Delmonte Kenya ran an integrated pineapple business in Kenya, covering the cultivation, harvesting, processing, packing and export of finished pineapple products. Its controlled transactions included the sale of fresh and processed pineapple products to foreign group distributors, intercompany charges and recharges for agricultural inputs and other production-related costs, and intra-group financing through related-party loan arrangements. Delmonte argued that it should be characterised as a cost-plus service-type producer with a routine return, while key market-facing functions and residual profits should belong to related parties abroad. Following an audit, the tax authority argued that the pricing and documentation did not reflect the economic reality of where the value was created. They claimed that Delmonte Kenya performed the core functions and bore key risks, meaning it had understated the taxable profits in Kenya. According to the tax authority Delmonte Kenya should not be the tested party when applying the transfer pricing method. Furthermore, they asserted that Del Monte had not provided sufficient documentation to support the basis for the pricing of its controlled transactions. Delmonte Kenya appealed, arguing that their functional analysis and characterisation were correct and that their benchmarking and TNMM-based cost-plus approach should be accepted for related-party sales. They also argued that the authority was wrong to use alternative methods and that its pricing of the controlled transactions should have been respected as documented. Judgment The Tax Appeal Tribunal dismissed the appeal, ruling that Delmonte Kenya had failed to provide sufficient evidence on key factual points and that the cost-plus and TNMM approaches were not appropriate given the nature of the Kenyan activities. Furthermore, the related-party loan arrangements were deemed to lack sufficient commercial substance or arm’s-length support, resulting in the assessment being upheld. Excerpts “202. The dispute herein arose because the Appellant had used the TNMM method combined with FCMU whilst the Respondent was of the view that the methods used to determine the arms- length price were inappropriate and that it could therefore only use the deductive method of customs valuation under the circumstances. The Tribunal notes that previous precedents as well as paragraph 7 (f) of the ITTP allows the Respondent to apply a method different from that applied from the Appellant where it finds it appropriate to do so. 203. Pursuant to the following provisions of paragraph 3.18 in order to apply TNMM and FCMU it would be necessary to establish the tested party: “When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested [emphasis ours]. The choice of the tested party should be consistent with the functional analysis of the transaction [emphasis ours]. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis [emphasis ours] ….” 204. The Tribunal having made a finding that the FAR analysis was inaccurate will proceed on the basis that DMI GmbH is the party that has a less complex functional analysis and is the party that ought to have been the tested party. Accordingly, the TNMM and FCMU methods were inappropriately applied in the circumstances since the same would not reward the Appellant for its functions performed, assets employed and risks taken. The accurate FAR analysis reflects that the Appellant is the more complex party in the transaction and that therefore DMI GmbH should be the tested party.” […] “207. Having so found that the services provided by DMI GmbH were low value intra-group services, it follows that the provisions of paragraph 7.61 of the OECD transfer pricing guidelines apply. Paragraph 7.61 of the OECD transfer pricing guidelines provides as follows: “In determining the arm’s length charge for low value-adding intragroup services, the MNE provider of services shall apply a profit mark-up to all costs in the pool with the exception of any pass-through costs as determined under paragraphs 2.99 and 7.34. The same mark-up shall be utilised for all low value-adding services irrespective of the categories of services. The mark-up shall be equal to 5% of the relevant cost as determined in Section D.2.2. The mark-up under the simplified approach does not need to be justified by a benchmarking study [emphasis ours]. The same mark-up may be applied to low value-adding intra-group services performed by one group member solely on behalf of one other group member, the costs of which are separately identified under the guidance in paragraph 7.57. It should be noted that the low value-adding intra-group services mark-up should not, without further justification and analysis, be used as benchmark for the determination of the arm’s length price for services not within the definition of low value-adding intra-group…” 208. The Tribunal is of the firm view that the use of the FCMU was inappropriate and distinguishes the same from its findings in CIPLA Kenya Limited vs. Commissioner of Domestic Taxes [TAT No. E422 of 2024] and the findings in Checkpoint Technologies Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal 1181 of 2022) [2024] KETAT 114 (KLR) (2 February 2024) (Judgment). In both cited cases, there was a dispute regarding the most appropriate position to adopt in the interquartile range and in both instances, it was held that the OECD transfer pricing guidelines allow a taxpayer to adopt any position within the interquartile range.” Click here for translation ...

