A Dutch company “Tobacco B.V.” belonging to an internationally operating tobacco group was subjected to (additional assessment) corporate income tax assessments according to taxable amounts of €2,850,670,712 (2013), €2,849,204,122 (2014), €2,933,077,258 (2015) and €3,067,630,743 (2016), and to penalty fines for the year 2014 of €1,614,709, for the year 2015 of €363,205 and for the year 2016 of €125,175,082. In each case, the dispute focuses on whether the fees charged by various group companies for supplies and services can be regarded as business-related. Also in dispute is whether transfer profit should have been recognised in connection with a cessation of business activities. One of the group companies provided factoring services to “Tobacco B.V.”. The factoring fee charged annually for this includes a risk fee to cover the default risk and an annual fee for other services. The court concluded that the risk was actually significantly lower than the risk assumed in determining the risk fee, that the other services were routine in nature and that the factoring fee as a whole should be qualified as impractical. “Tobacco B.V.” has not rebutted the presumption that the disadvantage caused to it by paying the factoring fees was due to the affiliation between it and the service provider. In 2016, a reorganisation took place within the tobacco group in which several agreements concluded between group companies were terminated. The court concluded that there had been a coherent set of legal acts, whereby a Dutch group company transferred its business activities in the field of exporting tobacco products, including the functions carried out therein, the risks assumed therein and the entire profit potential associated therewith, to a group company in the UK. For the adjustment related to the transfer profit, the court relies on the projected cash flows from the business and information known at the time the decision to transfer was taken. The conclusions regarding factoring and the termination of business activities in the Netherlands lead to a deficiency in the tax return for each of the years 2014 to 2016. For these years, “Tobacco B.V.” filed returns to negative taxable amounts. For the years 2014 and 2016, a substantial amount of tax due arises after correction, even if the corrections established by application of reversal and aggravation are disregarded. For the year 2015, the tax due remains zero even after correction. Had the return been followed, this would have resulted in “Tobacco B.V.” being able to achieve, through loss relief, that substantially less tax would be due than the actual tax due. At the time the returns were filed, “Tobacco B.V.” knew that this would result in a substantial amount of tax due not being levied in each of these years and the court did not find a pleading position in this regard. The burden of proof is therefore reversed and aggravated. For the year 2013, this follows from the court’s decision of 17 October 2022, ECLI:NL:RBNHO:2022:8937. To finance their activities, the group companies issued listed bonds under the tobacco group’s so-called EMTN Programme, which were guaranteed by the UK parent company. A subsidiary of “Tobacco B.V.” joined in a tax group paid an annual guarantee fee to the UK parent company for this purpose. The court ruled that: – the guarantee fees are not expenses originating from the subsidiary’s acceptance of liability for debts of an affiliated company; – the EMTN Programme is not a credit arrangement within the meaning of the Umbrella Credit Judgment(ECLI:NL:HR:2013:BW6520); – “Tobacco B.V.” has made it clear that a not-for-profit fee can be determined at which an independent third party would have been willing to accept the same liability on otherwise the same terms and conditions; – “Tobacco B.V.” failed to show that in the years in which the guarantee fees were provided, credit assessments did not have to take implied guarantee into account; – “Tobacco B.V.” failed to show that its subsidiary was not of such strategic importance to the group that its derivative rating did not match the group rating, so that the guarantee fees paid are not at arm’s length due to the effect of implied guarantee in their entirety; – “Tobacco B.V.” did not put forward any contentions that could rebut the objectified presumption of awareness that follows from the size of the adjustments (the entire guarantee fee), that the disadvantage suffered by the plaintiff as a result of the payment of the guarantee fees is due to its affiliation with its parent company. A group company charges the claimant, inter alia, a fee corresponding to a percentage of “Tobacco B.V.”‘s profits (profit split) for activities on behalf of the tobacco group that result in cost savings for “Tobacco B.V.”. The court ruled that “Tobacco B.V.” failed to prove that the group company made a unique contribution to the tobacco group that could justify the agreed profit split. The group company also charges “Tobacco B.V.” a fee equivalent to a 12% mark-up on costs for services relating to the manufacture of cigarettes. The court ruled that, in the context of the reversal and aggravation of the burden of proof, it was not sufficient for “Tobacco B.V.” to refer to the functional analysis, as it was based on the incorrect premise that the group company could be compared to a manufacturer. Finally, since April 2012, “Tobacco B.V.” has been paying the group company a 10% fee on the costs excluding raw materials for the production of cigarettes as toll manufacturer, where previously the basis of this fee also included the costs of raw materials. The court noted that the flow of goods remained the same and that “Tobacco B.V.” remained operationally responsible for the production process. The court ruled that it was up to “Tobacco B.V.” to establish and prove facts from which it follows that it was businesslike to change the basis of remuneration, which it did not do sufficiently. Regarding an adjustment made by the tax authorities in relation to reorganisation costs, the court finds that the adjustment was made in error ...

