Tag: Gross margin

Gross profit divided by turnover

France vs SAS CFEB Sisley, December 2023, CAA de Paris, Case No. 22PA01528

SAS CFEB Sisley, the head of the Sisley group, which specialises in high-end cosmetic products, was the subject of an accounting audit covering the 2012 and 2013 financial years. At the end of the audit CFEB Sisley was notified of a proposed assessment, as the tax authorities considered that the pricing applied by the group led to a transfer of profits, within the meaning of Article 57 of the General Tax Code, to several of its subsidiaries established in Asia. However, later on the tax authorities limited the assessment to a single subsidiary, based in Hong Kong. A appeal was filed by CFEB Sisley and in a ruling handed down on 2 December 2021, the Montreuil Administrative Court, discharged the taxes resulting from the assessment. According to the court the selection of internal comparables provided by the company showed gross margins equivalent to those achieved by its subsidiary. The tax authorities had therefore not established that the prices charged by the company to its subsidiary were lower than those charged by comparable independent businesses. The authorities then filed an appeal against this ruling. Judgement of the Administrative Court of Appeal The CAA dismissed the appeal of the authorities and decided in favor of CFEB Sisley. Excerpts in English “In order to question CFEB Sisley’s transfer pricing policy and consider that it constituted an indirect transfer of profits abroad, in the form of a reduction in the purchase prices at which products are resold to its subsidiaries, the French tax authorities carried out a comparison of gross and net margins with the selection of external comparables produced by the company, reduced to six companies after excluding one. Even after being restated by the authorities, this selection of external comparables shows significant differences between the companies, revealing that the sector is marked by considerable disparity, and that the gross margin achieved by Sisley Hong-Kong Ltd remains well within the range of gross margins achieved by companies, recognised by the authorities as comparable, established in Asia. With regard to the net margin, although the margin achieved by the subsidiary established in Hong Kong is significantly higher than the third quartile in the range calculated on the basis of the same selection of external comparables, the authorities have not established that this method would be more relevant in the circumstances of this case, more relevant than the gross margin method and of such a nature, on its own, as to establish that the prices invoiced by CFEB Sisley are lower than those charged by comparable companies operating normally, when, moreover, CFEB Sisley itself records a significant net margin. Consequently, and without it being necessary to rule on the validity of the selection of internal comparables subsequently produced by CFEB Sisley, the administration did not provide the proof required of it of a practice falling within the scope of Article 57 of the General Tax Code.” Click here for English translation Click here for other translation FR22PA01528ORG ...

Greece vs “Raw Materials Ltd”, December 2023, Tax Court, Case No 2129/2023

Following an audit of “Raw Materials Ltd” an assessment was issued by the tax authority regarding pricing of intra-group transactions in FY 2018 and 2019. At issue was the pricing of intra group sales and purschases. A complaint was filed by “Raw Materials Ltd” with the Dispute Resolution Board claming that the tax authority had misapplied the chosen transfer pricing method. Decision of the Board The Board upheld the assessment of the tax authorities and rejected the appeal of “Raw Materials Ltd”. Excerpt in English “Because the tax authority, taking into account the activity, the organisation and the specific characteristics of the audited company itself, chose as more reliable the internal comparables relating to sales to third independent companies, because the internal comparables are more reliable due to their internal nature. In addition, it is ensured that identical accounting practices are followed in relation to the cost structure (….). Moreover, internal comparables have a more direct and closer relationship with intra-group transactions, in line with the OECD Guidelines (last updated version – July 2010), which in para. 3.27: “Step 4 of the formal process described in paragraph 3.4 is to review internal comparables that may exist. Internal comparables may have a more direct and closer relationship to the controlled transaction than external comparables. The financial analysis may be easier and more reliable as it will be based on identical accounting standards and practices between the internally comparable transaction and the controlled transaction. In addition, access to information on internally comparable transactions may be more comprehensive and less costly.” As stated in the relevant audit report, the applicant company did not sufficiently justify in the documentation file the rejection of the internal comparative sales data to third independent undertakings, and no further evidence was submitted at the appeal stage to substantiate that claim. As regards the applicant company’s claim that it sold products with a loss due to defects, as is apparent from the relevant report, the audit showed that the result of that transaction was profitable. Because the applicant’s claim that the audit has unjustifiably changed the treatment of the same tax subject matter in relation to previous audits of the financial years 2010-2011 and 2015-2017 is unfounded as, on the one hand, according to the principles of accounting there is independence of the financial years and, on the other hand, the table relied on by the applicant itself shows that the circumstances in the years under audit are different as the percentage of its turnover relating to sales to affiliated undertakings has varied significantly. Because according to Article 28 of the Code of Taxation: “1. The Tax Administration shall notify the taxpayer in writing of a note of findings containing the results of the tax audit and the provisional corrective tax assessment, which must be fully reasoned. The taxpayer may request to receive copies of the documents on which the corrective tax assessment is based. The taxpayer shall have the opportunity to express its views in writing on the provisional corrective tax assessment within twenty (20) days of the written notification. 2. The Tax Administration shall issue the final act of corrective determination of the tax, within one (1) month from the date of receipt of the taxpayer’s views or, in case the taxpayer does not submit his views, from the expiry of the deadline specified in par. 1. The final act of corrective tax assessment shall be issued on the basis of an audit report prepared by the Tax Administration. The audit report shall contain a detailed and reasoned account of the facts, data and provisions taken into account by the Tax Administration in determining the tax. The final tax assessment notice together with the audit report shall be communicated to the taxpayer.” Because Article 65 of the Tax Code states that: “In the event of a challenge to an act of assessment of tax in an appeal, the taxpayer or any other person making such a challenge shall bear the burden of proving that the act of assessment of tax is defective.” Since the audit complied with the provisions of Article 28 of the Tax Code and prepared the audit report no…… which it delivered to the applicant company with the provisional determination acts attached. The applicant responded to the abovementioned Memorandum of Acknowledgments by means of the letter No……Replying Memorandum. The audit examined the allegations set out in that memorandum, the positions of which are set out on pages 122 to 129 of the relevant audit report, and then proceeded to adopt the contested definitive acts. Consequently, the allegation of infringement of the right to a prior hearing. Since, in the present appeal, the applicant puts forward allegations essentially similar to those made during the audit, on which the audit has taken a position in the relevant report (see pages 122 to 129 of the relevant audit report), and does not submit any new evidence to alter the findings. Because the findings of the audit, as recorded in the tax division for large tax payers’s audit report, on which the contested acts are based, are considered to be well-founded, acceptable and fully reasoned.” Click here for English translation Click here for other translation gr-ded-2023-2129e_en_ath-2129e_2023 ...

