(i) USP, a U.S. corporation, and FSub, a wholly-owned foreign subsidiary of USP, enter into a CSA in Year 1 to develop Product A. Company Y is an uncontrolled corporation that owns Technology X, which is critical to the development of Product A. Company Y currently markets Product B, which is dependent on Technology X. USP is solely interested in acquiring Technology X, but is only able to do so through the acquisition of Company Y in its entirety for $200 million in an uncontrolled transaction in Year 2. For accounting purposes, the acquisition price is allocated as follows: $120 million to Product B and the underlying Technology X, $30 million to trademark and other marketing intangibles, and the residual $50 million to goodwill and going concern value. After the acquisition of Company Y, Technology X is used to develop Product A. No other part of Company Y is used in any manner. Immediately after the acquisition, product B is discontinued, and, therefore, the accompanying marketing intangibles become worthless. None of the previous employees of Company Y is retained. (ii) The Technology X of Company Y acquired by USP is reasonably anticipated to contribute to developing cost shared intangibles and is therefore a platform contribution for which FSub must compensate USP as part of a PCT. Although for accounting purposes a significant portion of the acquisition price of Company Y was allocated to items other than Technology X, the facts demonstrate that USP had no intention of using and therefore placed no economic value on any part of Company Y other than Technology X. If USP was willing to pay $200 million for Company Y solely for purposes of acquiring Technology X, then assuming the acquisition price method is otherwise the most reliable method, the value of Technology X is the full $200 million acquisition price. Accordingly, the value of the arm’s length PCT Payment due from FSub to USP for the platform contribution consisting of the rights in Technology X will equal the product of $200 million and FSub’s RAB share ...

(i) The facts are the same as in Example 1, except that Company X is a mature software business in the United States with a successful current generation of software that it markets under a recognized trademark, in addition to having the research team and new generation software in process that could significantly enhance the programs being developed under USP’s and FSub’s CSA. USP continues Company X’s existing business and integrates the research team and the in-process technology into the efforts under its CSA with FSub. For accounting purposes, the $100 million price for acquiring Company X is allocated $50 million to existing software and trademark, $25 million to in-process technology and research workforce, and the residual $25 million to goodwill and going concern value. (ii) In this case an analysis of the facts indicates a likelihood that, consistent with the allocation under the accounting treatment (although not necessarily in the same amount), a significant amount of the nonroutine contributions to the USP’s business activities consist of goodwill and going concern value economically attributable to the existing U.S. software business rather than to the platform contributions consisting of the rights in the in-process technology and research workforce. In addition, an analysis of the facts indicates that a significant amount of the nonroutine contributions to USP’s business activities consist of the make-or-sell rights under the existing software and trademark, which are not platform contributions and might be difficult to value. Accordingly, further consideration must be given to the extent to which these circumstances reduce the relative reliability of the acquisition price method in comparison to other potentially applicable methods for evaluating the PCT Payment ...

(i) USP, a U.S. corporation and FSub, a wholly-owned foreign subsidiary of USP, enter into a CSA in Year 1 to develop software programs with application in the medical field. Company X is an uncontrolled software company located in the United States that is engaged in developing software programs that could significantly enhance the programs being developed by USP and FSub. Company X is still in a startup phase, so it has no currently exploitable products or marketing intangibles and its workforce consists of a team of software developers. Company X has negligible liabilities and tangible property. In Year 2, USP purchases Company X as part of an uncontrolled transaction in order to acquire its in-process technology and workforce for purposes of the development activities of the CSA. USP files a consolidated return that includes Company X. For accounting purposes, $50 million of the $100 million acquisition price is allocated to the in-process technology and workforce, and the residual $50 million is allocated to goodwill. (ii) The in-process technology and workforce of Company X acquired by USP are reasonably anticipated to contribute to developing cost shared intangibles and therefore the rights in the in-process technology and workforce of Company X are platform contributions for which FSub must compensate USP as part of a PCT. In determining whether to apply the acquisition price or another method for purposes of evaluating the arm’s length charge in the PCT, relevant best method analysis considerations must be weighed in light of the general principles of paragraph (g)(2) of this section. The allocation for accounting purposes raises an issue as to the reliability of using the acquisition price method in this case because it suggests that a significant portion of the value of Company X’s nonroutine contributions to USP’s business activities is allocable to goodwill, which is often difficult to value reliably and which, depending on the facts and circumstances, might not be attributable to platform contributions that are to be compensated by PCTs. See paragraph (g)(5)(iv)(A) of this section. (iii) Paragraph (g)(2)(vii)(A) of this section provides that accounting treatment may be a starting point, but is not determinative for purposes of assessing or applying methods to evaluate the arm’s length charge in a PCT. The facts here reveal that Company X has nothing of economic value aside from its in-process technology and assembled workforce. The $50 million of the acquisition price allocated to goodwill for accounting purposes, therefore, is economically attributable to either of, or both, the in-process technology and the workforce. That moots the potential issue under the acquisition price method of the reliability of valuation of assets not to be compensated by PCTs, since there are no such assets. Assuming the acquisition price method is otherwise the most reliable method, the aggregate value of Company X’s in-process technology and workforce is the full acquisition price of $100 million. Accordingly, the aggregate value of the arm’s length PCT Payments due from FSub to USP for the platform contributions consisting of the rights in Company X’s in-process technology and workforce will equal $100 million multiplied by FSub’s RAB share ...

