Following an audit of “Tin Cup Ltd” for FY 2016 and 2017 an assessment was issued by the tax authorities regarding excessive amounts of waste materials and pricing of intra-group transactions. On the issue of excessive amounts of waste materials, tax deductions was denied by the authorities as the costs was not considered to have been held in the interest of the company, i.e. it did not take place with the purpose of increasing “Tin Cup Ltd” income. On the second issue, the tax authorities found that the most appropriate method for the transactions in question (sales to a related party) was the CUP method. Applying the CUP to the controlled transactions (instead of the TNMM) resulted in additional income of approximately 392.000 EUR in total for FY 2016 and 2017. A complaint was filed by “Tin Cup Ltd” with the Dispute Resolution Board. Decision of the Board The Board upheld the assessment of the tax authorities both in regards of denied deductions of costs related to excessive waste materials and in regards of the transfer pricing adjustment. Excerpts Issue of excessive waste materials “The applicant further submits that the audit is not entitled to disallow the excess consumption for tax purposes, since it is a real amount, which can only be considered to be in the interest of the undertaking, since the processing of the raw material results in the products to be sold. Since, however, the applicant’s above individual allegation is well-founded only to the extent that the purchases of raw and auxiliary materials are made within reasonable and expected limits and taking as a reference technical specifications and the data of common experience. Because in the present case, the products for which a difference was calculated show overruns of consumptions from 8,43% to 53,96% in excess of the normal consumption according to the accounting records. Because as it follows from the relevant Audit Report, the audit established with full and clear arguments that the excessive consumption of raw and auxiliary materials, which affected the cost of sales and the net results, did not take place in the interest of the company, i.e. it did not take place with the purpose of increasing its income and therefore, the condition of para. (a’) of Article 22 of Law 4172/2013. The applicant’s claim is therefore rejected as unfounded.” Issue of transfer pricing “…Because, as is clear from the relevant Audit Report (pp. 28-35), the audit provides full and sufficient reasons for the rejection of the applicant’s documentation, namely: · the sample of external comparables selected by the applicant concerns EU-28 countries, whereas the transaction at issue is between two Greek undertakings and the geographical area is a factor which materially affects the comparability of the transactions. · the audit preferred the comparable uncontrolled price (CUP) method, not only because it is the preferred traditional method in accordance with the above provisions, but also because it found that internal comparables with independent/unrelated companies existed. · the transactional net margin method (TNMM) has the disadvantage that the net profits taken into account are affected by factors not related to intra-group transactions, such as extraordinary income and expenses, thus reducing its reliability (OECD Guidelines 2017, para. 2.70 and 2.72). Indeed, in the present case, specifically in the 2016 tax year, the applicant incurred extraordinary expenses of €1.5 million, with the result that the net profit margin ratio is approximately half of what it would have been without them. Because the applicant also claims that there is a comparability deficit in the sample of the audit, since the way and time of payment of the sales invoices differs. In particular, unlike other independent/unrelated customers, which have open balances for a significant period of time, the related company………..normally advances 50 % of the annual turnover from the previous year. Since, however, because of this preferential method of collection, the applicant incurs significant amounts of interest payable to the abovementioned affiliated company, amounting to: · 2016: 200.121,00 € · 2017: 103.000,00 €, transaction which has also been documented and contributes to the elimination of any difference in comparability. Since the methodology and the conclusion of the audit, as reflected in the relevant Audit Report, are hereby found to be valid, acceptable and fully justified. The applicant’s claim is therefore rejected as unfounded. Click here for English translation Click here for other translation ...

