Tag: Legal status of TPG

Switzerland vs “A AG”, September 2023, Federal Administrative Court, Case No A-4976/2022

A Swiss company, A AG, paid two related parties, B AG and C AG, for services in the financial years 2015 and 2016. These services had been priced using the internal CUP method based on the pricing of services provided by B Ltd to unrelated parties. Following an audit, the tax authorities concluded that the payments made by A AG for the intra-group services were above the arm’s length price and issued a notice of assessment where the price was instead determined using the cost-plus method. According to the tax authorities, the CUP method could not be applied due to a lack of reliable data. Following an appeal the court of first instance ruled mostly in favor of the tax authorities. A AG then appealed to the Federal Administrative Court. Decision of the Court The Federal Administrative Court ruled in favour of A AG. According to the Court, the CUP method is preferred to other methods and other transfer pricing methods should not be applied in cases where data on comparable uncontrolled prices are available. Therefore, the tax authorities had not complied with the OECD transfer pricing guidelines. Click here for English translation Click here for other translation Swiss FAC A-4976-2022_2023-09-04 ...

Poland vs “E S.A.”, June 2023, Provincial Administrative Court, Case No I SA/Po 53/23

In 2010, E S.A. transferred the legal ownership of a trademark to subsidiary S and subsequently entered into an agreement with S for the “licensing of the use of the trademarks”. In 2013, the same trademark was transferred back to E. S.A. As a result of these transactions, E. S.A., between 2010 and 2013, recognised the licence fees paid to S as tax costs, and then, as a result of the re-purchase of those trademarks in 2013 – it again made depreciation write-offs on them, recognising them as tax costs. The tax authority found that E S.A. had reported income lower than what would have been reported had the relationships not existed. E S.A. had  overestimated the tax deductible costs by PLN […] for the depreciation of trademarks, which is a consequence of the overestimation for tax purposes of the initial value of the trademarks repurchased from S – 27 December 2013 – by the amount of PLN […]. The function performed by S between 2010 and 2013 was limited to re-registration of the trademarks with the change of legal ownership. In the tax authority’s view, the expenses incurred by E S.A. for the reverse acquisition of the trademarks did not reflect the transactions that unrelated parties would have entered into, as they do not take into account the functions that E S.A. performed in relation to the trademarks. A tax assessment was issued where – for tax purposes – the transaction had instead been treated as a service contract, where S had provided protection and registration services to E S.A. A complaint was filed by E S.A. Judgement of the Court The Court found that there was no legal basis for re-characterisation in Poland for the years in question and that the issue should instead be resolved by applying the Polish anti-avoidance provision. On that basis, the case was referred back for further consideration. Excerpts “In principle, the tax authorities did not present any argumentation showing from which rules of interpretation they came to the conclusion that such an application of the above-mentioned provisions is legally possible and justified in the present case. It should be noted in this regard that Article 11(1) in fine speaks of the determination of income and tax due without – ‘[…] taking into account the conditions arising from the relationship…’, but does not allow for the substitution of one legal act (a licence agreement) for another act (an agreement for the provision of administration services), and deriving from the latter the legal consequences for the determination of the amount of the tax liability. There should be no doubt in this case that, in fact, the authorities made an unjustified reclassification of the legal act performed in the form of the conclusion of a valid licensing contract, when they concluded (referring to the OECD Guidelines – Annex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4) that the transactions carried out by E. and S. in fact constitute, for the purposes of assessing remuneration, a contract for the provision of trademark administration services and the market price in such a case should be determined for administration services. As the applicant rightly argued, such a possibility exists as of 1 January 2019, since Article 11c(4) uses the expression – “[…] without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction appropriate to the controlled transaction”. This is what is meant by the so-called recharacterisation, i.e. the reclassification of the transaction, which is what the tax authorities actually did in the present case. At the same time, the Court does not share the view expressed in the jurisprudence of administrative courts, referring to the content of the justification of the draft amending act, according to which, the solutions introduced in 2019 were of a clarifying rather than normative nature (cf. the judgment of the WSA in Rzeszów of 20 October 2022, I SA/Rz 434/22). The applicant rightly argues in this regard that the new regulation is undoubtedly law-making in nature and that the provisions in force until the end of 2018 did not give the tax authorities such powers. It is necessary to agree with the view expressed in the literature that a linguistic interpretation of Article 11(1) of the A.p.d.o.p. and Article 11c of the A.p.d.o.p. proves that Article 11c of that Act is a normative novelty, as the concepts and premises it regulates cannot be derived in any way from the wording of Art. 11(1) u.p.d.o.p. (cf. H. LitwiÅ„czuk, Reclassification (non-recognition) of a transaction made between related parties in the light of transfer pricing regulations before and after 1.01.2019, “Tax Review” of 2019, no. 3).” “It follows from the justification of the contested decisions that, in applying Article 11(1) and (4) of the TAX Act to the facts of this case, the tax authorities referred to the OECD Guidelines, inter alia, to the example provided therein (Anex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4), from which, according to the authorities, it follows that the transactions carried out by E. S.A. and S. for the purposes of assessing remuneration constitute, in fact, a contract for the provision of trademark administration services and, in that case, the market price should be determined for such services. In this context, it should be clarified that the OECD Guidelines (as well as other documents of this organisation), in the light of the provisions of Article 87 of the Constitution of the Republic of Poland, do not constitute a source of universally binding law. Neither can they determine in a binding manner the basic structural elements of a tax, since the constitutional legislator in Article 217 of the Basic Law has subjected this sphere exclusively to statutory regulations. Since these guidelines do not constitute a source of law, they can therefore neither lead to an extension of the powers of the tax authorities nor of the ...

