Terex Italia s.r.l. is a manufacturer of heavy machinery and sold these products to a related distributor in the UK. The remuneration of the distributor had been determined based on application of the TNM-method. Following an audit for FY 2009 and 2010 the tax authorities served Terex a notice of assessment where adjustments was made to the taxable income in respect of a transfer pricing transaction, and in particular contesting the issuance of a credit note, in favour of the English company GENIE UK with the description “sales prices adjustment” recorded in the accounts as a reversal of revenue, in that, according to the Office, as a result of the adjustment made by the note, Terex would have made sales below cost to the English company, carrying out a clearly uneconomic transaction. In the same note, the non-deductibility of costs for transactions with blacklisted countries was contested. Terex lodged appeals against the assessments, but the Provincial Tax Commission upheld them only “in respect of the purchases from Hong Kong”, implicitly rejecting them in respect of the purchases made in Switzerland and explicitly rejecting them in respect of the disputed credit notes. An appeal was later rejected by the Regional Tax Commission. An appeal was then filed by Terex with the Supreme Court. In this appeal Terex stated that “The CTR, for the purposes of identifying the ‘normal value’ of the intra-group transactions relating to the relations with the English company GENIE UK, wrongly disallowed the applicability of the TNMM method (of the ‘net margin’), used by the taxpayer for the years 2009 and 2010 and presupposed the issuance of the contested credit notes and the relative reduction of the declared income, on the other hand, the Office considered that the CUP method (of the ‘price comparison’), used by the tax authorities in the findings relating to the same tax years, was applicable, with the consequent emergence of a higher taxable income, compared to that declared. The same Administration, on the other hand, with reference to the intra-group relations with the same company, located in the tax years 2007 and 2008 and subject to control without censure in the same audit, had not denied the applicability of the TNMM method, used by the taxpayer, which in such cases had led to the issuance of debit notes, with the relative increase in declared income.” Judgement of the Court The Supreme Court upheld part of the judgement (black listed costs) and refered part of it (Transfer pricing method and “sales prices adjustment”) back to the Regional Tax Commission for reconsideration. Excerpts in English 5.1. In particular, with regard to the method applicable for the purpose of determining the “normal value”, it has been clarified, with specific reference to the one referred to as the “TNMM”, that “On the subject of the determination of business income, the regulations set forth in Article 110, paragraph 7, of Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD which is based on the determination of the net margin of the transaction (so-called “TNMM”), which is based on the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the differences between the tested party and the comparable companies in terms of risks assumed or functions performed, and a reliable indicator of the level of profitability is assumed.” (Cass. 17/05/2022, no. 15668; the principle was shared by, among others, Cass. 12/09/2022, nos. 26695, 26696, 26697 and 26698; Cass. 28/04/2023, no. 11252).” “The adoption of the TNMM is particularly reliable when the functional analysis shows the existence of a party (tested party or tested party) to the controlled transaction that performs simpler functions and assumes less risk than the other party to the transaction (para. 2.64 et seq. OECD). In analogy to the RPM (Resale Price Method) or CPM (Cost Plus Method), it focuses on the profitability of the tested party in the controlled transaction, whereas it differs from it in that it operates at the level of net margins and not gross margins.” “Indeed, according to the OECD Guidelines (OECD, Guidelínes,1995), ‘The selection of a transfer pricing method is always aimed at finding the most appropriate method for a particular case. For this purpose, the following should be taken into account in the selection process: the respective advantages and disadvantages of the methods recognised by the OECD; the consistency of the method considered with the nature of the controlled transaction, as determined in particular through functional analysis; the availability of reliable information (especially on independent comparables) necessary for the application of the selected method and/or the other methods; the degree of comparability between controlled transactions and transactions between independent companies, including the reliability of comparability adjustments that are necessary to eliminate significant differences between them. No method can be used in all eventualities and it is not necessary to demonstrate the non-applicability of a given method to the circumstances of the particular case. Ministerial Circular No. 42 of 12 December 1981 also pointed out that the appropriateness of a transfer pricing method is assessed on a case-by-case basis.” “5.6. The importance that the TNMM has assumed in practice, as the most widely used means of determining transfer prices, has made it the subject of interest of the Eu Joint Transfer Pricing Forum (JTPF) body, set up by the European Commission, which, in 2019, drew up a document (EU JOINT TRANSFER PRICING FORUM, DOC: JTPF/002/2019/EN, SECTION 2), in which it describes its essential characteristics, among which, substantially tracing the ...

