Hargreaves Property Holdings Ltd paid interest on certain loans between 2010 and 2015. HMRC formed the view that Hargreaves should have deducted and accounted for withholding tax on the interest. Hargreaves disagreed and appealed to the First-tier Tribunal on four grounds. All four grounds were rejected ([2021] UKFTT 390 (TC). Hargreaves then appealed on similar grounds to the Upper Tribunal. Hargreaves’ appeal was dismissed ([2023] UKUT 120 (TCC)). An appeal was filed with the Court of Appeal where two of the four grounds were pursued: whether interest payments made from 2012 onwards to a UK tax resident company, Houmet Trading Limited (“Houmet”), fell within the exception from withholding tax in s.933 Income Tax Act 2007 (“ITA 2007”); and whether interest paid on loans the duration of which was less than a year, but which were routinely replaced by further loans from the same lenders, was “yearly interest” within s.874 ITA 2007. Judgment The Court of Appeal dismissed the appeal and upheld the decision of the Upper Tribunal. Excerpts “(…) 81. In conclusion on ground 1, I would dismiss Hargreaves’ appeal. The FTT and UT correctly concluded that Houmet was not beneficially entitled to the interest assigned to it. (…) 86. In this case the FTT found that the loans fulfilled an important commercial need for the business, and (being raised from connected parties) both left the borrower’s assets free from security and could be raised quickly and at minimal cost (para. 78 of the FTT’s decision). They were also repayable on demand (para. 79). However, there was a pattern under which loans were routinely replaced by a further loan from the same lender in the same or a larger amount. The FTT found that the enquiries made of lenders as to whether they wished to carry on lending were formalities, and a new loan was never declined (para. 87). 87. In my view the FTT and UT applied the correct legal approach. The FTT made no legal error in concluding that the interest was yearly interest because the loans were in the nature of long-term funding, were regarded by the lenders as an investment and formed part of the capital of the business, with a permanency that belied their apparent shortterm nature (paras. 79, 81 and 82). It makes no difference to this whether an individual loan happened to last for less than a year. On a business-like assessment, those loans could not be viewed in isolation as short-term advances. In reality, as the FTT concluded at para. 86, the lenders provided attractive long-term funding in the nature of an investment. 88. In conclusion, I would dismiss Hargreaves’ appeal on both grounds. Houmet was not “beneficially entitled” to the interest assigned to it for the purposes of s.933 ITA 2007, and the interest on the loans was yearly interest even if the loan in question had a duration of less than a year.” EWCA Civ 365″] ...

The Second Chamber of the Supreme Court of Brazil issued an interpretation of Normative Instruction SRF n. 243/2002 concerning the legal basis for application of the sixth method – RPL60 – under the Brazilianarm’s length provision contained in art. 18 of Law no. 9430/1996. The Second Champer of the Supreme Court concluded that the interpretation adopted by the Brazilian Federal Revenue Service through Normative Instruction SRF n. 243/2002 did not violate art. 18 of Law n. 9.430/1996. Excerpts “This is a writ of mandamus filed for the purpose of ensuring the right to calculate transfer prices using the PRL method according to the criteria established by art. 18 of Law no. 9430/1996, excluding those contained in SRF Normative Instruction no. 243/2002. The main objective of the transfer pricing methodology is to ensure that taxable events do not escape the state’s taxing power due to the allocation of profits by taxpayers with international business projections. It is an instrument to combat the erosion of tax bases resulting from the transfer of values to other jurisdictions, which the Organization for Economic Cooperation and Development (OECD) has been working on through the Action Plan on BEPS (Base Erosion and Profit Shifting). In practical terms, the system is based on a comparison between a transaction under normal market conditions and a transaction between bound parties, determining the value involved in the transaction based on what usually happens in unbound situations (parameter price). In other words, states adopt this system in order to find out or confirm the real price of the imported good, thus avoiding the undue export of profits. In Brazil, the transfer pricing methodology was instituted by Law No. 9430/1996, a rule which includes the concept of related parties and lists the established methods, including the PRL, which is the subject of discussion in this case. Under the wording of Law No. 9,430/1996 in force at the time the writ of mandamus was filed, the PRL was a method of predetermined margins through the imposition of a presumed profit coefficient, to which the taxpayer agreed when choosing to apply it to its transactions with related parties. The interpretation adopted by the Brazilian Federal Revenue Service through Normative Instruction SRF n. 243/2002, endorsed by the Court of origin, does not violate art. 18 of Law n. 9.430/1996, nor the other legal provisions indicated. This is a logical interpretation, based on the ratio legis, i.e. the purpose of the rule. The function of a normative instruction is not to merely repeat the text of the law, but to regulate it, clarifying its practical function. The purpose of SRF Normative Instruction no. 243/2002 was simply to substantiate the correct interpretation that should be made with regard to the methodology provided for in art. 18 of Law no. 9430/1996, in compliance with art. 100, I, of the CTN, without unduly increasing the tax. The calculation method provided for by law and detailed in art. 12 of SRF Normative Instruction n. 243/2002 meets the purpose enshrined in the transfer pricing system, and the interpretation defended by the appellant is a real cause of disrespect for articles 43 and 97 of the CTN, as it seeks to reduce its tax burden by unduly deducting amounts. The advent of Law No. 12.715/2012 with the intention of including the provisions of SRF Normative Instruction No. 243/2002 in the text of Law No. 9.430/1996 should not be seen as recognition by the tax authorities that the infralegal rule went beyond the legal provision. Notwithstanding the correct position of the Brazilian Federal Revenue Service, as set out in this vote, it is at least appropriate to amend the rule in order to stop the countless battles in the administrative and judicial spheres, as a measure to reduce tax damages and costs with tax litigation ...