Romania vs “A. S.R.L.”, October 2022, High Court, Case No 4859/2022

A. S.R.L. was issued with a notice of additional taxable income based on an audit of the pricing of the company’s controlled transactions. Among other things, the tax authority had found that the company had claimed to have achieved a profitability rate of 10% on the sale of finished products to the related company B., when in fact this was not the case. If the profitability had been 10%, corporate income tax of RON 3,840,000 would have been paid, but A. S.R.L. only paid RON 188,302 in tax. In the assessment, the tax authority had applied the TNMM using the median of the ROTC indicator for comparable independent companies and, on this basis, determined additional income for the period 2012-2016. An appeal was lodged which went to the High Court. Judgement of the Court The Court dismissed the appeal and found largely in favour of the tax authorities. Excerpt (In English) “As stated in Art. 3.43 of the OECD Guidelines the illustrative list of selection criteria presented in the Guidelines is neither limiting nor prescriptive, as long as the whole process of searching for comparables is transparent and verifiable. The transfer pricing file notes that a number of quantitative and qualitative criteria were also applied to the companies initially selected, so that the expert found that the independent companies considered by the complainant company in determining the interquartile range were comparable in terms of the criteria set out in the OECD Guidelines. The High Court finds that the appellant-respondents did not provide a basis for requiring the introduction of the size criterion in the selection of comparable companies. The Appellants’ argument is that the use of a minimum threshold for these criteria (size criteria) would have been relevant in the identification of independent companies for the comparability sample, but they have not indicated what the legal basis is for such an obligation, in order for the Court of Appeal to find a possible misapplication of the law. The algorithm for selecting comparable companies is entirely an economic, factual algorithm which is within the competence of specialists and the soundness of which can be verified only by the court of first instance, and it is not appropriate for the appeal brought on the basis of grounds of appeal to analyse that aspect. The High Court finds that the Court of First Instance did not misapply the law when it found that the independent companies taken into account by the applicant company in determining the interquartile range were comparable in terms of the criteria set out in the OECD Guidelines, and that the fact that the tax authorities had found that the operating income obtained by F. are lower than those of the Appellant was not sufficient to exclude it from the comparability sample, since the tax authorities did not justify the need to introduce a size criterion for maintaining it in the comparability sample for the period 2012-2016. At the same time, however, since the expert’s verification revealed situations in which A. did not fall within the interquartile range calculated for independent companies with the same functional profile, it was necessary to adjust the company’s income, which was such as to render the claim only partially unlawful. As regards the criticism that the tax inspection authorities found that the company claimed to have achieved a 10% profitability rate from the sale of finished products to the affiliated company B., but in reality this profitability rate did not exist in the financial results of the respondent, the first court took into account the fact that, in the light of the provisions of Articles 3.62 and 3.76 of the OECD Guidelines, the expert identified in the transfer pricing file the choice and justification of the transfer pricing calculation method and the data used, which is as follows: “7.3.2 Application of the cost-plus method to the operating profit/net margin method.” Article 3.62 of the 2010 OECD Guidelines states, “In determining this point, if the range contains relatively equal and highly reliable results, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability flaws remain as discussed in paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (e.g. median, principal or weighted averages, etc., depending on the specific characteristics of the data set), in order to minimise the risk of error due to remaining unknown or unquantifiable comparability flaws.” Art. 3.76 of the OECD Guidelines states, “To obtain a complete understanding of the facts and circumstances surrounding an audited transaction, it may generally be useful to examine data from both the year under review and previous years. Analysis of such information could reveal facts that may have influenced (or should have influenced) transfer pricing. For example, the use of prior years’ data will show whether the taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of certain economic conditions in a prior year that resulted in higher costs in the following year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis can be particularly useful when applying a transactional projection method. See paragraph 1.72 on the usefulness of multi-yearly data in examining loss statements. Multi-year data can improve understanding of long-term arrangements.” Following the analysis of the transfer pricing file and the chapters of the 2010 OECD Guidelines mentioned above, the expert concludes that the multi-year weighted average of the profit indicator determined in the transfer pricing file over the period 2012-2016 for comparable independent companies is a viable calculation option as set out in the OECD Guidelines, but not fully justifiable in this case. As regards the request to the expert to verify whether, in the light of the OECD Guidelines, the adjustment is made to the multi-year average of the range analysed or to the annual median, it was held that, in view of the provisions of Chapters A.7 ...

