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

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

A guarantee from another party may be used to support the borrower’s credit. A lender placing reliance on a guarantee or guarantees would need to evaluate the guarantor(s) in a similar way to that in which it evaluates the original borrower. For the lender to take a guarantee into account in setting or adjusting the terms and conditions of a loan, it would need to be reasonably satisfied that the guarantor(s) would be able to meet any shortfall resulting from the borrower being unable to meet its obligations in full in the event of a default. Guarantees are discussed in more detail in Section D ...

For instance in the case of a loan, those characteristics may include but are not limited to: the amount of the loan; its maturity; the schedule of repayment; the nature or purpose of the loan (trade credit, merger/acquisition, mortgage, etc.); level of seniority and subordination, geographical location of the borrower; currency; collateral provided; presence and quality of any guarantee; and whether the interest rate is fixed or floating ...

A Portuguese subsidiary – A SA – had received intra group loans in foreign currency and had various other transactions with foreign group companies. The tax authorities claimed that the pricing of the transactions had not been at arm’s length and that the interest payment and exchange losses on the loans were not tax deductible. Decision of CAAD The CAAD set aside the assessment and decided in favour of “Welding Mesh SA” Click here for English translation ...

The Tax Authority had made a transfer pricing adjustment for FY 2007 in the amount of €262,500.00 arising from the provision of a guarantee for payment granted under a credit agreement between a bank and its subsidiary. The adjustment had been determined using a CUP method where the pricing of the controlled transaction had been compared to the pricing of uncontrolled bank guarantees. The Court of first instance held that “it cannot be concluded that the transactions at issue here are comparable on the basis of the criterion adopted by the Tax Authorities referred to above. In fact, although the guarantee and the independent bank guarantee may share common features, the way in which the risk falls on the guarantor and on the guarantor of the independent bank guarantee potentially generates differences that significantly affect their comparability.” An appeal was filed by the tax authorities. Decision of Supreme Administrative Court The Court dismissed the appeal of the tax authorities. In accordance with article 58 of the CIRC (wording at the time of the facts), the AT could make the corrections that are necessary for the determination of the taxable profit whenever, by virtue of special relations between the taxpayer and another person, subject or not subject to IRC, different conditions have been established to those that would normally be agreed upon between independent persons, leading to the profit ascertained on the basis of accounting being different from that which would be ascertained in the absence of such relations. The Tax Authority has the burden of proving the existence of those special relations, as well as the terms under which operations of the same nature normally take place between independent persons and under identical circumstances, and the act must be annulled if that proof is not provided, which means that the correction referred to in Article 58 of the CIRC cannot therefore be based on indications or presumptions, the AT having to prove the abovementioned legal requirements in order to be able to correct the taxpayer’s taxable amount under that regime. The provision of a guarantee by the Defendant constitutes a situation that has no equivalent between independent entities, since this type of provision is proper of related entities and to that extent there is no term of comparison between the situation of a guarantee provided by a bank and the guarantee provided by the dominant company in favour of its subsidiary and as follows from the provisions of article 6, paragraphs 1 and 3 of the Commercial Companies Code, the provision of real or personal guarantees for the debts of other entities is, as a general rule, considered to be contrary to the pursuit of the company’s purpose (profit), and operations relating to the provision of (remunerated) guarantees may only be carried out by credit institutions and financial companies. Bearing in mind the fact that the bank guarantee has its own characteristics that differentiate it from the guarantee, as profusely explained in the judgment appealed against, leads us to conclude that the conditions for the provision of a bank guarantee by a banking institution cannot serve as a model of comparison for the purpose of determining the remuneration to be fixed for the guarantee provided by the Appellant since the two transactions are not sufficiently comparable, in accordance with the provisions of Article 4(3) of Order in Council No 1446-C/2001, particularly since part of the benefits which the defendant expects to gain from the provision of the guarantee in favour of its subsidiary