SAS Itron France (a manufacturer and distributor of water, electricity and gas meters) was the subject of a tax audit for the financial years 2012 and 2013, which resulted in an assessment. The tax authorities considered that the transfer pricing applied by the group had resulted in an understatement of taxable income in France and a transfer of profits to a Hong Kong-based distributor of the group. An appeal was filed by SAS Itron France and in a ruling handed down on 2 December 2021, the Administrative Court annulled the assessment. The tax authorities filed an appeal against this ruling. Judgement of the Court The Administrative Court of Appeal dismissed the appeal and decided in favor of SAS Itron France. Excerpt in English “…In order to calculate the transfer price to be set by SAS Itron France in its relations as a producer with its group distributors, the tax authorities followed the profit-sharing method defined at group level, applicable to relations between its various entities, and, after a functional analysis of the company and taking into account the respective contribution of the producer and distributor to the costs and risks for each of the eight functions defined and for each of the three main product lines (water-gas-electricity), it finally retained a distribution of the margin between producers and distributors of 53% and 47% respectively for the “gas” product line and 51% and 49% for the other two lines. By comparing the respective turnover of SAS Itron France as a producer and that of the group’s foreign distributors relating to sales of SAS Itron France products, it estimated that the respondent’s turnover as a producer, determined by applying a cost-plus method with margin rates differentiated according to product category, ranging from 14% to 35%, showed that SAS Itron France’s profit was insufficient in relation to the overall margin sharing targets (producer and seller) mentioned of 51% or 53%, constituting an advantage within the meaning of Article 57 of the General Tax Code. It also noted that no correction, as provided for by the transfer pricing method at group level, had been implemented. In the absence of any alleged quid pro quo, and despite the adjustments determined on appeal in respect of the benefits granted to SAS Itron France by certain group companies and the neutralisation of benefits granted to distributors in an amount of less than 30,000 euros, the tax authorities consider that they have demonstrated the undervaluation of transfer prices to the detriment of the company as a producer, and the undue reduction in its tax base. 5. However, it appears from the investigation that, in order to reconstitute the transfer prices between SAS Itron France as a producer and its other partners, distributors, in the Itron group, the tax authorities used, on the one hand, the margin of the distributing entities after deducting the sale price of SAS Itron France’s products, without taking into account the distributor’s own operating expenses (cost of discounting ; commissions paid to agents; rebates and discounts; product shipping costs; insurance costs incurred in transporting products; customs duties; product packaging costs), even though these expenses contribute to the distributors’ share of the Group’s net margin to which they should be entitled. On the other hand, it deducted their direct expenses from the margin of the manufacturing entities, including SAS Itron France, to which the gross margin rates mentioned in the previous point apply under the cost plus method. Without calling into question the parameters used by SAS Itron France to determine its transfer prices as a producer (costs used and margin rates mentioned, determined within an arm’s length interval), it thus carried out a comparison of different margins, gross for the distributing entities and net for the producing entities. If, as stated in point 3 of this judgment, the existence of a shortfall in the net margin accruing to the producer, compared with the net margin target assigned to it under the profit split method defined at group level, is likely to give rise to a presumption of the existence of an advantage granted by the producer to the distributors within the meaning of Article 57 of the General Tax Code; in the present case, as its criticism of the calculation of the net margins of SAS Itron France was unfounded, the administration did not establish the existence of such an advantage. 6. Furthermore, although the tax authorities maintain that SAS Itron France’s documentation setting out the group’s transfer pricing policy requires adjustments to be made in the event of a significant difference between the transfer price resulting from this method and the economic reality, such adjustments, as the respondent points out, are provided for only in exceptional circumstances and under a procedure that derogates from the cost-plus method. According to appendix 5 of the document on the group’s transfer pricing method provided by SAS Itron France, they are lawful only in the presence of an exceptional flow of a regular amount, i.e. over a period of time, and if three conditions are met: existence of new markets or invitations to tender; existence of a turnover exceeding 10% of the distributor’s revenue; existence of a variation in the distributor’s turnover of at least 500,000 euros. In this respect, it is not clear from the investigation that exceptional circumstances of the kind mentioned above arose during the period in dispute, requiring an adjustment to the margin charged by Itron France. Consequently, the tax authorities have not provided any evidence that the adjustments should have been made in order to justify the appropriateness of the method used and the resulting transfer prices. 7. In view of the foregoing, the plea that the pricing method defined at group level was wrongly disregarded in favour of the cost-plus method applied by SAS Itron France has no bearing on the outcome of the present dispute.” Click here for English translation Click here for other translation CAA de PARIS, 9ème chambre, 12_01_2024, 21PA04452 ...

