Following an audit of Beta Healthcare International Limited, a Kenyan subsidiary in the Aspen Healthcare Group, the tax authorities issued a notice of additional taxable income relating to controlled transactions, in which they had determined the arm’s length price for controlled transactions using the CUP method instead of the TNM-method as applied by the company. Beta Healthcare International Limited appealed to the Tax Appeals Tribunal, arguing that the tax authorities had failed in its characterisation of the company, failed to consider the comparability factors of the transactions and misapplied the transfer pricing guidelines. Decision of the Tax Appeals Tribunal The Tribunal dismissed the appeal and ruled in favour of the tax authorities. Excerpts “(…) 134. The Tribunal reviewed the parties’ pleadings and established that the Appellant attached the disputed information to its pleadings. However, the Respondent, both in its pleadings and orally at the hearing, urged that the information was never provided to it. Further, while the Appellant stated that it submitted the disputed information on 8th March, 2022, the Tribunal did not sight any document to confirm this averment. 135. In regard to selection of an appropriate Transfer Pricing method, Paragraph 2.1 of the OECD Guidelines provides that the selection of the transfer pricing method should consider the following; a. the respective strengths and weaknesses of the OECD recognised methods; b. the appropriateness of the method considered in view of the nature of the controlled transaction, determined through a functional analysis; c. the availability of reliable information (on uncontrolled comparables) needed to apply the selected method and/or other methods; and d. the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. 136. Additionally, Paragraph 3.20 of the OECD Guidelines states that, “ In order to select and apply the most appropriate transfer pricing method to the circumstances of the case, information is needed on the comparability factors in relation to the controlled transaction under review and in particular on the functions, assets and risks of all the parties to the controlled transaction, including the foreign associated enterprise(s).” 137. Paragraph 1.35 and 1.36 of the OECD Guidelines state as follows regarding comparable factors for the establishment of an appropriate Transfer Pricing method: “ 1.35. …Before making comparisons with uncontrolled transactions, it is therefore vital to identify the economically relevant characteristics of the commercial or financial relations as expressed in the controlled transaction. 1.36 The economically relevant characteristics or comparability factors that need to be identified in the commercial or financial relations between the associated enterprises in order to accurately delineate the actual transaction can be broadly categorised as follows: i. The contractual terms of the transaction; ii. The functions performed by each of the parties to the transaction, taking into account assets used and risks assumed, including how those functions relate to the wider generation of value by the MNE group to which the parties belong, the circumstances surrounding the transaction, and industry practices; iii. The characteristics of property transferred, or services provided; iv. The economic circumstances of the parties and of the market in which the parties operate; and v. The business strategies pursued by the parties.” 138. The Tribunal further notes that Paragraph 2.20 of the OECD Guidelines provides as follows in regard to application of the CUP method of Transfer Pricing: “ For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For commodities, the economically relevant characteristics include, among others, the physical features and quality of the commodity; the contractual terms of the controlled transaction, such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm’s length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines.” (Emphasis ours) 139. Separately, Paragraph 2.64 of the OECD Guidelines provide as follows regarding the application of the TNMM method: “ The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9 -3.12). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net profit indicator of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9 -3.12) should ideally be established by reference to the net profit indicator that the same taxpayer earns in comparable uncontrolled transactions, i.e. by reference to “internal comparables” (see paragraphs 3.27-3.28). Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise (“external comparables”) may serve as a guide (see paragraphs 3.29-3.35) ...

