The tax authorities had issued a tax assessment disallowing the deductibility of intra-group service costs charged to Gru Comedil s.r.l. because, in the opinion of the tax authorities, the company had not provided sufficient documentation and proof of the benefits of the alleged services received (management services). Gru Comedil, and later the tax authorities, appealed the decision, which eventually reached the Supreme Court. Judgment The court overturned the tax authorities’ assessment and ruled in favour of Gru Comedil s.r.l. Excerpts in English “According to an approach widely shared by this Court, in the matter of so-called intra-group costs, in order for the consideration paid to the parent company or to the company entrusted with the service for the benefit of another subsidiary to be deductible by the company receiving it, it is necessary that the subsidiary derives an actual utility from the remunerated service and that this utility is objectively determinable and adequately documented (Court of Cassation, n. 26/01/2023, n. 26/01/2023, n. 1795, followed by many others, including recently Supreme Court, n. 1921, 06/07/2021, n. 1919). 30/01/2023, no. 2689; Cass. 27/01/2023, no. 2599; Cass. 04/03/2020, no. 6820; Cass. 14/12/2018, no. 32422; Cass. 04/10/2017 no. 23164; Cass. 23/11/2015, no. 23027; Cass. 18/07/2014, no. 16480; Cass. 21/12/2009, no. 26851), even if those costs do not directly correspond to revenues in the strict sense (Cass. 05/12/2018, no. 31405; previously Cass. 01/08/2000, no. 10062). Moreover, the administrative practice (C.M. no. 32/9/2267 of 22 September 1980) that, beyond the flat-rate percentage of the costs charged by the parent company to the subsidiaries, subordinates the deductibility of costs deriving from contractual agreements on services to the actuality and inherent nature of the expense to the business activity carried out by the subsidiary and to the real advantage derived by the latter (Cass. 11/11/2015, no. 23027); it should be noted that the same circular expressly specifies that the control on the utility (and on the inherence) is prejudicial to the assessment of the normal value (and therefore the appropriateness of the consideration). This approach is in line with the OECD guidelines, according to which, on the subject of intra-group provision of services, it is necessary to proceed to the so-called. benefit test, i.e., to verify whether the activity in question confers on the enterprise an advantage aimed at improving its economic or commercial position (OECD Guidelines, 18 July 2010, Chapter VII), and with the rigorous approach, on the subject of OECD-derived arbitrages, of which there is ample – and not contradicted – trace in the sectional jurisprudence (Cass. 06/07/2021, no. 19001). The existence of the cost, its pertinence and usefulness, and finally its determinability are therefore different issues and all preceding its adjustment according to the normal value.” (…) “The first complaint relates to the profile of inherence, which must be understood as set out in the preamble;  On this point, it is untrue that the CTR did not assess the existence of a benefit for the company, holding instead explicitly that the management fees charged by the foreign parent company to the Italian subsidiary are deductible where they result from a written agreement containing the details of the services and specifying a congruous allocation criterion, << more if the subsidiary’s organisational structure does not appear to be suitable for the performance on its own of the services received from controllante>>, correctly pointing out that the inherent nature did not derive from a connection between costs and revenues but it was necessary to assess whether the former were functional to the business activity. The second objection, relating to the possible presence of non-deductible cost items, is inadmissible because it does not relate to the specific rationale of the decision on this point, the CTR having expressly pointed out the groundlessness of this objection since <<non is a mere reversal of costs incurred by the parent company on behalf of Gru Comedil but the cost of a management service whose quantification must be objectively determinabile>>. The third ground of appeal is unfounded, in that the CTR did not attribute any effect of reliance to the independent auditors’ report, indeed expressly stating that it did not even determine a relative presumption of the truthfulness of the records, and recalling this Court’s orientation according to which expenses and other negative components (costs) are allowed as deductions, if and to the extent that they are charged to the profit and loss account for the year in which they are incurred, which, which, especially when it is a matter of ascertaining facts that cannot be analytically proven, constitutes, as part of the financial statements, a relevant source of information and may be verified by the tax authorities in accordance with the criteria of congruity and consistency, also taking into account the auditor’s report, itself a relevant means of proof, because of the public control profiles and the auditor’s civil and criminal liability, and may only be rebutted by producing documents demonstrating the auditor’s error or breach (Cass. 12/03/2009, no. 5926; Cass. 26/02/2010, no. 4737). Above all, however, the CTR did not at all use the auditor’s report as the sole source of its own conviction, attributing overall relevance to the entire compendium of evidence produced by the company, and in particular acknowledging the examination of the cost-sharing agreement, the invoices issued by the parent company, the statements of account, the specifications of the criteria for the allocation of corporate charges the auditing firm’s annual report and also the auditing firm’s certification and the accounting records, which, according to the defence, had been produced with the indication of the name of each employee to whom the disputed services were to be referred, evidently in order to overcome the first, and indeed only, explicit ground of dispute contained in the notice of assessment. After examining these documents, the CTR, with reasons, albeit concise, that were certainly sufficient and consistent, found that they showed the nature of the services rendered, the allocation criteria, and the reality of the costs incurred by the parent company, making ...

