XZ España SA, a Spanish subsidiary of a multinational consumer goods group, underwent a corporate income tax audit for the 2015–17 financial years. The controlled transactions included intra-group loans, participation in cross-border and domestic cash pooling arrangements, and the provision of contract manufacturing services to related entities. For manufacturing activities, the group applied the TNMM with EBIT over total costs as the profit level indicator, supported by a benchmarking study. While the tax authorities accepted the method and profit indicator used for manufacturing services, they rejected part of the comparable set used by the taxpayer and recalculated the interquartile range. Based on this, they concluded that the taxpayer’s profitability fell outside the arm’s length range and adjusted the margin to the median. Adjustments were also made in relation to intra-group loans and cash pooling. These included the use of the group credit rating, the rejection of country risk adjustments, the substitution of Euribor with Eonia, and the requirement for symmetrical remuneration of creditor and debtor positions. XZ España SA challenged the assessment relating to manufacturing services, arguing that the automatic adjustment to the median for these services was unjustified as the tax authorities had not identified any ongoing comparability defects after refining the comparable set. The taxpayer relied on OECD Guidelines paragraphs 3.61 and 3.62, as well as Spanish case law, to argue that any adjustment should be made to the lower quartile in the absence of proven comparability defects. The taxpayer also contested the transfer pricing adjustments relating to intra-group financing and cash pooling. Judgment The court upheld the transfer pricing adjustments relating to intra-group loans and cash pooling in full. However, it partially upheld XZ España SA’s claim in relation to manufacturing services. The court held that, while the tax authorities were entitled to revise the comparable set and determine a new interquartile range, they had not justified the existence of persistent comparability defects that would warrant the use of a measure of central tendency/median. In the absence of such justification, the court ruled that the adjustment could not be made to the median, but instead to the lower quartile of the range. Excerpt in English “It is clear that the arguments presented on pages 103 and 104 of the statement of disagreement, and those expressed on pages 80 and 81 of the settlement agreement, do not justify the existence of comparability defects that, in accordance with paragraph 3.62 of the OECD Guidelines, would advise the use of the median to determine the point in the range that would satisfy the arm’s length principle. On the other hand, in the analysis, by the Inspection, of the allegations made by the entity, which are subject to partial estimation, a “new interquartile range” is determined -page 88 of the settlement agreement- indicating that its main consequence “is that the result of the taxpayer in the years subject to verification would continue to be outside the range and it would be necessary to make an adjustment of said results to the median of the new interquartile range” . And it is established -page 90 of the settlement agreement- that “partially accepting the claim of the entity with regard to the exclusion of entities dedicated exclusively to the manufacture of water and other beverages, we will recalculate, with the new margins, the adjustment to be made with respect to the 2015 and 2016 financial years, as the new study yields, with respect to 2017, the same median as that used in the actuary’s proposal” . Nor is there any justification, in the arguments included in the settlement agreement when examining allegations made by the taxpayer, for the existence of comparability defects that would advise the use of the median. Therefore, the partial assessment of the claim made is appropriate, and the adjustment should be made to the lower quartile of the range obtained by the Inspection instead of to the median.” Click here for English translation Click here for other translation ...