A Korean subsidiary of a Dutch multinational electronics group imported medical equipment, small household appliances, and lighting products from related parties and sold them in Korea. The company also provided after-sales maintenance services for medical equipment. For FY 2012 to 2015, the company applied the transactional net margin method separately to each business division and reported its corporate tax accordingly, using operating profit margin as the profit level indicator. Following an audit the tax authorities reclassified the company’s activities into four segments. They concluded that in the medical equipment, small household appliances, and automotive lighting segments, the transfer prices paid to foreign related parties exceeded arm’s length levels, while no upward adjustment was needed for the general lighting segment. On that basis, they issued a tax assessment. The authorities treated maintenance service activities in the medical equipment segment as closely linked to product sales and selected comparable companies largely based on similarity to domestic maintenance service businesses. The taxpayer challenged the assessment and the Tax Tribunal partly upheld the challenge and ordered a re-examination of the lighting segment, which resulted in a partial refund. Litigation continued regarding the remaining adjustments, particularly for the medical equipment and small household appliance segments. The High Court ruled that the tax authorities’ selection of comparables and calculation of arm’s length prices were unlawful for both segments, mainly due to insufficient comparability analysis and improper functional characterization. Judgment The Supreme Court partially disagreed with the High Court. It held that for the small household appliance segment, the authorities’ selection of full-fledged distributors as comparables was inappropriate given the taxpayer’s limited functional profile, and therefore the High Court’s conclusion of illegality could be upheld. However, for the medical equipment segment, the Supreme Court ruled that the High Court had misapplied transfer pricing principles. It found that maintenance service support from foreign affiliates did not constitute a separate international transaction with a material impact on profitability and that the transactional net margin method is less sensitive to differences in transaction stages and product characteristics. The Supreme Court concluded that the tax authorities were not required to perform a separate comparability analysis for maintenance service support and that the selection of comparables could be considered reasonable. As a result, the Supreme Court set aside the High Court judgment in its entirety and remanded the case for recalculation of the proper tax amount in line with its reasoning. Click here for English translation. Click here for other translation ...

Nestlé Zambia Limited (NZL) had made continuous losses during the period in question. Following an audit, the Zambia Revenue Authority (ZRA) issued an assessment adjusting NZL’s income, resulting in additional taxable income. While the Tax Appeals Tribunal found that the ZRA was justified in initiating a transfer pricing audit of NZL, it held that the resulting assessment was invalid due to the ZRA applying inappropriate transfer pricing methods and using comparables from unsuitable jurisdictions. NZL filed a cross-appeal, arguing that the Tribunal had erred in categorising it as a low-risk distributor and that the Tribunal had exceeded its jurisdiction by directing the ZRA to reassess. The ZRA filed an appeal and NZL filed a cross-appeal against the decision of the Tax Appeals Tribunal. In their appeal, the ZRA argued that the Tribunal had misinterpreted the law, incorrectly criticised the ZRA’s use of methods and comparables, and overlooked NZL’s obligation to demonstrate that its transactions were conducted at arm’s length. The ZRA relied on Zambian and foreign case law, emphasising that taxpayers must disprove an assessment and maintain sufficient documentation. In its cross-appeal, NZL countered that it was a fully-fledged distributor and that ZRA had failed to conduct a proper benchmarking study, having selected comparables from economies that were far more advanced than Zambia. Judgment The Supreme Court ruled that, under Section 106 of the Income Tax Act, the onus is on the taxpayer to provide evidence once an assessment has been made. The Tribunal was correct to find that ZRA could initiate an audit. However, the Court found that the Tribunal had erred in rejecting ZRA’s methods solely on the grounds of comparability, and in directing a reassessment since the Tribunal had no jurisdiction to order ZRA to reopen the case. Regarding NZL’s classification, the Court agreed with the Tribunal that the evidence supported treating NZL as a low-risk distributor, as the greater risks and strategic functions lay with Nestlé South Africa and other related parties. The Court therefore allowed ZRA’s appeal in part, setting aside the Tribunal’s order for reassessment and dismissing NZL’s cross-appeal. The Court affirmed that ZRA’s audit was justified, that NZL was responsible for proving that its transfer prices were at arm’s length, and that the Tribunal’s finding regarding NZL’s risk profile was supported by evidence. Click here for translation ...