In this case the Slovenian Supreme Court explains that a legal act created by an international organisation can be directly applicable in a Member State only if the Member State has transferred part of its sovereign rights to the organisation, which the Republic of Slovenia has not done by ratifying the OECD Convention. The OECD Guidelines themselves are therefore not directly binding on the Member State, which is already clear from the OECD’s internal acts (Article 18 of the Rules of Procedure of the OECD). It concludes that the mere existence of marketing costs does not mean that they are incurred as a result of the implementation of a business strategy. That link is possible if its substance is demonstrated. It is not possible to determine which costs are causally linked to the implementation of a business strategy if it is not clear what is included in the business strategy in the first place. It is only when an activity can be linked to its implementation costs in a meaningful way that the facts about the level of those costs become legally determinative. It is not possible to refer to the costs of a strategy without demonstrating the content of the strategy.” Click here for English translation Click here for other translation ...

The Court of First Instance found no merit in the argument that the tax authority should have compared the price at issue with the prices obtained in the liquidation procedure, since the “Inventory-Corp” was not in the liquidation procedure. The three bidders relied on by “Inventory-Corp” do not provide a sufficiently reliable basis for the decision in view of the fact that the applicant did not sell any of its stock to any of them without explanation and the fact that it sold part of its stock to another, unrelated party at cost. In finding the value of the stock to be the amount of the transfer prices, the tax authority in fact decided in favour of “Inventory-Corp”, since the said value of the stock did not contain any mark-up. Judgment of the Court The Supreme court explained that, although Slovenian legislation in force at the time did not specifically provided for the methods of determining transfer market comparable prices, the OECD Guidelines can be used as an interpretative aid or indicative aid in assessing transfer pricing within the meaning of Article 10 of the ITA in the present case. Excerpt “16. However, in the Supreme Court’s view, the transfer prices in the present case were determined in accordance with the regulations in force at the time of the decision, as well as in the light of the OECD Guidelines and the subsequent statutory and regulatory framework for transfer pricing in the Republic of Slovenia. Article 10 of the ITA already provided for the use of the comparative price method (average prices on the domestic or comparable market) for the determination of transfer prices, and the OECD Guidelines also laid down the so-called independent market principle, which is otherwise enshrined as the basic principle for transfer pricing in Article 9 of the OECD Model Agreement. This principle is based on comparing the terms and conditions of directed transactions with those of non- directed transactions, or on determining whether the reported values of related transactions are consistent with comparable market prices that would be obtained between unrelated parties in the same or comparable circumstances. The application of the arm’s length principle involves assessing whether the transfer price accepted by the related undertakings is consistent with the price accepted by unrelated parties in a comparable arm’s length transaction. 17. In determining the transfer prices of inventories at cost, the Primary Authority has satisfied the standard of average prices in the domestic or comparable market, or has reasonably determined those transfer prices on the basis of the so-called free internal price comparability method, i.e. comparing the prices achieved by the auditor with a related party with the prices achieved by the auditor with unrelated parties. In fact, the tax authority found that, in the present case, the only prices realised with unrelated parties were the prices on the basis of which the auditor purchased the material from suppliers on the domestic and foreign markets (purchase prices) and the same (selling) price agreed by the auditor with the unrelated party, B. d.o.o., for a part of this material, to which the auditor, on the same day as to the related party A. Ltd, sold part of the same stock of material that was also the subject of the sale with the related party, at cost, but not at 15% of cost as he had sold it to the related party. In doing so, he also reasonably checked the price obtained against the so-called special conditions of the business (within the meaning of Article 9 of the OECD Model Agreement) alleged by the auditor (that the business was being wound up and, in the case of the sale to B.o.o., a prior order), but found that these alleged special conditions were not present or had not been demonstrated by the auditor in the present case. 18. In the Court’s view, therefore, for the reasons correctly stated by both tax authorities and the Court of First Instance in the contested judgment, in the light of the totality of the circumstances of the present case, the correct decision was not to recognise the purchase prices less the 85% rebate to the auditor for the material sold, but to determine them at the cost of purchase in accordance with the definition of transfer prices as tax-recognised prices set out in Article 10(3) of the ITA.” Click here for English translation Click here for other translation ...