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been a great danger that a third company would have siphoned off “Cutting Tech GMBH”‘s know-how and then taken over the business with “Cutting Tech GMBH”‘s customer. This could have led to large losses in turnover for “Cutting Tech GMBH”. Furthermore, some of the labour-intensive work also had to cover one or more finishing stages of the high-tech processes, so that this business was also at risk if it was outsourced. For these reasons, the decision was made to outsource the labour-intensive production processes to Bosnia-Herzegovina in order to become profitable again and to remain competitive in the future. There, there were German-speaking staff with the necessary expertise, low customs duties and a low exchange rate risk. CB functioned as a contract manufacturer with the processes of production, quality assurance and a small administrative unit. Cost advantages existed not only in personnel costs, but also in electricity costs. CB prevented the plaintiff’s good earnings from the high-tech processes in Germany from having to continue to be used to subsidise the low-tech processes. “Cutting Tech GMBH” supplied CB with the material needed for production. The deliveries were processed as sales of materials. “Cutting Tech GMBH” received as purchase prices its cost prices without offsetting profit mark-ups or handling fees/commissions. The material was purchased and supplied to CB by “Cutting Tech GMBH”, which was able to obtain more favourable purchase prices than CB due to the quantities it purchased. The work commissioned by “Cutting Tech GMBH” was carried out by CB with the purchased material and its personnel. CB then sold the products to “Cutting Tech GMBH”. In part, they were delivered directly by CB to the end customers, in part the products were further processed by “Cutting Tech GMBH” or by third-party companies. “Cutting Tech GMBH” determined the transfer prices for the products it purchased using a “contribution margin calculation”. Until 2012, “Cutting Tech GMBH” purchased all products manufactured by CB in Bosnia and Herzegovina. From 2013 onwards, CB generated its own sales with the external company P. This was a former customer of “Cutting Tech GMBH”. Since “Cutting Tech GMBH” could not offer competitive prices to the customer P in the case of production in Germany, CB took over the latter’s orders and supplied P with the products it manufactured in accordance with the contracts concluded. CB did not have its own distribution in the years in dispute. The tax audit of FY 2011 – 2013 The auditor assumed that the transfer of functions and risks to CB in 2007/2008 basically fulfilled the facts of a transfer of functions. However, since only a routine function had been transferred, “Cutting Tech GMBH” had rightly carried out the transfer of functions without paying any special remuneration. Due to CB’s limited exposure to risks, the auditor considered that the cost-plus method should be used for transfer pricing. In adjusting the transfer prices, the auditor assumed a mark-up rate of 12%. The material invoiced by “Cutting Tech GMBH” and the scrap proceeds was not included in the cost basis used in the assessment. For 2013, the auditor took into account that the customer P had agreed contracts exclusively with CB and reduced the costs by the costs of the products sold to P. Furthermore, the auditor took the legal view that the entire audit period should be considered uniformly. Therefore, it was appropriate to deduct an amount of €64,897 in 2011, which had been calculated in favour of “Cutting Tech GMBH” in 2010 and not taken into account in the tax assessment notices, in order to correct the error. The auditor did not consider it justified to determine the transfer prices for “Cutting Tech GMBH”‘s purchases of goods by means of a so-called contribution margin calculation. Based on the functional and risk analysis, the auditor concluded that CB was a contract manufacturer. On the grounds that this profit of CB was remuneration for a routine function, the auditor refrained from recognising a vGA because of the transfer of client P from the applicant to CB. However, he stated that according to arm’s length royalty rates, values between 1% and 3% could be recognised as royalty “according to general practical experience.” “Cutting Tech GMBH” filed an appeal against the assessment in 2015 and in November 2019 the Tax Court parcially allowed the appeal of “Cutting Tech GMBH” and adjusted the assessment issued by the tax authorities. An appeal and cross appeal against the decision of the Tax Court was then filed with the Federal Tax Court (BFH). Judgement of the BFH The Federal Tax Court overturned the decision of the Tax Court and referred the case back to the Tax Court for another hearing and decision. “The appeals of the plaintiff and the FA are well-founded. They lead to the previous decision being set aside and the matter being referred back to the Fiscal Court for a different hearing and decision (§ 126 Para. 3 Sentence 1 No. 2 FGO). The arm’s length comparison carried out by the lower court to determine the transfer prices for the acquisition of processed products from C by the Plaintiff is not free of legal ...

