agri B.V.” had declared a profit of € 35 million, including € 2 million in exit profits. In an assessment issued by the tax authorities this amount had been adjusted to more than € 350 million. Judgement of the Court of Appeal The Court of appeal decided predominantly in favour of the tax authorities. An expert was appointed to determine the value of what had been transferred, and based on the valuation report produced by the expert the court set the taxable profit for 2009/2010 to €117 million. Excerpt “The Functional Analysis of [company 9] submitted, the Asset Sale and Purchase Agreements, the Manufacturing Services Agreements and the Consulting services and assistance in conducting business activities agreements show that there was a transfer of more than just separate assets and liabilities. The factual and legal position of [company 2] and [company 1] has changed significantly as a result of the reorganization. In this respect, the Court considered the following. 27. Whereas prior to the reorganization [company 1] operated independently under its own name on the purchasing and sales markets, independently hedged price risks and ran the full risk of good and bad luck in all its activities, after the reorganization it only provides (production) services to [company 3] for a fixed fee for a certain period of time. The claimant’s contention that already with the establishment of the [company 6] in 2000 there was far-reaching coordination as a result of which [company 1] no longer operated completely independently but only as a processing facility is only supported by written statements from employees in 2019. These statements are difficult to reconcile with the 2009 Functional Analysis, in which the [company 6] is not even mentioned. Therefore, the Court does not attach the value that the claimant wishes to see attached to these statements. That [company 3] and [company 4] were involved in the (strategic) planning of [company 1] prior to the reorganization is not surprising in view of the global activities of the group. However, no more can be deduced from the Functional Analysis than that [company 3] and [company 4] were operating in cooperation with [company 1]. That the form in which this cooperation is cast detracts from the independence of [company 1] described elsewhere in the Functional Analysis has not become plausible on the basis of the documents. 28. A similar analysis can be made of [company 2’s] activities before and after the reorganisation. Whereas prior to the reorganisation [company 2] operated independently under its own name on the purchasing and sales markets, independently hedged price risks (not only for its own benefit, but for the benefit of the activities of all group companies that it coordinated worldwide), and ran the full risk of good and bad opportunities in all its activities, after the reorganisation it only provides (production) services to [company 3] for a fixed fee for a limited period of time. 29. The claimant has stated without contradiction that the profitability of [company 4] depends to a large extent on daily global and regional price fluctuations over which [company 4] has no influence, and that the market developments are therefore analysed on a daily basis. From the description of the market expertise of [company 3] after the reorganization in the Functional Analysis (see recital 8), the Court deduces that the market expertise present in the group of [company 4], gained from hedging, taking positions on markets and contract negotiations, forms the basis for the activities of [company 3] after the reorganization. This description explicitly states that this knowledge plays a key role in improving the profitability of the Dutch oilseed business. In that connection, reference is made to the fact that [company 3] will set the price and volume guidelines for purchases and sales, conclude the contracts and take care of the hedging. It is established that all these activities were carried out by [company 1] and [company 2] prior to the reorganisation. It has not become plausible that, prior to the reorganization, [company 3] was already engaged in such similar activities that those of [company 1] and [company 2] can only be regarded as additional. During the reorganization, not only stocks, current purchase and sales contracts, currency contracts and futures, etc. were transferred to [company 3], but also dozens of employees, including traders from [company 1] and [company 2], were transferred to [company 3]. The Court therefore deems it plausible that the aforementioned market expertise was not actually invested in [company 3] itself until the transfer of these employees. 30. The prices agreed as part of the reorganisation only concern the transfer of assets and liabilities. However, in view of the foregoing, this transfer cannot be viewed separately from the concentration of market expertise at [company 3] that was previously held by [company 1] and [company 2]. The fact that the market expertise at the latter company was also supported by employees who were not employed by it does not mean that this knowledge should not be attributed to the company of [company 2]. In addition to market expertise, the power of decision regarding purchases, sales and hedging was also transferred from [company 1] and [company 2] to [company 3]. Since having market expertise, seen against the background of the aforementioned power of decision, plays a key role in the activities of [company 3] after the reorganization aimed at increasing profitability, the Court deems it plausible that a value must be attributed to it separately that has not already been reflected in the agreed prices for the assets and liabilities. The Court also sees support for this conclusion in the circumstance that the turnover and cash flow of [company 1] and [company 2] – as has not been contradicted by the claimant – decreased considerably after the reorganization, while those of [company 3] increased considerably.” Click here for English translation Click here for other translation ...