Poland vs “H. LVAS Sp. z oo”, September 2022, Administrative Court, Case No I SA / Go 234/22

“H. LVAS Sp. z oo” had deducted expenses related to intra-group services in its taxable income. The services had been provided by its German parent company, H. GmbH. The services (supervision and management support, coordination of projects, support in accounting, controlling, IT and personnel) had been classified by the group as low value-added services. Following a inspection, the tax authority issued an assessment where these deductions had been denied resulting in additional taxable income. An appeal was filed by H with the Administrative Court. Judgement of the Administrative Court The Court found that the assessment issued by the tax authorities was incorrect and remanded the case for further considerations. Excerpts “Inaccuracies or incompleteness of documentation, and in particular its absence, may result in the necessity to estimate income (cf. the judgments of the Supreme Administrative Court of 22 October 2014, II FSK 2494/12 and of 7 February 2018, II FSK 3644/15). The court notes that the company – as is evident from the content of the decision of the appellate authority – did not present documentation that would detail the provisions of the agreement with regard to the specific services provided to the company and to be settled by the disputed invoice. It was stated that, as it was not clear from the evidence which specific services were subject to billing, to what extent and in what amount their value was determined, this prevented the tax authority from examining whether they had been valued with the market price (k.14 of the DIAS decision). At the same time, the authorities did not deny that the services had been provided. Therefore, in this situation – in the opinion of the Court – it was wrong for the authorities to exclude the disputed expenses in their entirety from the tax deductible costs. The provisions of Art. 9a of the CIT Act impose on the taxpayer the burden of proof in the material sense, understood as the obligation to indicate specific information proving that transactions concluded by the taxpayer with related parties, resulting in payment to such parties, are of a market nature. The tax documentation, the elements of which are specified in Article 9a of the Corporate Income Tax Act, is the basic source of evidence containing information making it possible to analyse the essence of economic activities and to assess them, indicating whether the remuneration in a transaction concluded between related entities was set at a market level, i.e. does not differ from the terms and conditions that would be set between independent entities. The consequence of questioning by the tax authority of the correctness of tax documentation, which the taxpayer was obliged to keep pursuant to Article 9a of the CIT Act, is not, therefore, the automatic exclusion from tax deductible costs of the expenditure incurred by the taxpayer as payment for the performance of an intangible service, but the undermining of the presumption that the price actually paid for that service is a market price (cf. the judgment of the WSA in Åódź of 17 September 2020, I SA/Åd 160/20).” “However, by excluding the expense from tax deductible costs due to the lack of documentation and failing to undertake an assessment, the authorities misinterpreted Article 15(1) in conjunction with Article 9a and Article 11 of the CIT Act and § 22a of the Transfer Pricing Ordinance and – as already determined by the NSA in its judgment of 16 March 2022, case file No. II FSK 1643/19 – breached Article 122, Article 187 § 1 and Article 191 of the Tax Ordinance by failing to pursue the substantive truth.” “…The relevant calculations presented by the company and referred to in the justification of the aforementioned judgment may therefore – in the NSA’s view – constitute the starting point for considerations concerning the application of the institution of assessing the income of related parties. At the same time, the authority should bear in mind that in the context of the case in question, it is obliged to apply the legal norms provided for in Article 122, Article 180, Article 187 § 1 and also Article 191 of the Tax Ordinance.” Click here for English Translation Click here for other translation Poland vs LVAS - I SA_Go 234_22 z 2022-09-08 ORG ...