France vs SASU Menarini Diagnostics France, November 2023, CAA de Paris, Case No. 21PA06233

SASU Menarini Diagnostics France (a French subsidiary in the Italian Menarini Group) buys and resells diagnostic equipment and products for self-diagnosis and laboratories. Since its creation it had recurring operating losses, despite the profitability of each business line and irrespective of sales trends, and even though it was no longer in a market penetration phase. An audit was initiated by the tax authorities for fiscal 2011-2013, which revealed that the pricing of intra-group transactions was not at arm’s length and that overpricing of products purchased from two related parties in Italy had resulted in an indirect transfer of profits within the meaning of Article 57 of the French General Tax Code. Menarini Diagnostics France appealed against the assessment with the Montreuil Administrative Court which rejected its request for discharge of these taxes. An appeal was then filed with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal dismissed the appeal of Menarini Diagnostics France and upheld the decision of the Administrative Court. “12. Firstly, with regard to the application of the comparable price method, the applicant company criticizes the single reference, namely the G-ECCH product range, used by the tax authorities, which, in its view, does not represent a representative sample of the relevant market enabling a satisfactory statistical distribution to be made in accordance with the recommendations of the Organization for Economic Cooperation and Development. It adds that the French authorities have not carried out any analysis of the factors of comparability in terms of products, volumes, functional and market analysis, nor made any adjustments to compensate for the lack of comparability, even though the specific features of the G-ECCH and G-IHCO ranges are different. However, it is common ground that the administration used only internal comparables corresponding to products acquired directly by the company from third-party suppliers. In addition, it is clear from the investigation that these two product ranges are aimed at the same clientele, in the same sector of activity, that the G-IHCO product range represents a share of sales within the G range that is sufficiently representative, that the mere fact that there is only one comparable product range does not make it any less reliable as such, and that the applicant company does not, moreover, mention any adjustments that might need to be made. Finally, the fact that another product in the range, not purchased directly from a third party and representing a very marginal share of sales, generates a lower average gross margin than the G-IHCO range does not call into question the validity of the method used by the authorities. 13. Secondly, with regard to the application of the transactional net margin method, AMDF argues first of all that the tax authorities do not validly question the resale price method used, which has been validated by an independent firm and is recommended by the Organisation for Economic Co-operation and Development. However, it follows from the investigation that the resale price method, which is certainly recommended by the Organisation for Economic Co-operation and Development, is only relevant when the margin is sufficient to cover selling costs. In this case, however, the margin is very low, or even negative, and in any case, AMDF has not provided the marketing contracts concluded at group level in order to study the breakdown of costs and margins achieved. On the other hand, the transactional method, which applies the net margin rather than the gross margin, takes into account all the expenses incurred by the company, and thus makes it possible to examine the company’s overall remuneration in relation to the functions it performs and the entirety of its operational activity. After analyzing AMDF’s distribution functions, the tax authorities were entitled to use the panel of comparable companies operating in a similar market to compare net margins on all AMDF’s activities. If, as the applicant company maintains, some of the companies on the panel have lower or, on the contrary, higher sales than its own, it does not follow from the investigation that, given the net margin rates compared, taking them into account would be unfavorable to it. Furthermore, if the two companies with the most distant activity from the applicant were excluded from the panel, the recalculated median would be higher and therefore unfavorable to the applicant company. Lastly, the applicant company does not present any alternatives, merely arguing that no external comparables are available. Consequently, AMDF has no grounds for questioning the validity of the transactional net margin method. 14. Lastly, the applicant company asks the Court, in the alternative, that instead of the median used by the administration to determine the arm’s length range, which constitutes the acceptable price range, the low interquartile range be used to calculate the increases resulting from the application of the transactional net margin method. However, on the one hand, the administration compared the company’s net margin with the panel’s interquartile median, thus eliminating extreme values and risks of error, and retained two different periods in order to take account of the economic difficulties invoked by the company. Furthermore, and in any case, the company has not justified that the application of a low interquartile range would be more appropriate for the calculation of uplifts. Under these circumstances, the low interquartile range should not be used to calculate the said increases.” Click here for English translation Click here for other translation CAA de PARIS, 21PA06233 ORG ...

France vs ST Dupont, July 2023, Conseil d’État, Case No 464928

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) An appeal was then filed with the CAA of Paris, where in April 2022 the Court dismissed the appeal and upheld the decision of the court of first instance. Finally an appeal was filed with the Conseil d’État. Judgement of the Conseil d’État The Conseil d’État dismissed the appeal of ST Dupont and upheld the decision of the Court of Appeal. Excerpt “ 15. It is clear from the documents in the file submitted to the lower courts that, in order to assess whether the prices at which ST Dupont sold its finished products to its distribution subsidiary ST Dupont Marketing constituted a transfer of profits abroad, it compared them to the prices at which the same products were sold to the independent South Korean company SJ Duko Co and to a network of duty-free sellers in South-East Asia. It considered that this comparison revealed the existence of an advantage granted by ST Dupont to its subsidiary, which it reintegrated into the parent company’s profits. However, in its response to the taxpayer’s comments, this adjustment was reduced by a “reduction” in the arm’s length prices used by the tax authorities, which consisted of aligning the margin on transactions with duty free shops with the margin on sales to SJ Duko, and then, in accordance with the opinion issued by the departmental commission for direct taxes and turnover taxes, by a further reduction of 50% of the amounts reintegrated into the company’s results. 16. In the first place, the company criticised the method used by the tax authorities on the grounds that ST Dupont Marketing and the Korean company SJ Duko Co were not comparable, since the former operated as a wholesaler and retailer while the latter only operated as a wholesaler. In rejecting this criticism on the grounds, firstly, that SJ Duko’s wholesale activity had been supplemented by that of exclusive sales agent and retailer and, secondly, that the applicant had not provided any evidence making it possible to assess the nature and cost of the differences in functions between ST Dupont Marketing and SJ Duko Co, taking into account in particular the assets used and the risks borne, and consequently to assess the existence, if any, of differences such that they would render the comparison irrelevant if they could not be appropriately corrected, the Court did not err in law. Although the company also argued that the differences in the functions performed by ST Dupont and the duty free shops prevented the duty free shops from being considered comparable, this criticism is new in the appeal and is therefore inoperative. 17. Secondly, in order to dismiss the criticism of the administration’s method based on the failure to take account of the difference in the geographical markets in which ST Dupont Marketing and SJ Duko Co operated, respectively, the Court was able, without committing an error of law, by disregarding the rules governing the allocation of the burden of proof or distorting the documents in the file submitted to it, to rely on the fact that ST Dupont’s transfer pricing documentation itself specified that retail prices were set uniformly by continental zone. 18. Thirdly, the Court noted, in a sovereign assessment not vitiated by distortion, on the one hand, that it did not follow either from the tables attached to the rectification proposal, or from the method of determining the selling prices of finished products to the various Asian subsidiaries, that the prices charged by ST Dupont to its customers depended on the quantities sold and, secondly, that the document produced by ST Dupont showing an overall statistical correlation between volume sold and unit price, which did not guarantee that the products compared were homogeneous, did not make it possible to establish this either. In relying on these factors to dismiss the company’s criticism based on the difference in the volume of transactions with ST Dupont Marketing and SJ Duko Co respectively, the Court did not err in law. 19. Fourthly, although the company criticises the grounds of the judgment in which the Court rejected its argument that the alignment of the mark-up applied to sales to duty-free shops with that applied to sales to SJ Duko Co meant that only one term of comparison was used, it is clear from other statements in the judgment, not criticised by the appeal, that the court also based itself on the fact that the tax authorities had, as an alternative, in their response to the taxpayer’s observations, applied a 27% reduction to the prices granted to duty-free shops in order to take account of the fact that these were ...