Two issues were adressed in this case – transfer pricing and withholding taxes. The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction. The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act. Judgement of the High Court In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were made in accordance with the arm’s length principle. The High Court emphasised, among other things, that the documentation did not sufficiently describe how prices and terms had actually been determined. The High Court also emphasised that there had only been a very general description and very sparse information about the sister company’s business activities, contractual terms and financial circumstances, including no information about to whom and at what prices the goods from the sister company were resold. SKAT was therefore entitled to make a discretionary assessment of the company’s taxable income. The High Court found no basis to set aside SKAT’s estimate, as the company had neither demonstrated that the estimate was exercised on an erroneous basis nor led to a manifestly unreasonable result. The High Court emphasised, among other things, the extent and nature of the deficiencies in the information basis and the fact that SKAT had unsuccessfully attempted to obtain additional information for use in the tax assessment. As regards the arm’s length interval used by SKAT, the High Court found, after an overall assessment, that SKAT had been entitled to use the interquartile range and adjusted the price to the third quartile. The High Court stated that the company had a central and value-creating function in the group, and that the comparability analysis was based on “limited risk distributors”, which were not directly comparable with the company. The High Court also found that the foreign sister company had to be considered a pure flow-through company that had no independent business justification in the group. In this connection, the High Court stated that there had been changing information about the sister company’s employees and that there was no documentation that there had been employees to carry out the alleged activities in the company. The analyses prepared after the tax assessment, including the capital adjustment test and the berry ratio analysis, as well as the other factors invoked by the company could not lead to a different assessment. In regards of the withholding tax issue the High Court found that the foreign sister company could only be considered to have acted as a flow-through company that did not bear any risk with the commodity trade. The High Court emphasised, among other things, that no hedging contracts had been presented. In light of the other circumstances of the case, the High Court found that the 13 transfers, which did not take place until 2010, could not be considered to have been made pursuant to the aforementioned agency agreement. The High Court stated that in the situation at hand, the company had a heightened burden of proof that there was no basis for considering the payments as subsidies/dividends with derived liability for withholding tax. The High Court found that the Danish company had not met this burden of proof through the testimony of the company’s former CEO and auditor. Finally, the High Court found that the Danish company was aware of all the circumstances surrounding the transfers to the foreign sister company in Y1 country, and that the transfers were very significant without documentation. On this basis, the High Court found that the Danish company had acted negligently and was therefore liable for the missing withholding tax, cf. section 69(1) of the current Withholding Tax Act, cf. section 65(1). Click here for English translation Click here for other translation ...

A was the sole owner of “C-Advisory Business ApS” established in Denmark in 2003. The company advised and represented taxpayers in cases related to tax deductions for land improvements to immovable property. A was also the sole owner of a company established in Dubai in 2006. The Dubai company provided services for “C-Advisory Business ApS” in Denmark and a total of DKK 78,785,549 was expensed in FY 2006-2010 relating to the purchase of these services. The Danish tax authorities considered that the payments had not been at arm’s length and reduced the service fees to the Dubai company to DKK 20 million for the income years in question. This resulted in additional taxable income of “C-Advisory Business ApS” in a total amount of DKK 58,5 million. Following an unsuccessful complaint to the Tax Tribunal, “C-Advisory Business ApS” filed an appeal with the regional court where a judgement was issued in June 2021. The Regional Court found, that the tax authorities had been entitled to exercise discretion over the pricing of the controlled transactions as the transactions had not been priced at arm’s length and the transfer pricing documentation did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle had been complied with. An appeal was then filed by “C-Advisory Business ApS” with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Regional Court and found in favour of the tax authorities. The Court considered that the tax authorities had been entitled to exercise discretion in relation to pricing of the controlled transactions at issue and that there were no grounds for setting aside the tax assessment “(…) Whether the tax authorities were entitled to exercise a discretion in respect of the controlled transactions It is accepted, for the reasons given by the Court, that the tax authorities have established that the transfer pricing documentation is so deficient that it did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle was complied with. As stated by the Regional Court, in assessing whether the pricing between C and the Dubai company was at arm’s length, it must be borne in mind, inter alia, that it followed from the Service Agreement concluded and the allonge thereto that in 2006-07 the Dubai company received a management fee consisting of a fixed base fee of DKK 800,000 and a profit-based fee of 50-70% of C’s profits, and that in 2008-10 the Dubai company received a base fee with full cost recovery plus the same profit-based fee. The Supreme Court finds, as did the Regional