Romania vs “A. Median S.R.L.”, May 2022, High Court, Case No 2946/2022

In this case “A. Median S.R.L.” had appealed a decision of the court of first instance where the income had been determined to the median value. According to the company the median is not the only value corresponding to the market value, when both the lower limit and the upper limit of the range of comparison in turn reflect the market value of the goods or services supplied. The provisions of Article 2.7 of the Guidelines were relied on in that regard. “…the assessment must be made in a manner which does not contravene Article 2.7 of the OECD Guidelines, that is to say, does not lead to overtaxation. However, given that the court of first instance assumed that the only value which may be taken into account in determining the transfer price is the median value, any other value within the margin established is excluded, which is contrary to the Tax Code and the OECD Guidelines.” The Tax authorities requested that the appeal be dismissed as unfounded. In its grounds, it states that the provisions of the Code do not reveal the priority applicability of the rules set out in the OECD Guidelines, but highlight the fact that, depending on the circumstances of the case, the relevant guidelines which the Guidelines develop are taken into account. The Guide is a practical tool and its incorporation into national legislation has been left to the discretion of the States. Although Romania is not a member of the OECD, there has been concern to align with international standards in this area. However, it should be borne in mind that the provisions of the Guide can only be invoked domestically if they are incorporated into national legislation. Judgement of Court The Court dismissed the appeal of “A. Median S.R.L.” and decided in favor of the tax authorities. “Having analysed the documents and the case-file and the judgment under appeal in the light of the grounds for annulment, the High Court finds that the appeal brought by the applicant A. S.R.L. is unfounded….” Excerpts (Unofficial English translation) “The Court of First Instance correctly held that the provisions of the Order, which state that the adjustment/estimation of transfer prices is to take place at the median value of the comparison range, fully correspond to the provisions of the Tax Code. Compliance with the market price in transactions between related persons is verified on the basis of the transfer pricing file and involves an analysis under conditions of comparability of controlled transactions in relation to uncontrolled ones, using the most appropriate method among those provided for in Article 11(1)(b) of the Code. (2) of the Tax Code. The result of the analysis is reflected in a range of values/range of values with relatively equal relevance. If the prices used in the relationship between the affiliates fall within this range, the provisions of the Tax Code relating to the adjustment do not apply. Adjustment occurs when the prices used by the affiliates do not fall within the range of comparison and that adjustment, as provided for in the rule challenged by the applicant, takes place at the median value of the range of comparison. The appellant-claimant submits that any value of the comparison range, that is to say not only the median value but also the lower quartile as well as the upper quartile of the comparison range, corresponds to the market value, so that the norming of the adjustment to the median value is unlawful. The High Court finds that the claims of the appellant-appellant are unfounded since the median value of the comparison range best corresponds to the requirement to reflect market value. The appellant criticises, in fact, the failure of the secondary legislature to adopt the rule of adjustment to any value of the comparison range which would be more favourable to the affiliated person concerned by the transfer pricing verification. That does not, however, constitute, in relation to the higher-ranking legislative framework, a criticism of the unlawfulness of the lower-ranking rules under challenge. Transfer pricing is not an exact science, as the OECD Guidelines also point out. There is flexibility in terms of the methods used for comparison, and in terms of assessing the results by reference to a range of values rather than a fixed point. However, when verified prices fall outside the range of comparison, the manner of adjustment to reflect market value is within the discretion of the secondary legislator. And the solution chosen by the secondary judge – adjusting to the median value of the comparison range – is the one that best meets the imperative of reflecting market value and the imperative of uniform and equal application of the tax law. The exercise of this role by the national tax administration is also recognised by the OECD Guidelines, paragraphs 3.61 and 3.62. Moreover, the very recommendations in the OECD Guidelines referred to above are to the effect that the point within the range at which the adjustment takes place should be the median value if there are some comparability flaws which cannot be identified and/or quantified. The applicant’s references to paragraph 2.7 of the OECD Guidelines were correctly dismissed by the court. Those provisions contain recommendations applicable at the stage of carrying out the comparability analysis, which ends with the establishment of the comparability range. Paragraph 2.7 refers to profit-based methods of comparison and not to the adjustment operation. As such, not only at the level of the legality analysis, but not even at the level of argument, the reference to point 2.7 of the Guidelines is irrelevant and does not support the appellant-claimant’s contention that the choice of the median adjustment solution could lead to overtaxation.” “Referring to paragraphs 3.57 and 3.62 of the OECD Guidelines, the appellant submits that the central tendency of the market is not a point, but a range, namely the range of comparison, from the lower quartile to the upper quartile, and that the Guidelines leave the possibility of adjustment to any ...