In TC opinion of 18 November 2020 the US Tax Court agreed with the US tax authorities (IRS) that Coca-Cola’s US-based income should be increased by $9 billion in a dispute over royalties from its foreign-based licensees. The principal holding was that the Commissioner did not abuse his discretion in reallocating income to Coca-Cola using a “comparable profits method” (TNMM) that treated independent Coca-Cola bottlers as comparable parties. However, one question remained. Coca-Colas’s Brazilian subsidiary paid no actual royalties to Coca-Cola during 2007–2009. Rather, it compensated Coca-Cola for use of its intangibles by paying dividends of $886,823,232. The court held that the Brazilian subsidiary’s arm’s-length royalty obligation for 2007–2009 was actually about $1.768 billion, as determined by the IRS. But the court held that the dividends remitted in place of royalties should be deducted from that sum. This offset reduces the net transfer pricing adjustment to petitioner from the Brazilian supply point to about $882 million. Thus, the issue to be decided is whether this $882 million net transfer-pricing adjustment is barred by Brazilian law. During 2007–2009 Brazil capped the amounts of trademark royalties and technology transfer payments (collectively, royalties) that Brazilian companies could pay to foreign parent companies. Coca Cola contended that Brazilian law blocked the $882 million net transfer-pricing adjustment. IRS contended that the Brazilian legal restriction should be given no effect in determining the arm’s-length transfer price, relying on what is commonly called the “blocked income” regulation (Treas. Reg. § 1.482-1(h)(2)). According to tax authorities the “blocked income” regulation generally provides that foreign legal restrictions will be taken into account for transfer-pricing purposes only if four conditions are met, including the requirement that the restrictions must be “applicable to all similarly situated persons (both controlled and uncontrolled).” Judgement of the tax court The Tax Court sustained the transfer pricing adjustment in full. Excerpts “Allocation of Value Between Grandfathered Intangibles and Those Not Grandfathered Petitioner has shown that eight of TCCC’s trademarks were li-censed to the supply point before November 17, 1985. Those are the only intangibles in commercial use during 2007–2009 that were covered by the grandfather clause. We find that petitioner has failed to carry its burden of proving what portion of the Commissioner’s adjustment is at-tributable to income derived from this (relatively small) subset of the licensed intangibles. And the record does not contain data from which we could make a reliable estimate of that percentage.” “Because the supply point sold concentrate to preordained buyers, it had no occasion to use TCCC’s trademarks for economically significant marketing purposes. By contrast, the bottlers and service companies were much heavier users of TCCC’s trademarks. The bottlers placed those trademarks on every bottle and can they manufactured and on every delivery truck in their fleet. See id. at 264. And the service com-panies, which arranged consumer marketing, continuously exploited the trademarks in television, print, and social media advertising. See id. at 240, 263–64.” “We conclude that all non-trademark IP exploited by the Brazilian supply point was outside the scope of the grandfather clause. The blocked income regulation thus applies to that portion of the transfer-pricing adjustment attributable to exploitation of those intangible as-sets. We further find that this non-trademark IP represented the bulk of the value that the Brazilian supply point derived from use of TCCC’s intangibles generally. Petitioner has supplied no evidence that would enable us to determine, or even to guess, what percentage of the overall value was attributable to the residual intangible assets, i.e., the trademarks.” “In sum, petitioner has failed to satisfy its burden of proof in two major respects. It has offered no evidence that would enable us to determine what portion of the transfer-pricing adjustment is attributable to exploitation of the non-trademark IP, which we have found be the most valuable segment of the intangibles from the Brazilian supply point’s economic perspective. And petitioner has offered insufficient evidence to enable us to determine what portion of the transfer-pricing adjustment is attributable to exploitation of the 8 original core-product trademarks, as opposed to the 60 other core-product trademarks and the entire universe of non-core-product trademarks. Because petitioner has failed to establish what portion of the aggregate transfer-pricing adjustment might be attributable to exploitation of the eight grandfathered trademarks, we have no alternative but to sustain that adjustment in full.” ...