The French Accor hotel group was the subject of an tax audit related to FY 2010, during which the tax authorities found that Accor had not invoiced a fee for the use of its trademarks by its Brazilian subsidiary, Hotelaria Accor Brasil, in an amount of 8,839,047. The amount not invoiced was considered a deemed distribution of profits and the tax authorities applied a withholding tax rate of 25% to the amount which resulted in withholding taxes in an amount of EUR 2.815.153. An appeal was filed by Accor with the Administrative Court. In a judgment of 7 July 2020, the Administrative Court partially discharged Accor from the withholding tax up to the amount of the application of the conventional reduced rate of 15% (related to dividends), and rejected the remainder of the claim. The Administrative Court considered that income deemed to be distributed did not fall within the definition of dividends under article 10 of the tax treaty with Brazil and could not, in principle, benefit from the reduced rate. However in comments of an administrative instruction from 1972 (BOI 14-B-17-73, reproduced in BOI-INT-CVB-BRA, 12 August 2015) relating to the Franco-Brazilian tax treaty, it was stated, that the definition of dividends used by the agreement covers “on the French side, all products considered as distributed income within the meaning of the CGI”. The Administrative Court noted that such a definition would necessarily include distributed income within the meaning of the provisions of Article 109 of the CGI”. The tax authorities appealed against this judgment. Judgement of the Administrative Court of Appeal The Court allowed the appeal of the tax authorities and set aside the judgment in which the Administrative Court had partially discharged Accor from the withholding tax to which it was subject in respect of the year 2010. “Under the terms of Article 10 of the tax treaty concluded between the French Republic and the Federative Republic of Brazil on 10 September 1971: “1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. / 2. However, dividends may be taxed in the State in which the company paying the dividends has its tax domicile and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the dividends / (…) 5. (a) The term “dividend” as used in this Article means income from shares, “jouissance” shares or “jouissance” warrants, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate units which is assimilated to income from shares by the taxation law of the State of which the company making the distribution is resident. (…) “. It follows from these stipulations that the dividends mentioned in Article 10 of the Franco-Brazilian Convention must be defined as the income distributed by a company to its members by virtue of a decision taken by the general meeting of its shareholders or unit holders under the conditions provided for by the law of 24 July 1966, as amended, on commercial companies, which does not include income deemed to be distributed within the meaning of Article 109(1) of the French General Tax Code. Neither these stipulations, nor any other clause of the Franco-Brazilian agreement, prevent the taxation in France of income considered as distributed to Hotelaria Accor Brasil by Accor, according to French tax law, at the common law rate set, at the date of the taxation in dispute, at 25% of this income by Article 187 of the General Tax Code.” “The Accor company claims, on the basis of Article L. 80 A of the Book of Tax Procedures, of the instruction of 8 December 1972 referenced BOI n° 14-B-17-72 relating to the tax treaty concluded between France and Brazil on 10 September 1971, which provides that: “According to paragraph 5 of Article 10, the term dividends means income from shares, jouissance shares or warrants, mining shares, founders’ shares or other profit shares with the exception of debt claims and, in general, income assimilated to income from shares by the tax legislation of the State of which the distributing company is resident. / This definition covers, on the French side, all income considered as distributed income within the meaning of the Code général des Impôts (art. 10, paragraph 5b). “However, this interpretation was brought back by an instruction referenced 4 J-2-91 of July 2, 1991, published in the Bulletin officiel des impôts n° 133 of July 11, 1991, relating to the impact of international treaties on the withholding tax applicable to income distributed outside France, according to which: “the advantages which benefit [the partners and the persons having close links with the partners] and which are considered as distributed income in domestic law retain this character in treaty law when the applicable treaty refers to dividends and gives a definition similar to that of the OECD model. On the other hand, when they benefit persons other than the partners, these benefits are subject to the treaty provisions relating to “undesignated” income, i.e. income that does not fall into any of the categories expressly defined by the applicable treaty”. Annex 1 to this instruction specifically states, with regard to Brazil, that income paid to a beneficiary who is not a shareholder of the distributing company is subject to withholding tax at the ordinary law rate of 25%. These statements must be regarded as having reported, on this particular point, the administrative interpretation contained in paragraph 2351 of the instruction of 8 December 1972. In this respect, it is irrelevant that the instruction of 8 December 1972 was fully reproduced and published by the BOFIP on 12 September 2012 under the reference BOI-INT-CVB-BRA, after the tax year in question. It follows that Accor cannot claim the benefit of the reduced conventional tax rate.” Click here for English translation Click here for other translation ...