arise from its status as a shareholder, a situation which has no economic equivalent in the case of the provision of a bank guarantee by a bank. Furthermore, for a transaction to be considered comparable it must have economic characteristics similar to those of non-binding transactions. It therefore “it seems unquestionable that the assumption of a payment guarantee by the parent company (for the debts of a controlled company) does not alter, in a significant manner, the liability regime already applicable to it by virtue of the provisions of articles 501 and 491 of the Commercial Companies Code. In summary, in view of the reality of the situation in the case, the conclusion of the sentence appealed must be followed in the sense that, in view of what article 58, nos. 1 and 2, of the Corporate Income Tax Code and article 5 of Ministerial Order no. 1446-C/2001 establish as regards the liability regime of the company in question, the conclusion of the sentence appealed must be followed. no. 1446-C/2001 establish as to the factors to be assessed in order to ascertain the comparability of the transactions, we conclude that the Tax Authorities failed to demonstrate that, in the specific case, the provision of the guarantee by the Impugnant and the provision of autonomous bank guarantees whose expenses were borne by the Impugnant meet the conditions to be considered comparable, as they present relevant economic and financial characteristics that are sufficiently similar, and ensure a high degree of comparability, so as to correct the taxable amount through the transfer pricing regime provided for in article 58, no. 1, of the IRC Code. 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Genefinance – previously Interga – carried out a credit risk guarantee activity for the benefit of certain foreign branches and subsidiaries of the Société Générale group to which it belonged. Following an audit, the tax authorities considered the amount of premiums paid by foreign entities in 2008 and 2009 to be insufficient in relation to the guarantees granted and considered that the advantage thus granted characterised a transfer of profits within the meaning of Article 57 of the General Tax Code. The tax authorities noted that Interga, which had previously been profitable, in 2008 and 2009 had recorded significant losses, as the amount of guarantee premiums received was not sufficient to cover the expenses resulting from the guarantee calls. It found that the amount of the guarantees paid to the client entities corresponded to the difference between the cost of the risk for each of these entities and twice their respective average gross operating income and that, in return for this service, the company received a premium corresponding to the sum of a percentage of the balance sheet account balances and a percentage of the off-balance sheet account balances covered by the guarantee for each of the client entities. It noted that these two percentages in the premium calculation formula had been set in 2004 on the basis of four parameters calculated at the level of all client entities, including a trigger threshold of 2.4% of the outstanding amount covered. Genefinance brought the tax assessment to the administrative court and later the administrative court af appeal. In a decision of 9 July 2019 the appeal of Genefinance was rejected. This decision was then appealed to the Supreme Administrative Court – Conseil d’Etat. Judgement of the Court The Court decided in favour of Genefinance – previously Interga – and remanded the case to Administrative Court of Appeal. “It is clear from the statements in the judgment under appeal that, in order to establish the existence of an advantage granted by Interga to certain foreign branches of the group, the court noted that while for these branches the contractual threshold for triggering the credit risk guarantee was set at 2.4% of the outstanding amount covered, the actual threshold was in fact 0% and that, as a result, they were indemnified from the first euro of a claim without paying the corresponding premiums. It ruled that, in the absence of proof that the company had obtained compensation, this advantage constituted a transfer of profits within the meaning of Article 57 of the General Tax Code. In so ruling, however, the court distorted the documents in the file, from which it did not appear that the contractual threshold for triggering the guarantee had been set, for the branches concerned, at 2.4% of the outstanding amount covered, such a threshold being provided for only at the level of all client entities and solely to contribute to the calculation of premiums. Consequently, without needing to rule on the other pleas in law of the appeal, Genefinance is entitled to request the annulment of the judgment which it is challenging.” Click here for English translation Click here for other translation ...

In February 2020, OECD released the report Transfer Pricing Guidance on Financial Transactions. The guidance in the report describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return. Sections A to E of this report are included in the OECD Transfer Pricing Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106 ...