France vs (SA) Saint Louis Sucre, June 2023, CAA de VERSAILLES, Case No 20VE02300

SA Saint Louis Sucre, whose main activity is the production of beet-based sugar and which is a member of the Südzucker group, was the subject of an accounting audit covering the period from 1 March 2010 to 28 February 2013, at the end of which the tax authorities notified it of, on the one hand, additional corporation tax and social security contributions, as well as default interest, in respect of the financial year ended 28 February 2011 in the amount of EUR 1,801,398, resulting from a transfer pricing reassessment and, secondly, additional corporate income tax, social security contributions and exceptional contributions, as well as penalties for deliberate non-compliance, in respect of the financial year ended 28 February 2013 in the amount of 4,908,559 euros, arising from the reconsideration of an extra-accounting deduction of an indemnity from the Belgian intervention and restitution office received following a court decision. In a judgment of 17 July 2020, the Montreuil Administrative Court ruled that there was no need to adjudicate in respect of the disgorgement that had occurred in the course of the proceedings, corresponding to late payment interest in respect of that allowance, that the additional corporation tax, social security contribution and exceptional contribution should be discharged, and that the penalty for wilful misconduct in respect of that allowance should be waived, and dismissed the remainder of the claim. SA Saint Louis Sucre asked the Court to set aside that judgment insofar as it dismissed the remainder of its claim. In its application, the authorities appealed against the same judgment and asked the Court to reinstate the taxes at issue, the discharge for which was wrongly granted by the first judges. Judgement of the Court of Appeal In regards of the transfer pricing adjustment, the Court of Appeal dismissed the appeal of Saint Louis Sucre. Excerpt “10. In order to contest the existence of a tariff advantage granted to its parent company Südzucker AG, and therefore of an indirect transfer of profits within the meaning of the aforementioned provisions of Article 57 of the General Tax Code, Saint Louis Sucre maintains that the price of EUR 427.20 per tonne, determined using the alternative method, corresponds to the arm’s length price. To justify the use of this method, it produced a methodology sheet provided for in the transfer pricing documentation, entitled “Swap SZAG-) SLS: Derivation transfer price 2009/10”. This sheet mentions a resale price of EUR 495 per tonne, to which the applicant company deducted an amount of EUR 70 corresponding to logistical costs, on the grounds that the transfer prices did not take them into account, and then added an amount of EUR 2.70 per tonne, corresponding to the profit margin granted to it by Südzucker AG. To justify the resale price of EUR 495 per tonne, however, it merely took into account the sole reference sales contract between Südzucker AG and its Italian customer Maxi, i.e. EUR 510 per tonne, after deducting Maxi’s profit margin of EUR 15 per tonne. Although Südzucker AG also produced a table to justify the amount of the logistical costs, it does not make it possible to establish the reality of the figures put forward by the company. Moreover, as the Minister maintains in his defence, Annex 5 to the applicant company’s application states that average sugar prices on the European market are determined ‘ex works’, i.e. at the factory gate, without taking logistics costs into account. From 2010 to 2011, the average price of sugar varied between €476 and €654 per tonne. Accordingly, the applicant company does not substantiate, on the basis of the documents produced, the sales price of EUR 427.70 per tonne to its parent company resulting from its application of the alternative method. 11. Saint Louis Sucre also points to the lack of outlets following the fall in the price of quota sugar in 2009/2010. It maintains that its parent company could not have purchased it at the UPC price of EUR 472.80 per tonne, given the transport costs generated by deliveries to southern Europe. Without this sale at the price of 427.20 euros per tonne, it would have had to either store its goods with a view to selling them in the following marketing year, incurring significant storage costs, or sell them in the European Union on loss-making markets, in particular the Spanish market, at a lower price than that negotiated with its parent company. However, it does not provide any evidence in support of its allegations, merely producing two invoices with the Spanish company Südzucker Iberica SLU, showing a selling price of EUR 446 on 15 July 2010 and EUR 471 on 23 August 2010, even though prices fluctuated widely over those few weeks. Furthermore, the applicant company did not demonstrate that its “quota sugar” could only be sold in Spain. 12. Consequently, in light of all of these elements, the alternative method relied on by Saint Louis Sucre was insufficiently documented, and the tax authorities could dismiss it as irrelevant for determining the transfer price in light of the arm’s length principle and rely on the comparable price method. Although the applicant company maintains that the tax authorities did not provide any comparables for determining the transfer price using this method, it is clear from the investigation that they used the price of €472.84 defined by the Südzucker group itself and based on the prices charged to customers Barry Callebaut, Ferrero, Kraft Foods, Coca-Cola and Maxi in October 2009. This price corresponds to the estimated market price at the beginning of the period on the basis of contracts currently being signed. By simply maintaining that the price of EUR 427.20 per tonne, determined using the alternative method, corresponds to the arm’s length price, Saint Louis Sucre is not contesting that the UPC method used by the department could be applied to establish the arm’s length price. The tax authorities could therefore consider that the price of EUR 427.20, which was lower than the average for comparable contracts using the UPC ...

Spain vs Transalliance Iberica SA, November 2022, Audiencia Nacional, Case No SAN 5336/2022 – ECLI:EN:AN:2022:5336

Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method used by the company due to differences in the treatment of cost items and thus issues of comparability at a gross margin level. Instead, the tax authorities applied the TNMM. The profit was outside the interquartile range and an adjustment to the median was made. Transalliance lodged an appeal. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since such defects had not been established, the adjustment was reduced to the lower quartile. Excerpt “Of the points that are dealt with, the appellant focuses the discussion on the application of the median. In particular the Guidelines – 3.62 – state that “where the range comprises highly reliable and relatively equal results, it can be argued that any one of them satisfies the arm’s length principle. Where some defects in comparability persist, as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency that allow this point to be determined (e.g. median, measure or weighted mean, depending on the speciï¬c characteristics of the data) in order to minimise the risk of error caused by defects in comparability that persist but are not known or cannot be quantiï¬ed”. Applying this rule, p. 109 of the Agreement states that “the normal practice in such cases is to use the median as the most signiï¬cant value of the interquantile range, as it avoids the problems that extreme values cause in the calculation of the arithmetic mean”. The appellant – p. 120 of the agreement – argued that the administration could not apply the median “mechanically”, as such automatism is not required by the Guidelines. Therefore, it argued that it is sufficient to apply the “lower quartile of the interquartile range” instead of the median. To which the Agreement replied that ‘the preference for the median must be justified on statistical grounds: it is a robust statistic, which is not influenced by extreme values in the sample of purchasables’. Both the TEAC and the Abogacía del Estado insist on the argument. The Chamber’s position in this regard is described in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ) – the appeal was rejected by order of 14/11/2019 – and 4 February 2021 (Rec. 658/2017), which hold that “it is legitimate to resort to what the Guideline calls “measures of central tendency”, but whoever resorts to them has the burden of reasoning and setting out the reasons that lead to their application”. This solution has been accepted in the Resolution of the TEAC of 23 November 2021 (4881/2019), which states, with a correct interpretation of the position of this Chamber, “that in order to resort to the median, there must be defects of comparability. In the event that such defects are not highlighted by the inspection, the adjustment would be made to the lower quartile”. Well, what the Inspectorate has done is to “automatically” apply the median -also the TEAC and the Abogacía del Estado-, without explaining and reasoning the concurrence of “defects of comparability”, a burden that corresponds to it and that the Chamber should not replace. This means that the lower inter-quantile range must be applied and not the median, as the appellant claims. On this point, the appeal is also upheld.” Click here for English translation Click here for other translation Spain vs Logistica SA SAN 5336-2022 - November 2022 ORG PDF ...

§ 1.482-3(d)(4) Example 4.