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 ...

Vincenzo Zucchi spa is an Italian company that operates in the textile sector. Following an audit an assessment was issued related to various controlled transaktions – deductions for bad debt, deductions for costs, lack of income on a loan, income from sale of goods to foreign subsidiaries, cost of goods and services purchased from subsidiaries in non EU countries, costs of employees VAT etc. The adjustment was partially upheld and partially dismissed by the Court of Appeal. An appeal and cross appeal was then filed with the Supreme Court by the tax authorities and Vincenzo Zucchi. Among the objections in the cross appeal filed by Vincenzo Zucchi was a claim stating that transfer pricing rules were not applicable in the case since the group was using global tax consolidation. Judgement of the Supreme Court The Supreme Court upheld the second plea in the main appeal (undue deduction of costs charged by the subsidiary Basitalia Leasing S.p.A.), rejecting all the other pleas in the main appeal and the cross-appeal. The judgment under appeal was set aside in relation to the upheld plea, and referred back to the CTR for reconsideration and also for the costs of these proceedings. In regards to the second plea in the appeal on deduction of costs based on an unauthenticated private contract “The tax appeal court based its decision on the point in question essentially on the use of a document that was unquestionably unregistered, therefore devoid of a certain date, and not even signed by the taxpayer company. As regards the first aspect, it is clear that Article 2704, paragraph 1, of the Italian Civil Code has been infringed, since it is documentary evidence that cannot be relied upon by the tax office precisely because of the lack of the “certainty” requirements provided for by such legislative provision (see Section 5, Sentence no. 7636 of 31 March 2006, Rv. 588675 – 01). In addition, the failure of the taxpayer company to sign the contract also makes the correlative contractual obligation uncertain and, in the final analysis, invalidates the judgment of the Lombardy Regional Tax Court in so far as it entails a misapplication of Article 109(1) of Presidential Decree 917/1985, with particular regard to the “certainty/determinability” of the negative income component in question.” In regards to the plea in the cross appeal on global tax consolidation “It is rather evident that these are autonomous legal provisions, which in their literalness do not contain direct elements of connection/coordination. This leads to the systematic hermeneutical solution that, in the case of intra-group sales of goods or services, taxation at “normal value” is not affected by the establishment of the so-called unified tax group, or, even better, that the unification of the income statement of the companies belonging to a group opting for the (global) consolidation, according to the logic of the algebraic sum of individual corporate income, is based on the prior – autonomous determination of the same according to the general rules. Moreover, investigating the rationale of the domestic rules on transfer pricing, this Court has repeatedly ruled, with a clearly prevailing orientation, that it should not be found in anti-avoidance purposes, but in those of preventing distortion of free competition and preserving the tax power of the EU member states (ex pluribus, in this sense, see Cass., 1232/2021, 16948/2019, 9673/2018, 18392/2015).” “Concluding on the decision points under examination, it is appropriate to formulate the following principle of law: “The rules on transfer pricing under Article 11O, paragraph 7, in relation to Article 9, paragraph 3, Presidential Decree 917/1986 and the “global tax consolidation” under 130, ss., Presidential Decree 917/1986 are distinct and autonomous, so that they do not interfere with each other and must be applied separately, since the effects of the option for group taxation are limited by the specific provision of Article 131 of the same TU.” Click here for English translation Click here for other translation Italy_20220502_Case no 13718 ...