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. In 2017 the Administrative Court decided in favour of Ferragamo and dismissed the assessment issued by the tax authorities. According to the Court the tax administration had not demonstrated the existence of an advantage granted by Ferragamo France to the Italien parent, Salvatore Ferragamo SPA, nor the amount of this advantage. This decision was later upheld by the Administrative Court of Appeal. An appel was then filed by the tax authorities with the Supreme Court. The Supreme Court (Conseil d’Etat) overturned the decision and remanded the case back to the Administrative Court of Appeal for further considerations. “In ruling that the administration did not establish the existence of an advantage granted to the Italian company on the grounds that the French company’s results for the financial years ending from 2010 to 2015 had been profitable without any change in the company’s transfer pricing policy, whereas it had noted that the exposure of additional charges of wages and rents in comparison with independent companies was intended to increase, in a strategic market in the luxury sector, the value of the Italian brand which did not yet have the same notoriety as its direct competitors, the administrative court of appeal erred in law. Moreover, although it emerged from the documents in the file submitted to the trial judges that the tax authorities had established the existence of a practice falling within the provisions of Article 57 of the General Tax Code, by showing that the remuneration granted by the Italian company was not sufficient to cover the additional expenses which contributed to the value of the Salvatore Ferragamo trade mark incurred by the French subsidiary and by arguing that the latter had been continuously loss-making since at least 1996 until 2009, the court distorted the facts and documents in the file. By dismissing, under these conditions, the existence of an indirect transfer of profits to be reintegrated into its taxable income when the company did not establish, by merely claiming a profitable situation between 2010 and 2015, that it had received a consideration for the advantage in question, the court incorrectly qualified the facts of the case.” Judgement of the Administrative Court of Appeal The Administrative Court of Appeal issued a final decision in June 2022 in which the 2017 decision of the Paris Administrative Court was annulled and the tax assessment issued by the tax authorities reinstated. “Firstly, Ferragamo France argued that the companies included in the above-mentioned panel were not comparable, since most of their activities were carried out in the provinces, whereas its activity was concentrated in international tourist areas, mainly in Paris, and their workforce was less than ten employees, whereas it employed 68 people, that they are mere distributors whereas it also manages a network of boutiques and concessions in department stores, and that some of them own their premises whereas it rents its premises for amounts much higher than the rents in the provinces, the relationship between external charges and turnover thus being irrelevant. However, most of the comparables selected by the administration, which operate as multi-brand distributors in the luxury ready-to-wear sector, were proposed by Ferragamo France itself. Moreover, the company does not indicate the adjustments that should be made to the various ratios of salary and external costs used to obtain a result that it considers more satisfactory, even though it has been established that additional costs in the area of salaries and property constitute an advantage granted to Salvatore Ferragamo Spa. Furthermore, apart from the fact that it has not been established that some of the companies on the panel own their premises, Ferragamo France does not allege that excluding the companies in question from the calculation of the ratios would result in a reduction in the amount of the adjustments. Lastly, as regards the insufficient consideration of the management of a network of department stores’ boutiques and concessions, Ferragamo France does not provide any specific information in support of its allegations, whereas the comparison made by the administration is intended to assess the normality of the remuneration of its retail activity.” … It follows from all of the above that the Minister of the Economy, Finance and Recovery is entitled to argue that it was wrong for the Administrative Court of Paris, in the judgment under appeal, to discharge, in terms of duties and increases, the supplementary corporate tax assessment to which Ferragamo France was subject in respect of the financial year ended in 2010, of the withholding tax charged to it for 2009 and 2010 and of the supplementary minimum business tax and business value added contribution charged to it for 2009 and 2010 respectively. This judgment must therefore be annulled and the aforementioned taxes, in duties and increases, must be remitted to Ferragamo France.” Click here for English Translation Click here for other translation ...

Non-operating items such as interest income and expenses and income taxes should be excluded from the determination of the net profit indicator. Exceptional and extraordinary items of a non-recurring nature should generally also be excluded. This however is not always the case as there may be situations where it would be appropriate to include them, depending on the circumstances of the case and on the functions being undertaken and risks assumed by the tested party. Even where exceptional and extraordinary items are not taken into account in the determination of the net profit indicator, it may be useful to review them because they can provide valuable information for the purpose of comparability analysis (for instance by reflecting that the tested party bears a given risk) ...

Non-operating items such as interest income and expenses and income taxes should be excluded from the determination of the net profit indicator. Exceptional and extraordinary items of a non-recurring nature should generally also be excluded. This however is not always the case as there may be situations where it would be appropriate to include them, depending on the circumstances of the case and on the functions being undertaken and risks assumed by the tested party. Even where exceptional and extraordinary items are not taken into account in the determination of the net profit indicator, it may be useful to review them because they can provide valuable information for the purpose of comparability analysis (for instance by reflecting that the tested party bears a given risk) ...