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

In February 2016 the Regional Tax Commission rejected an appeal filed by the Revenue Agency against the first instance judgment, which had upheld an appeal brought by Italian car manufacturer, Ferrari S.p.A. against a notice of assessment issued by the Revenue Agency in which the company was accused of having applied prices lower than the ‘normal value’ in transactions with its foreign subsidiaries, in particular with the US company Ferrari NA (North America). In determining the arm’s length price of the relevant controlled transactions Ferrari had applied the CUP method. The Revenue Agency considered the TNMM to be the most appropriate method. The Regional Tax Commission observed that “for verifying the “normal value”, the Revenue Agency itself, in Circular No. 32 of 22/09/1980, had suggested the use of the CUP method instead of the less reliable TNMM method “which is not advisable due to its considerable approximation and arbitrariness’ for which reason the Office’s objection must be considered inadmissible”. On that basis the Regional Tax Commission determined that the CUP method should be applied in the case. Furthermore, the Regional Tax Commission found that the Revenue Agency had not discharged the burden of proof of tax avoidance attributed to the appellant company, for having charged prices to foreign subsidiaries that were lower than the normal value. An appeal was filed by the Revenue Agency with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and upheld the Revenue Agency’s adjustments to the taxable profits of Ferrari Spa. According to the Court a transfer pricing adjustments does not require the Revenue Agency to prove the existence of tax avoidance, as stated by the Regional Tax Commission, but rather the mere existence of ‘transactions’ between related companies at a price apparently lower than the normal one. The taxpayer, by virtue of the principle of proximity of evidence, bears the burden of proving that such “transactions” took place in accordance with the arm’s length principle. Excerpts “8.5.2. In this, the contested decision ignored the fact that the development of the jurisprudence of this Court, already at the time of the issuance of the judgment rendered by the CTR, had abandoned the consideration of the nature of Article 110, paragraph 7, TUIR, as an anti-avoidance clause (see Cass. sez. 5, 18 September 2015, no. 18392; hereinafter see also Cass. sez. 5, 15 April 2016, no. 7493; Cass. sez. 5, 30 June 2016, no. 13387; Court of Cassation, section 5, 15 November 2017, no. 27018; Court of Cassation, section 5, 19 April 2018, no. 9673; most recently, while awaiting the publication of this decision, Court of Cassation, section 5, 17 May 2022, no. 15668), which leads to the further principle, affirmed by the case law of this Court, according to which “[i]n the matter of determining business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at taxing the income of a company, are not applicable to the taxable person. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national laws, does not require the administration to prove the avoidance function, but only the existence of “transactions” between related companies at a price apparently lower than the normal price, while it is for the taxpayer, by virtue of the principle of proximity of proof under Article 2697 e.g. and on the subject of tax deductions, the burden of proving that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, therefore not excluding the usability of other means of proof” (cf, more recently, Cass. sez. 5, orci. 19 May 2021, no. 13571 and already, in a conforming sense, Cass. sez. 5, 8 May 2013, no. 10742). 8.5.3. It should also be noted, in relation to the concluding passage of the grounds of the contested judgment, how the same Tax Administration had already specified in Circular No. 42/IIDD/1981 that the adequacy of a transfer pricing method must be assessed on a case-by-case basis. 8.6. In conclusion, it should be recalled how the aforementioned Court of Cassation No. 15668/2022, with specific reference to the Transactional Net Margin Method or TNMM, in referring to Section B of Part III of Chapter II of the OECD Guidelines of 2010 which regulates it, as well as, similarly, the subsequent edition of 2017, had the opportunity to affirm the principle, which must be given further continuity herein, according to which “[i]n the matter of determining business income, the rules under Article 110, paragraph 7, of Presidential Decree No. 917 of 1986, aimed at determining the transfer price of a company, are not applicable to the transfer pricing method. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e., the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of the weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD that is based on the determination of the net margin of the transaction (so-called “TNM”), which is the basis for the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the ...

Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm’s length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm’s length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where, taking account of the criteria described at paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred. See paragraphs 2.14-2.26 for a discussion of the CUP method ...

The Revenue Service had audited Severstal Distribution for FY 2008-2009 and found that the company had purchased metal products from related companies at prices above market prices. An assessment was issued where reported losses for 2009 were reduced. During the audit, Severstal Distribution indicated to the tax authorities that it had used the transactional net margin method to determine the price of its controlled transactions. However, later the company also stated that it had used the CUP method (quated steel prices from the SBB database). Severstal Distribution Ltd filed an appeal with the Administrative Regional Court. In a decision of 2019 the appeal was dismissed and the assessment of additional income upheld. An appeal was then filed by Severstal Distribution Ltd with the Administrative Court of Appeal. The issue to be examined by the Administrative Court of Appeal was whether the Revenue Service correctly determined Severstal Distribution’s income subject to corporate income tax by applying the arm’s length provisions in Section 12(2)(3) of the Law on Corporate Income Tax – i.e. whether Severstal Distribution purchased goods from related companies at above-market prices. Judgement of the Administrative Court of Appeal The Court dismissed the appeal of Severstal Distribution and upheld the decision from the Regional Court. Excerpts “Tax collection is based on the taxpayer’s cooperation with the tax administration. The tax administration can only determine the correct tax liability if it is aware of all the factual circumstances on which such liability is based. Such facts are best available and known to the taxpayer himself and it is therefore in the taxpayer’s own interest not to delay the examination of the tax liability and to provide the tax administration with the relevant information and explanations. The taxpayer’s duty to cooperate is laid down in the form of a legal obligation in paragraphs 5, 6, 10, 11 and 32.2 of the first part of Article 15 of the Law on Taxes and Duties.” “In summary, the Senate considers that there is no particular order in the choice of methods, but that the most appropriate method should be applied in each case on the basis of the circumstances of the individual case. Moreover, the choice of method is primarily the taxpayer’s responsibility, whereas the tax authorities must respect that choice as far as possible during the tax examination.” “In the light of the above, the Court was wrong to conclude that aggregated data could not be used in the application of the comparable uncontrolled price method. At the same time, as already pointed out, they must also be sufficiently comparable and meet the criteria laid down by law, bearing in mind in particular that such aggregates are not, for the most part, produced for transfer pricing purposes.” “The comparable uncontrolled price method compares a controlled transaction with a similar uncontrolled transaction to provide a direct estimate of the price that the parties could have agreed if they had used a market alternative to the controlled transaction. However, the method becomes a less reliable proxy for arm’s length transactions if all the characteristics of the uncontrolled transaction that significantly affect the prices charged between arm’s length parties are not comparable. The application of the method is limited because it is practically difficult to find an uncontrolled transaction whose differences from a related party transaction would not affect the price. Any minor inaccuracy may lead to a mispricing…” Click here for English translation Click here for other translation ...

This case deals with arm’s length remuneration of a Greek Diary Distributor. Following an audit of “Diary Distributor Ltd.”, the Greek tax authorities determined that the prices paid to related parties for FY 2017 had been above the arm’s length price. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Diary Distributor Ltd.” Judgement of the Court The court dismissed the appeal of “Diary Distributor Ltd.” and upheld the assessment of the tax authorities Click here for English translation Click here for other translation ...