A Korean subsidiary in the “Semiconductor-group” was active in distribution and sales services. At issue was which transfer pricing method was the most appropriate for determining the arm’s length remuneration for these activities in FY 2013. Judgement of the Court The Court dismissed the claims of the company and upheld the decision of the tax authorities. Excerpt “However, the following circumstances that can be comprehensively acknowledged in the foregoing evidence and description in Evidence A No. 21, namely, (1) OECD Transfer Price Taxation Guidelines 2.101 stipulate that in order for a Gross Margin Ratio to be applied, a taxpayer shall not perform other important functions (manufacturing functions, etc.) that must be compensated using other transfer price methods or financial indicators in a related transaction, which are very sensitive to cost classification, such as operating expenses and other expenses, and thus may cause problems of comparability and irrelevant costs; and (2) Charles H. Berry, which devised the Gross Margin Method of the Transactional Net Margin Method, stated in the paper “Berry Ratios” that, in a case where a company performs other functions in addition to simple sales activities, the distinction between the cost of sales and the cost of operations is unclear and thus the gross margin ratio of sales can be artificially changed, and thus the Gross Margin Method of the Transactional Net Margin Method may not be applied. (3) Although the Plaintiff may perform a service installation and guarantee business, part sales business, in light of the above laws, it is difficult to apply the gross profit margin method among the transactional net margin methods to the Plaintiff’s sales support service transactions (even if the gross profit margin method among the Transactional Net Margin Methods can be applied, as the Plaintiff claims, the following circumstances that can comprehensively acknowledge the purpose of the entire pleadings in each of the descriptions of A Nos. 18 and 19, that is, (1), the codes of 508 companies extracted by the Plaintiff according to the industrial classification codes of the Korean Standard Industrial Classification are “46539: Other industrial machinery and equipment wholesale business, 46592: Medical, Precision and Scientific Equipment wholesale business, 46594: Machinery and equipment for electricity, wholesale business, 46599, and other wholesale business,” (1) In the case of the Plaintiff’s direct comparison of the technical support services and the wholesale business of the Plaintiff, which can be directly determined by the method (1) Four comparable companies were selected, and the difference in the degree of holding inventory assets, trade receivables, and purchase obligations was adjusted for comparability. Considering the characteristics of the Plaintiff in which inventory assets, trade receivables, and purchase obligations do not exist, it is difficult to deem that such adjustment is an ordinary net profit margin that can be generally accepted. Therefore, we do not accept the Plaintiff’s allegation in this part.” Click here for English translation Click here for other translation Korea 270521 ...