The question at issue was whether a Crop tax adviser had acted in accordance with the requirements of a reasonably competent and reasonably acting adviser when advising on the so-called royalty routing and its implementation. Judgement of the Court of Appeal “Crop is liable for the damages arising from the shortcoming. For the assessment of that damage, the case must be referred to the Statement of Damages, as the District Court has already decided. To answer the question of whether the likelihood of damage resulting from the shortcomings is plausible, a comparison must be made between the current situation and the situation in which business rates would have been applied. For the hypothetical situation, the rates to be recommended by the expert should be used. For the current situation, the Tax Authorities have agreed to adjusted pricing. The question whether and to what extent [the respondents] et al. can be blamed for insufficiently limiting their loss in the negotiations with the tax authority, as argued by Crop, should be adjudicated in the proceedings for the determination of damages, because it has not been made plausible beforehand that Crop’s obligation to pay compensation should lapse in full because this is required by the requirements of fairness under the given circumstances” Click here for English Translation Click here for other translation ...

SA SACLA, which trades in protective clothing and footwear, as well as small equipment, was the subject of an tax audit covering the FY 2007, 2008 and 2009. In a proposed assessment issued in December 2011, the tax authorities increased its taxable income, on the basis of Article 57 of the General Tax Code, by considering that SACLA, by selling, a set of brands held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime, had carried out an indirect transfer of profits in the context of a reduction in the selling price. In a ruling of February 2020, the Lyon Administrative Court of Appeal, after dismissing the plea of irregularity in the judgment, decided that an expert would carry out an valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation should take into consideration an agreed exemption from payment of royalties for a period of five years granted by Involvex to SA SACLA. The expert report was filed on 8 April 2021. After receiving the expert report SA SACLA asked the court to change the judgment by considering that the value of the transferred trademarks should be set at a sum of between 1.3 and 2.1 million euros and that penalties for deliberate breach should be discharged. Judgement of the Court of Appeal The court dismissed the request filed by SACLA and determined the value of the trademarks – in accordance with the expert report – to be 5,897,610 euros. Excerpt “The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.” Click here for English translation Click here for other translation ...

In 2007 real estate had been transferred from “G gestão imobiliária S.A.” to “Publicações Real Estate Lda”. The Portuguese tax authority issued an assessment, where the pricing of real estate had been adjusted in accordance with the arm’s length principle, based on the prices paid for real estate in the same area. “Publicações Real Estate Lda” filed an appeal with the Administrative Court, where the assessment was later set aside. An appeal was then filed by the tax authorities with the Administrative Court of Appeal. Judgement of the Court The Court of Appeal upheld the assessment notice issued by the tax authorities and set aside the decision of the Administrative Court. Excerpt “The defendant and the judgment in crisis consider that the transaction chosen by the Tax Authorities is not comparable to the one subject to arithmetic correction and that the burden of proving the factual assumptions that determined such correction was not observed. However, this is not correct. The AT has collected information that allows the questioned transaction and the reference transaction to be compared, such as the date of both (2007), the location of both properties (A……….-M……..-M……..), the fact that both are industrial properties as defined by the applicable Municipal Development Plan, the fact that both are industrial warehouses, the fact that there is a study by the Real Estate Association on the price per square metre of warehouses in the area, which is set at between 500.00 euros and 550.00 euros per square metre. To the referred elements, the reasons justifying the corrective action of the AT should be added, to wit (10): i) the lack of presentation by the taxpayer of the transfer pricing documentation, in spite of having been notified to that effect; ii) the Chartered Accountant was not provided with information and documentation which would allow him to assess the reasonability of the price practised in the sale of real estate to a company with which special relations exist; iii) the appellant ascertained in the financial year in question a tax loss of €1. 034,476.33, most of which arose from the tax loss of €868,309.55, inherent to the transaction at issue in the proceedings. The comparability of transactions requires reference to objective factors that arise from the circumstances of the transactions being compared. Objective elements were collected on the calculation of the sale price of the category of property in question in the area under analysis (industrial warehouses). These elements justify the correction to the taxable income imposed by the AT. In turn, there is no evidence in the case-file that allows the comparability assessment made by the AT to be mischaracterised. In view of the evidence gathered of the existence of a similar transaction, carried out between independent entities, with a price different from that of the contested disposal, it was up to the taxpayer to allege and prove, through concrete facts, that the transactions in question are different. This allegation and proof was not made in this case. Therefore, the correction of the value of the transaction and the consequent correction to the taxable income are grounded. By judging in a discrepant sense, the sentence under appeal has committed an error of judgement, for which reason it should be replaced by a decision that rejects the opposition. Accordingly, the present conclusions of appeal are upheld.” Click here for English translation. Click here for other translation ...