Court, that it has been established that C would not have entered into an agreement on those terms with an independent company. The Supreme Court therefore holds that the tax authorities were entitled to set aside C’s pricing and instead exercise discretion in relation to the controlled transactions in order to determine what C would have paid to the Dubai company for the purchase of the services if they had been independent contracting parties. Whether there is a basis to set aside the estimate SKAT’s estimate of C’s payments for the services provided by the Dubai company is based on the TNM method as a pricing method. In applying the TNM method, SKAT calculated the Dubai company’s transfer prices for the provision of services to C by carrying out a benchmark analysis of 25 law firms and audit firms, using return on total cost (RoTC) as a profit level indicator. RoTC is calculated by dividing the firms’ profits (earnings before interest and tax) by their costs (total costs). The benchmark analysis showed a market RoTC with a median of 6.72% and on this basis the tax authorities have estimated that the Dubai company is entitled to a profit of 6.72% of the Dubai company’s expenses. C’s expenditure on the Dubai company was then estimated for tax purposes to be approximately DKK 20 million for the period 2006-10. For the reasons stated by the Regional Court, the Supreme Court finds that C and B have not demonstrated that the TNM method was not applicable as a pricing method. C and B submit that SKAT’s calculation does not take account of the fact that a partner in a law firm – as described, inter alia, in the Competition Council’s analysis report of 14 January 2021 on ‘Competition in the legal profession’ – receives both payment for his work and remuneration for ownership in the form of a share of the law firm’s profits. The Ministry of Taxation has submitted to the Supreme Court a calculation which, according to the Ministry, shows that a discretionary tax assessment based on the conclusions of the said report would not have resulted in a lower tax assessment than the tax assessment calculated by SKAT based on the application of the TNM method and RoTC as described above. The Supreme Court considers that, with regard to this calculation, C and B have not provided any evidence that the tax authorities’ estimate rests on an incorrect or inadequate basis or is manifestly unreasonable. There are therefore no grounds for setting aside the tax authorities’ assessment and referring the case back to the Court.” Click here for English translation Click here for other translation ...

Olympus Medical Systems India is a subsidiary of Olympus Corp and engaged in the import, sale and maintenance of medical equipment in India. For FY 2012 and 2013 the company reported losses. An transfer pricing audit was initiated by the tax authorities and later an assessment was issued. Since Olympus India had failed to provide audited financials of its associated enterprises to determine the overall profits of the group, it adopted the Resale Price Method using the Bright Line Test approach. An appeal was then filed by Olympus with the Tax Appellate Tribunal. Olympus India argued that the tax authorities was erroneous in adopting the Residual Profit Split Method in determining the arm’s length price of the AMP expenses and furthermore that the tax authorities could not make an adjustment without having information on the total profits of the group. Judgement of the Tax Appellate Tribunal The tribunal held that Olympus India should not benefit for non-cooperation in providing audited financials of associated enterprises. Olympus was obligated to submit the audited financials of the associated enterprises. Failure to do so could justify an assessment by applying the Residual Profit Split Method in the determination of the arm’s length price of the AMP expenses. Excerpts “The TPO has benchmarked using the Residual Profit Split Method. For applying the Residual Profits Split Method, it is incumbent upon the TPO first to combine profit from the international transaction of incurring AMP expenses and then split the combined profit in proportion to the relative contribution made by both the entities. In order to work out the combined profit in the transaction the financials/profitability of the AE’s is very much essential. In the instant case, the Assessee has refused to submit the profitability of the AE’s, therefore the TPO has adopted the RPSM.” “In our opinion, the Assessee who is entering into the International transaction is duty bound to maintain and produce the same before the Department when it is asked to produce as per Section 92D of Income Tax Act R/w. Rule 10D and 92D of Income Tax Rules, 1962. If the assessee doesn’t provide the financials of its AE’s, the TPO/AO/DRP can very well invoke the provisions of Income tax Provisions of Income-Tax Act and the Rules framed there under to call for such records not only from the country of residence but also from any other country in cases of AE’s and decide the issue.” “In our opinion the TPO/Assessing Officer cannot apply wrong method in the absence of material ie: audited financials of AE. On the other hand, TPO/AO cannot even give the benefit as well to the Assessee for non cooperation for providing the audited financials of AE.” “By following the above said binding decision in Assessee’s own case and also for the reasons mentioned above, we hold that the international transaction of AMP functions exists in the case of the Assessee and restore the issue to the TPO for following the direction of the Hon’ble Delhi High Court in the case of Sony Ericsson (supra) for benchmarking under TNMM in aggregated manner along with the purchase of goods from the AE’s or in the segregated manner, after taking into account appropriate comparables or applying of Resale price method or Cost Plus Method or Profit Split Method keeping in view the findings of the Hon’ble Delhi High Court. Needles to say that, the Assessee shall be given opportunity of being heard. Further Assessee is directed to provide all the relevant documents including the financials of its AE’s if required, failing to which the Authorities can act in accordance with law by invoking the relevant provisions.” ...