A guarantee from another party may be used to support the borrower’s credit. A lender placing reliance on a guarantee or guarantees would need to evaluate the guarantor(s) in a similar way to that in which it evaluates the original borrower. For the lender to take a guarantee into account in setting or adjusting the terms and conditions of a loan, it would need to be reasonably satisfied that the guarantor(s) would be able to meet any shortfall resulting from the borrower being unable to meet its obligations in full in the event of a default. Guarantees are discussed in more detail in Section D ...

For instance in the case of a loan, those characteristics may include but are not limited to: the amount of the loan; its maturity; the schedule of repayment; the nature or purpose of the loan (trade credit, merger/acquisition, mortgage, etc.); level of seniority and subordination, geographical location of the borrower; currency; collateral provided; presence and quality of any guarantee; and whether the interest rate is fixed or floating ...

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. Judgement of the Administrative Court The court dismsissed the appeal of A. Sp. z o.o. and sided with the tax authorities. Excerpt “The essence of the dispute in this respect boils down to the understanding of the notion of transaction used in this provision to define the actions the performance of which is to result in the necessity to draw up tax documentation. The provisions of ustawa p.d.o.p. do not contain a legal definition of this notion, therefore, the basis for interpretation of its meaning must be a colloquial understanding of the word transaction. However, basing such an interpretation solely on lexical definitions is doomed to failure because both the interpreter himself, as well as the applicant, basing themselves on linguistic definitions contained in dictionaries, came to completely different conclusions from the point of view of interpretation. One of them concluded that a transaction is a legal act concluded in connection with a party’s business activity in the performance of which at least one payment is made (based on the Internet Dictionary of the Polish Language http://sjp.pl), while the applicant, relying on another dictionary https://sjp.pwn.pl), argued that the word transaction covers only an agreement for the purchase and sale of goods and services. Therefore, resolving the merits of the case based solely on dictionary concepts does not give sufficiently satisfactory results. n such a situation one should refer to a purposeful interpretation, referring to the reasons for introducing this regulation, as well as to the goal the legislator intended to achieve through its introduction. In this respect, it should be pointed out that the provisions on the obligation to prepare tax documentation in the case of civil law transactions between related entities were introduced in order to ensure transparency of such activities, in particular to ensure that such activities are conducted on market principles. The purpose of introducing such a regulation convinces the court to accept as correct a broad definition of the word transaction. Such a definition ensures transparency of actions by related entities. There are no grounds for assuming that the legislator intended to achieve this only with respect to purchase and sale agreements, leaving the entire wide range of possible legal actions between related entities outside these regulations. Such an understanding of this provision is also an implementation of the guarantee function of the tax law, allowing related entities to obtain adequate protection in the event of disclosure of their actions. Therefore, in the court’s opinion, the interpreting authority did not violate the law by stating that the applicant’s position in this respect, in which it assumes that the notion of transaction means only and exclusively sale and purchase agreements, is incorrect. In this respect, the court of first instance fully agrees with the view of the Supreme Administrative Court expressed in the judgment of 8 March 2016 in case II FSK 4000/13, which stated that on the grounds of Article 9a(1) and (2) of the Act, the term “transaction” is synonymous with the term “agreement”. (ONSAiWSA 2017/3/52). In the same judgment, this Court considered as transactions within the meaning of Article 9a(1) of the P.C.P. making a contribution-in-kind to a capital company in the form of shares or stocks, the purchase (acquisition) of shares or taking up shares in increased share capital in exchange for a cash contribution. Cash-pooling agreements were also recognised as agreements exhausting the notion of transaction indicated in Article 9(1) of the APS (e.g. judgment of the Supreme Administrative Court of 8 January 2019 II FSK 121/17) or taking up by a bank in exchange for a cash contribution of shares issued upon the establishment of a mortgage bank and subsequent increases in the share capital of a mortgage bank (judgment of the WSA in Gliwice of 25 April 2018 I SA/Gl 314/18). Thus, the court jurisprudence in this respect adopts a broad understanding of the notion of transaction, not limiting it only to a sale-purchase agreement. Taking into account all the elements indicated above, the court held that the authority did not infringe the law by assuming that the notion of transaction referred to in Article 9a(1) of the A.P.C. also includes a legal transaction such as the one described in the application, which is subject to the granting of a surety free of charge to the applicant under a loan agreement. The interpreter’s position does not violate the law either, to the extent in which he stated that the obligation to prepare tax ...