(i) FS, a foreign corporation, produces apparel for USP, its U.S. parent corporation. FS purchases its materials from unrelated suppliers and produces the apparel according to designs provided by USP. The district director identifies 10 uncontrolled foreign apparel producers that operate in the same geographic market and are similar in many respect to FS. (ii) Relatively complete data is available regarding the functions performed and risks borne by the uncontrolled producers. In addition, data is sufficiently detailed to permit adjustments for differences in accounting practices. However, sufficient data is not available to determine whether it is likely that all material differences in contractual terms have been identified. For example, it is not possible to determine which parties in the uncontrolled transactions bear currency risks. Because differences in these contractual terms could materially affect price or profits, the inability to determine whether differences exist between the controlled and uncontrolled transactions will diminish the reliability of these results. Therefore, the reliability of the results of the uncontrolled transactions must be enhanced by the application of a statistical method in establishing an arm’s length range pursuant to § 1.482-1(e)(2)(iii)(B) ...

§ 1.482-3(d)(4) Example 3.

The facts are the same as in Example 1, except that under its contract with FS, USP uses materials consigned by FS. UT1, UT2, and UT3, on the other hand, purchase their own materials, and their gross profit markups are determined by including the costs of materials. The fact that USP does not carry an inventory risk by purchasing its own materials while the uncontrolled producers carry inventory is a significant difference that may require an adjustment if the difference has a material effect on the gross profit markups of the uncontrolled producers. Inability to reasonably ascertain the effect of the difference on the gross profit markups will affect the reliability of the results of UT1, UT2, and UT3 ...

§ 1.482-3(d)(4) Example 2.

The facts are the same as in Example 1, except that USP accounts for supervisory, general, and administrative costs as operating expenses, which are not allocated to its sales to FS. The gross profit markups of UT1, UT2, and UT3, however, reflect supervisory, general, and administrative expenses because they are accounted for as costs of goods sold. Accordingly, the gross profit markups of UT1, UT2, and UT3 must be adjusted as provided in paragraph (d)(3)(iii)(B) of this section to provide accounting consistency. If data is not sufficient to determine whether such accounting differences exist between the controlled and uncontrolled transactions, the reliability of the results will be decreased ...

§ 1.482-3(d)(4) Example 1.

(i) USP, a domestic manufacturer of computer components, sells its products to FS, its foreign distributor. UT1, UT2, and UT3 are domestic computer component manufacturers that sell to uncontrolled foreign purchasers. (ii) Relatively complete data is available regarding the functions performed and risks borne by UT1, UT2, and UT3, and the contractual terms in the uncontrolled transactions. In addition, data is available to ensure accounting consistency between all of the uncontrolled manufacturers and USP. Because the available data is sufficiently complete to conclude that it is likely that all material differences between the controlled and uncontrolled transactions have been identified, the effect of the differences are definite and reasonably ascertainable, and reliable adjustments are made to account for the differences, an arm’s length range can be established pursuant to § 1.482-1(e)(2)(iii)(A) ...

§ 1.482-3(d)(4) Examples.

The following examples illustrate the principles of this paragraph (d) ...

§ 1.482-3(d)(3)(iii)(B) Consistency in accounting.

The degree of consistency in accounting practices between the controlled transaction and the uncontrolled comparables that materially affect the gross profit markup affects the reliability of the result. Thus, for example, if differences in inventory and other cost accounting practices would materially affect the gross profit markup, the ability to make reliable adjustments for such differences would affect the reliability of the results. Further, the controlled transaction and the comparable uncontrolled transaction should be consistent in the reporting of costs between cost of goods sold and operating expenses. The term cost of producing includes the cost of acquiring property that is held for resale ...

§ 1.482-3(d)(3)(iii)(A) In general.

The reliability of the results derived from the cost plus method is affected by the completeness and accuracy of the data used and the reliability of the assumptions made to apply this method. See § 1.482-1(c) (Best method rule) ...

§ 1.482-3(d)(3)(ii)(D) Purchasing agent.

If a controlled taxpayer is comparable to a purchasing agent that does not take title to property or otherwise assume risks with respect to ownership of such goods, the commission earned by such purchasing agent, expressed as a percentage of the purchase price of the goods, may be used as the appropriate gross profit markup ...

§ 1.482-3(d)(3)(ii)(C) Adjustments for differences between controlled and uncontrolled transactions.

If there are material differences between the controlled and uncontrolled transactions that would affect the gross profit markup, adjustments should be made to the gross profit markup earned in the comparable uncontrolled transaction according to the provisions of § 1.482-1(d)(2). For this purpose, consideration of the operating expenses associated with the functions performed and risks assumed may be necessary, because differences in functions performed are often reflected in operating expenses. If there are differences in functions performed, however, the effect on gross profit of such differences is not necessarily equal to the differences in the amount of related operating expenses. Specific examples of the factors that may be particularly relevant to this method include – (1) The complexity of manufacturing or assembly; (2) Manufacturing, production, and process engineering; (3) Procurement, purchasing, and inventory control activities; (4) Testing functions; (5) Selling, general, and administrative expenses; (6) Foreign currency risks; and (7) Contractual terms (e.g., scope and terms of warranties provided, sales or purchase volume, credit terms, transport terms) ...

§ 1.482-3(d)(3)(ii)(B) Other comparability factors.

Comparability under this method is less dependent on close physical similarity between the products transferred than under the comparable uncontrolled price method. Substantial differences in the products may, however, indicate significant functional differences between the controlled and uncontrolled taxpayers. Thus, it ordinarily would be expected that the controlled and uncontrolled transactions involve the production of goods within the same product categories. Furthermore, significant differences in the value of the products due, for example, to the value of a trademark, may also affect the reliability of the comparison. Finally, the reliability of profit measures based on gross profit may be adversely affected by factors that have less effect on prices. For example, gross profit may be affected by a variety of other factors, including cost structures (as reflected, for example, in the age of plant and equipment), business experience (such as whether the business is in a start-up phase or is mature), or management efficiency (as indicated, for example, by expanding or contracting sales or executive compensation over time). Accordingly, if material differences in these factors are identified based on objective evidence, the reliability of the analysis may be affected ...

§ 1.482-3(d)(3)(ii)(A) Functional comparability.

The degree of comparability between controlled and uncontrolled transactions is determined by applying the comparability provisions of § 1.482-1(d). A producer’s gross profit provides compensation for the performance of the production functions related to the product or products under review, including an operating profit for the producer’s investment of capital and assumption of risks. Therefore, although all of the factors described in § 1.482-1(d)(3) must be considered, comparability under this method is particularly dependent on similarity of functions performed, risks borne, and contractual terms, or adjustments to account for the effects of any such differences. If possible, the appropriate gross profit markup should be derived from comparable uncontrolled transactions of the taxpayer involved in the controlled sale, because similar characteristics are more likely to be found among sales of property by the same producer than among sales by other producers. In the absence of such sales, an appropriate gross profit markup may be derived from comparable uncontrolled sales of other producers whether or not such producers are members of the same controlled group ...

§ 1.482-3(d)(3)(i) In general.

Whether results derived from the application of this method are the most reliable measure of the arm’s length result must be determined using the factors described under the best method rule in § 1.482-1(c) ...

§ 1.482-3(d)(2)(iii) Arm’s length range.

See § 1.482-1(e)(2) for determination of an arm’s length range ...

