A Swiss company, A AG, paid two related parties, B AG and C AG, for services in the financial years 2015 and 2016. These services had been priced using the internal CUP method based on the pricing of services provided by B Ltd to unrelated parties. Following an audit, the tax authorities concluded that the payments made by A AG for the intra-group services were above the arm’s length price and issued a notice of assessment where the price was instead determined using the cost-plus method. According to the tax authorities, the CUP method could not be applied due to a lack of reliable data. Following an appeal the court of first instance ruled mostly in favor of the tax authorities. A AG then appealed to the Federal Administrative Court. Decision of the Court The Federal Administrative Court ruled in favour of A AG. According to the Court, the CUP method is preferred to other methods and other transfer pricing methods should not be applied in cases where data on comparable uncontrolled prices are available. Therefore, the tax authorities had not complied with the OECD transfer pricing guidelines. Click here for English translation Click here for other translation Swiss FAC A-4976-2022_2023-09-04 ...

STOCK Plzeň-Božkov, s. r. o. had deducted costs for production consultancy services, financial services and internal support services allegedly received from related parties. The tax authorities disallowed deduction of the costs for tax purposes on the basis that the evidence provided by STOCK regarding the nature and pricing of the services was insufficient. Judgement of the Supreme Administrative Court The Court ruled in favour of STOCK in relation to the production consultancy services. The tax authority’s requirement that the company document each individual ‘piece of advice’ and quantify the benefits in minute detail was unreasonable. According to the Court, it is sufficient to explain how the production services were provided and what benefits the company derived from them. The Court agreed with the tax authority’s conclusions regarding the financial services. STOCK did not document the conditions of withdrawal or the amount of credit granted to group companies. Furthermore, it did not prove that the part of the consultancy price allocated to it, calculated as the ratio between the drawdown and the total credit provided to the group, was correct. In addition, it was not even clear from the documents what the service specifically related to. The court also agreed with the tax authorities on the internal support services. The documents, witness statements and e-mails provided by STOCK were not sufficient to prove that the services had been received. Click here for English Translation Click here for other translation 10 Afs 93-2021 - 69 ORG ...

A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian company. A Oyj had raised funds from outside the group and lent these funds to its Finnish subsidiary B Oy, which in turn had provided a loan to ZAO C. The interest charged by B Oy on the loans to ZAO C was based on the cost of A Oyj’s external financing. The interest rate also included a margin of 0,55 % in tax year 2009, 0,58 % in tax year 2010 and 0,54 % in tax year 2011. The margins had been based on the average margin of A Oyj’s external financing plus 10 %. The Tax Administration had considered that the level of interest to be charged to ZAO C should have been determined taking into account the separate entity principle and ZAO C’s credit rating. In order to calculate the arm’s length interest rate, the synthetic credit rating of ZAO C had been determined and a search of comparable loans in the Thomson Reuters DealScan database had been carried out. On the basis of this approach, the Tax Administration had considered the market interest margin to be 2 % for the tax year 2009 and 3,75 % for the tax years 2010 and 2011. In the tax adjustments the difference between the interest calculated based on the adjusted rates and the interest actually charged to ZAO C had been added to A Oyj’s taxable income. Judgement of the Supreme Administrative Court The court overturned an earlier decision handed down by the Administrative Court of Helsinki and ruled in favour of A Oyj. The Supreme Administrative Court held that ZAO C had received an intra-group service in the form of financing provided by A Oyj through B Oy. The Court also considered that the cost-plus pricing method referred to in the OECD Transfer Pricing Guidelines was the most appropriate method for assessing the pricing of intra-group services. Thus, the amount of interest to be charged to ZAO C could have been determined on the basis of the costs incurred by the Finnish companies of the group in obtaining the financing, i.e. the cost of external financing plus a mark-up on costs, and ZAO C could have benefited from the better creditworthiness of the parent company of the group. Consequently the Supreme Administrative Court annulled the previous decisions of the Administrative Court and set aside the tax adjustments. Excerpts “B Oy has been responsible for financing ZAO C and certain other group companies with funds received from the parent company. The company is a so-called ‘shell company’ which has had no other activity since 2009 than to act as a company through which intra-group financing formally flows.” “The question is whether the tax assessments of A Oyj for the tax years 2009 to 2011 could be adjusted to the detriment of the taxpayer and the taxable income of the company increased pursuant to Article 31 of the Tax Procedure Act, because the level of the interest margin paid by ZAO C to the Finnish group companies was below the level which ZAO C would have had to pay if it had obtained financing from an independent party. The Supreme Administrative Court’s decision KHO 2010:73 concerns a situation where a new owner had refinanced a Finnish OY after a takeover. The interest rate paid by the Finnish Oy on the new intra-group debt was substantially higher than the interest rate previously paid by the company to an external party, which the Supreme Administrative Court did not consider to be at arm’s length. The present case does not concern such a situation, but whether ZAO C was able to benefit financially from the financing obtained through the Finnish companies of the group. In its previous case law, the Supreme Administrative Court has stated that the methods for assessing market conformity under the OECD Transfer Pricing Guidelines are to be regarded as an important source of interpretation when examining the market conformity of the terms of a transaction (KHO 2013:36, KHO 2014:119, KHO 2017:146, KHO 2018:173, KHO 2020:34 and KHO 2020:35). As explained above, the transfer pricing guidelines published by the OECD in 1995 and 2010 are essentially the same in substance for the present case. It is therefore not necessary to assess whether the company’s tax assessment for the tax year 2009 could have been adjusted to the detriment of the taxpayer on the basis of the 2010 OECD transfer pricing guidelines. According to the OECD transfer pricing guidelines described above, when examining the arm’s length nature of intra-group charges, a functional analysis must first be carried out, in particular to determine the legal capacity in which the taxpayer carries out its activities. The guidelines further state that almost all multinational groups need to organise specifically financial services for their members. Such services generally include cash flow and solvency management, capital injections, loan agreements, interest rate and currency risk management and refinancing. In assessing whether a group company has provided financial services, the relevant factor is whether the activity provides economic or commercial value to another group member which enhances the commercial position of that member. In contrast, a parent company is not considered to receive an internal service when it receives an incidental benefit that is merely the result of the parent company being part of a larger group and is not the result of any particular activity. For example, no service is received when the interest-earning enterprise has a better credit rating than it would have had independently, simply because it is part of a group. The financial activities of the A group are centralised in A Oyj. The group’s external and internal loan agreements have prohibited A Oyj subsidiaries from obtaining external financing in their own name. Where necessary, the subsidiaries have provided collateral for ...