The following examples illustrate the principles of this paragraph (g)(2)(vii): ...

Allocations or other valuations done for accounting purposes may provide a useful starting point but will not be conclusive for purposes of the best method analysis in evaluating the arm’s length charge in a PCT, particularly where the accounting treatment of an asset is inconsistent with its economic value ...

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The degree of consistency in accounting practices between the controlled transaction and the uncontrolled comparables that materially affect operating profit affects the reliability of the result. Thus, for example, if differences in inventory and other cost accounting practices would materially affect operating profit, the ability to make reliable adjustments for such differences would affect the reliability of the results ...

The companies NCL Investments Ltd and Smith & Williamson Corporate Services Ltd (the Companies) had granted its employees stock options to acquire shares in the ultimate holding company, Smith & Williamson Holdings Limited (SWHL). The companies employ staff and make those staff available to other companies in the group in return for a fee. That fee is based on the costs that the companies incur in employing the staff, marked up with a profit element. The Companies claimed deductions in the computation taxable profits. The tax authorities accepted that IFRS2 required the Companies to recognise an expense in their income statements equal to the fair value of the options, but held that the debits were inapt to affect the profits of the Companies for corporation tax purposes. These transactions were treated by IFRS2 as a capital contribution (benefit) granted by SWHL to the Companies. The Debits did not represent any cost to the Companies, nor did they anticipate or reflect an actual cost which would arise in the future. On that basis tax authorities disallowed deductions for corporate tax purposes. An appeal was filed by the companies which was allowed by the lower courts. Appeals were then filed by the tax authorities. Judgement of the Supreme Court The Supreme Court dismissed the tax authorities’ claims and decided in favour of the Companies ...

Where the relevant profits to be split are comprised of profits of two or more associated enterprises, the relevant financial data of the parties to the transaction to which a transactional profit split is applied need to be put on a common basis as to accounting practice and currency, and then combined. Because accounting standards can have significant effects on the determination of the profits to be split, accounting standards should, in cases where the taxpayer chooses to use the transactional profit split method, be selected in advance of applying the method and applied consistently over the lifetime of the arrangement. Differences in accounting standards may affect the timing of revenue recognition as well as the treatment of expenses in arriving at profits. Material differences between the accounting standards used by the parties should be identified and aligned ...