§ 1.482-3(d)(2)(ii) Appropriate gross profit.

The appropriate gross profit is computed by multiplying the controlled taxpayer’s cost of producing the transferred property by the gross profit markup, expressed as a percentage of cost, earned in comparable uncontrolled transactions ...

§ 1.482-3(d)(2)(i) In general.

The cost plus method measures an arm’s length price by adding the appropriate gross profit to the controlled taxpayer’s costs of producing the property involved in the controlled transaction ...

§ 1.482-3(d)(1) In general.

The cost plus method evaluates whether the amount charged in a controlled transaction is arm’s length by reference to the gross profit markup realized in comparable uncontrolled transactions. The cost plus method is ordinarily used in cases involving the manufacture, assembly, or other production of goods that are sold to related parties ...

France vs Ferragamo France, June 2022, Administrative Court of Appeal (CAA), Case No 20PA03601

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 France vs Ferragamo CAA de PARIS, 2ème chambre, 30_06_2022, 20PA03601 ...

Chile vs Avery Dennison Chile S.A., May 2022, Court of Appeal, Case N° Rol: 99-2021

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” An appeal was then filed by the tax authorities. Judgement of the Court of Appeal The Court upheld the decision of the Tax Tribunal and set aside the assessment issued by the tax authorities. Excerpts “(…) Fourth: That the OECD regulations – while article 38 of the LIR was in force – should be understood as a guide with indications or suggestions for determining prices assigned between related parties with respect to those charged between independent parties. The aim is to eliminate distortions that may arise between companies with common ownership and to respect market rules. Notwithstanding the above recognition, Article 38 of the LIR regulated transfer prices and even though its normative content was minimal and insufficient to provide an adequate response on the matter, its text must be followed for the purposes of resolving the conflict in question, especially if one considers that the third paragraph of the provision states that when prices between related companies are not in line with the values charged between independent companies for similar transactions, “the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the transaction, or the production costs plus a reasonable profit margin. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also consider the resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies”. The following paragraph adds that if the company does not carry out the same type of operations with independent companies, the Regional Directorate “may challenge the prices based on the values of the respective products or services on the international market (…) for this purpose (…) it shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information”. It can be inferred from the transcribed rule that the use of external comparables is only authorised if the company does not carry out any type of transaction of goods and services with independent companies; that the challenge must be well-founded; and that the taxpayer and the SII are free to use the method that seems most appropriate to them as long as the legal requirements are met. It is also relevant to note that the domestic regulations at that date did not contemplate all the methods included in the OECD guidelines and it is inappropriate, under article 38 of the LIR, to resort directly to such guidelines in respect of situations not provided for in the domestic regulations, i.e., in relation to methods not included in the aforementioned provision. An interpretation contrary to the above would infringe the principle of legality of taxes or legal reserve, according to which only the law can impose, eliminate, reduce or condone taxes of any kind or nature, establish exemptions or modify existing ones and determine their form, proportionality or progress. Fifth: That the contested act shows that the method used by the SII for the entire period under review, business year 2012, corresponds to the so-called “Transactional Net Margin Method” for marketing operations, and the ” Comparable Uncontrolled Price Method” for financial operations, The Court therefore agrees with the findings of the lower court in grounds 22 to 25 of the judgment under review regarding the lack of the necessary grounds for the administrative act, in that the tax authority, although obliged to do so, omitted to analyse the transactions in accordance with the legislation in force at the date on which they were carried out…” Click here for English translation Click here for other translation Chile vs Avery Dennison Chile May 2022 ...

France vs ST Dupont , April 2022, CAA of Paris, No 19PA01644

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) Still not satisfied with the result, an appeal was filed by ST Dupont with the CAA of Paris. Judgement of the CAA The Court of appeal dismissed the appeal of ST Dupont and upheld the decision of the court of first instance. Excerpt “It follows from the above that the administration provides proof of the existence and amount of an advantage granted to ST Dupont Marketing that it was entitled to reintegrate into ST Dupont’s results, pursuant to the provisions of Article 57 of the General Tax Code, before drawing the consequences on the amount of the deficits declared by this company in terms of corporation tax, on the liability of the sums thus distributed to the withholding tax and on the integration in the base of the minimum contribution of professional tax and the contribution on the added value of companies. 29. It follows from all the foregoing that ST Dupont is not entitled to maintain that it was wrongly that, by the contested judgment, the Paris Administrative Court rejected the remainder of its claim. Its claims for the annulment of Article 4 of that judgment, for the discharge of the taxes remaining in dispute and for the restoration of its declared carry-over deficit in its entirety must therefore be rejected.” Click here for English translation Click here for other translation France CAA de PARIS, 2ème chambre, 13_04_2022, 19PA01644, Inédit au recueil Lebon ...

TPG2022 Chapter II paragraph 2.54

The distinction between gross and net profit analyses may be understood in the following terms. In general, the cost plus method will use mark ups computed after direct and indirect costs of production, while a net profit method will use profits computed after operating expenses of the enterprise as well. It must be recognised that because of the variations in practice among countries, it is difficult to draw any precise lines between the three categories described above. Thus, for example, an application of the cost plus method may in a particular case include the consideration of some expenses that might be considered operating expenses, as discussed in paragraph 2.52. Nevertheless, the problems in delineating with mathematical precision the boundaries of the three categories described above do not alter the basic practical distinction between the gross and net profit approaches ...

TPG2022 Chapter II paragraph 2.42

Assume that there are two distributors selling the same product in the same market under the same brand name. Distributor A offers a warranty; Distributor B offers none. Distributor A is not including the warranty as part of a pricing strategy and so sells its product at a higher price resulting in a higher gross profit margin (if the costs of servicing the warranty are not taken into account) than that of Distributor B, which sells at a lower price. The two margins are not comparable until a reasonably accurate adjustment is made to account for that difference ...

TPG2022 Chapter II paragraph 2.41

Where the accounting practices differ from the controlled transaction to the uncontrolled transaction, appropriate adjustments should be made to the data used in calculating the resale price margin in order to ensure that the same types of costs are used in each case to arrive at the gross margin. For example, costs of R&D may be reflected in operating expenses or in costs of sales. The respective gross margins would not be comparable without appropriate adjustments ...

TPG2022 Chapter II paragraph 2.30

In a market economy, the compensation for performing similar functions would tend to be equalized across different activities. In contrast, prices for different products would tend to equalize only to the extent that those products were substitutes for one another. Because gross profit margins represent gross compensation, after the cost of sales for specific functions performed (taking into account assets used and risks assumed), product differences are less significant. For example, the facts may indicate that a distribution company performs the same functions (taking into account assets used and risks assumed) selling toasters as it would selling blenders, and hence in a market economy there should be a similar level of compensation for the two activities. However, consumers would not consider toasters and blenders to be particularly close substitutes, and hence there would be no reason to expect their prices to be the same ...

TPG2022 Chapter II paragraph 2.28

The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions (“internal comparableâ€). Also, the resale price margin earned by an independent enterprise in comparable uncontrolled transactions may serve as a guide (“external comparableâ€). Where the reseller is carrying on a general brokerage business, the resale price margin may be related to a brokerage fee, which is usually calculated as a percentage of the sales price of the product sold. The determination of the resale price margin in such a case should take into account whether the broker is acting as an agent or a principal ...