A non-interest-bearing loan had been granted by GI Group S.p.A., to a related company – Goldfinger Limited – in Hong Kong, in order to acquire a 56% shareholding in the Chinese company Ningbo Gi Human Resources Co. Limited. The Italien tax authorities had issued an assessment, where an interest rate on the loan had been determined and an amount equal to the interest calculated on that basis had been added to the taxable income of GI Group S.p.A. GI Group brought this assessment to the Regional Tax Commission where a decision was rendered setting aside the assessment. This decision was appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme court upheld the appeal of the tax authorities and referred the case back to the Regional Tax Commission. According to the Supreme Court, the decision of the Tax Commission dit not comply with the principles of law concerning the subject matter of evidence and the burden of proof on tax authorities and the taxpayer. Excerpts: “…In conclusion, according to the Court, “such discipline, being 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 one” “according to the application practice of the Italian Revenue Agency (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the reclassification of debt (or part of it) as a capital contribution should represent an “exceptional measure”. Moreover, it is not excluded that free intra-group financing may have a place in the legal system where it can be demonstrated that the deviation from the arm’s length principle is due to “commercial reasons” within the group, related to the role that the parent company assumes in supporting the other companies of the group; “ “…the Regional Commission did not comply with the (aforementioned) principles of law concerning the subject-matter of the evidence and the criterion for sharing the burden of proof, between the tax authorities and the taxpayer, on the subject of international transfer pricing. In essence, the examination of the trial judge had to be oriented along two lines: first, it had to verify whether or not the tax office had provided the evidence, to which it was entitled, that the Italian parent company had carried out a financing transaction in favour of the foreign subsidiary, as a legitimate condition for the recovery of the taxation of the interest income on the loan, on the basis of the market rate observable in relation to loans with sufficiently “comparable” characteristics and provided to entities with the same credit rating as the associated debtor company (see the OECD Report 2020), the determination of which is quaestio facti referred to the judge of merit; secondly, once this preliminary profile had been established, also on the basis of the principle of non-contestation, it had to be verified whether, for its part, the company had demonstrated that the non-interest-bearing loan was due to commercial reasons within the group, or in any event was consistent with normal market conditions or whether, on the contrary, it appeared that that type of transaction (i.e. the loan of money) between independent companies operating in the free market would have taken place under different conditions. Instead, as stated above (see p. 2 of the “Findings”), the C.T.R. required the Office to demonstrate facts and circumstances extraneous to the onus pro bandi of the Administration, such as the existence of an interest of Goldfinger Ltd in obtaining and remunerating the loan and, again, that there had been other similar onerous intra-group loans; Click here for English translation Click here for other translation IT vs GI Group Sez. 5 Num. 13850 Anno 2021 ...

Levi Strauss South Africa (Pty) Ltd, has been in a dispute with the African Revenue Services, over import duties and value-added tax (VAT) payable by it in respect of clothing imports. The Levi’s Group uses procurement Hubs in Singapore and Hong Kong but channeled goods via Mauritius to South Africa, thus benefiting from a favorable duty protocol between Mauritius and South Africa. Following an audit, the tax authorities issued an assessment in which it determined that the place of origin certificates issued in respect of imports from countries in the South African Development Community (SADC) and used to clear imports emanating from such countries were invalid, and therefore disentitled Levi SA from entering these goods at the favorable rate of zero percent duty under the Protocol on Trade in the Southern African Development Community (SADC) Region (the Protocol). The tax authorities also determined that the transaction value of the imported goods on which duty was payable should include certain commissions and royalties paid by Levi SA to other companies in the Levi Strauss group – Singapore and Hong Kong. Judgement of the Supreme Administrative Court The Court issued a decision predominantly in favour of the tax authorities. Click here for translation SA-vs-LEV-2021 ...

In 2013, Snowy Owl Energy Inc entered into a Consultancy Agreement (Subconsultant Services Agreement) with Rolenergy Inc. – a Hong Kong-based corporation organized and registered in the British Virgin Islands. Based on the Agreement, Rolenergy would serve as Snowy Owl Energy Inc’s sub-consultant. The tax authorities issued an assessment for deficiency income tax (IT), final withholding tax (FWT) and compromise penalty in relation to the sub-consultant fees it paid for taxable year 2013. Judgement of the Tax Court The Court decided in favour of Snowy Owl Energy Inc. Section 23(F)36 in relation to Section 42(C)(3)37 of the NIRC of 1997, as amended, provides that a non-resident foreign corporation is taxable only for income from sources within the Philippines, and does not include income for services performed outside the Philippines. Excerpts: “Indubitably, the payments made in exchange for the services rendered in Hong Kong are income derived from sources outside of the Philippines, thus not subject to IT and consequently to FWT.” Philippines vs Snowy Owl Energy Inc. CTA_2D_CV_09618_D_2021MAR03_ASS ...