The case concerned a Danish company that provided legal services regarding tax deductions for improvements to real estate, etc. In 2006, the owner of the Danish company moved to Y2 city and in the process established a company in Y2 city, which would then provide services to the Danish sister company, including legal advice. The tax authorities had increased the Danish company’s taxable income by an estimated total of approximately DKK 58.4 million, as the tax authorities considered that the company’s transfer pricing documentation was sufficiently deficient, in accordance with Section 3 B(8) of the Tax Control Act, cf. Section 5(3), and that the service agreements were not concluded at arm’s length in breach Danish arm’s length provisions. Judgement of the High Court The tax authorities were entitled to exercise discretion over pricing of the controlled transactions as the transactions had not been priced at arm’s length and the transfer pricing documentation was deficient. “The case shows that SKAT’s estimate of H2 ApS’s payment (management fee) for the services provided by G1 is based on the TNM method as a pricing method, which is justified in particular by the fact that G1 was a simple service/service provider. Furthermore, the case shows that in calculating G1’s transfer prices for the provision of services to H2 ApS, SKAT carried out a benchmark analysis of 25 comparable law firms and audit firms using Return on Total Cost (hereinafter RoTC) as a profit level indicator. It is stated that RoTC is calculated by dividing the companies’ profits (earnings before interest and tax) by their costs (total costs). The benchmark analysis showed a market RoTC median of 6,72 %, which implied that the tax authorities considered G1 eligible to earn a profit of 6,72 % in relation to G1’s expenses and that G1’s expenses with the said mark-up could be approved as the amount of H2 ApS’s expenses to G1 for tax purposes for the period 2006-2010 (approximately DKK 20 million). The High Court accepts, after an overall assessment, that the services provided by G1 to H2 ApS are comparable to the services provided by law firms and auditing companies and that the applicants have not demonstrated that the TNM method was not applicable as a pricing method, also referring to the above-mentioned reason why, in the High Court’s view, the profit-split method was not the appropriate pricing method to apply in relation to the controlled transactions. The High Court considers that, on the basis of the evidence submitted – in particular in the light of the calculation of the profit rate in the legal sector contained in the Competition Council’s analysis report of 14 December 2005 – the applicants have not established that the profit-split method was applied. In the light of the evidence, including the evidence of the profitability analysis carried out by the tax authorities, as set out in the Competition Authority’s report of 14 January 2021 on ‘Competition in the legal sector’, the applicant submits that the tax authorities’ estimate in the present case is based on an incorrect or inadequate basis capable of influencing the estimate, having regard also to the fact that the Y2 company mainly provided legal services and that approximately half of the companies included in the SKAT benchmark analysis are law firms. In this respect, the Court of Appeal has emphasised in particular that it follows from the above-mentioned analysis report that a partner in a law firm receives a salary for work performed as well as a remuneration for ownership in the form of a share of the law firm’s profits, that if the partners’ income is calculated on the basis of their personal income – which includes both a salary for work performed as well as a remuneration for ownership – the profit rate in the legal sector was between 30 and 35 %. in the years 2012 to 2018, and that the profit rate was around 20 per cent in those years if the remuneration for the partners’ work is adjusted. The High Court thus considers that the calculation method used by SKAT does not take proper account of the remuneration structure of law firms and that SKAT’s benchmark analysis thus arrived at a profit rate which is not accurate. In doing so, the High Court also took into account that it follows from TPG 2010, points 2.90-2.91, 2.92 and 2.97, that profit level indicator may be, inter alia, net profit in relation to turnover (sales), costs (costs) or assets (assets), see also section C.D.11.4.1.4 of the Legal Guide 2021-1. On the basis of the above, the High Court remands the tax assessment for Rafn & Søn ApS and, consequently, the determination of the joint taxable income for PB Holding ApS for the income years 2006-2010, as regards the amount of DKK 33,699,860, to be reviewed by the Tax Agency in order for the Tax Agency to take due account of the remuneration structure of the law firms in the discretionary assessment.” Click here for English translation Click here for other translation ...