TPG2022 Chapter II paragraph 2.27

The resale price method begins with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin on this price (the “resale price marginâ€) representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit. What is left after subtracting the gross margin can be regarded, after adjustment for other costs associated with the purchase of the product (e.g. customs duties), as an arm’s length price for the original transfer of property between the associated enterprises. This method is probably most useful where it is applied to marketing operations ...

Ukrain vs PJSP Gals-K, July 2021, Supreme Administrative Court, Case No 620/1767/19

Ukrainian company “PJSP Gals-K” had been involved in various controlled transactions – complex technological drilling services; sale of crude oil; transfer of fixed assets etc. The tax authority found, that prices had not been determined in accordance with the arm’s length principle and issued a tax assessment. Gals-K disagreed and filed a complaint. The Administrative Court dismissed the tax assessment and this decision was later upheld by the Administrative Court of Appeal. Judgement of the Supreme Administrative Court The Supreme Court set aside the decisions of the Court of Appeal and remanded the case to the court of first instance for a new hearing. The court considered that breaches of procedural and substantive law by both the Court of Appeal and the Court of First Instance have been committed, and the case should therefore be referred to the Court of First Instance for a new hearing. Excerpts “Thus, in order to properly resolve the dispute in this part, the courts must determine, on the basis of the relevant and admissible evidence, whether the oil sales by the plaintiff to the non-resident GFF AG (Swiss Confederation) are controlled transactions within the meaning of paragraph 39. 2.1 of Article 39.2 of Article 39 of the Code of Ukraine. In this case, when establishing the validity of the position on the extension of the provisions of Article 39 of the CP of Ukraine to other legal relationships, the courts should also assess the validity of the opinion of the State Traffic Department regarding the improper valuation by the caller of a controlled operation when using the method of “comparative uncontrolled price”. For example, in the SO No. 35/4, the price that was set at the auction (auction certificate No. A185-186 of 23 January 2014 for the sale of oil on the domestic market) was reversed as the price of the export of oil from GFF AG to Orlen Lietuva.” “According to the appellant’s position, the transfer of the tangible fixed assets by the managing directorate of SD No 35/4 in the name of all the parties to the contract to one of the parties (PJSC “Ukrnafta”) in the person of its structural division (NGVU “Chernihivnaftogaz”) cannot be considered a sale, since the goods were actually transferred to the entire legal entity of PJSC “Ukrnafta”. In connection with the above-mentioned circumstances, during the cassation examination of the case, the plaintiff also pointed to the absence of legislative grounds for considering such a transaction as controlled, and the mention of the latter in the Report on Controlled Transactions constitutes a mistake made by the relevant administrative department. In accordance with this position, the courts of the previous instances have found that the use of the “resale price” method was unjustified. The College of Judges considers that, in resolving the dispute between the parties in this part, the courts of the previous instances did not fully appreciate the parties’ arguments on the dispute, which resulted in an incorrect assessment of the circumstances of the case. It should be noted that the sub-clauses of clause 14.1.139 of Article 14.1 and clause 153.14.5 of Article 153.14 of the Ukrainian Civil Code provide that for the purposes of the disclosure the obligations of the parties to the joint venture under the Joint Venture Agreement are specific civil law contracts. At the same time, the accounting treatment of transactions involving the transfer/sale of tangible goods has been subject to respect and legal scrutiny by the courts. In order to properly resolve the dispute in this part, the following should have been addressed: who and for what money the goods were delivered; to whom (PJSC “Ukrznafta” as a separate legal entity or PJSC “Ukrznafta” as a member of the Agreement No. 35/4) and on what legal basis the goods were exchanged/sold; how the relevant transaction was recorded in the accounting records and whether such recording corresponds to the primary documents that were created in connection with the transfer/sale of the goods.” “The Collegium of Judges notes that, in addition to the above-mentioned deficiencies in the absence of primary documents and accounting documents, which were created for the results of the business transactions, the documentation from the transfer pricing, which was provided to the audit, is also absent (volume 1, page 30). The above makes it impossible to establish officially the conditions of the case as to the method used by the caller, the arguments of the latter in the absence of the conditions for the inclusion of the joint operation in the controlled order with the self-inclusion of the operations of PJSC “Ukrnafta” in the Report for 2014 with the inclusion of the methods 303 “costs plus” and 305 “revenue allocation”, whereas in the letter No 1855/10 dated 22 March 2017 the caller informed the State Tax Administration about the use of only the 303 “cost plus” method.” Click here for English translation Click here for other translation 620-1767-19 ORG ...

Chile vs Avery Dennison Chile S.A., March 2021, Tax Court, Case N° RUT°96.721.090-0

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” Click here for English translation Click here for other translation CH vs Avery Dennison 16-9-0001493-0 ...

France vs Ferragamo France, November 2020, Conseil d’Etat, Case No 425577

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. The Administrative Court decided in favour of Ferragamo and dismissed the assessment. According to the Court the tax administration has not demonstrated the existence of an advantage granted by Ferragamo France to Salvatore Ferragamo SPA, nor the amount of this advantage. Judgement of the Conseil d’Etat The Conseil d’Etat overturned the decision of the Administrative Court 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.” Click here for English Translation Click here for other translation Fr vs IT fash ...

Panama vs “Petroleum Wholesale Corp”, September 2020, Administrative Tribunal, Case No TAT-RF-062

“Petroleum Wholesale Corp” is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation and financial reports and other publicly available information, an assessment was issued for FY 2013 and 2014 resulting in additional taxes and surcharges of approximately $ 14 millions. Petroleum Wholesale Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities with a minor adjustment in the calculations for 2014. “…we consider that the Tax Administration adhered, in this case, to the powers conferred by law, and that there is no defenselessness, since it was verified that, in the course of the audit, several requests for information were made (as evidenced in the minutes of the proceedings in the background file), and then, in the governmental channel, after notification, the evidence requested by the plaintiff was admitted and practiced, in the first instance, having carried out the corresponding procedural stages.” “In view of the above, we consider that the taxpayer should have been consistent in the handling of the financial information used, and calculate the gross margin in accordance with the guidelines established in our legislation…” “In this sense, it is noteworthy that a method was chosen that weighs the margins, rather than the price of the product, when the part analysed is exclusively dedicated to the distribution of oil, a product that has a public market price, and in the Panamanian case, there is a suggested price for its purchase and sale to the consumer.” “Based on the calculations described in the previous point, no adjustment would be necessary to the calculation of the additional settlement for the period 2013, as it coincides with the work carried out by the tax authorities (see Table n.). 40 to sheet 309 of the background file). Therefore, we will only proceed with the adjustment of the taxpayer’s financial information for the 2014 period, specifically the cost of sales, in order to bring it to the median of the interquartile range, reflecting, for clarity, a comparative analysis of the adjustment made in the first instance, with the findings described in this resolution“ Click here for English translation Exp. 099-19 ...