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

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

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

In regards of transfer pricing A. SA had two activities – production of dairy products and distribution of milk – that had been subject to an audit by the tax authorities which resulted in an assessment of additional taxable income. The transfer pricing assessment had been upheld by the court of first instance and A. SA then filed an appeal to the Supreme Court. In regards of production activities the main criticism by A. SA was that the tax authorities had replaced one market price with another price considered convenient by tax authorities, without legal basis, although the tax inspection accepted the list of companies and comparable transactions for all three sections of the file. The judge of the merits did not motivate his choice in law and supports the maintenance of the median according to the RIF, but does not specify how he reached this conclusion, the data for which the cost plus method is substituted and the legal grounds are not analysed. In regards of distribution activities the criticism was that the forensic accountant reached the same conclusion as the company under review, but the court did not retain it, stating that it would require the tax authority to request a change in the transfer pricing file. The court also noted that the expert “commented lapidarily” in his analysis and in his conclusion. It considers that the court’s conclusion to rely strictly on the tax authority’s interpretation is erroneous, since the tax authority does not regularly carry out price analyses on affiliated companies in the geographical area in which the company is located. In practice, as long as the tax body cannot be suspected of having business ideas, it also follows that the tax body cannot correctly and consistently analyse pricing in an independent market as well as in a controlled market; in the present case, however, the method was chosen by the tax inspectorate with the intention of maximising the amounts set for additional payment, without taking into account, as it should have, the objective factors and the legal provisions applicable in the case, which were interpreted erroneously, without taking into account the principles of the OECD Guidelines. The tax body has access to databases on transfer pricing practices within the ANAF central unit. In this respect, the query of the database by the tax authority is absolutely necessary in order to determine both the transfer pricing method and the prices charged, and not the arbitrary determination of a random method without any reasoning. Judgement of Supreme Court The Supreme Court dismissed the appeal of A. SA and upheld the decision of the court of first instance. Excerpts “7.3.3.1. Production activity. The main criticism on this aspect concerns the re-framing of all market prices in the comparison range with the median price. The tax authority removed two companies from the comparison list which did not meet the independence criteria and calculated separately for each of the years under review at the median level resulting from this recalculation. The first court held that the tax authority correctly referred to the median resulting from the comparison of the 4 companies that met the independence criteria and did not make an estimate in accordance with Article 3 of OPANAF No 222/2008, since formally, F. met the conditions to be used for the price comparison, but the median resulting from the analysis of the 6 companies is different from the one resulting from the removal from the comparison of the companies that did not meet the independence criteria, and the new C. pen. The new C.C. had been established in the abstract, ignoring the above calculation formula. In accordance with Article 2 of Order No 222/2008 on the contents of the transfer pricing file: “(1)The margin of comparison is the range of price or profit values for comparable transactions between comparable independent companies. (2) For the determination of extreme values, the comparison margin shall be divided into 4 segments. The maximum and minimum segments represent the extreme results. For the purpose of determining the comparator range, the extreme results within the comparator range will not be used. (3) If the transfer price consideration established by the taxpayer is not included in the comparison range, the competent tax authority shall establish the median value as the transfer price at market price. The median value shall be the value which is in the middle of the comparison range. (4) If the median value cannot be identified, the arithmetic mean of the two middle values of the comparison range shall be taken. (5) The benchmarking will consider territorial criteria in the following order: national, European Union, international.” The tax authority justified the measure taken by the fact that the adjustment occurred in the case of years for which the indicator in question was found to be lower than the minimum limit of the quartile range, and that applying the calculation of the adjustment to the median of the quartile range is correct and logical, because just as the indicator in question can have values lower than the median, so it can also have values higher than the median. The High Court finds that the first court applied the law correctly, validating the measure ordered by the tax authority. The applicant’s claim that the tax inspection team accepted the list of companies and comparable transactions for all three sections (concerning the activity of selling raw milk as a raw material, concerning the activity of producing dairy products and concerning the activity of distributing goods) cannot be upheld, so that it was not necessary to apply the median value for the transfer price at market price. The acceptance referred to by the tax authority concerned only the fact that the transfer pricing file submitted to the tax inspection met the minimum requirements in terms of content (comparative lists, calculation of profit indicators for the companies included in those lists, information from the accounting records). Otherwise, a tax audit would be pointless if the actual handing over ...