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the group’s prices has not changed and compliance with the arm’s length principle has been demonstrated by a study by the firm Taj using the transactional net margin method and the criticisms of its prices are unfounded. The results must be analyzed in the context of heavy investments made by the Bluestar Silicones International sub-group, 80% of which it financed, and which are at the root of the heavy losses recorded in the sub-group’s first fiscal years for the years 2007 to 2009. Furthermore, the business tax adjustments was considered unjustified by the company since, the transfer prices charged did not constitute transfers of profits; Decision of the Court No charge of management fees from Brazil and Hong Kong: “Under these conditions, the administration was justified in considering that BSF’s renunciation to invoice management fees to the Chinese and Brazilian companies of the Bluestar Silicones International group constituted an abnormal act of management. It was thus entitled to correct the company’s profit and also to correct the company’s added value for the determination of its business tax.” No charge of cost of provision of employees in China: “While BSF claims that it derived a direct benefit from the provision of these three expatriates through the development of sales by the Chinese subsidiary, it does not establish this, even though it has been shown that the project manager and the two technicians worked at the Jiangxi site, which was acquiring the technology needed to manufacture products similar to those previously purchased by the Chinese subsidiary from BSF and therefore potentially competing with it. The impossibility of charging such fees due to Chinese legislation has also not been demonstrated, nor has any compensation resulting from insufficient transfer pricing. Under these conditions, the applicant company does not demonstrate that the advantage granted to the Chinese company had sufficient consideration in the interest of its operations and, consequently, was justified by normal management of its own interests.” Additional withholding tax and business tax However, the Court did find that the company was “entitled to argue that the Montreuil Administrative Court wrongly refused to discharge it from the additional withholding tax contributions charged to it for the financial year ended in 2007 and the additional business tax contributions for the year 2007 resulting from the correction made by the tax authorities of its transfer prices practiced with the company BSI Hong Kong.” Click here for English Translation Click here for other translation France vs Bluestar Silicones France CAA de VERSAILLES, 090221, 16VE00352 ...

“Metal Plating Corp” is engaged in manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”. The tax authorities found that the amount of the consideration paid to “Metal Plating Corp” for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years FY 2007-2012. “Metal Plating Corp” on its side held that it was inappropriate to use a residual profit split method and that there were errors in the calculations performed by the tax authorities. Judgement of the Court The Court dismissed the appeal of “Metal Plating Corp” and affirmed the assessment made by the Japanese tax authority. On the company’s use of the CUP method the Court concluded that there were significant differences between the controlled transactions and the selected “comparable” transactions in terms of licences, services and the circumstances under which the transactions were took place. Therefore the CUP method was not the most appropriate method to price the controlled transactions. The Court recognised that “Metal Plating Corp” had intangible assets created by its research and development activities. The Court also recognised that the subsidiaries had created intangible assets by penetrating regional markets and cultivating and maintaining customer relationships. The Court found the transactions should be aggregated and that the price should be determined for the full packaged deal – not separately for each transaction. Click here for English Translation Click here for other translation JAP TOKYO 089550_hanrei ...

Goodland Taiwan had sold 7 machines to a local buyer via a related party in Hongkong thus avoiding taxes on sales profits. The transaction had been audited by the Taiwanese tax administration and an assessment issued. Goodland brought the case to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all specific to the income tax law and may not be consistent with the judgment of related parties under the business tax law. In addition, in this case, the U.S. and local companies are at least covered by the fact that the income tax of the business is not in compliance with the requirements of Article 3 and Article 4(2) of the regular transfer pricing audit. The method of recognizing the income of a controlled foreign enterprise is based on the premise that there is a difference between domestic and foreign income tax liabilities, and is not related to the determination of related parties under business tax law. It is difficult to argue that the original decision did not apply these provisions and that the application of the law was incorrect or that the reasons for the decision were inadequate.As to the statement in the appeal that “the factual findings of the original judgment are contrary to the law of civil contracts”, the reasoning of the appeal is that “the original judgment is contrary to the law of civil contracts”.It is not clear what the specific breach of the law is, as the argument is brief and vague and lacks a complete legal reasoning.3. In conclusion, the original decision is clear and detailed and there is nothing that can be said to be unlawful. The grounds of appeal, as set forth in the original judgment, are only general allegations of the application of the law, but not specific allegations of “inapplicability of the law”, “improper application of the law”, or “the circumstances listed in Article 243, Paragraph 2 of the Administrative Procedure Law”. In accordance with the preceding provisions and explanations, the appeal should be considered unlawful.” Click here for English Translation 最高行政法院109年裁字第147號裁定 ...