Greece vs “G Pharma Ltd”, july 2020, Court, Case No 1582

“G Pharma Ltd” is a distributor of generic and specialised pharmaceutical products purchased exclusively from affiliated suppliers. It has no significant intangible assets nor does it assume any significant risks. However for 17 consecutive years it has had losses. Following an audit, the tax authorities issued an assessment, where the income of G Pharma Ltd was determined by application of the Transactional Net Margin Method (TNMM). According to the tax authorities a limited risk distributor such as G Pharma Ltd would be expected to be compensated with a small, guaranteed, positive profitability. G Pharma Ltd disagreed with the assessment and filed an appeal. Judgement of the Court The court dismissed the appeal of G Pharma Ltd and upheld the assessment issued by the tax authorities. Excerpts “First, the reasons for the rejection of the final comparable sample of two companies were set out in detail and then the reasons for using the net profit margin as an appropriate indicator of profitability for the chosen method of documenting intra-group transactions were documented in a clear and substantiated manner, citing the relevant OECD guidelines, in order to establish whether or not the principle of equidistance was respected. Subsequently, since the claim concerning the inclusion of the company ……………………. in the final sample of comparable companies was accepted, the calculations of the arm’s length thresholds were provided in order to assess whether or not the arm’s length principle was respected. Following the above, the method of calculation of the resulting difference due to the non-respect of the arm’s length principle in the intra-group invoicing of the applicant’s transactions with the related companies of the group was analysed. Consequently, the applicant’s claims in respect of the first plea in law of the application are not upheld and are rejected as unfounded in law and in substance. Because the applicant itself, as documented in detail in the documentation file, arrived at the above method of documentation, which it nevertheless applied on incorrect bases. The choice of the gross profit margin as an appropriate indicator of profitability is incorrect as it is not provided for in the OECD guidelines” “based on the above, it would be expected that it would be compensated with a small, guaranteed, positive profitability. Instead, the picture it presents over time is one of a company with consistently disproportionately high losses from inception to the present day beyond any notion of business sense or contrary to normal commercial transactions, which demonstrates the need to adjust its intragroup pricing given the fact that all of its purchases and a significant portion of its operating expenses are intragroup transactions. Since the applicant’s claim that ‘in calculating the adjustment to its operating profitability, due to non-compliance with the arm’s length principle, account should also be taken of the adjustments to the tax adjustment already made by the accounting differences declared by the company’ cannot be accepted and is rejected, since this is a comparison between dissimilar figures, that is to say, a comparison between the applicant’s tax result and the accounting results of comparable companies in the sample. Because the applicant’s claim that, ‘any adjustment to its operating profitability should be based on the 1st quartile value and not that of the median’, is not accepted and is rejected, as, when assessing the operating profile, the applicant performs additional functions beyond a mere reseller and in particular than the comparable companies in the final sample as it has a disproportionately high cost of operating expenses to gross income compared to the comparable companies. Moreover, none of the comparable undertakings in the final sample is representative of the industry as they all have similar gross revenues to the applicant and therefore similar market share in the pharmaceutical industry. The choice of the median is the most appropriate because it eliminates possible comparability deficits (differences in factors and circumstances) that may exist between the applicant and the undertakings in the sample. Because the tax audit has come to the clear and well-founded conclusion that the pricing policy pursued by the applicant with its related undertakings does not comply with the arm’s length principle and is outside the acceptable limits. Since it follows from the foregoing that the contested income tax assessment measure was lawfully adopted, the applicant’s claims to the contrary must be rejected as unfounded.” Click here for English translation Click here for other translation ΔΕΔ 1582-2020 ...

Greece vs “Agri Ltd”, july 2020, Court, Case No A 1514

A Greek MNE Group, “Agri Ltd”, was active and specialised in wholesale trade of agricultural machinery, parts and tools. In 2012 a German company was established by the group to distribute products in the Central European region. The pricing of the goods sold by Agri Ltd. to the German distributor was determined by testing the income of Agri Ltd using a TNMM. Following an audit the tax authorities issued a revised tax assessment, where the pricing of the inter-company transactions had instead been determined by applying a traditional cost plus method where the German subsidiary was the tested party. The resulting assessment was appealed by Agri Ltd. Judgement of the Court The court dismissed the appeal of Argri Ltd. “Since the tax audit, documented and clearly concluded that the cost plus margin method should have been chosen for the sales of the applicant to its subsidiary, the findings of the audit, as recorded in the 18.12.2019 Partial Income Tax Audit Report, are considered valid, acceptable and fully justified. Since it is clear from the above that the impugned income tax adjustment order was lawfully issued, the applicant’s contentions to the contrary are rejected as unfounded.” Click here for English translation Click here for other translation ΔΕΔ Α 1514-2020 ...

France vs ST Dupont, March 2019, Administrative Court of Paris, No 1620873, 1705086/1-3

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation France vs ST Dupont 1092183260 ...

TPG2017 Chapter II paragraph 2.54

The distinction between gross and net profit analyses may be understood in the following terms. In general, the cost plus method will use mark ups computed after direct and indirect costs of production, while a net profit method will use profits computed after operating expenses of the enterprise as well. It must be recognised that because of the variations in practice among countries, it is difficult to draw any precise lines between the three categories described above. Thus, for example, an application of the cost plus method may in a particular case include the consideration of some expenses that might be considered operating expenses, as discussed in paragraph 2.52. Nevertheless, the problems in delineating with mathematical precision the boundaries of the three categories described above do not alter the basic practical distinction between the gross and net profit approaches ...

TPG2017 Chapter II paragraph 2.42

Assume that there are two distributors selling the same product in the same market under the same brand name. Distributor A offers a warranty; Distributor B offers none. Distributor A is not including the warranty as part of a pricing strategy and so sells its product at a higher price resulting in a higher gross profit margin (if the costs of servicing the warranty are not taken into account) than that of Distributor B, which sells at a lower price. The two margins are not comparable until a reasonably accurate adjustment is made to account for that difference ...

TPG2017 Chapter II paragraph 2.41

Where the accounting practices differ from the controlled transaction to the uncontrolled transaction, appropriate adjustments should be made to the data used in calculating the resale price margin in order to ensure that the same types of costs are used in each case to arrive at the gross margin. For example, costs of R&D may be reflected in operating expenses or in costs of sales. The respective gross margins would not be comparable without appropriate adjustments ...

TPG2017 Chapter II paragraph 2.30

In a market economy, the compensation for performing similar functions would tend to be equalized across different activities. In contrast, prices for different products would tend to equalize only to the extent that those products were substitutes for one another. Because gross profit margins represent gross compensation, after the cost of sales for specific functions performed (taking into account assets used and risks assumed), product differences are less significant. For example, the facts may indicate that a distribution company performs the same functions (taking into account assets used and risks assumed) selling toasters as it would selling blenders, and hence in a market economy there should be a similar level of compensation for the two activities. However, consumers would not consider toasters and blenders to be particularly close substitutes, and hence there would be no reason to expect their prices to be the same ...

TPG2017 Chapter II paragraph 2.28

The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions (“internal comparableâ€). Also, the resale price margin earned by an independent enterprise in comparable uncontrolled transactions may serve as a guide (“external comparableâ€). Where the reseller is carrying on a general brokerage business, the resale price margin may be related to a brokerage fee, which is usually calculated as a percentage of the sales price of the product sold. The determination of the resale price margin in such a case should take into account whether the broker is acting as an agent or a principal ...

TPG2017 Chapter II paragraph 2.27

The resale price method begins with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin on this price (the “resale price marginâ€) representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit. What is left after subtracting the gross margin can be regarded, after adjustment for other costs associated with the purchase of the product (e.g. customs duties), as an arm’s length price for the original transfer of property between the associated enterprises. This method is probably most useful where it is applied to marketing operations ...