“Tobacco B.V.” is a Dutch company belonging to an international tobacco group. Following an audit an assessment of additional taxable income of €196,001,385, €220,624,304 and €179,896,349 for FY 2008-2010 was issued to “Tobacco B.V.”, and a penalty for non-compliance for FY 2010 of €477,624 was imposed. The dispute focused on whether the fees charged by various group companies for supplies and services had been at arm’s length. To finance their activities, the group companies issued listed bonds under the tobacco group’s so-called EMTN Programme, guaranteed by the parent company in the UK. For this, the claimant paid an annual guarantee fee to the parent company of approximately €35,000,000. Judgement of the court – the guarantee fees are not expenses originating from the “Tobacco B.V.”‘s acceptance of liability for debts of an affiliated company; – the EMTN Programme is not a credit arrangement within the meaning of the Umbrella Credit Judgment (ECLI:NL:HR:2013:BW6520); – the tax authorities has not made it plausible that it is not possible to determine a non profit-related remuneration at which an independent third party would have been willing to accept the same liability under otherwise the same conditions and circumstances; – the tax authorities did make it plausible that “Tobacco B.V.”, as a ‘core company’ of the tobacco group, enjoys an implied guarantee from the parent company for which no remuneration should be paid because there is no group service; – “Tobacco B.V.” has not put forward any arguments capable of rebutting the objective presumption of awareness that follows from the size of the adjustments (the entire guarantee fee), that the disadvantage suffered by “Tobacco B.V.” as a result of the payment of the guarantee fees is due to its affiliation to its parent company, – the tax authorities did not reasonably have to doubt the accuracy of the information on the guarantee fees contained in the declarations, so that the authorities did not commit an official omission – the tax authorities did not provide information or create the justified impression of a deliberate determination of position as a result of which the authorities was entitled to rely on the principle of legitimate expectations. One of the group companies provided factoring services to the claimant. The factoring fee of €2,500,000 charged annually for this purpose includes a risk fee to cover the debtor risk – excluding a bad debtor – and an annual fee of €1,200,000 for other services. Noting that the debtor risk – including the bad debtor – can be insured on the market for €438,000, the court inferred that an independent third party would not be willing to pay the risk fee. Given the large share of the risk fee, the court qualifies the entire factoring fee as non-business. The court considers that the tax due according to the tax return in respect of the factoring fees, assessed independently, is not significantly lower than the actual tax due. The court further considers that the tax payable in respect of the factoring fees and guarantee fees taken together is indeed significantly lower than the actual tax payable, and the amounts are individually significant. However, reversal and aggravation of the burden of proof is not forthcoming because the subjective awareness required for this is lacking. The court ruled that the adjustment of transfer prices did not violate European law. It follows from the Hornbach judgment (ECLI:EU:C:2018:366) that the TFEU in principle does not preclude a regulation such as that contained in Section 8b of the Vpb Act. The claimant could have made it plausible without undue administrative effort that the transactions were agreed for commercial reasons arising from the shareholder link with the group companies involved, but it did not put forward such reasons. Finally, the court found that the “Tobacco B.V.” knew that the entire debtor portfolio was insurable on the market for €438,000, and by deducting the proportionally much higher factoring fees, knew that too little tax would be levied. The court ruled that there was no pleading and found that the fine was appropriate and necessary in principle, albeit reduced for exceeding the reasonable time limit. The court declares the appeals unfounded and reduces the fine decision. Click here for English translation Click here for other translation ...

Acer Computer Ibérica S.A. (ACI) is part of the multinational ACER group, which manufactures and distributes personal computers and other electronic devices. Acer Europe AG (AEAG), a group entity in Switzerland, centralises the procurement of the subsidiaries established in Europe, the Middle East and Africa, and acts as the regional management centre for that geographical area. ACI is responsible for the wholesale marketing of electronic equipment and material, as well as in the provision of technical service related to these products in Spain and Portugal. ACI is characterized as a limited risk distributor by the group. At issue was deductibility of payments resulting from factoring agreements undertaken ACI with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Based on an interpretation of the limited risk agreement signed between ACI and its principal AEAG, the tax authorities disregarded the allocation of the risk – and hence allocation of the relevant costs – to ACI. The tax authorities considered that the financial costs arising from the relocation of cancelled orders, those arising from differences in the criteria for calculating collection and payment deadlines and those arising from delays in shipments are due to the application of incorrect criteria for the accounting and invoicing of certain transactions. It also considers that the assumption of those costs by ACI is in contradiction with its classification as a low-risk distributor and does not comply with the distribution of functions and risks between ACI and AEAG, which results from the distribution contract and the transfer pricing report. An assessment for FY 2006 – 2008 where the costs were added back to the taxable income of Acer Computer Ibérica S.A. was issued. Judgement of the Federal Court The court dismissed the appeal of Acer and upheld the tax assessment in which deductions for the costs in question had been disallowed. Excerpts “The interpretation of the contract terms which we uphold follows the above mentioned OECD Guidelines: In arm’s length transactions, the contract terms generally define, expressly or implicitly, how responsibilities, risks and results are allocated between the parties.” “However, it is irrelevant, in view of the foregoing on the assumption of risk, that ACI’s financing costs are higher than those of comparable undertakings (as the tax authorities maintain), since the refusal of deductibility is based on the fact that the costs claimed to be deductible are not borne by the appellant in accordance with the terms of the contract.” Click here for English Translation Click here for other translation ...