The French company SMAP carries out activities in the area of advertising management and organisation of trade fairs. Following an audit of the company for FY 2008 to 2011 and assessment was issued where deduction of costs for certain intra group “services” had been denied, resulting in additional value added tax, corporate income tax surcharges, apprenticeship tax and business value added tax. The company held that the tax administration had disregarded fiscal procedures, and that the reality of the services – and deductibility of the costs – cannot be disregarded on mere presumptions. Decision of the Court The Appeal of SARL SMAP was rejected by the Court. “Firstly, the administration notes that by virtue of a Lebanese legislative decree n° 46 of 24th June 1983, companies governed by Lebanese law … carrying out their essential activities outside the national territory are considered as offshore companies and as such benefit from a privileged tax regime. In particular, Article 4 of this legislative decree exempts these companies from the tax on the annual profits of joint stock companies. As mentioned in point 6, the activities of APCOM, as they are only covered by the 2004 contracts signed with SMAP SARL, concern administrative and financial services and commercial representation activities for companies not domiciled in Lebanon, and are therefore subject to the provisions of the Legislative Decree No. 46 of 24 June 1983. By merely maintaining that the company APCOM paid taxes in Lebanon, without producing any documents in support of its allegations, the applicant did not usefully contest the elements put forward by the administration. The latter must, therefore, be regarded as establishing that APCOM benefits from a privileged tax regime in Lebanon. It was therefore not required to establish the existence of a link of dependence between the two companies.” “…the claimant has not produced any documents to establish the reality of the services that APCOM performs on behalf of SMAP. Finally, the APCOM supplier account opened in the accounts of SMAP SARL functions as a partner’s current account. A transfer of 25,982 euros to SMAP was also entered there under the heading “loan repayment”, without any explanation being given by the applicant. Under these conditions, the administration must be considered as having produced elements likely to establish that the sums paid by SMAP SARL to APCOM constituted pure generosity granted in an interest other than that of the applicant company.” “…in order to establish the link of dependence between the applicant company and SMAP EXPO SL, the administration relies on the circumstance that the two companies shared the same director. Moreover, it is clear from the terms of the two proposed corrections that the administration also noted that the Spanish company, a sister company to SMAP EXPO S.L., had been the applicant company’s director.” “SARL SMAP, which does not have the material and human resources necessary to carry out its activity of organising trade fairs in Spain, relies on those of the applicant company. In these circumstances, the administration must be considered as establishing the link of dependence between the applicant and SMAP EXPO SL.” “As stated in paragraph 7, there is no evidence to establish the reality of the services which would have been provided by SMAP EXPO SL to SMAP SARL. Moreover, the applicant does not contest the transfer of profits to SMAP EXPO SL.” “It follows from what has just been said in the preceding points that the plea alleging that the administration has disregarded the provisions of Article 57 of the General Tax Code must be dismissed.” “It follows from all of the foregoing that SMAP SARL is not entitled to argue that the Montreuil Administrative Court wrongly rejected its claims in the contested judgment”. Click here for English translation Click here for other translation ...

In 2005 the tax authorities conducted an audit of Alliance One Tobacco T. Ltd and on that basis issued a notices of assessment for FY 2003 and 2004. In 2011 the tax authorities conducted another audit for the years of income 2009 and 2010 and issued an additional assessment. In the assessments, the tax authorities disallowed several corporate tax items relating to capital expenditure, inventory costs, loss of input stock and bad debt written off. Moreover, a significant transfer pricing adjustment was made on the price from Alliance One Tobacco to its sister company Alliance One International AGA. Judgement of the Court of Appeal The court ruled in favour of the tax authorities. “...in view of the reasons we have stated above with respect to the sole ground of appeal, we have to conclude that this appeal is bound to fail.” The court observed that: “In the circumstances, if the intention of the appellant from the outset was to challenge the assessment of the respondent in respect of the disallowed direct sales costs based on the issue of non-compliance of the respondent with section 97 (c) of the ITA, she would have indicated so directly in her statement of appeal at the TRAB and later at the TRAT to enable them to deliberate and decide upon that legal question. As that was not done and the issue before the TRAB or TRAT remained that of whether there was evidence on actual costs incurred on direct sales, the appellant was duty bound to prove through cogent evidence (supporting invoices) that the disallowance of the said costs was erroneous. Otherwise, we think that the TRAB and the TRAT cannot be blamed as the question which they were called upon to adjudicate required sufficient proof and the burden lied on the appellant as provided under section 18 (b) of the TRAA. In the event, we agree with the learned counsel for the respondent that the TRAT properly confirmed the decision of the TRAB on the issue of disallowance of the direct sales costs as no cogent evidence was tendered by the appellant to the contrary. We do not therefore, think, with respect, that the TRAT wrongly held against the appellant on this point as stated by her learned counsel.” Click here for translation ...