For the years 2008 to 2016, Tobacco BV was issued multiple tax assessments with significant corrections to the taxable amounts it had declared. In addition, the tax authorities had imposed penalties for misconduct for the years 2010 and 2012 to 2016. For all years, it was disputed whether various fees charged by other group companies for supplies and services to Tobacco BV had been at arm’s length. For 2016, an additional issue arose as to whether the termination of licence rights operated by a subsidiary should be regarded as an unbusinesslike withdrawal from the company’s assets. One of the transfer pricing adjustments concerned the factoring costs charged to Tobacco BV by a group company. The Court ruled that these costs were largely unbusinesslike and that the company had not refuted the presumption under Section 8b of the 1969 Corporation Tax Act, namely that the disadvantage it suffered was caused by its affiliation with the group company. Tobacco BV also paid guarantee fees to its parent company for guarantees related to listed bonds it had issued. The Court accepted the tax authorities’ argument, based on criteria developed by S&P, that Tobacco BV should be regarded as a “core company” of the group. Its credit rating, if that position is taken into account (“derived rating”), corresponds to the credit rating of the group as a whole. Because of this, the company could raise bond loans on more favourable terms, as the market would assume that it could rely on support (“implicit support”) from the group if necessary. In that situation there is no separate intra-group service requiring compensation. The guarantee fees deducted by Tobacco BV therefore did not comply with the arm’s length principle, and it failed to rebut the presumption that its unbusinesslike conduct stemmed from its affiliation with the parent company. With regard to the licence rights that expired in 2016, which had entered Tobacco BV’s assets in 2008 at a value of €1 billion, the Court found it unbusinesslike that no compensation was received when the rights expired, while the exploitation of those rights continued within the group in the United Kingdom. This was treated as an unreasonable withdrawal from the company’s assets amounting to more than €1.3 billion. For the years 2011 to 2016, the Court considered that the tax authorities had demonstrated, on the basis of the corrections to factoring fees, guarantee fees (2013) and termination of licence rights (2016), which were partly upheld by the Court, that Tobacco BV had not filed the required tax returns as referred to in Section 27e of the General Tax Act. As a result, the burden of proof was reversed and increased for the entire decision on the objection. The company’s position that this evidentiary sanction could not be applied in transfer pricing disputes was rejected. With regard to the adjustments to guarantee fees, the Court held that it was at least arguable, given the past uncertainties surrounding the doctrine of “implicit support,” that Tobacco BV had not taken this into account for some years. However, from the publication of the Transfer Pricing Decree 2013 on 26 November 2013, it was required to do so. The Court assessed a number of other transfer pricing adjustments that were in dispute. These included: • fees charged by a group company to Tobacco BV for activities aimed at cost savings, partly in the form of a percentage of its profit (profit split) and partly as a cost-plus surcharge. The adjustments taken into account by the tax authorities were largely upheld, except for the cost-plus percentage; • royalties paid for “Innovations and Technology” of 2% (later 3%) of the net turnover achieved using a licence made available by a group company, which were upheld as corrections; • interest deducted in connection with long-term bond loans agreed with unrelated parties, the funds of which were used to purchase participating interests. The corrections were reversed; • a correction relating to deductible reorganisation costs, which the Court found to have been wrongly applied; • deductible costs linked to the unsuccessful introduction of a product on a foreign market. Tobacco BV convincingly demonstrated that it did not act unprofessionally, and the correction was withdrawn. The Court ruled that taking into account corrections to transfer prices charged by foreign group companies is not contrary to European law. It follows from the Hornbach judgment (ECLI:EU:C:2018:366) that the TFEU does not in principle preclude a provision such as that contained in Section 8b of the Corporate Income Tax Act. Nor is there any conflict with the freedom of establishment or the principle of legal certainty under EU law. In the Court’s view, the penalties imposed by the tax authorities in respect of the correction of factoring fees were rightly imposed. They convincingly demonstrated that the assessment was set too low or that incorrect returns were filed (2012 to 2016) as a result of Tobacco BV’s conditional intent. The Court ruled that there was no defensible position and considered the fines imposed, totalling more than €2.2 million, to be appropriate and necessary, although reduced because the reasonable time limit had been exceeded. The argument that in transfer pricing disputes penalties can only be imposed in cases of pure intent was dismissed. By contrast, the penalties linked to the profit split and cost-plus corrections were annulled, as the tax authorities had not convincingly demonstrated that the company had intentionally submitted incorrect tax returns in these respects. The penalty of €125 million imposed in connection with the termination of the licence rights (reduced by the court to €106,382,065) was also overturned by the Court of Appeal. Before submitting the 2016 corporation tax return, Tobacco BV had sent a letter to the tax authorities informing them of the position it would take in the return regarding the tax consequences of the termination of the licence rights, with references to earlier correspondence and consultations on the issue. In this letter it also offered to provide further information if requested. In light of these specific facts and ...