A Korean subsidiary of a multinational electronics group imported medical equipment, small household appliances and lighting products from related parties abroad and sold them in Korea. It also provided after-sales maintenance services for medical equipment. The taxpayer segmented its activities by business line, applying the transactional net margin method separately to each segment and using operating profit margin as the profit level indicator. Maintenance services relating to medical equipment were treated either as a distinct activity or as a routine function with limited profitability. Following an audit, the tax authorities rejected the taxpayer’s segmentation and functional analysis. They reclassified the taxpayer’s activities into four segments, treating the maintenance services for medical equipment as economically integrated with the sale of medical equipment. Based on this, they concluded that the prices paid to foreign related parties for medical equipment, small household appliances and automotive lighting products exceeded arm’s length price, while no adjustment was required for the general lighting segment. The authorities selected comparables that included domestic maintenance service companies and issued a tax assessments. The taxpayer challenged the assessment in the Tax Tribunal, which partially upheld the challenge and ordered a re-examination of the lighting segment. This resulted in a partial refund. However, disputes remained regarding the medical equipment and small household appliances segments, particularly with regard to the functional characterisation of the taxpayer, the treatment of maintenance services and the selection and application of comparables. The taxpayer therefore pursued the case in the courts. Judgment The High Court ruled that the tax assessments for the disputed segments were unlawful. It found that the tax authorities had failed to conduct a proper comparability analysis in line with the transactional net margin method. The authorities had also not adequately demonstrated that the taxpayer’s segmentation and functional analysis were inappropriate. Furthermore, they had relied on comparables whose functions and risk profiles were not sufficiently similar to those of the taxpayer. The court also criticised the authorities for effectively substituting their own assumptions without providing a reasoned justification under the International Tax Coordination Law. Consequently, the court annulled the remaining transfer pricing adjustments. Click here for English translation. Click here for other translation ...

Procter & Gamble Sdn. Bhd., is a Malaysian company engaged in the marketing and distribution of consumer goods, which purchased products from a related Singapore entity, Procter & Gamble International Operations Pte. Ltd., under a distribution agreement. The agreement guaranteed the Malaysian entity a margin of 2.25 percent. For the years of assessment 2004 to 2008, the taxpayer characterised itself as a limited risk distributor and supported the margin with transfer pricing documentation based on regional and local comparable companies. Following a transfer pricing audit, the tax authorities rejected the taxpayer’s characterisation as a limited risk distributor and recharacterised it as a full fledged distributor. The tax authority relied on contractual clauses, the taxpayer’s control over marketing and advertising activities, and its bearing of certain commercial risks. It selected a new set of comparables, adjusted the taxpayer’s results to the median, disallowed certain grant payments, and imposed additional tax and penalties amounting to approximately RM 44.6 million, invoking section 140(6) of the Income Tax Act 1967 and the OECD Transfer Pricing Guidelines. The taxpayer appealed to the Special Commissioners of Income Tax, arguing that the tax authority had failed to produce its own transfer pricing report, had not properly rebutted the taxpayer’s documentation, and had wrongly adjusted the results to the median contrary to the OECD Guidelines. The Special Commissioners allowed the appeal in full and set aside all additional assessments. The Director General of Inland Revenue then appealed to the High Court. Judgment The High Court dismissed the tax authorities’ appeal and upheld the decision of the Special Commissioners. It held that the burden of proof rested on the tax authority to demonstrate that the controlled transactions were not at arm’s length and that this burden was not discharged merely by recharacterisation arguments and financial analysis without a proper transfer pricing report. The Court agreed that the adjustment to the median was inconsistent with paragraphs 3.60 to 3.62 of the OECD Guidelines, particularly in the absence of proven comparability defects. As a result, the additional tax assessments and penalties for all years were definitively annulled. Click her for text version Click here for translation ...