Tag: Joint audit

Netherlands vs “Lux Credit B.V.”, July 2023, Court of Hague, Case No AWB – 21_4016 (ECLI:NL:RBDHA:2023:12061)

“Lux Credit B.V.” took out various credit facilities from related parties [company name 2] s.a.r.l. and [company name 3] s.a.r.l. – both resident in Luxembourg. These were financings whereby “Lux Credit facility B.V.” could draw funds (facilities) up to a pre-agreed maximum amount. In doing so, “Lux Credit B.V.” owed both interest and “commitment fees”. The commitment fees were calculated on the maximum amount of the facility. Interest and commitment fees were owed. The interest payable to [company name 2] and [company name 3], respectively, was calculated by deducting the commitment fees from the interest payable on the amount withdrawn, with interest payable on the amount withdrawn, the commitment fees owed after the due date and the interest owed after the due date. In its returns for the current financial years, “Lux Credit B.V.” charged both interest and commitment fees against taxable profit. Following an audit, an assessment of additional taxable income was issued for the financial years 2012/2013 – 2016/2017. According to the tax authorities, the financial arrangement was not at arm’s length. The interest rate and commitment fees were adjusted and part of the loans were classified as equity. A complaint was filed by “Lux Credit B.V.” Judgement of the District Court The Court found mainly in favour of Credit Facility B.V.. It upheld most of the adjustments relating to commitment fees, but overturned the adjustment to the interest rate. According to the Court, Lux Credit B.V. was entitled to an interest deduction for the years under review, calculated at the contractually agreed interest rate on the amounts actually borrowed. Excerpts “51. With regard to the transfer pricing documentation, the court considers the following. Although the documentation referred to in Section 8b(3) of the 1969 Vpb Act was not available at the time the defendant requested it, the claimant has remedied this defect by again preparing records to substantiate the conditions surrounding the facilities. In the court’s opinion, the defendant did not make it plausible with what it argued that the claimant’s administration contains such defects and shortcomings that it cannot serve as a basis for the profit calculation that must lead to the conclusion that the claimant did not file the required return.10 The court also took into account that the parliamentary history of Section 8b of the 1969 Vpb Act noted that the documentation requirement of Section 8b(3) of the 1969 Vpb Act relates to the availability of information necessary to assess whether the prices and conditions(transfer prices) used in affiliated relationships qualify as arm’s length. 11 In the court’s opinion, the defendant has not argued sufficiently to conclude that the transfer-pricing data further collected, prepared and documented by the claimant and the documents that were present at [company name 2] and [company name 3] on the determination of the credit ratings are so deficient that the claimant has not complied with the obligations of Section 8b(3) of the 1969 Income Tax Act. The fact that source documents for the period, in which the transactions were entered into, have not been preserved and the defendant has comments on the data used by the claimant and disagrees with the outcomes of the claimant, do not alter this.” “56. In the court’s view, the defendant was right to make the adjustments in respect of commitment fees on facilities 1 and 3 for the years under review. The defendant was also correct in imposing the 2014/2015, 2015/2016 and 2016/2017 assessments to correct the commitment fees on Facility 7bn. In assessing whether the defendant was justified in making those corrections, the court relied on what [company name 1] and [company name 2] and [company name 3] agreed on civilly. The agreements between [company name 1] and [company name 2] and [company name 3] explicitly distinguish between interest due and commitment fees due. The court therefore rejects the plaintiff’s position that it must be assessed whether the total of the commitment fee and interest costs remained within the margins of Section 8b of the 1969 Vpb Act, and the commitment fee and interest costs should be considered together as an “all-in rate”. That the terms of Facilities 1, 3 and 7bn show similarities with Payment in Kind loans, as claimed by the claimant, does not make it necessary in this case to deviate from what the parties agreed under civil law. Indeed, the defendant has argued, with reasons, that stipulating headroom for the purpose of funding interest that may be credited, if the same facts and circumstances are present, is not usual in the market but it is usual in the market that over interest to be credited, a charge arises only at the time of the maturity of the interest. It is not usual that a charge – in this case in the form of commitment fees – is already due before the due date. This involves a double burden, as interest is also charged on the commitment fee. On the other hand, the plaintiff has not made it plausible that independent third-party parties were willing to agree such terms in similar circumstances, nor has it made its economic reality plausible. The court also took into account that the claimant did not make any calculations, prior to setting the maximum amount and commitment fees. 57. In the court’s view, the defendant was right to make the adjustments in respect of the commitment fees and interest payable thereon in respect of Facility 5. The defendant has made it plausible that such an agreement between independent third parties will not be concluded. The defendant was right to point out the following aspects:” “In the court’s opinion, with what the defendant has put forward and also in view of what the claimant has put forward in response, the defendant has failed to make it plausible that the interest rates agreed by [company name 1] , [company name 2] and [company name 3] regarding facilities 1, 3 and 7bn are not in line with what would have been agreed by independent parties in the ...