Bunge Iberica SA participates in the group’s cash pooling system, as both a borrower and a provider of funds. Following an audit, the tax authorities had issued a notice of assessment in which the interest rates on deposits and withdrawals in the cash pool had been adjusted and determined symmetrically on the basis of a group credit rating. Bunge Iberica SA filed a complaint which was rejected by the Tax Court in a decision issued in October 2019, and an appeal was then filed with the National Court. In March 2023 the National Court also rejected the appeal and confirmed the tax assessment. An appeal was then filed by Bunge Iberica with the Supreme Court. Judgment The Supreme Court upheld the decison of the National Court and dismissed Bunge Iberica’s appeal. Excerpt in English “On this occasion, the function of the organising entity is limited. Its function is to centralise, allocating funds in accordance with the requirements of the participants and keeping records of this. The limited role played by this entity is fundamental, and this is emphasised in the settlement agreement. It operates on amounts or surpluses that have been contributed by the participants in the cash pooling as sole owners of the same, without the entity making its own decisions in this regard. In addition to not having generated or held the economic (or legal) ownership of the channelled liquidity and not making decisions, the lead entity also does not assume any risks. The risk is borne by the participating entities, while the managing entity remains on the sidelines. On the one hand, the former generate and hold the assets (funds) whose transfer they decide, assuming the consequences of such transfer (and the corresponding financial remuneration). On the other hand, there is the managing entity, coordinating and keeping records of the allocation of third-party funds (not generated by itself) and lacking the capacity to decide on them (their allocation responds to the requirements of the participants). The characterisation of the transactions carried out by Bunge Ibérica, according to which the amounts contributed are treated as deposits and those received by the participants are treated as loans (credit lines, with or without availability fees), cannot but be rejected. In the cash pooling as a whole, only short-term loans granted by the participants (transactions between non-financial entities) take place and in no case deposits. Based on the analysis of functions/assets/risks, in order to ensure the proper application of the principle of free competition, it has been shown that the substance of cash pooling is the participating entities. They share liquidity, which originates from normal operations (business operations or any other, corresponding to the activity carried out by each of the entities, which, as a result of this, have generated a surplus. These amounts contributed to cash pooling tend to vary over time, are not usually large, and do not have a stable frequency (since, if this were the case, it would mean that this ‘stable’ or idle surplus could be used in alternative investments to be tied up for a longer term, obtaining a higher return, thus ceasing to be available in the form of liquidity. Such surpluses are contributed to the cash pooling on a daily basis (remember that a daily sweep is expressly contemplated), forming a common pool of cash available to the entities requesting funds. As a result of the above, the contributions, considered individually, are characterised by variability and short-term nature. The opposite of this would be a loan (bank or otherwise) granted to a specific borrower for a considerable amount and for the medium or long term, which is precisely the scheme outlined in the report provided by Bunge Ibérica. In addition to the variability of the daily contribution, the cash pooling system is permanent in nature as a structural tool in the group’s operational functioning.” Click here for English translation Click here for other translation ...

In 2011, J.C.I. BV took out an 800 million euro loan at an interest rate of 7.22% from J.C.L.F. Sarl (hereafter referred to as ‘J.C.L.F.’), a Luxembourg company that operates through its US branch. Both J.C.I. BV and J.C.L.F. Sarl are part of the J.C. Group. J.C.I. BV repaid the loan in December 2016. As a result, it paid J.C.L.F. interest amounting to €38,025,033.33, corresponding to an annual interest rate of 7.22%. In 2019, J.C.I. BV received a notice of amendment to the corporation tax return for FY 2016. The tax authorities challenged several aspects of J.C.I. BV’s intra-group financing and dividend structures. With regard to transfer pricing, the tax authorities claimed that an interest rate of 7.22% on a 2011 loan exceeded the arm’s length interest rate. They also claimed that certain intra-group arrangements created abnormal advantages and that profits were funnelled through UK conduit entities to generate DBI deductions without real taxation at the subsidiary level. J.C.I. BV filed an appeal, arguing that the 7.22% interest rate was within the arm’s length range. The company also denied the claims of abnormal or favourable advantages, and challenged the applicability of the anti-abuse provisions on temporal grounds as the relevant legislation and the EU ATAD were not yet in force for the years in question. Judgment The Court ruled predominantly in favour of J.C.I. BV. Regarding the arm’s length adjustment of the interest rate on the 2011 loan, the court stated that it was primarily up to the tax authorities to demonstrate that J.C.I. BV’s method led to an interest rate that was not at arm’s length, but they had failed to do so. Even if the tax authorities had succeeded in convincing the Court that J.C.I. BV’s method produced an interest rate that was not at arm’s length, they did not demonstrate that their own method produced an arm’s length result. However, the court permitted a downward adjustment to a rate of 6.93%, meaning that some of the interest was deemed to be non-arm’s length. Excerpt “20. In the opinion of the court, the defendant therefore fails to meet the burden of proof incumbent upon him that the modified CUP method used by the claimant in the T. e. produced a non-market-based result (interest rate), nor that — where applicable — the method used by the defendant himself leads to a market-based result (interest rate). 21. However, abstracting from the stipulated subordinated nature of the loan, the assumed market-conform interest rate of 6.93 per cent, which is the difference between the interest rate of 7.22 per cent assumed by the claimant on the one hand and the interest rate of 6.93 per cent assumed by the court on the other hand, based on the modified CUP method used in the T. e. report, hereby disregarding the stipulated subordinated nature of the loan — can the claimant be said to have received an abnormal (or favourable) advantage within the meaning of Article 26 WIB92. The extent of the abnormal (or favourable) advantage (as demonstrated by the defendant) within the meaning of Article 26 WIB92 therefore consists of the portion of the interest expense recognised in the relevant financial year that corresponds to an interest rate of 7.22 per cent – 6.93 per cent = 0.29 per cent. Consequently, the portion of the interest deducted that corresponds to an interest rate of 0.29 per cent must be added to the disallowed expenses as an abnormal or favourable advantage in accordance with Articles 26 and 185, §2, a) WIB92. The disputed corporation tax assessment for the 2016 tax year must therefore be waived, insofar as only the amount of interest corresponding to an interest rate of 0.29 per cent can be added to the taxable base on the basis of Articles 26 and 185, §2 WIB92. In other words, the disputed corporate income tax assessment for 2016 must be waived in the amount of the difference between the interest rate of 4.88 per cent assumed by the defendant and the interest calculated on this basis, on the one hand, and the interest rate of 6.93 per cent assumed by the court and the interest calculated on this basis, on the other.” Click here for English Translation Click here for other translation ...

