Eni Norge AS was a wholly owned subsidiary of Eni International B.V., a Dutch company. Both companies were part of the Eni Group, in which the Italian company Eni S.p.A was the HQ. Eni Norway had deducted costs related to the purchase of “technical services” from Eni S.p.A. Following an audit, the tax authorities reduced these deductions pursuant to section 13-1 of the Taxation Act (arm’s length provision). This meant that Eni Norway’s income was increased by NOK 32,673,457 in FY 2015 and NOK 16,752,728 in FY 2016. The tax assessment issued by the tax authorities was later confirmed by a decision of the Petroleum Tax Appeal Board. The Appeals Board considered that there were price deviations between the intra-group hourly rates for technical services and the external hourly rates. The price deviations could be due to errors in the cost base and/or a lack of arm’s length in the distribution of costs. There was thus a discretionary right pursuant to section 13-1, first paragraph, of the Tax Act. Eni Norge A/S applied to the District Court for a review of the decision refering to a previous judgement from the Norwegian Supreme Court HR-2020-1130-A (the Shell R&D judgement). Judgement of the District Court The court did not find that the decision of the Appeals Board was based on incorrect facts or application of the law and upheld the decision. Excerpts “The Supreme Court held that the correct approach was to base the assessment on what was actually the cost burden for Norske Shell. Costs covered by others should not be included (paragraph 57). The Court cannot see that this judgement provides guidance for our case, because it concerns a different fact. The Supreme Court assumed that it concerned a case with an agreed cost contribution scheme: 51-52: (51) In the legislative proposal in connection with the addition of section 13-1 fourth paragraph of the Tax Act in 2007, Proposition No. 62 (2006-2007), the Ministry reviewed the content of the OECD Transfer Pricing Guidelines. Section 5.9 of the proposal provides an account of the guidelines relating to cost contribution arrangements (CCA) – referred to in the guidelines as Cost Contribution Arrangements (CCA). The content of such arrangements is described as follows: “A CCA is a contractual framework for sharing the costs and risks associated with the development, production or acquisition of assets, services or rights. The participants seek to obtain an expected benefit through their contributions to the KBO. Under a KBO, each participant will have the right to utilise its interests in the KBO as the actual owner of these, and the participants will thus not be liable to pay royalties or other remuneration to any other party for the utilisation of their interests in the arrangement. The most common KBOs are arrangements for joint development of intangible assets, but KBOs are also established for other purposes.” In my view, it is in good accordance with the arm’s length principle that follows from Section 13-1 of the Tax Act and the OECD Guidelines, when the Complaints Board in its decision has assumed that the relationship between Norske Shell and the group companies involves a cost-sharing arrangement. In this case, there is no transfer of assets for a consideration to be determined on the basis of the commercial principles that would apply to an ordinary sale of goods, services or rights.” The situation in our case concerns a case that the Supreme Court has limited itself to, namely the purchase of services between mother and daughter, which must be considered a transfer of assets for consideration. An ordinary sale has taken place. The service agreement and the individual sales do not involve a cost contribution scheme. Nor did the agreement state that revenues were to be deducted in a cost sharing arrangement, as was the situation in the Shell R&D judgement. The fact that the accounting agreement contains provisions on cost allocation between the licence partners does not change the facts. It concerns the sale of services between two independent parties, Eni S.p.A and Eni Norge. In the assessment, the income shall be determined as if the community of interest had not existed, cf. section 13-1, third paragraph, of the Tax Act. The Court agrees with the reasoning of the majority of the Appeals Board: “In the assessment, the income shall be determined as if the community of interest had not existed, cf. section 13-1 third paragraph of the Tax Act. § Section 13-1, third paragraph. If independent parties would have viewed the transactions in context, it is natural to do so also in controlled transactions. An independent service provider in a similar arrangement would naturally demand payment for all the services provided, regardless of whether the service recipient is subsequently re-invoiced or reimbursed for the costs of some of the services by others. An independent service recipient in such an arrangement would also accept to pay for all the services, but no more than what similar services would cost in the open market. This must also apply to the services that Eni Norge can charge the licence partners under the accounting agreement.” Without it being of decisive importance for the Court’s assessment, the Plaintiff has not been as clear in the administrative proceedings that there is a pure passing on of the service costs to the licence partners as it was during the main hearing. The Court refers to this description by the majority of the Board of Appeal of the charge: (…) As the Court understands the Plaintiff’s response during the proceedings, it confirms that there is not full correspondence between the costs from the purchase of the service from Eni S.p.A and the onward charge. The Plaintiff has at best been very unclear on this point. This supports the Court’s assessment that the transactions must be assessed separately. As stated, this is not decisive for the Court’s conclusion. The Court has no need to problematise the principle that it can only rely on the facts presented by the ...