Germany vs Z Group, January 2022, Finanzgericht Cologne, Case No 2 V 827/21

Z-Group had been subject to a joint transfer pricing audit by the tax administrations of Belgium, France, Italy, Spain, Austria and Germany in order to examine the appropriateness of the franchise fee charged between the group companies. Z Group filed a complaint where it disputed the German tax administration’s entitlement to cooperate in a coordinated cross-border external tax audit and, in this context, to exchange information with the other tax administrations. Judgement of the Tax Court The Court dismissed the complaint filed by Z Group. Excerpt “118 The defendant does not violate the principle of subsidiarity by agreeing on or conducting a coordinated examination as planned in the present case with Belgium, France, Italy, Spain and Austria. With reference to the findings of the domestic tax audit, the defendant understandably points out that the audit serves to further clarify the facts, which is not possible in this way in Germany, in order to examine the appropriateness of the franchise fee charged between the group companies. Against this background, a coordinated tax audit between Germany and the other states appears to be a suitable and necessary possibility to clarify the facts by way of administrative assistance with regard to the franchise model and the prices applied within the group of companies of the applicants and to assess the possibility of an arm’s length comparison of the remunerations paid. 119 Furthermore, the requirement to exhaust domestic investigation possibilities may be limited in the event of a simultaneous tax audit, in particular since it is also part of the tasks of a tax audit to verify the submission of a taxpayer, to examine factual assertions and to request or inspect documents in this regard in order to carry out a corresponding verification (cf. FG Köln, decisions of 23 May 2017, 2 V 2498/16, EFG 2017, 1322; of 20 October 2017, 2 V 1055/17, EFG 2018, 351). 120 The prerequisites for an external audit in accordance with the provisions of the Fiscal Code are also and precisely in line with this. Pursuant to section 193(1) AO, an external audit is permissible in the case of taxpayers who maintain a commercial or agricultural and forestry business, who are self-employed or who are taxpayers within the meaning of section 147a AO. In the case of taxpayers other than those referred to in section 193(1) AO, an external audit is permissible under the conditions specified in section 193(2) AO. The external audit serves to determine the tax circumstances of a taxpayer (section 194(1) AO). The tax circumstances of other persons may be audited insofar as the taxpayer was or is obliged to pay taxes or to withhold and pay taxes for the account of these persons (section 194, paragraph 1, sentence 4, first half-sentence AO). 121 As follows from the statutory wording in § 193(1) AO, an external audit is permissible, inter alia, in the case of taxpayers who maintain a commercial business, without any further preconditions (cf. BFH rulings of 7 February 2002 IV R 9/01, BStBl. II 2002, 269; of 2 October 1991 X R 89/89, BStBl. II 1992, 220; ruling of 27 July 2001 XI B 133/00, BFH/NV 2001, 1534). For the order of a routine audit of taxpayers covered by section 193(1) AO, it is generally sufficient if the legal basis, i.e. the legal provision governing the audit order, is stated as the reason (cf. BFH ruling of 10 February 1983 IV R 104/79, BStBl. II 1983, 286). The regulation in § 193 (1) AO is based on the idea that the tax circumstances of the named group of persons are in principle subject to examination. In particular, there is no need for a special reason for an audit. This means, above all, that the taxpayer’s tax conduct need not have given reason for suspicion (cf. Schallmoser in Hübschmann/Hepp/Spitaler, § 193 AO marginal no. 42). 122 With regard to the ordering of an external audit, however, limits arise according to the meaning and purpose of the provision insofar as it is at the discretion of the tax authority whether and with whom an external audit is actually carried out. Thus, an external audit is inadmissible if the audit findings cannot be used for tax purposes from any conceivable point of view, for example because the tax assessment period has already expired (cf. BFH ruling of 10 April 2003 IV R 30/01, BFH/NV 2003, 1234) or if the lack of possibilities for use is undoubtedly established for other reasons. Likewise inadmissible are external audits which are investigations “out of the blue”, i.e. if there are no indications of a possible tax liability (cf. Intemann in Pahlke/König, § 193 AO marginal no. 35; on this also BFH judgements of 26 July 2007 VI R 68/04, BStBl. II 2009, 338; of 17 November 1992 VIII R 25/89, BStBl. II 1993, 146 in each case on the justification of audit orders under § 193, paragraph 2, no. 2 AO). On the other hand, an external audit is not already unlawful because the tax claims to be audited may be statute-barred (cf. BFH decision of 3 March 2006 IV B 39/04, BFH/NV 2006, 1250; Intemann in Pahlke/König, § 193 AO marginal no. 26). 123 According to these standards, an external audit of the applicants as well as the sister companies of the Z group resident in the other states involved would in principle be permissible without any further preconditions, since these companies maintain a commercial enterprise. 124 e) Furthermore, there are no legal reservations with regard to the fact that the defendant has so far – due to the present application for a temporary injunction – participated purely “passively” in the coordinated audit. There are no indications that the defendant has already participated in the exchange of information and disclosed information available to him or the German tax authorities. The mere passive receipt of information does not constitute a violation of the protection of tax secrecy within the meaning of § 30 AO. Tax secrecy can only be ...