A Greek company had borrowed a total of €18.5 million from related parties and applied an interest rate of 8.5% in FY 2017. The interest rate on the loans were documented using the CUP method with external comparables based on a stand alone credit rating. The tax authorities carried out an audit and concluded that the company’s creditworthiness had been understated, as its membership of a financially stronger multinational group provided implicit support and enhanced its credit rating. Based on this, the arm’s length interest rate was determined to be 2.92%. The company appealed, arguing that: the audit had unlawfully rejected its credit rating analysis and comparables; the CUP method had been misapplied because the specific features of the loans had been ignored, including their unsecured nature, low repayment priority, long maturity, fixed rate, and the credit rating of the individual bond issues; and the authorities had wrongly relied on group membership instead of the risk of the specific loans. Judgment The Administrative Tribunal rejected the appeal and upheld the tax assessment. According to the tribunal the creditworthiness of a group company must reflect the implicit support arising from its membership of a stronger group. As the documentation failed to take this into account, the 8.5% interest rate applied by the company was not considered to be at arm’s length. Excerpt in English “The term “incidental benefit” does not refer to the amount of the benefits, nor does it imply that these benefits must be small or relatively insignificant. Consistent with this general view of the benefits associated with membership of the multinational group, when incidental benefits or costs of membership of the Multinational Group arise solely and exclusively from membership of a Multinational Group and without the deliberate and coordinated actions of the affiliated companies of the Multinational Group or the provision of any intra-group service or other function by the associated enterprises of the multinational group, is that such incidental benefits do not need to be invoiced separately or allocated between the associated enterprises of the multinational group. In fact, paragraph 1.164 [TPG 2017] gives an example of such benefits: 1.164 “P is the parent company of an MNE group engaging in a financial services business. The strength of the group’s consolidated balance sheet makes it possible for P to maintain an AAA credit rating on a consistent basis. S is a member of the MNE group engaged in providing the same type of financial services as other group members and does so on a large scale in an important market. On a stand-alone basis, however, the strength of S’s balance sheet would support a credit rating of only Baa. Nevertheless, because of S’s membership in the P group, large independent lenders are willing to lend to it at interest rates that would be charged to independent borrowers with an A rating, i.e. a lower interest rate than would be charged if S were an independent entity with its same balance sheet, but a higher interest rate than would be available to the parent company of the MNE group.” This is because foreign rating agencies take into account the passive link and the ancillary benefits of a company’s membership of a group, increasing the credit rating of the company under review (……..). Because equating the creditworthiness of the applicant (B) with the creditworthiness of the country (CCC) underestimates the creditworthiness of the applicant, because the applicant, as a member of the foreign group, may have access to financing on more favourable terms than the foreign group. Country risk overestimates the risk of default by the applicant, as it does not take into account the ancillary benefits that the applicant enjoys as a result of its participation in the foreign group. Therefore, the audit correctly conducted a search using a credit rating criterion of B, including one grade above BB, in order to take into account the ancillary benefits to the applicant’s credit rating, its participation in the group, and one grade below CCC, which is the credit rating of the country, in order to take into account the country risk and the economic conditions faced by the applicant.” Click here for English translation Click here for other translation ...