The Ukrainian group Rivneazot imports natural gas from – and exports mineral to – foreign related companies. The tax authority carried out an audit and concluded that the controlled prices of these transactions had not been determined in accordance with the arm’s length principle, which had resulted in an understatement of taxable income. Rivneazot disagreed. According to the company the CUP method had correctly been applied to the controlled natural gas import transactions and the TNMM had correctly been applied to the controlled export transactions. In 2018 the Administrative Court decided in favor of Rivneazon and set aside the tax assessment. The court concluded that information provided by the company were sufficient to use the preferred CUP method with a defined market price range for natural gas. The decision was then appealed to the Administrative Court of Appeals. The Court of Appeal upheld the decision of the Administrative court. This decision was then appealed by the tax authorities to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Court partially set aside the decision of the Court of Appeal. According to the Supreme Administrative Court, amendments to the Tax Code of Ukraine, which took effect on 1 January 2015, introduced more clarity in regards to transfer pricing methods. The CUP method has priority (compared to other methods) in case of its applicability. However, the use of the CUP method for the controlled natural gas import transactions is not possible due to the absence of information on the underlying uncontrolled transactions. Therefore, the tax authority had rightly used the TNMM as the most appropriate method for determining the prices of these transactions. Click here for English translation Click here for other translation ...

Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm’s length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm’s length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where, taking account of the criteria described at paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred. See paragraphs 2.14-2.26 for a discussion of the CUP method ...

X Sub GmbH is a German subsidiary of a multinational group. The parent company Y Par B.V. and the financial hub of the group Z Fin B.V. – a sister company to the German subsidiary – are both located in the Netherlands. In its function as a financial hub, Z Fin B.V granted several loans to X Sub GmbH. As part of a tax audit, the German tax authority considered that the interest on the inter-company loans paid by X Sub GmbH to Z Fin B.V. was too high. In order to determine the arm’s length interest rate, X Sub GmbH had applied the CUP method. The tax authority instead applied the cost plus method and issued an assessment. X Sub GmbH filed an appeal to Münster Fiscal Court. The Court found that the cost plus method had been correctly chosen by the tax authority, as the external CUPs could not be used because of differences in conditions between the uncontrolled transactions and the controlled transactions. Hence, the Court dismissed the appeal of X Sub GmbH. The decision has been appealed by X Sub GmbH to the German Federal Fiscal Court, ref. I R 4/17, where it is still pending. Click here for English translation Click here for other translation ...

Alberta Printed Circuits Ltd (APC, the taxpayer) was a Canadian manufacturer of custom prototype circuit boards. The manufacturing process was initially manual and later automated. In 1996, a Barbados company, APCI Inc.,  was formed via a complex ownership structure. The Barbados company provided services to Alberta Printed Circuits Ltd. by performing setup functions, software and website development, and maintenance services. APCI charged the appellant a fixed fee for the setup services and a square-inch fee for non-setup services. Alberta Printed Circuits Ltd charged the same fee for the same services to third-party customers. The tax authorities asserted that the Alberta Printed Circuits Ltd overpaid APCI $3.4 million because the terms and conditions of the agreements differed from those that would have been entered at arm’s length. Alberta Printed Circuits Ltd provided evidence of internal comparable transactions and transfer prices were determined by the comparable uncontrolled price (CUP) method. The court held that the price paid to APCI for the setup fees was arm’s length. It allowed the appeal for those amounts but found that the appellant failed to establish that it did not overpay for the non-setup services. The court disagreed with the CRA’s application of the transactional net margin method. The TCC judge instead accepted the hierarchy of methods established in the 1995 OECD guidelines, which shows a preference for traditional transaction methods and cites the CUP method as providing the highest degree of comparability. Thus, the court preferred the appellant’s internal comparable transactions. Case No 2011 TCC 232 ...