Following an audit of GE Medical Systems Limited Partnership (SCS), which is engaged in the manufacturing and marketing of medical equipment and software, the French tax authorities issued an assessment related to the “value added amount” produced by the company, which serves as the basis for calculating the French minimum contribution of business tax provided for in Article 1647 E of the General Tax Code. The tax authorities was of the view that (1) prices charged for goods and services provided to foreign-affiliated companies had been lower than arm’s length prices and that (2) part of deducted factoring costs were not deductible in the basis for calculating the minimum business tax. On that basis a discretionary assessment of additional minimum business tax was issued. GE Medical Systems appealed the assessment to the Administrative Court of  Appeal. The Court of Appeal came to the conclusion that the basis for assessment of arm’s length prices of the goods and services sold had been sufficient, but in regards to the denial of deductions of the full factoring costs the court ruled in favor of GE Medical Systems. GE appealed the decision in relation to basis for the assessment of arm’s length prices for goods and services, and the tax authorities appealed the decision in relation to allowance of the full deduction of factoring costs in the basis for calculating the minimum business tax. The Supreme Court – Conseil d’État – denied the appeal of GE Medical Systems in relation to the basis for determining arm’s length prices of the goods and services sold to foreign-affiliated companies. On the issue of full deduction of factoring costs, the Supreme Court allowed the appeal of the tax authorities and annulled the decision of the Administrative Court of Appeal. Click here for Translation ...

This case concerned a tax scheme where taxable income was eliminated using factoring and management fees to shift profits. The Tax Court held that the scheme was in essence an attempt to eliminate the taxes. Factoring and management fees were not deductible expenses but rather disguised distributions of corporate profits and generally currently taxable to the individual shareholders as constructive dividends or as income improperly assigned to the corporations. In the TC Memo interesting views on the arm’s length nature of factoring and management fees is elaborated upon. TC memo 2018-131 ...

In this case, the French tax authorities questioned the method implemented by GE Healthcare Clinical Systems to determine the purchase price of the equipment it was purchasing from other General Electric subsidiaries in the United States, Germany and Finland for distribution in France. The method used by the GE Group for determining the transfer prices was to apply a margin of 5% to all direct and indirect production costs borne by the foreign group suppliers. For the years 2007, 2008 and 2009 the tax authorities applied a TNM-method based on a study of twenty-six comparable companies. The operating results of GE Healthcare France was then determined by multiplying the median value of the ratio “operating result/turnover” from the benchmark study to the turnover in GE Healthcare Clinical Systems. The additional profit was declared and qualified as constituting an indirect transfer of profits to the related party suppliers in the General Electric Group. The GE Group disagreed and brought the case to Court. First, the Tribunal dismissed the application by judgment of 18 May 2015, as did the Versailles Administrative Court of Appeal in a judgment of 9 February 2017. Finally, the Conseil d’Etat rejected the appellant’s appeal on the ground that the administration had established the existence of a benefit constituting a transfer of profits. When the tax authorities note that the prices charged to a company established in France by a foreign related company are higher than those charged to independent parties, without this difference being explained by the different circumstances, it is entitled to reinstate in the results of the French company an amount equal to the advantage. The Conseil d’Etat also confirmed that a benchmark study could include companies whose turnover was not identical to that of the taxpayer. Click here for translation ...

Following the Tax Courts decision in 2013 (2013 TCC 404), Judge Boyle J. in an order from September 2014 recused himself from completing the McKesson Canada proceeding in the Tax Court. This extended to the consideration and disposition of the costs submissions of the parties, as well as to confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry. Postscript An appeal was filed by McKesson with the Federal Court, but the appeal was later withdrawn and a settlement agreed with the tax authorities. In May 2015 McKesson filed a 10-K with the following information regarding the settlement “…Income tax expense included net discrete tax benefits of $33 million in 2015, net discrete tax expenses of $94 million in 2014 and net discrete tax benefits of $29 million in 2013. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. We have received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of 2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003 through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter and do not expect it to have a material impact to income tax expense.” Further information on the settlement was found in McKesson’s 10-Q filing from July 2015 “…We received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we filed a Notice of Appeal to the Federal Court of Appeal. During the first quarter of 2016, we reached an agreement to settle the transfer pricing matter for years 2003 through 2010 and recorded a discrete income tax benefit of $12 million for a previously unrecognized tax benefit.” ...

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 ...