Latvia vs SIA Severstal Distribution, December 2021, Administrative Court of Appeal, Case No A420576312, SKA-314/2021

The Revenue Service had audited Severstal Distribution for FY 2008-2009 and found that the company had purchased metal products from related companies at prices above market prices. An assessment was issued where reported losses for 2009 were reduced. During the audit, Severstal Distribution indicated to the tax authorities that it had used the transactional net margin method to determine the price of its controlled transactions. However, later the company also stated that it had used the CUP method (quated steel prices from the SBB database). Severstal Distribution Ltd filed an appeal with the Administrative Regional Court. In a decision of 2019 the appeal was dismissed and the assessment of additional income upheld. An appeal was then filed by Severstal Distribution Ltd with the Administrative Court of Appeal. The issue to be examined by the Administrative Court of Appeal was whether the Revenue Service correctly determined Severstal Distribution’s income subject to corporate income tax by applying the arm’s length provisions in Section 12(2)(3) of the Law on Corporate Income Tax – i.e. whether Severstal Distribution purchased goods from related companies at above-market prices. Judgement of the Administrative Court of Appeal The Court dismissed the appeal of Severstal Distribution and upheld the decision from the Regional Court. Excerpts “Tax collection is based on the taxpayer’s cooperation with the tax administration. The tax administration can only determine the correct tax liability if it is aware of all the factual circumstances on which such liability is based. Such facts are best available and known to the taxpayer himself and it is therefore in the taxpayer’s own interest not to delay the examination of the tax liability and to provide the tax administration with the relevant information and explanations. The taxpayer’s duty to cooperate is laid down in the form of a legal obligation in paragraphs 5, 6, 10, 11 and 32.2 of the first part of Article 15 of the Law on Taxes and Duties.” “In summary, the Senate considers that there is no particular order in the choice of methods, but that the most appropriate method should be applied in each case on the basis of the circumstances of the individual case. Moreover, the choice of method is primarily the taxpayer’s responsibility, whereas the tax authorities must respect that choice as far as possible during the tax examination.” “In the light of the above, the Court was wrong to conclude that aggregated data could not be used in the application of the comparable uncontrolled price method. At the same time, as already pointed out, they must also be sufficiently comparable and meet the criteria laid down by law, bearing in mind in particular that such aggregates are not, for the most part, produced for transfer pricing purposes.” “The comparable uncontrolled price method compares a controlled transaction with a similar uncontrolled transaction to provide a direct estimate of the price that the parties could have agreed if they had used a market alternative to the controlled transaction. However, the method becomes a less reliable proxy for arm’s length transactions if all the characteristics of the uncontrolled transaction that significantly affect the prices charged between arm’s length parties are not comparable. The application of the method is limited because it is practically difficult to find an uncontrolled transaction whose differences from a related party transaction would not affect the price. Any minor inaccuracy may lead to a mispricing…” Click here for English translation Click here for other translation SKA-314-2021 (1) ORG ...