France vs SAS Cooper Capri, December 2015, CAA de Nantes, Case No 14NT01720

SAS Cooper Capri’s belongs to the American group Cooper Industries. The Group carries out a parts production and sales activity in the context of two branches, a “construction” branch and an “industry” branch which produces, in particular, cable glands Cooper Capri was subject to an audit at the end of which the administration considered that it had indirectly transferred part of its profits to companies belonging to the same group located outside France and, consequently, incorporated the profits thus transferred into the result charged to the accounts for FY 2007 The company asked the Administrative Court to discharge the additional taxes. In November 2014 the request of Cooper Capri was rejected and the assessment of the tax authorities upheld. Cooper Capri then filed an appeal with the Court of Appeal. According to Cooper Capri, the tax administration had not demonstrated the granting of an advantage to related companies located abroad; in fact, if the ratio between the gross margin and sales is lower than that observed for comparable unrelated transactions, this is due, on the one hand, to the fact that the related companies bear distribution costs that normally accrue to them and, on the other hand, to the fact that these companies operate on markets with specific characteristics. Furthermore, according to Cooper Capri the tax administration could not base the disputed taxes on Article 57 of the general tax code since it had not identified with sufficient precision the companies benefiting from this advantage; Finally, the tax administration did not demonstrate that these companies were established in a foreign State or in a territory outside France with a privileged tax regime. Judgement of the Court of Appeal The court dismissed the appeal of Cooper Capri and upheld the decision of the administrative court. Excerpts “4. Considering, on the one hand, that it is common knowledge that SAS Cooper Capri was dependent on the American company Cooper Industries, a company located outside of France; that it is clear from the investigation that it manufactures goods sold on the French market and for export, either through independent distributors or through Cooper Shanghai located in China and Cooper Crouse Hinds located in Germany, Norway, Spain, the United Arab Emirates and South Korea; that all these companies were also dependent on the American company Cooper Industries; that the administration thus established the existence, which was not formally contested, of a link of dependence between the company located in France and these companies located outside France and which belonged to the same group; that the company cannot therefore usefully maintain that the administration could not apply Article 57 of the General Tax Code on the grounds that it had not established the privileged nature of the tax regimes applicable to the companies located abroad; 5. Considering, on the other hand, that it results from the investigation that, to determine the price of the products that it manufactures and that it intends to sell, the company used the method of the production cost increased by a margin; that this method, known as the “cost +”, was not disputed by the administration; that, however, and in the first place, the administration noted during the audit that, with regard to transactions concerning these products and carried out with the companies mentioned in point 4, the ratio between the gross margin and the amount of sales was 25.3% for the financial year ending in 2007, whereas, with regard to transactions concerning the same products carried out with other customers not belonging to the group, this ratio was 38.5%; that secondly, it is not disputed that the setting of prices is the responsibility of the company for all transactions carried out outside the group and of the American parent company for all intra-group transactions; that in this respect the prices are established on the basis of a “cost+” calculated on the basis of a margin of 27% and are revised continuously to take account of the valuation of raw materials; that, given the method used by the company, the finding of a lower margin results from the application of lower selling prices; that the administration was thus able to validly base itself on the margin differences found without having to analyse comparable markets and comparable functions, since it referred only to the company’s own data and did not compare them with the prices charged by other companies; that the company cannot reproach the administration for not having carried out a more detailed analysis and established a transfer of profits by company since, in response to the department’s request for documents specifying the method of determining prices by product and by client company, it confined itself, even though it was the only one to hold the documents, to providing it with overall data for the year under review without supporting documents; that, under these conditions, the differences in rates highlighted by the administration reveal that the prices invoiced by SAS Cooper Capri to companies established outside France and belonging to the same group were significantly lower than those it charged to its other clients;” Click here for English translation Click here for other translation France vs SAS Cooper Capri December 2015 CAA de NANTES Case No 14NT01720 ORG ...

France vs GE Healthcare Clinical Systems, December 2015, CAA de VERSAILLES, Case No 13VE00965

During the period from 1 January 2003 to 31 December 2005 all the products marketed by GE Healthcare Clinical Systems (France), a company wholly owned by the American company GE Medical Systems Information Technologies and the exclusive distributor in France of medical equipment produced by the General Electric group, were supplied to it by its German subsidiary, GE Medical Systems Information Technologies (MSIT) GmbH, of which it held 100% of the capital. Transfer prices were determined based on the cost plus method. Following an audit of the accounts of GE Healthcare Clinical Systems, the tax authorities dismissing the cost plus method and instead set up a sample of eight companies considered comparable to GE Healthcare Clinical Systems. The difference between the operating loss declared by this company and its arm’s length operating results, calculated on the basis of the median of the net operating margin of the eight companies deemed to be comparable, constituted an indirect transfer of profits granted without consideration by GE Healthcare Clinical Systems to its supplier, GE MSIT GmbH, within the meaning of Article 57 of the general tax code. This transfer of profits constituted income distributed to a company established in Germany, within the meaning of the provisions of Article 111c of the General Tax Code, the administration subjected GE Healthcare Clinical Systems to the withholding tax provided for in Article 119a(2) of this code, in respect of the 2004 and 2005 financial years, at the rate provided for by the French-German tax treaty GE Medical Systems, which took over the rights and obligations of GE Healthcare Clinical Systems following the merger of that company, is appealing against the judgment of 3 January 2013 by which the Montreuil Administrative Court dismissed the latter’s application for discharge of the withholding tax and the corresponding penalties to which it was subject in respect of the financial years ended in 2004 and 2005, which were levied on 30 April 2009; Judgement of the Court of Appeal The Court of Appeal upheld the assessment of the tax authorities and dismissed the appeal of GE Medical Systems Excerpts “22. Considering that the administration, which did not limit itself to noting the loss-making results, with the exception of the year 2000, of GE Healthcare Clinical Systems during the financial years 1998 to 2005, which are not attributable to salary and structural costs as the applicant company maintains, failing to provide any proof of its allegations, and to pointing out that these losses represented 60% of the turnover for the year 2005, thus provides proof of the relevance of the method derived from the study of net transactional margins; that in these circumstances, given the size of the difference between the operating losses declared by GE Healthcare Clinical Systems and the company’s arm’s length operating results resulting from the application of the transactional net margin method, which amounted to EUR 3,675,112 for 2004 and EUR 5,025,107 for 2005, it must be regarded as establishing that the company’s operating losses were in line with the net margin method, it must be regarded as establishing that in the financial years 2004 and 2005 GE Healthcare Clinical Systems, by paying GE MSIT GmbH purchase prices that were excessive in relation to an arm’s length situation, transferred to it profits in the amount of the difference recorded, respectively, in respect of each financial year, within the meaning and for the application of Article 57 of the General Tax Code ; – As regards the justification of the advantages granted : 23. Considering that neither GE Healthcare Clinical Systems nor GE MEDICAL SYSTEMS establishes or even alleges that the advantages granted by GE Healthcare Clinical Systems to its German subsidiary were justified by the obtaining of counterparties favourable to the activity of GE Healthcare Clinical Systems or to its operating results; 24. Considering that it follows that the tax authorities were right to consider that GE Healthcare Clinical Systems indirectly transferred to its German subsidiary profits amounting to EUR 3,675,112 for the 2004 financial year and EUR 5,125,107 for the 2005 financial year;” Click here for English translation. Click here for translation France vs GE CAA de VERSAILLES, 7ème Chambre, 03_12_2015, 13VE00965 ...