This case is about deduction of certain “cost” related to sale of property and intragroup financing between an Italian company and a related group company in Luxembourg. Judgment of the Supreme Court The Court ruled partly in favour of the tax authorities and partly in favour of the PDM D srl. I regards to the deduction of the “guarantee” granted in relation to the sale of real estate the Court states: “In the present case, in the absence of proof of the above requirements in the reference financial year (2005/2006), and since the costs in question have not yet been actually incurred, but are future costs that may be incurred in subsequent financial years, following a comparison between the amount actually received from the leases and the fixed amount guaranteed by the seller company and therefore depending on the actual development of the lease relationship, the tax recovery is legitimate. ” In regards to the arm’s length nature of the interest rate the Court states: “This Court has therefore affirmed that ‘the burden of proof on the Office – in the matter of transfer pricing – is limited to demonstrating the existence of transactions between related companies and the clear deviation between the agreed consideration and the market value (abnormal value), since this burden does not extend to the proof of the elusive function of the transaction’, and that, on the other hand, ‘in the face of the evidence offered by the Administration, it is up to the taxpayer to demonstrate – by virtue of the principle of proximity of the evidence, inferable from Article 2697 of the Civil Code. – It is for the taxpayer to demonstrate – by virtue of the principle of closeness of evidence, as inferable from Article 2697 of the Civil Code – not only the existence and relevance of the deducted costs, but also any other element that allows the Office to consider that the transaction took place at market value.” “In the present case, the C.T.R. made a precise assessment, applying the concept of “economic normality of the transaction”, considering justifiable the agreement, in favour of the Luxembourg parent company, of an interest rate of 2%, taking into account the specific concrete characteristics (the fact that it was an intra-group loan but with a short term and of an amount exceeding one million euros, as well as the lower average riskiness of the borrowing company, a company under Luxembourg law, financed by a company from the South, in particular), which made the financing in any event not comparable to other financing provided by the same company or by the banking system. The statements contained in the judgment are therefore consistent with the rules governing the remuneration of intra-group financing and with the rules on transfer pricing, with reference to the appropriateness of the interest rate and its correspondence to the “normal market value”.” Click here for English translation Click here for other translation ...

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

McKesson is a multinational group engaged in the wholesale distribution of pharmaceuticals. Its Canadian subsidiary, McKesson Canada, entered into a factoring agreement in 2002 with its ultimate parent, McKesson International Holdings III Sarl in Luxembourg. Under the terms of the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for approximately C$460 million and committed to purchase all eligible receivables as they arise for the next five years. The receivables were priced at a discount of 2.206% to face value. The funds to purchase the accounts receivable were borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent company in Luxembourg. At the time the factoring agreement was entered into, McKesson Canada had sales of $3 billion and profits of $40 million, credit facilities with major financial institutions in the hundreds of millions of dollars, a large credit department that collected receivables within 30 days (on average) and a bad debt experience of only 0.043%. There was no indication of any imminent or future change in the composition, nature or quality of McKesson Canada’s accounts receivable or customers. Following an audit, the tax authorities applied a discount rate of 1.013%, resulting in a transfer pricing adjustment for the year in question of USD 26.6 million. In addition, a notice of additional withholding tax was issued on the resulting “hidden” distribution of profits to McKesson International Holdings III Sarl. McKesson Canada was not satisfied with the assessment and filed an appeal with the Tax Court. Judgement of the Tax Court The Tax Court dismissed McKesson Canada’s appeal and ruled in favour of the tax authorities. The Court found that an “other method” than that set out in the OECD Guidelines was the most appropriate method to use, resulting in a highly technical economic analysis of the appropriate pricing of risk. The Court noted that the OECD Guidelines were not only written by persons who are not legislators, but are in fact the tax collecting authorities of the world. The statutory provisions of the Act govern and do not prescribe the tests or approaches set out in the Guidelines. According to the Court, the transaction at issue was a tax avoidance scheme rather than a structured finance product ...