“Tobacco S.A.” is the parent company of a group active in the tobacco industry. C. SA is a subsidiary of the group and operates as a toll manufacturer (Toller) on behalf of another subsidiary, B S.A. For the manufacturing services provided C S.A receives a “toll fee” from B S.A. According to the manufacturing service agreement the toll fee is calculated, based on Toller’s production costs plus and the capital invested by Toller in the production. Following an audit the tax authorities issued an additional assessment of corporate income tax and compensatory interest, relating to FY 2009, in the amount of EUR 1,395,039.79. The tax authorities considered that i) to correct the value of the production costs of the year 2009, in the amount corresponding to the deduction of the income with the “Write Off” of several credit balances of third parties over the company, since these deductions were not provided for in the contract; ii) to correct the value of the return on invested capital [which in the contract and also in the sentence is designated by the acronym ROCE] because the rules of the contract for its determination were not respected, which resulted in a lower remuneration by C. S.A. and in a cost saving by its contractual counterpart, leading to a result that is not compatible with the arm’s length principle. An appeal was filed against the assessment, but the tax tribunal of Lisbon dismissed the appeal and upheld the assessment. An appeal was then filed with the Supreme Administrative Court. Tobacco S.A. claimed that it did not in any way breach the contract for the provision of production services as it applied the POC rules when calculating the toll fee. Thus, it must be concluded that the correction made by the Tax Authority and confirmed by the Court of Appeal and which is claimed to be exclusively based on the incorrect interpretation of the contract by the Appellant is illegal due to the violation of the law. Moreover, according to Tobacco S.A, the tax authorities made an error on the assumptions, since it corrected the calculation of the value of the return on invested capital based on different rules from those which, in its interpretation, result from the contract. The appellant had made the calculations according to the statutory accounts (POC accounts), in compliance with the provisions of Annex B to the contract, and the Tax Authorities decided to correct those values by applying the values contained in Annexes C and D (US GAAP accounting classifications), which, according to the appellant, have the sole function of “allowing uniform intra-group reporting, essentially of a management nature”. “(…) as to the corrections to the ROCE, in the amount of €2,965,761.08, the appellant claims that, by disregarding the POC accounts and considering the US GAAP accounts, the Tax Authorities followed an understanding that does not prove to be correct and is distant from that provided for in the agreements entered into. Judgement of the Supreme Administrative Court The Supreme Administrative Court dismissed the case, as it considered to lack jurisdiction in regards to a judgment on the factual matter. The case was therefore officially transferred to the South Administrative Central Court. Excerpt “… Therefore, the Supreme Administrative Court is reserved the role of a review court, with intervention only in cases where the matter of fact in dispute in the case is stabilised and only the law remains under discussion. In order to assess the competence of the Supreme Administrative Court on the grounds of hierarchy, it is necessary to consider, in principle, only the content of the conclusions of the appeal statements (since these define the object and delimit the scope of the appeal – cf. It is necessary, in principle, to look only at the content of the conclusions of the appeal statement (since the object and scope of the appeal are defined by those conclusions – see Article 635 of the CPC) and check whether, in the light of those conclusions, the questions in dispute are resolved exclusively by applying and interpreting legal norms or whether, on the contrary, consideration of them implies the need to settle questions of fact (either because the appellant maintains that the facts presented as proved in the judgment have not been proved, or because he disagrees with the conclusions of fact to be drawn from them, or, still, because he invokes facts which have not been presented as proved and which are not, in the abstract, irrelevant for the judgment of the case). But not only this, it may also be necessary to compare the conclusions with the very substance of the allegations in the appeal, in particular to check whether they expressly contradict the facts on which the decision is based. And if the appellant raises any issue of fact, the appeal will no longer be based exclusively on points of law, and the competence of the Central Administrative Court will be defined from the outset, regardless of the possibility that this Court may eventually conclude that the disagreement on the factual issue is irrelevant for the decision of the appeal. However, the problem, in this case, of the correct interpretation of the contractual clauses on the basis of which the accounts (the accounting system) that are to serve as the basis for the calculation of the taxable amount are defined, is still a matter of fact. Although it is accepted that it may be qualified as a mixed matter (of fact and law), as it involves, on the one hand, the interpretation of the will of the contractual parties in determining the accounts that they intended to use in the calculation of the taxable amount for the purposes of taxation in Portugal of C……… (factual judgment) and, on the other hand, the normative interpretation of the contractual and legal clauses that define the arm’s length principle in the scope of legal transactions between persons that are in a special relationship with each other (transfer pricing), the truth is ...

Following the collapse of Enron in 2001, Goldman Sachs and Cargill had purchased a company previously known as Teeside Power Ltd. Teesside Power had claimed hundreds of millions of pounds were owed to the plant by other Enron subsidiaries. In a scheem devised by Ernst and Young, Teesside Power set up a Jersey-based company to avoid paying corporation tax on about £200 million by converting the receivables into shares. The Court of Appeal ruled in favour of the tax authorities and considered the scheme abusive tax avoidance covered by UK GAARs. The Court stated that statutory notes, although they are not endorsed by Parliament, are admissible as an aid to construction. The explanatory notes relating to the 2006 amendment to FA 1996 s 85A(1) confirmed that the amendment aimed to make it absolutely clear that the ‘fairly represent’ rule in s 84(1) takes priority over the accounting treatment mandated by s 85A(1). EWCA Civ 2075 (05 October 2018)”] ...

Where the relevant profits to be split are comprised of profits of two or more associated enterprises, the relevant financial data of the parties to the transaction to which a transactional profit split is applied need to be put on a common basis as to accounting practice and currency, and then combined. Because accounting standards can have significant effects on the determination of the profits to be split, accounting standards should, in cases where the taxpayer chooses to use the transactional profit split method, be selected in advance of applying the method and applied consistently over the lifetime of the arrangement. Differences in accounting standards may affect the timing of revenue recognition as well as the treatment of expenses in arriving at profits. Material differences between the accounting standards used by the parties should be identified and aligned ...