Chile vs Avery Dennison Chile S.A., May 2022, Court of Appeal, Case N° Rol: 99-2021

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” An appeal was then filed by the tax authorities. Judgement of the Court of Appeal The Court upheld the decision of the Tax Tribunal and set aside the assessment issued by the tax authorities. Excerpts “(…) Fourth: That the OECD regulations – while article 38 of the LIR was in force – should be understood as a guide with indications or suggestions for determining prices assigned between related parties with respect to those charged between independent parties. The aim is to eliminate distortions that may arise between companies with common ownership and to respect market rules. Notwithstanding the above recognition, Article 38 of the LIR regulated transfer prices and even though its normative content was minimal and insufficient to provide an adequate response on the matter, its text must be followed for the purposes of resolving the conflict in question, especially if one considers that the third paragraph of the provision states that when prices between related companies are not in line with the values charged between independent companies for similar transactions, “the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the transaction, or the production costs plus a reasonable profit margin. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also consider the resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies”. The following paragraph adds that if the company does not carry out the same type of operations with independent companies, the Regional Directorate “may challenge the prices based on the values of the respective products or services on the international market (…) for this purpose (…) it shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information”. It can be inferred from the transcribed rule that the use of external comparables is only authorised if the company does not carry out any type of transaction of goods and services with independent companies; that the challenge must be well-founded; and that the taxpayer and the SII are free to use the method that seems most appropriate to them as long as the legal requirements are met. It is also relevant to note that the domestic regulations at that date did not contemplate all the methods included in the OECD guidelines and it is inappropriate, under article 38 of the LIR, to resort directly to such guidelines in respect of situations not provided for in the domestic regulations, i.e., in relation to methods not included in the aforementioned provision. An interpretation contrary to the above would infringe the principle of legality of taxes or legal reserve, according to which only the law can impose, eliminate, reduce or condone taxes of any kind or nature, establish exemptions or modify existing ones and determine their form, proportionality or progress. Fifth: That the contested act shows that the method used by the SII for the entire period under review, business year 2012, corresponds to the so-called “Transactional Net Margin Method” for marketing operations, and the ” Comparable Uncontrolled Price Method” for financial operations, The Court therefore agrees with the findings of the lower court in grounds 22 to 25 of the judgment under review regarding the lack of the necessary grounds for the administrative act, in that the tax authority, although obliged to do so, omitted to analyse the transactions in accordance with the legislation in force at the date on which they were carried out…” Click here for English translation Click here for other translation Chile vs Avery Dennison Chile May 2022 ...

Sweden vs Pandox AB, February 2022, Administrative Court, Case No 12512-20, 12520–12523- 20 and 13265-20