An assessment had been issued where the pricing of intra group rental expenses for machinery had been set aside by the tax authorities for FY 2010-2013. By an application filed with the Court of Appeal S.C. A. S.R.L. requested the Court for annulment of the assessment issued by the tax authorities. The Court of Appeal by judgment no. 164 of 31 October 2017, partially partially annulled the assessment. Unsatisfied with this decision, both parties filed an appeal to the High Court. S.C. A. S.R.L. considers that the first court misapplied the substantive rules of law applicable to the case with regard to the additional determination of a corporation tax in the amount of RON 56,715 for 2010, with reference to the interpretation of the OECD Guidelines. “Although the expert appointed by the court of first instance correctly established the adjusted margins of trade mark-up for each of the years 2010 to 2013 and the adjusted margins of operating profit for the same period, he erred in finding that, for the purposes of the final calculation, an analysis of the year-by-year comparability of the profitability indicators obtained in the period 2010 to 2013 is required. The approach is wrong because paragraphs 3.76 and 3.79 of the OECD Guidelines require the elimination of any market influences or gaps that may have an impact on the company, the only correct method being to use multi-year financial data. The use of this method is intended to minimise the impact of individual factors on comparable entities and the economic environment, as well as temporary economic factors such as the economic crisis.” Judgement of Supreme Court The Supreme Court upheld the decision of the court of first instance. Excerpts “As regards the method chosen, although the appellant criticises the ‘year-on-year’ comparability method, it does not specifically point out what its shortcomings are, but only why it is necessary to use the method of multi-year or agreed financial data. The ‘year-on-year’ comparability method was used because it was observed that the adjusted net trading profit margins and adjusted operating profit margins for 2012 were lower than the lower quartile limit, so it was correctly required to adjust the company’s 2012 revenue to bring the profitability indicators to the median of the market range obtained for independent comparable companies. Paragraph 3.76 of the OECD Guidelines was correctly interpreted by the court of first instance as meaning that the provision primarily considers the analysis of the data for the year under assessment and, in the alternative, the data for previous years, so that the use of the aggregate comparison method is not required. Furthermore, paragraph 3.79 of the OECD Guidelines states that the use of multi-yearly data may only be used to improve the accuracy of the range of comparison, but in the present case the appellant has not shown in concrete terms the consequences of using that method.” “With regard to the estimation of transfer prices and the increase of the tax base by the amount of RON 3 815 806, the appellant-respondent submits that the difference in income between the expert’s report and the tax inspection report is due solely to the fact that the expert used the indicators from 7 companies and the tax authority used the indicators from 3 companies out of the 11 chosen. The criticism is unfounded because the expert and, by implication, the court of first instance, demonstrated that there were 4 other companies which were comparable in terms of the activity carried out and for which the tax inspection authorities considered that there was no information, but it was demonstrated by the evidence in the file that they should be included in the comparability sample.” Click here for English translation Click here for other translation ...