Maersk Oil and Gas A/S (later TotalEnergies EP Danmark A/S) continued to make operating losses, although the group’s combined oil and gas operations were highly profitable. Following an audit of Maersk Oil, the tax authorities considered that three items did not comply with the arm’s length principle. Maersk Oil incurred all the expenses for preliminary studies of where oil and gas could be found, but the results of these investigations and discoveries were handed over to the newly established subsidiaries free of charge. Licence agreements were signed with Qatar and Algeria for oil extraction. These agreements were entered into with the subsidiaries as contracting parties, but it was Maersk Oil that guaranteed that the subsidiaries could fulfil their obligations and committed to make the required technology and know-how available. Expert assistance (time writing) was provided to the subsidiaries, but these services were remunerated at cost with no profit to Maersk Oil. An assessment was issued where additional taxable income was determined on an aggregated basis as a share of profits from the activities – corresponding to a royalty of approximately 1,7 % of the turnover in the two subsidiaries. In 2018, the Tax Court upheld the decision and Maersk Oil and Gas A/S subsequently appealed to the High Court. In 2022, the High Court held that the subsidiaries in Algeria and Qatar owned the licences for oil extraction, both formally and in fact. In this regard, there was therefore no transaction. Furthermore the explorations studies in question were not completed until the 1990s and Maersk Oil and Gas A/S had not incurred any costs for the subsequent phases of the oil extraction. These studies therefore did not constitute controlled transactions. The Court therefore found no basis for an annual remuneration in the form of royalties or profit shares from the subsidiaries in Algeria and Qatar. On the other hand, the Regional Court found that Maersk Oil and Gas A/S’ so-called performance guarantees for the subsidiaries in Algeria and Qatar were controlled transactions and should therefore be priced at arm’s length. In addition, the Court found that technical and administrative assistance (so-called time writing) to the subsidiaries in Algeria and Qatar at cost was not in line with what could have been obtained if the transactions had been concluded between independent parties. These transactions should therefore also be priced at arm’s length. The High Court referred the cases back to the tax authorities for reconsideration. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court decided in favour of the tax authorities and upheld the original assessment. The court stated that the preliminary exploration phases in connection with oil exploration and performance guarantees and the related know-how had an economic value for the subsidiaries, for which an independent party would require ongoing payment in the form of profit share, royalty or the like. They therefore constituted controlled transactions. Furthermore, the court stated that Maersk Oil and Gas A/S’ delivery of timewriting at cost price was outside the scope of what could have been achieved if the agreement had been entered into at arm’s length. Finally, the transactions were considered to be so closely related that they had to be assessed and priced on an aggregated basis and Maersk Oil and Gas A/S had not provided any basis for overturning the tax authorities’ assessment. Click here for English translation Click here for other translation ...

Whereas it cannot be assumed that the value of pre-existing contributions corresponds to costs, it is sometimes the case that cost could be used as a practical means to measure relative value of current contributions. Where the difference between the value and costs is relatively insignificant, for practical reasons, current contributions of a similar nature may be measured at cost in such cases for services CCAs. However, in other circumstances (for example where contributions provided by the participants vary in nature and include a mixture of service types and/or intangibles or other assets) measuring current contributions at cost is unlikely to provide a reliable basis for determining the value of the relative contributions of participants, and may lead to non-arm’s length results. For development CCAs, the measurement of current contributions at cost (apart from the administrative guidance in paragraph 8.27) will generally not provide a reliable basis for the application of the arm’s length principle. See Examples 1-3 in the Annex to this chapter for illustration of this guidance. Where uncontrolled arrangements are claimed to be comparable to the arrangements between the associated enterprises in the CCA, and those uncontrolled arrangements provide for contributions to be made at cost, it is important to consider the comparability of all of the economically relevant characteristics of the transactions in the broader context of the arrangement, including the impact of any broader arrangement of economically related transactions which may exist between the parties to the uncontrolled transaction, and the sharing of risks. Particular attention should be paid to whether other payments are made in the uncontrolled arrangements; for example, stage payments or compensating contributions may be made in addition to the reimbursement of costs ...