The disputed issue concerns the purchase prices of natural gas by SC A from an affiliated company SC B. By orders of the National Energy Regulatory Authority (NERA), the prices of supply of natural gas to domestic and non-domestic consumers were regulated and fixed, but not the price at which SC A purchased it from the SC B. The tax authority issued an assessment where the price of the controlled gas transaction was determined by reference to profit level indicators of comparable businesses. SC A brought the decision to the Romanian courts. Judgement of the Court of Appeal The appeal of SC A was dismissed and the assessment of the tax authorities upheld. Excerpt “In the present case, in order to adjust the expenses for the cost of the goods purchased from SC “B.” SRL, based on the level of the central market trend, the tax body used the information provided by the ORBIS and FISCNET applications. Following the comparative analysis of the information provided by the two IT applications, the tax body identified 22 potentially comparable companies in Romania, of which only one met the qualitative criteria, which is why it correctly moved to a higher search level, namely that of the European Union, identifying 6 companies that were comparable in terms of quantity and quality. In this regard, it was noted that, according to Article 8 of OPANAF No 442/2016, transactions between related persons are considered to be carried out according to the market value principle if the financial indicator of the transaction/transaction value (margin/profit/price) falls within the range of comparison. The following provisions shall be respected in determining the comparator range: 1. the comparability analysis will consider territorial criteria in the following order: national, European Union, pan-European, international; 2. reasonable availability of data at the time of transfer pricing or at the time of their documentation, for which the taxpayer/payer being verified provides supporting documentation for the data used at the time of transfer pricing; 3. the margin of comparison is the range of price or margin/profit values for comparable transactions between independent comparable companies; 4. for the determination of outliers, the margin of comparison shall be divided into 4 segments. The maximum and minimum segments represent the extreme results. The range of comparison is the range of price or margin/output values for comparable transactions between independent comparators, after eliminating the extreme results from the margin of comparison; 5. the extreme results within the margin of comparison shall not be used in determining and calculating the estimate/adjustment; 6. if the median value cannot be identified (the median value is the value at the middle of the range of comparison), the arithmetic mean of the two middle values of the range of comparison shall be taken. In so far as the tax authority complied with the legal procedure for estimating the purchase prices, as required by ANAF Order 442/2016, the appellant’s criticisms are unfounded, especially as they do not essentially concern the specific procedure carried out by the tax authority. Consequently, the appellant’s criticisms, which relate to the ground for annulment relied on, are unfounded, which is why the appeal was dismissed as unfounded.” Click here for English translation Click here for other translation ...

In 2013, L SARL requested in writing an “advance tax agreement” regarding the tax treatment of Mandatory Redeemable Preference Shares (MRPS) which generated a preferred dividend for its sole shareholder. L SARL wanted confirmation that the MRPS would be characterised as debt and that payments under the MRPS would therefore be tax deductible. The tax administration issued an advance tax agreement confirming that the content of the request complied with the tax laws and administrative practices in force. However, despite the agreement the tax authorities challenged the 2013 tax return and demanded proof that the return on the MRPS complied with the arm’s length principle. L SARL found that such proof was not necessary since the MRPS’ tax treatment had already been agreed by the tax administration agreement. The tax administration disagreed and issued an assessment. The case was brought before the Administrative Tribunal. The Administrative Tribunal held that an advance tax agreement is binding upon the tax administration where the following conditions are met: the taxpayer’s question must be in writing; the taxpayer’s request must be sufficiently clear and complete to allow the LTA to adequately analyse the taxpayer’s situation; the tax administration’s answer must come from a duly authorised tax official, or an official who the taxpayer could legitimately expect to be duly authorised; the tax administration must have had the intention of being bound by the information given to the taxpayer; and the tax administration’s answer must have had decisive influence on the taxpayer. These conditions were met and the Tribunal concluded that the tax administration was bound to the advance tax agreement. The Tribunal added that in the presence of an advance tax agreement, the tax authority cannot characterise the same structure and operations as an abuse of law, since the reality and legality of the taxpayer’s actions has already been acknowledged. Click here for other translation ...