Key End Es Energy concluded a share purchase and sale agreement of 20.12.2012 with a related party LUKERG BULGARIA GmbH, under which KEY END EU ENERGY transferred to its parent company LUKERG BULGARIA GmbH the ownership of the shares in eight subsidiaries. The subsidiaries owned a total of 15 wind turbines for the production of electricity and operated them on the Bulgarian energy market. According to the Purchase and Sale Agreement the price of the shares were BGN 20 935 937,75. Following an audit of the transaction the tax authorities issued an assessment of additional taxable income for FY 2012 related to the sale of shares. According to the authorities the arm´s length value of the shares were BGN 38 609 215,00. This value was determined based on a CUP/CUT method. As support/sanity check for the valuation the DCF method and the DuPont Analysis was also applied. The additional value was added to the taxable income of Key End Es Energy. A complaint was filed by Key End Es Energy with the Administrative court where, by decision No. 5477 of 09.09.2019, the assessment was annulled. The tax authorities then filed appel with the Supreme Administrative Court. In the appeal the tax authorities argued that the court erred in ignoring the valuation of the independent valuer, Raiffeisen Investment AG, on which the transaction was based and erred in holding that the agreed price was a market price. Further, it is submitted that the court erred in holding that the market price of the controlled sale and purchase transaction dated 20.12.2012 was as set out in the 2013 Share Transfer Pricing Documentation prepared by KPMG Bulgaria after the 20.12.2012 transaction. It also contested the court’s conclusions that the expert prepared in the course of the audit only formally used the CUP/CUT method, while in reality it used the discounted cash flow method, which was not provided for in Regulation No. N-9 of 14.08.2006. In view of the tax authorities, the priority should not be the formal application of the transfer pricing methods in Regulation N-9/2006, but instead arriving at actual values by means of the mechanisms of the various methods. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case to another panel of the court of first instance for reconsideration. Excerpt “Since the burden of proving the substantive grounds for the issuance of the RA rests with the revenue administration, in the presence of a material difference between the conclusions of the valuation experts appointed in the course of the audit and the court proceedings, the defendant in the first instance proceedings has requested by an application filed in open court on 21.02.2018 the appointment of a valuation expert, which, having familiarized itself with all the evidence in the case, to give a conclusion under item 13 of the application in three options for the market. By admitting only the appellant’s questions and refusing to admit the questions formulated by the respondent in the proceedings at first instance to the appointed expert examination by order of 18.04.2018, the court violated a fundamental principle under Article 8(1) of the APC – the arm’s length principle and at the same time limited the right of the respondent to engage evidence in support of the thesis it defends. The infringement constitutes a material breach of the rules of court procedure and a ground for cassation under Article 209(3) of the Code of Civil Procedure and, in so far as the dispute has not been clarified from the factual point of view, the case must be referred back to another formation of the court of first instance. In the new hearing, the court should appoint a expert, which independently, using one of the applicable rules under Regulation No H-9 of 14.08.2006. The court should, in accordance with the provisions of Article N-9 of the Law on the procedure and methods for the application of methods for determining market prices, derive the market value of the shares of the eight subsidiaries owned by the audited entity, the subject of the sale both under the transaction of 20.12.2012 between related parties and as part of the subject of the sale under the transaction of 14.06.2012 concluded between unrelated parties.” Click here for English Translation Click here for other translation ...

SA Sacla, a French company trading in protective clothing and footwear, as well as small equipment, was audited for fiscal years 2007, 2008 and 2009. The French tax administration issued an assessment, considering that SA Sacla by selling brands owned by it for an amount of 90,000 euros to a Luxembourg company, Involvex, had indirectly transfered profits abroad. Due to inconclusive results of various valuations presented by the tax authorities and the taxpayer, an expert opinion was ordered by the Court on the question of whether the price of the brands sold by SA Sacla to the company Involvex had been at arm’s length. DECIDES: Article 1: Before ruling on the request of SA SACLA, an expert will carry out an assessment in order to determine whether the selling price of the brands sold by SA SACLA corresponds to their value, taking into account the exemption payment of royalties for a period of 5 years granted by the company Involvex to SA SACLA. Click here for translation ...