Airbnb under examination by the Internal Revenue Service for 2013 and 2016

Airbnb is under examination by the Internal Revenue Service for its income taxes in 2013 and 2016, according to the company’s December 2020 SEC filing. According to the filing a draft notice of adjustment from the IRS proposes that the company owes an additional $1.35 billion in taxes plus interest and penalties for the years in question. The assessment is related to valuation of its intellectual property that was transferred to a subsidiary in FY 2013. Airbnb then had had two subsidiaries outside the United States – Airbnb International Holdings Ltd and Airbnb International Unlimited Co – both resident for tax purposes in tax haven Jersey. The company plans to fight a potential adjustment. “We disagree with the proposed adjustment and intend to vigorously contest it,” “If the IRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material adverse impact on our financial position and results of operations, and any assessment of additional tax could require a significant cash payment and have a material adverse impact on our cash flow,”  Finally, it appears that the company is now in the process of moving its intellectual property back to the United States. Excerpts From Airbnb’s SEC filings “We are currently under examination for income taxes by the Internal Revenue Service (“IRSâ€) for the years 2013 and 2016. We are continuing to respond to inquiries related to these examinations. While we have not yet received a Revenue Agent’s Report generally issued at the conclusion of an IRS examination, in September 2020, we received a Draft Notice of Proposed Adjustment from the IRS for the 2013 tax year relating to the valuation of our international intellectual property which was sold to a subsidiary in 2013. The notice proposes an increase to our U.S. taxable income that could result in additional income tax expense and cash tax liability of $1.35 billion, plus penalties and interest, which exceeds our current reserve recorded in our consolidated financial statements by more than $1.0 billion. A formal Notice of Proposed Adjustment is expected from the IRS by the end of 2020. Following formal receipt of the Revenue Agent’s adjustment which is anticipated late in the fourth quarter of 2020, we intend to vigorously contest the IRS’s proposed adjustment, including through all administrative and, if necessary, judicial remedies which may include: entering into administrative settlement discussions with the IRS Independent Office of Appeals (“IRS Appealsâ€) in 2021, and if necessary petitioning the U.S. Tax Court (“Tax Courtâ€) for redetermination if an acceptable outcome cannot be reached with IRS Appeals, and finally, and if necessary, appealing the Tax Court’s decision to the appropriate appellate court. If the IRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material adverse impact on our financial position and results of operations, and any assessment of additional tax could require a significant cash payment and have a material adverse impact on our cash flow.“ “We may have exposure to greater than anticipated income tax liabilities. In September 2020, we received a Draft Notice of Proposed Adjustment from the IRS for the 2013 tax year proposing an increase to our U.S. taxable income that could result in additional income tax expense and cash tax liability of $1.35 billion, plus penalties and interest, which exceeds our current reserve recorded in our consolidated financial statements by more than $1.0 billion.“ “The Company is in various stages of examination in connection with its ongoing tax audits globally, and it is difficult to determine when these examinations will be settled. The Company believes that an adequate provision has been recorded for any adjustments that may result from tax audits. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company may be required to record an adjustment to the provision for income taxes in the period such resolution occurs. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of the statute of limitations. However, an estimate of the range of the reasonably possible change in the next twelve months cannot be made.“ “On July 27, 2015, the United States Tax Court (the “Tax Courtâ€) issued an opinion in Altera Corp. v. Commissioner (the “Tax Court Opinionâ€), which concluded that related parties in a cost sharing arrangement are not required to share expenses related to stock-based compensation. The Tax Court Opinion was appealed by the Commissioner to the Ninth Circuit Court of Appeals (the “Ninth Circuitâ€). On June 7, 2019, the Ninth Circuit issued an opinion (the “Ninth Circuit Opinionâ€) that reversed the Tax Court Opinion. On July 22, 2019, Altera Corp. filed a petition for a rehearing before the full Ninth Circuit. On November 12, 2019, the Ninth Circuit denied Altera Corp.’s petition for rehearing its case. The Company accordingly recognized tax expense of $26.6 million related to changes in uncertain tax positions during the year ended December 31, 2019. The Company will continue to monitor future developments in this case to determine if there will be further impacts to its consolidated financial statements.” “The Ninth Circuit Court of Appeals issued a decision in Altera Corp. v. Commissioner in June of 2019 regarding the treatment of stock-based compensation expense in a cost sharing arrangement, which had a material effect on our tax obligations and effective tax rate for the quarter in which the decision was issued.” “The Company is in the process of providing documentation to the Internal Revenue Service in connection with an examination of the Company’s 2013 income taxes with the primary issue under examination being the valuation of the ...