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been a great danger that a third company would have siphoned off “Cutting Tech GMBH”‘s know-how and then taken over the business with “Cutting Tech GMBH”‘s customer. This could have led to large losses in turnover for “Cutting Tech GMBH”. Furthermore, some of the labour-intensive work also had to cover one or more finishing stages of the high-tech processes, so that this business was also at risk if it was outsourced. For these reasons, the decision was made to outsource the labour-intensive production processes to Bosnia-Herzegovina in order to become profitable again and to remain competitive in the future. There, there were German-speaking staff with the necessary expertise, low customs duties and a low exchange rate risk. CB functioned as a contract manufacturer with the processes of production, quality assurance and a small administrative unit. Cost advantages existed not only in personnel costs, but also in electricity costs. CB prevented the plaintiff’s good earnings from the high-tech processes in Germany from having to continue to be used to subsidise the low-tech processes. “Cutting Tech GMBH” supplied CB with the material needed for production. The deliveries were processed as sales of materials. “Cutting Tech GMBH” received as purchase prices its cost prices without offsetting profit mark-ups or handling fees/commissions. The material was purchased and supplied to CB by “Cutting Tech GMBH”, which was able to obtain more favourable purchase prices than CB due to the quantities it purchased. The work commissioned by “Cutting Tech GMBH” was carried out by CB with the purchased material and its personnel. CB then sold the products to “Cutting Tech GMBH”. In part, they were delivered directly by CB to the end customers, in part the products were further processed by “Cutting Tech GMBH” or by third-party companies. “Cutting Tech GMBH” determined the transfer prices for the products it purchased using a “contribution margin calculation”. Until 2012, “Cutting Tech GMBH” purchased all products manufactured by CB in Bosnia and Herzegovina. From 2013 onwards, CB generated its own sales with the external company P. This was a former customer of “Cutting Tech GMBH”. Since “Cutting Tech GMBH” could not offer competitive prices to the customer P in the case of production in Germany, CB took over the latter’s orders and supplied P with the products it manufactured in accordance with the contracts concluded. CB did not have its own distribution in the years in dispute. The tax audit of FY 2011 – 2013 The auditor assumed that the transfer of functions and risks to the CB in 2007/2008 basically fulfilled the facts of a transfer of functions. However, since only a routine function had been transferred, “Cutting Tech GMBH” had rightly carried out the transfer of functions without paying any special remuneration. Due to CB’s limited exposure to risks, the auditor considered that the cost-plus method should be used for transfer pricing. In adjusting the transfer prices, the auditor assumed a mark-up rate of 12%. The material invoiced by “Cutting Tech GMBH” and the scrap proceeds was not included in the cost basis used in the assessment. For 2013, the auditor took into account that the customer P had agreed contracts exclusively with CB and reduced the costs by the costs of the products sold to P. Furthermore, the auditor took the legal view that the entire audit period should be considered uniformly. Therefore, it was appropriate to deduct an amount of €64,897 in 2011, which had been calculated in favour of “Cutting Tech GMBH” in 2010 and not taken into account in the tax assessment notices, in order to correct the error. The auditor did not consider it justified to determine the transfer prices for “Cutting Tech GMBH”‘s purchases of goods by means of a so-called contribution margin calculation. Based on the functional and risk analysis, the auditor concluded that CB was a contract manufacturer. On the grounds that this profit of CB was remuneration for a routine function, the auditor refrained from recognising a vGA because of the transfer of client P from the applicant to CB. However, he stated that according to arm’s length royalty rates, values between 1% and 3% could be recognised as royalty “according to general practical experience.” “Cutting Tech GMBH” filed an appeal against the assessment in 2015. Judgement of the Fiscal Court The Fiscal Court adjusted the assessment issued by the tax authorities and thus parcially allowed the appeal of “Cutting Tech GMBH”. Excerpts “In the case at issue, the decisive cause for the plaintiff losing the customer P is not to be seen in the transfer of business to CB. The applicant lost the customer because it could not offer him competitive prices. The takeover of the business with P by CB is thus not the cause of the loss of the customer. The plaintiff’s factual submission is undisputed in this respect and is confirmed by the small profit that CB made from the business according to the calculations of the foreign auditor.” “The FA was correct to add € … to the taxable income in the year 2013 due to the supply of materials to CB for the processing of its business with ...

Following an audit Broker A SRL was ordered to submit corrective statements on the corporate income tax for the tax years 2016 and 2017, and not to take over the tax loss from previous years, in the amount of RON 62,773,810 in 2016 and 2017. The tax authorities had found shortcomings in the comparability study drawn up by the company and replaced it with their own study. According to Broaker A SRL the transfer pricing adjustment was unlawful: the measure of reworking the comparability study has no legal basis and was not reasoned by the tax authorities; the findings of the tax inspection bodies are based on a serious error concerning the accounting recognition of A. BV’s income in its records; unlawfulness as regards the adjustment of income in respect of support services. ANAF has made serious errors of calculation by reference to its own reasoning in establishing the adjustments. unlawfulness of the tax decision in relation to the adjustment of expenditure on strategic management services. The findings of the tax inspection team lead directly and directly to double taxation at group level of this income, to which the following criticisms are made: the tax authorities erroneously adjusted income relating to strategic management services which were not the subject of the Support Services Contract between A. SRL and A. BV and which were not provided by the company; the imposition of the obligation to re-invoice A. BV for management services leads to double taxation at group level. Judgement of Supreme Court The Supreme Court found the appeal of Broker A SRL unfounded and upheld the assessment of the tax authorities. Click here for English translation Click here for other translation ...

The court ruled that, based on all the findings in the proceedings (the plaintiff did not provide documentation, did not follow the tax authority’s instructions), the tax authority had the possibility to establish the tax base by assessment pursuant to Article 68 of ZDATP-2. The tax authority concluded that the application of the cost plus method was not applicable in the specific case and decided to apply the transactional net margin method. The so-called primary adjustment still did not restore the situation as it would have been if the transactions had been carried out on an arm’s length basis. Therefore, the tax authority correctly made a secondary adjustment in the form of a disguised profit payment Click here for English translation Click here for other translation ...