X BV  jointly participated in a third party credit arrangement with other group companies. X BV was jointly and severally liable for all the receivables that the creditor had on the other group companies under the credit arrangement, and the recourse (of X BV against the other group companies) that arose from such joint and several liability could not be claimed until the full amount outstanding under the credit arrangement had been repaid. The Supreme Court found that it could be assumed that a third party would not be willing to provide a guarantee only if, at the moment of granting the guarantee, no guarantee fee could be determined. The Supreme Court found that the cross guarantee was an arrangement that originated from shareholder interests. Hence a credit loss resulting from a cross-guarantee agreement was not deductible for tax purposes. Click here for translation ...

A company, which belonged to a Nordic group, had until August 2005, two loans with an independent party outside the group. The interest of the loans was 3.135 to 3.25 percent. The company’s long-term loans amounted to over EUR 36 million and the guarantees granted by the Company for its loans amounted to about 41 million. In August 2005 the financing of the entire group was re organised. A Ltd paid off old bank loans and took up a new loan from the Swedish company B AB, which belonged to the group. For loans between the group companies was 9.5 percent interest rate. The interest rate had been affected by interest rate percentages on unrelated loans , risk loans and loans from shareholders. After the change in funding A Ltd’s long-term debt totaled just over EUR 38 million and the guarantees granted by the Company for the group was around 300 million euros. A Ltd’s capital structure was not affected significantly by the change. The interest rates that A Ltd had paid to B AB had clearly exceeded the amount that two independent companies would have paid. The average external financing rate for the entire group, which was 7.04 percent, could not be used as the basis for deductible interest into a situation where the company’s own credit condition and other circumstances, would have made it possible for the Company to obtain financing at considerably more favorable conditions. To A Ltd’s taxable income for 2005 would thus non-deductible interest added 845,354 euros, corresponding to the difference between an interest rate of 9.5 percent and an interest rate of 3.25 percent. The law on the taxation of business income § 18 subsection 1. 2 point Click here for translation he ...

In the case of General Electric Capital, Canada, the issue was if a 1% guarantee fee  paid by General Electric Capital Canada Inc. to its AAA-rated US parent company satisfied the arm’s length test. The Canadian tax administration argued  that implicit support resulted in General Electric Canada having a AAA credit rating, so that the guarantee provided by the US parent had no value. Taxpayer argued that the 1% guarantee fee did not exceed arm’s length pricing and that implicit support from the US parent should be ignored since it stemmed from the non-arm’s length relationship. The Tax Court agreed with the tax administration that implicit support should be taken into account and applied a “yield approach,” comparing the interest rate the Canadian company would have paid with and without the guarantee. The Tax Court found that credit rating of the Canadian company – with implicit support but without the guarantee – was at most BBB-/BB+ and the 1% guarantee was arm’s length. The Federal Court of Appeal approved of both the Tax Court’s yield approach and its conclusion that the guarantee fee did not exceed an arm’s length price. On the issue of implicit support the Court concluded that under the arm´s length principle implicit support had to be taken into account . Determining arm’s length pricing “involves taking into account all the circumstances which bear on the price whether they arise from the relationship or otherwise.” Hence, Circumstances that are themselves inherently non-arm’s length in nature must also be considered. The relevant question is what an arm’s length guarantor would charge to provide a guarantee to a comparable subsidiary of a comparable AAA-rated US parent Company. Comparing prices of loans without regard to implicit support from the US parent, fails to recognize all of the relevant economic circumstances of the controlled transaction ...