At issue were tax deductions for expenses related to assets and expenses for services paid by SC A SRL to a related party, C SpA Italy. Following an audit the tax authorities had issued an assessment, where certain costs were considered non deductible and where the cost of services had been determined by applying the transactional net margin method (TNMM). The assessment was brought to the courts by SC A SRL. Judgement of Supreme Court The Supreme Court found the appeal of SC A SRL unfounded and decided in favor of the tax authorities. Excerpt “As regards the criticisms made by the appellant concerning the use of the net transaction margin method used by the tax authorities and held by the judgment delivered by the court of first instance to be correct, the Supreme Court considers them to be unfounded. As is apparent from the evidence adduced in the case, during the period examined by the tax inspection bodies, it was found that the transactions carried out by the appellant were transactions between related persons and that the price at which goods were transferred in transactions between related persons was the transfer price. Since the appellant submitted an incomplete record of the transfer prices charged in relation to the affiliated person C Spa Italia, in the period 2007-2010, without justifying the transfer prices charged, the tax authorities proceeded in accordance with the provisions of Article 3 of OMFP No 222/2008 to adjust the transfer prices charged between the two companies pursuant to the provisions of Article 11(1) and (2) of Law No 571/2003 on the Fiscal Code, as subsequently amended and supplemented. The trial judge correctly rejected the conclusions contained in the expert’s report with regard to the method of the net transaction margin used by the tax inspection bodies, the court of judicial review, in its analysis of that ground of appeal, points out that the purpose of the forensic technical expert’s report is to provide the court with an expert opinion on the documentation under examination, but the assessment of the evidence is made on the basis of the judge’s reasoning by correlating it with the other evidence adduced in the case and analysing it in the light of the legal rules applicable in the matter. In that context, the High Court finds that the criticisms made by the appellant-appellant in relation to the method of the net trading margin used which led to the adjustment of the income from operations in relation to the affiliated company C Spa Italia in the amount of 35 246 585 lei are in fact unfounded, since the judgment under appeal correctly held that the contested administrative and fiscal acts by which additional tax liabilities were established representing income tax with ancillary charges for the period under review are lawful and well founded. Having regard to all those considerations, the High Court, pursuant to Article 20(1) of Law No 554/2004 and Article 312(1) of the Code of Civil Procedure, will dismiss the appeal brought by the applicant, company A SRL, as unfounded. ” Click here for English translation Click here for other translation ...

McKesson is a multinational group engaged in the wholesale distribution of pharmaceuticals. Its Canadian subsidiary, McKesson Canada, entered into a factoring agreement in 2002 with its ultimate parent, McKesson International Holdings III Sarl in Luxembourg. Under the terms of the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for approximately C$460 million and committed to purchase all eligible receivables as they arise for the next five years. The receivables were priced at a discount of 2.206% to face value. The funds to purchase the accounts receivable were borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent company in Luxembourg. At the time the factoring agreement was entered into, McKesson Canada had sales of $3 billion and profits of $40 million, credit facilities with major financial institutions in the hundreds of millions of dollars, a large credit department that collected receivables within 30 days (on average) and a bad debt experience of only 0.043%. There was no indication of any imminent or future change in the composition, nature or quality of McKesson Canada’s accounts receivable or customers. Following an audit, the tax authorities applied a discount rate of 1.013%, resulting in a transfer pricing adjustment for the year in question of USD 26.6 million. In addition, a notice of additional withholding tax was issued on the resulting “hidden” distribution of profits to McKesson International Holdings III Sarl. McKesson Canada was not satisfied with the assessment and filed an appeal with the Tax Court. Judgement of the Tax Court The Tax Court dismissed McKesson Canada’s appeal and ruled in favour of the tax authorities. The Court found that an “other method” than that set out in the OECD Guidelines was the most appropriate method to use, resulting in a highly technical economic analysis of the appropriate pricing of risk. The Court noted that the OECD Guidelines were not only written by persons who are not legislators, but are in fact the tax collecting authorities of the world. The statutory provisions of the Act govern and do not prescribe the tests or approaches set out in the Guidelines. According to the Court, the transaction at issue was a tax avoidance scheme rather than a structured finance product ...

Nestlé de Costa Rica S.A. had been issued a tax assessment in which the taxable income for FY 2005 and 2006 was adjusted with an additional amount of ¢60,609,096.00 and ¢75,663,084.00. According to the tax authorities, the sales made by Nestlé to its related companies located in Chile, Switzerland and Puerto Rico had a profit margin different from those made to third parties. The margin on the unrelated transactions was 88% whereas the margins on comparable related party transactions was only 7%. The adjustments was determined based on internal CUPs. Judgement of the Court The Court dismissed the appeal of Nestlé. Excerpts “This Chamber agrees with the Tribunal, in the sense that the expert witness Luna Ramírez, during her testimony, does not manage to disprove the system applied by the Tax Administration, since she rejects the method used, however, she also states that it is difficult to resort to any other method. What is clear from this testimony is that in this process the plaintiff could not substantiate or justify the reason why it sold the same product at a lower price to its related companies.” “According to the study made by the Tax Administration, which again was not contested by the plaintiff, the average profit on the standard cost of the products sold to independent companies was 87.87%, while with the related companies it was 7.17% for the tax periods at issue here. The difference is so large that it is not possible to explain reliably the reason for this disparity.” “Therefore, this Chamber endorses the Court’s position of upholding the criterion issued by the Tax Administration and collecting the differences due to the total non-payment of the tax.” Click here for English translation Click here for other translation ...