A COORDINATED APPROACH TO TRANSFER PRICING CONTROLS WITHIN THE EU (2018)

“Think international – act international – audit international“. Multinational enterprises (MNEs) primarily engage in cross-border activities and invest internationally while the competences of national tax jurisdictions remain limited to the national territory as a matter of principle. To face up to the challenges of globalisation and address the business models that have been developed to match the new economic realities, tax administrations need to strengthen their cooperation and be open to experiment with new forms of collaboration that deepen the exchange of information. In this context, a coordinated approach to transfer pricing controls would contribute to a better functioning of the internal market on two fronts: it would offer tax administrations a transparent and efficient tool to facilitate the allocation of taxing rights and also prevent the occurrence of double taxation and double non taxation. In the EU legal order there is a framework that provides Member States’ tax administrations with the tools for cross-border/administrative cooperation. It is important to use all available tools for administrative cooperation in the best possible way, including bi- and multilateral transfer pricing controls and to consider their improvement where necessary1. In the Report on Transfer Pricing Risk Management of the Joint Transfer Pricing Forum (JTPF), it is recommended to take simultaneous controls or joint audits into consideration in appropriate cases while it is recognized that especially at the beginning of this practice, the capacity and experience of one or both tax administrations involved may be limited.2 For this reason the current work programme of the JTPF3 includes the assignment of summarizing Member States’ practices and experiences in the context of simultaneous controls and joint audits as well as providing practical guidance on how to cooperate bi- or multilaterally in transfer pricing controls. OBJECTIVE  The objective of this paper is to establish a coordinated approach to transfer pricing controls within the EU, in order to avoid double taxation or non-taxation. Furthermore, it serves as a starting point for analysing which tools, and how, can be improved based on the current EU legal framework. PART 1 THE FRAMEWORK FOR A COOPERATIVE APPROACH TO TRANSFER PRICING CONTROLS IN THE EU 1.1. PRINCIPLES A fair corporate tax system ensures that profits are allocated where the value is generated and that these profits are not taxed twice. Transfer pricing rules based on the arm’s length principle serve to allocate income earned by a multinational enterprise among those countries in which the company does business. Transfer pricing is highly fact-specific as, generally, the price of each transaction needs to be determined by reference to a comparable transaction. This determination requires the exercise of judgement on the part of both the tax administration and the taxpayer and a review of the transfer pricing methods at several points in the process of a comparability analysis4. Therefore, transfer pricing is potentially more subjective than other areas of direct and indirect taxation and, for this reason, sensitive to disputes. Given this nature of transfer pricing, it is key to develop administrative cooperation at two levels: (i) between the relevant tax administrations; and (ii) between tax administrations and taxpayers. When the tax authorities of a Member State decide to audit an MNE with taxable activity that extends beyond their taxing jurisdiction (and possibly, beyond the EU), close and transparent cooperation between the relevant Member States’ tax authorities throughout the auditing process could decisively contribute to a successful audit, i.e. an audit that is effective (concluding the review of a case without the need for further procedural steps, e.g. a MAP) and efficient (achieving this aim with a minimum of resources and time). To this end, tax administrations are encouraged to exchange all foreseeably relevant information in a timely manner and to cooperate for building a common analysis and understanding of the same facts and circumstances of a specific case. In fact, even a common risk assessment and analysis of the functions, risks and assets related to the cross-border transactions under scrutiny should facilitate a common interpretation of the arm’s length principle. “Recommendation 1: Exchange of information and cooperation between tax administrations should be used where they are expected to assist in the identification of transfer pricing risks and to contribute to an efficient audit.†Taking into consideration the recommendations that feature in the JTPF report on transfer pricing risk management and the principles laid out in the Guidelines for a Model European Taxpayers’ Code5, the taxpayer, without prejudice to national provisions, should have the right to be kept up-to- date with the milestone developments of the audit. At the same time, the taxpayer should be transparent and share – in a timely manner – the relevant information with each of the tax administrations involved in the bi-or multilateral control. “Recommendation 2: It is preferable to take a cooperative approach based on dialogue and trust. A cooperative approach  is inter alia characterised by communication between tax administrations and taxpayers. The taxpayer should be actively involved in the actual auditing activities and have the right to communicate and be heard in accordance with the national provisions. The taxpayer should be timely informed of the steps taken by the tax administrations during the audit.6 At the same time, the taxpayer should be transparent and share in a timely manner the relevant information with each of the tax administrations involved.†1.2 CURRENT CONCEPTS AND TERMS Various terms are used in the practice of tax administrations and in tax literature to refer to tax- related ‘examinations’ with a cross-border operational dimension. Presences in administrative offices and participation in administrative enquiries (PAOE) According to article 11 of Directive 2011/16/EU (the DAC), PAOEs consist in one Member State requesting to be present in another Member States’ offices and/or during administrative enquiries carried out in the territory of the requested Member State. In addition to being present, Member States’ officials may interview individuals and examine records during administrative enquiries – but under the condition that this is permitted under the legislation of the requested Member State. Simultaneous Controls According to article 12 of ...