A transfer pricing dispute between South African Revenue Service and Sishen Iron Ore, a subsidiary of Kumba Iron Ore, has now been resolved in a settlement of ZAR 2.5bn. The case concerned disallowance of sales commissions paid to offshore sales and marketing subsidiaries in Amsterdam, Luxembourg and Hong Kong. Since 2012, Kumba Iron Ore’s international marketing has been integrated with the larger Anglo American group’s Singapore-based marketing hub. The settlement follows a similar investigations into the transfer pricing activities of Evraz Highveld Steel, which resulted in a R685 million tax claim against the now-bankrupt company related to apparent tax evasion using an Austrian shell company between 2007 and 2009 ...

By Javier Garcia-Bernardo, Jan Fichtner, Frank W. Takes, & Eelke M. Heemskerk Multinational corporations use highly complex structures of parents and subsidiaries to organize their operations and ownership. Offshore Financial Centers (OFCs) facilitate these structures through low taxation and lenient regulation, but are increasingly under scrutiny, for instance for enabling tax avoidance. Therefore, the identifcation of OFC jurisdictions has become a politicized and contested issue. We introduce a novel data-driven approach for identifying OFCs based on the global corporate ownership network, in which over 98 million firms (nodes) are connected through 71 million ownership relations. This granular firm-level network data uniquely allows identifying both sink-OFCs and conduit-OFCs. Sink-OFCs attract and retain foreign capital while conduit-OFCs are attractive intermediate destinations in the routing of international investments and enable the transfer of capital without taxation. We identify 24 sink-OFCs. In addition, a small set of countries – the Netherlands, the United Kingdom, Ireland, Singapore and Switzerland – canalize the majority of corporate offshore investment as conduit-OFCs. Each conduit jurisdiction is specialized in a geographical area and there is signifcant specialization based on industrial sectors. Against the idea of OFCs as exotic small islands that cannot be regulated, we show that many sink and conduit-OFCs are highly developed countries. Conduits-and-Sinks-in-the-Global-Corporate-Ownership-Network.pdf ...

This case relates to sales of crude oil from the Russian company, Dulisma Oil,  to an unrelated trading company, Concept Oil Ltd, registered in Hong Kong. The Russian tax authorities found that the price at which oil was sold deviated from quotations published by the Platts price reporting agency. They found that the prices for particular deliveries had been lower than the arm’s length price and issued a tax assessment and penalties of RUB 177 million. Dulisma Oil had set the prices using quotations published by Platts, which is a common practice in crude oil trading. The contract price was determined as the mean of average quotations for Dubai crude on publication days agreed upon by the parties, minus a differential determined before the delivery date “on the basis of the situation prevailing on the market”. Transfer pricing documentation had not been prepared, and the company also failed to explain the method by which the price had been calculated and how the price differential was determined. In the tax assessment, the tax authorities used the same quotation for comparison in the pricing of the transactions, but adjusted for ESPO M1 differential (added the minimum premium), which was determined at the date closest to the signing of the contract addendum. The court ruled in favor of the Russian tax authorities. In the judgement the court pointed to the fact that there was no transfer pricing documentation supporting the pricing of the transaction as an argument in favor of the transfer pricing method used by the Russian tax authorities. The court did not accept the company’s arguments that the Hong Kong trader was an unrelated party. Counteragents registered in offshore zones are to be treated as related parties according to Russian legislation. Click here for translation A40-123426-2016_20170127_Reshenija-i-postanovlenija1 ...