One possible approach is to split the relevant profits based on the division of profits that actually is observed in comparable uncontrolled transactions. Examples of possible sources of information on uncontrolled transactions that might usefully assist the determination of criteria to split the profits, depending on the facts and circumstances of the case, include joint-venture arrangements between independent parties under which profits are shared, such as development projects in the oil and gas industry; pharmaceutical collaborations, co-marketing or co-promotion agreements; arrangements between independent music record labels and music artists; uncontrolled arrangements in the financial services sector, etc ...

It may also be relevant to consider industry practices. For instance, if information is available that independent parties do commonly use profit splitting approaches in similar situations, careful consideration should be given to whether the transactional profit split method may be the most appropriate method for the controlled transactions. Such industry practices may be a pointer to the fact that each party makes unique and valuable contributions, and/or that the parties are highly inter-dependent upon each other. Conversely, if independent parties engaged in comparable transactions are found to make use of other pricing methods, this should also be taken into account in determining the most appropriate transfer pricing method ...

Where two or more parties to the transaction assume a specific risk (as analysed under step 4(i)), and in addition they together control the specific risk and each has the financial capacity to assume their share of the risk, then that assumption of risk should be respected. Examples may include the contractual assumption of development risk under a transaction in which the enterprises agree jointly to bear the costs of creating a new product ...

The Swedish group TELE2, one of Europe’s largest telecommunications operators, had invested in an entity in Kazakhstan, MTS, that was owned via a joint venture together with an external party. Tele2 owned 51% of the Joint venture and MTS was financed by Tele2’s financing entity, Tele2 Treasury AB, which, during 2011-2015, had issued multiple loans to MTS. In September 2015, the currency on the existing internal loans to MTS was changed from dollars to KZT. At the same time a ‘Form of Selection Note’ was signed according to which Tele2 Treasury AB could recall the currency denomination within six months. A new loan agreement denominated in KZT, replacing the existing agreements, was then signed between Tele2 Treasury AB and MTS. In the new agreement the interest rate was also changed from LIBOR + 4.6% to a fixed rate of 11.5%. As a result of these contractual changes to the loan agreements with MTS, Tele2 Treasury AB in its tax filing deducted a total currency loss of SEK 1 840 960 000 million for FY 2015. Following an audit, the Swedish tax authorities issued an assessment where the tax deduction for the full amount had been disallowed. However, during the proceedings at Court the authorities acknowledged deductions for part of the currency loss – SEK 745 196 000 – related to the period between 22 October to 31 December 2015. Hence, at issue before the Court was disallowed deductions of the remaining amount of SEK 1 095 794 000. Decision of the Court The Administrative Court ruled in favor of the tax authorities. Tele2 Treasury AB could not deduct exchange rate losses resulting from the loan arrangements with MTS related to the period between 1 September and 21 October 2015. “…there have been no reasons to assume that MTS has risked bankruptcy, and that the company’s right to interest and repayments would thus have been in jeopardy. Thus, MTS’s financial position cannot be a reason to believe that the currency conversion would have been commercially justified. With regard to commerciality, the court considers it strange that an independent lender would take great risks to secure the financing when the borrower and another external player are to carry out a merger. That the company assumed responsibility for getting MTS financing in place speak instead of that it was the financial interests of the common interests that prompted the decision to conduct currency conversion. The court thus considers that the company cannot be considered to have any significant interest in securing MTS financing. In this context, the company has stated that other companies within the Tele2 Group’s financial interests must be taken into account when assessing the current issue. However, as stated by the Administrative Court above, the relationship with any other companies in a partnership with the trader shall not be taken into account. In this context, the company has referred to the Court of Appeal in Gothenburg’s judgment of 30 September 2011 in case no. 5854-10. However, the Administrative Court cannot, based on the circumstances and reasoning in the judgment, read out any general conclusions that could provide support for the company’s view in the current cases. The Administrative Court therefore considers that the company’s reasons for the conversion cannot be considered to be any other than reasons attributable to the common interest with MTS.” According to a press release from TELE2 the decision will be appealed. Click here for translation ...