At issue was the existence of a basis for taking into account the deductibility of the costs of services, the costs related to the repurchase and destruction of products and the tax deductibility of royalty expenses charged between related parties. Judgment of the Court The Administrative Court concluded that “Buy/Sell Distributor” had failed to prove that the disputed services charged to it were actually supplied and necessary for it. As regards the costs relating to the redemption and destruction of the products, it held that “Buy/Sell Distributor” was not obliged to bear those costs in view of the functions it performed within the multinational company’s system and the risks it bore. The Court also held that there was no basis for treating the royalty payment as a tax deductible expense. Click here for English translation Click here for other translation ...

The tax authority found that the taxpayer had not provided credible documentation or evidence from which it could be indisputably established that the services were actually provided between related parties and, therefore, did not include the costs of those services as a tax deductible expense under Article 16 ZDDPO-2. Judgment of the Court The Administrative Court agreed with the reasons given by the tax authority of first instance for its decision, namely in the treatment of the costs of services charged between related parties. Excerpt in English “The Court considers that the contested decision is correct and in accordance with the law relied on. The Court also agrees with the grounds on which the decision is based by the tax authority at first instance and with the grounds on which the appeal is rejected by the defendant. The pleas in law and defences are identical in substance to those raised in the appeal, and the Court therefore refers to and does not repeat the grounds of the contested decision and the decision on appeal (Article 71 Causes of Justice). Pursuant to Article 11(3) of the ITA-1, unless otherwise provided by that law, the income and expenditure recognised for the purpose of determining profits shall be the income and expenditure recognised in the profit and loss account or in the annual report corresponding to the profit and loss account and showing the income, expenditure and result, on the basis of the law and in accordance with the accounting standards established by that law. For the purpose of determining profit, the expenditure necessary to obtain the revenue taxed under this Law shall be recognised. However, expenses which, in the light of the facts and circumstances, are not a direct condition for carrying on an activity and do not result from the carrying on of an activity are not such expenses (Art. 20 ZDDPO-1). Costs of services are recognised on the basis of documents proving that they are normally related to the economic benefits arising (SRS 14.10). In determining the taxable person’s expenditure, transfer prices with related parties for assets, including intangible assets, and services are taken into account, in accordance with Article 12(2) of the ITA-1, but not more than to the extent that the expenditure is determined by reference to comparable market prices. Under Article 20(1) of the Regulations, a related party service is deemed to have been provided if the unrelated party would have been willing to purchase the service from another unrelated party or if the unrelated party would have been willing to provide the service itself. The arm’s length principle is defined in Article 9 of the OECD Model Tax Convention on Income and Wealth, which is the basis for the bilateral tax treaties concluded. It is also the basis for the OECD Guidelines, from which the domestic transfer pricing regime is derived. The tax authorities are therefore also justified in assessing the tax deductibility of expenditure in the light of its consistency with the OECD Guidelines. In the light of the above, two questions arise in the analysis of transfer pricing for intra-group services. The first is whether the intra-group services were actually provided, and the second is what price for such intra-group services would be consistent for tax purposes with the arm’s length principle (point 7.7 of the OECD Guidelines). The tax authority’s request for documentation demonstrating that the services charged for were actually rendered to the applicant, and the nature and extent of those services, is justified by the provisions of the ITA-1 and the SRS and ITA-2. There is no dispute in the case that the applicant did not submit the requested documentation in the tax proceedings. It has only substantiated the amount of the cost mark-up charged, but has not demonstrated the volume and nature of the services allegedly provided to it by the group companies. The alleged compliance of the costs charged with the arm’s length principle is for that reason not demonstrated. The tax authority further substantiates the finding of inconsistency of the transfer prices by the fact that the applicant had no influence on the price of the services provided by the group, that the allocation key established for each type of service is inappropriate and that there is duplication of services. The applicant claims otherwise, that there is no duplication of services, but does not prove that fact in the absence of any evidence of services provided by related companies. The allegations concerning the services allegedly provided to the applicant by the individual companies in the group and the calculation of the average monthly costs, which are repeated by the applicant in its application, do not, for the reasons given by the appellate authority, also do not, in the Court’s view, prove that the services were actually provided. In the light of the above, since the pleas in law are unfounded and the Court of First Instance has not found any irregularities of which the Office is aware, the Court of First Instance dismisses the action as unfounded on the basis of Article 63(1) of the Causes of Action Act.” Click here for English translation Click here for other translation ...