In 2012, ZAO NK Dulisma, a Russian oil and gas company, sold crude oil via an unrelated Hong Kong-based trader. In Russia, transactions with unrelated parties may be deemed controlled transactions for Transfer Pricing purposes, provided certain conditions are met. The Russian Tax Authorities audited the transactions with the Hong Kong trader and found that the price had been understated. The arm’s length price was determined using a CUP method, based on data from Platts quote for Dubai grade oil, adjusted for quality and terms of delivery etc. The court ruled in favor of the tax authorities, confirming that the application of the CUP method and the use of Platts data was justified. Click here for translation A40-123426-2016 ...

Oxfam’s list of Tax Havens, in order of significance are: (1) Bermuda (2) the Cayman Islands (3) the Netherlands (4) Switzerland (5) Singapore (6) Ireland (7) Luxembourg (8) Curaçao (9) Hong Kong (10) Cyprus (11) Bahamas (12) Jersey (13) Barbados, (14) Mauritius and (15) the British Virgin Islands. Most notably is The Netherlands placement as no. 3 on the list. Oxfam researchers compiled the list by assessing the extent to which countries employ the most damaging tax policies, such as zero corporate tax rates, the provision of unfair and unproductive tax incentives, and a lack of cooperation with international processes against tax avoidance (including measures to increase financial transparency). Many of the countries on the list have been implicated in tax scandals. For example Ireland hit the headlines over a tax deal with Apple that enabled the global tech giant to pay a 0.005 percent corporate tax rate in the country. And the British Virgin Islands is home to more than half of the 200,000 offshore companies set up by Mossack Fonseca – the law firm at the heart of the Panama Papers scandal. The United Kingdom does not feature on the list, but four territories that the United Kingdom is ultimately responsible for do appear: the Cayman Islands, Jersey, Bermuda and the British Virgin Islands ...

Li & Fung (Trading) Ltd., Hong Kong, entered into contracts with its global third party customers for provision of sourcing services with respect to products to be sourced by such global customers directly from third party vendors in India. For the sourcing services, the Hong Kong company received a 5% commission of the FOB value of goods sourced. The company in India was providing sourcing support services to the Hong Kong group company, and remunerated at cost plus 5 percent mark-up for provision of these services. The tax administration found that the the company in India should get the 5% commission on the free on board (FOB) value of the goods sourced from India as the Hong Kong company contributed no value. The Tribunal held that the compensation received by the company in Hong Kong – 5% of the FOB value – should be distributed between the company in India and the company in Hong Kong in the ratio of 80:20 based on there functional profiles. • The company in India had actually performed all critical functions, assumed significant risks and had also developed unique intangibles over the years. • The company in Hong Kong did not have either any technical expertise or manpower to carry out the sourcing activities. Se also India vs Li & Fung 2013 and India vs Li & Fung 2011 Li_&_Fung_(India)_Pvt._Ltd.,_New_..._vs_Assessee_on_23_March,_2016 ...

This case is about extensive tax evasion set up by the tax manager of the Asian Agri Group. According to the tax authorities income from export sales had been manipulated. Products were sent directly to the end buyer, whereas the invoices recorded that the products were first sold to companies in Hong Kong and then sold to a company in Macau or the British Virgin Islands before they were finally sold to the end buyer. The intermediary companies were proven to have been used only for the purpose of lowering the taxable income by under-invoicing the sales prices compared to the sales price to the end buyer. Various fees had also been deducted from the companies income to further lower the tax payment. These included a “Jakarta fee”, a Hedging fee and a Management fee. Judgement of the Supreme Court The court ruled that the tax manager was guilty of submitting an incorrect or incomplete tax return. On that basis the tax manager was sentenced to a probationary imprisonment for two years on condition that, within one year, Asian Agri Group’s 14 affiliated companies paid a fine of twice the underpaid tax amount – 2 x Rp. 1.259.977.695.652,- = Rp. 2.519.955.391.304,-. Click here for translation (Hundreds of pages from the judgement containing lists of thousands of invoices and payments have been omitted in the translated version) putusan_2239_k_pid.sus_2012_20220425 ...