In July 2018 Center for Global Development published a study of special transfer pricing practices in the oil sector, and their potential application to hard rock minerals. According to the study, governments of mining countries are vulnerable to investors manipulating transfer prices as a means of avoiding paying taxes. The two main risks are mining companies undercharging for mineral exports sold to related parties, and overpaying for goods and services. The “solution” has been to apply the “arm’s length principle,” which gives governments the right to adjust the value of a related party transaction so that it accords with similar transactions carried out between independent parties. However, it has been apparent for many years that the arm’s length principle, with its reliance on “comparables” that in practice can rarely be found, is an inadequate response. The paper looks at whether special practices in the oil sector that provide materially greater protection against transfer pricing risk could be applied to hard rock minerals. These are (1) administrative pricing, where government, rather than the taxpayer sets the price for crude oil; and (2) the no-profit rule, which prevents joint venture partners from charging a profit mark-up on the cost of providing goods and services to the group. The paper finds that administrative pricing may be effective at curtailing undercharging of specific mineral products, for example, base and precious metals. The no-profit rule is a less obvious “fit” for mining given the lack of joint ventures, and alternative rules to limit cost overstatement may be required instead ...

One possible approach is to split the relevant profits based on the division of profits that actually is observed in comparable uncontrolled transactions. Examples of possible sources of information on uncontrolled transactions that might usefully assist the determination of criteria to split the profits, depending on the facts and circumstances of the case, include joint-venture arrangements between independent parties under which profits are shared, such as development projects in the oil and gas industry; pharmaceutical collaborations, co-marketing or co-promotion agreements; arrangements between independent music record labels and music artists; uncontrolled arrangements in the financial services sector, etc ...

It may also be relevant to consider industry practices. For instance, if information is available that independent parties do commonly use profit splitting approaches in similar situations, careful consideration should be given to whether the transactional profit split method may be the most appropriate method for the controlled transactions. Such industry practices may be a pointer to the fact that each party makes unique and valuable contributions, and/or that the parties are highly inter-dependent upon each other. Conversely, if independent parties engaged in comparable transactions are found to make use of other pricing methods, this should also be taken into account in determining the most appropriate transfer pricing method ...

Whereas it cannot be assumed that the value of pre-existing contributions corresponds to costs, it is sometimes the case that cost could be used as a practical means to measure relative value of current contributions. Where the difference between the value and costs is relatively insignificant, for practical reasons, current contributions of a similar nature may be measured at cost in such cases for services CCAs. However, in other circumstances (for example where contributions provided by the participants vary in nature and include a mixture of service types and/or intangibles or other assets) measuring current contributions at cost is unlikely to provide a reliable basis for determining the value of the relative contributions of participants, and may lead to non-arm’s length results. For development CCAs, the measurement of current contributions at cost (apart from the administrative guidance in paragraph 8.27) will generally not provide a reliable basis for the application of the arm’s length principle. See Examples 1-3 in the Annex to this chapter for illustration of this guidance. Where uncontrolled arrangements are claimed to be comparable to the arrangements between the associated enterprises in the CCA, and those uncontrolled arrangements provide for contributions to be made at cost, it is important to consider the comparability of all of the economically relevant characteristics of the transactions in the broader context of the arrangement, including the impact of any broader arrangement of economically related transactions which may exist between the parties to the uncontrolled transaction, and the sharing of risks. Particular attention should be paid to whether other payments are made in the uncontrolled arrangements; for example, stage payments or compensating contributions may be made in addition to the reimbursement of costs ...

Where two or more parties to the transaction assume a specific risk (as analysed under step 4(i)), and in addition they together control the specific risk and each has the financial capacity to assume their share of the risk, then that assumption of risk should be respected. Examples may include the contractual assumption of development risk under a transaction in which the enterprises agree jointly to bear the costs of creating a new product ...