X BV in the Netherlands was a wholesaler in garden related (gift) articles. Customers are located in the Netherlands and abroad (especially in Western Europe, the United States and Canada). Procurement of the products is mainly done in China. Delivery of the products is made directly by the producer to [X] BV or to its other clients. As compensation for procurement activities performed by the [X Limited] in Hong Kong, X group BV pays a 10% surcharge on the purchase price paid by [X Limited] to its Chinese suppliers. This surcharge is passed on in the cost price of the products. The tax administration held that the compensation [X Limited] receives for its procurement activities is (much) too high. The District Court disagreed and decided in favor of X Group BV. Click here for other translation Netherland vs BV 2007 ...

“Holding B.V.” is a holding company. The actual activity of the [X] group in the Netherlands – a wholesale trade in garden-related (gift) items – takes place in [X] B.V. The latter is included in a fiscal consolidation for corporate tax purposes with “Holding B.V.”. Customers of [X] B.V. are located in both the Netherlands and abroad (particularly in Western Europe, the United States and Canada). The products are purchased in China in particular and supplied direct by the producer to [X] B.V. or to its other customers. The procurement company – X Limited has an office and a showroom in Hong Kong, and employs a staff of five. The core activities of X Limited consist of quality control, logistics, product development, purchasing and sales. As remuneration for its activities, [X] B.V. pays a mark-up of 10% on the purchase price paid by X Limited to its Chinese suppliers. The tax authorities issued an assessment where the remuneration of the procurement company in Hong Kong was instead based on a cost plus method. Judgement of the Court The court rules that the transfer prices are not arm’s length. The ‘comparable uncontrolled price’ method advocated by the plaintiff is not accepted. The court followed the tax authorities in the cost-plus method, in which a cost surcharge of 10% was applied. The Court considers the following. The cup method as advocated by the plaintiff involves a comparison of the price charged for goods or services transferred in a group transaction with the price charged for goods and services transferred in a comparable free market transaction in comparable circumstances. The Court is of the opinion – as stated by the Respondent – that in view of the various functions which [X Limited] performs vis-à-vis the Claimant or third parties, there is no question in this case of a cup. A cup can therefore not serve as a basis for the transfer price so that another method should apply as a basis for determining the transfer prices. According to the defendant, the cost-plus method should be taken as a starting point. According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995-1999), the cost-plus method is based on costs incurred by the supplier of the goods or services in a group transaction for goods or services supplied to an associated purchaser. An appropriate cost-plus mark-up is then added to these costs in order to achieve an appropriate profit in view of the functions performed and the market conditions. The court is of the opinion that in view of the OECD Guidelines, the cost-plus method is a correct method for determining transfer prices in the present case. A cost-plus surcharge of 10% as defended by the defendant and further calculated in the statement of defence, has not been contested by the plaintiff and also does not appear unreasonable to the court. In view of all relevant facts and circumstances – considered together and in relation to each other – the Court is therefore of the opinion that the Defendant has made it plausible that the transfer price applied between the Claimant and [X Limited] is not based on business economics. In view of the fact that the cost supplement applied by the plaintiff is considerably higher than a transfer price that should be considered as arm’s length, the defendant has herewith also made it plausible that there is an intention to favour and awareness of this on the part of both parties. The arguments put forward by the claimant against this is of insufficient weight to conclude otherwise. Click here for English translation Click here for other translation ECLI_NL_RBARN_2007_BA0339 ...