Pandox AB is the parent company of a hotel group active in northern Europe. Pandox AB’s business concept is to acquire hotel property companies with associated external operators running hotel operations. Pandox AB acquires both individual companies and larger portfolios, both in Sweden and abroad. Within the group, the segment is called Property Management. Pandox AB’s main income consists of dividends from the Property Management companies (PM companies), interest income from intra-group loans and compensation for various types of administrative services that Pandox AB provides to the Swedish and foreign PM companies. These services include strategic management, communication, general back-office functions and treasury. The PM companies’ income consists of rental income from the external hotel operators. Following an audit for FY 2013-2017 the Swedish tax authorities found that the affiliated property management entities were only entitled to a risk-free return and that the residual profit should be allocated to the Swedish parent. The tax authorities argued that Pandox AB had conducted all value-creating activities related to the core business, controlled and carried the financial risks, and actively managed the group’s business and operating agreements. The property management entities were merely legal parties in local agreements without any real control of the relevant risks. The property management entities had no employees and the boards consisted of one or two persons, most of whom were part of management at Pandox AB. Since Pandox AB controlled and managed major decisions and risks, the residual result should be allocated from the property management entities to Pandox AB. The property management entities should only be entitled to a risk-free return in line with their contributions to the value chain in accordance with paragraph 1.85 in the OECD transfer pricing guidelines. Paragraph 1.85 deals with the capability to make important business decisions. An appeal was filed by Pandox with the Administrative Court in Stockholm. Judgement of the Court The Court ruled in favor of Pandox AB. Excerpts “The Administrative Court finds that Pandox AB’s description of the operations of Property Management is strongly supported both by the documentary evidence in the cases and by what has emerged in interviews with Ms Liia Nõu. The Court also considers that the Swedish Tax Agency has not challenged the facts described by Pandox AB. Based on what has emerged from the investigation, the Administrative Court considers that Pandox AB must be regarded as having a limited role in the management of the hotel operations and a limited function in the value-creating core business. Nor does the investigation show anything other than that the PM companies independently make and implement decisions within the framework of the hotel property operations. Furthermore, the services that Pandox AB actually provides to the PM companies are priced in accordance with established transfer pricing documents, and there has been no indication that this pricing is not market-based. Even if Pandox AB, in its capacity as legal owner of the PM Companies, has the capacity and ability to renegotiate or enter into new operator agreements and make other crucial decisions for the hotel business, the investigation does not, according to the Administrative Court, show that this has been done to a particularly large extent. On the contrary, the investigation shows that Pandox AB is relatively passive after the shares in a PM company have been acquired. The Swedish Tax Agency has emphasised the management of the so-called Heart portfolio as a sign that Pandox AB actively manages the hotels in the PM companies. The Administrative Court considers, however, that the acquisition and how it was handled constitutes an exception in how Pandox AB otherwise conducts its Property Management business. Thus, the circumstance that the operator agreements were renegotiated in connection with the acquisition does not lend any more far-reaching or general conclusions about the business in general. The Administrative Court does not agree with the Tax Agency’s assessment of where in the Pandox Group the value-creating work is conducted. In this assessment, the Court takes into account in particular that the operations of the acquired PM companies are already established through, inter alia, ownership of hotel properties with associated operator agreements. Nor does the investigation provide support that Pandox AB would otherwise have had such control over the management of the hotels that the PM companies’ contribution to the business is limited in the manner described in the Tax Agency’s decision. Therefore, the Administrative Court finds that the Tax Agency’s investigation does not show that the Pandox group is based on commercial relationships as required by point 1.85 of the Guidelines. In such circumstances, the Tax Agency was not entitled to correct Pandox AB’s results in the manner recommended by the OECD Transfer Pricing Guidelines.” Click here for English Translation Click here for other translation Sweden vs Pandox 2022 PDF ...

Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question. Skechers held that the losses did not derive from the costs of the intra-group purchases of the goods, but from the fixed start-up costs, not compensated by an adequate volume of sales, as an effect also of the competitive Italien market. The provincial and later the regional Tax Commission rejected the taxpayer’s appeal. The judge of appeal held that Skechers had not proved that the losses stemmed from the fixed start-up costs, which – moreover – were found only in relation to the Italien company and not in relation to the distribution companies located in other European countries; it then held that it was Skechers’ burden to prove the arm’s length nature of the costs. Skechers then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision and remanded the case to the Regional Tax Commission in a different composition. Excerpts “6. The following principle of law should therefore be stated: “on the subject of the determination of business income, the transfer pricing rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 22 December 1986. 917 of 22 December 1986 imposes on the tax authorities the burden of proving the existence of transactions between related companies at a price other than the market price, using in this regard the transfer pricing methods described in the OECD Guidelines as soft law rules; once that burden of proof has been discharged, the taxpayer bears the burden of proving that those transactions took place for market values to be considered normal, having regard to the same stage of marketing, time and place where the goods and services were acquired or rendered, having regard – in particular – to the market context in which the taxpayer was operating”. 7. The judgment under appeal, in so far as it burdened the taxpayer company with the proof of the existence and inherent nature of the fixed operating costs, did not comply with the aforesaid principles, both in so far as the burden of proof lies with the Office, and in so far as the burden of proof must relate to the appropriateness of the transfer prices of the purchases of goods, in the market conditions in which the taxpayer company was required to operate, according to one of the criteria indicated in the OECD Guidelines. Nor can the burden of proof be discharged by alleging the mere uneconomicity of management (even if ascribed to the incidence of the aforesaid purchases), since the judge of the merits must verify the use of one of the methods indicated in the aforesaid Guidelines. The merit judge’s assessment must then be carried out in relation to the context in which the taxpayer company was operating at the time of the assessment, during which there had been a high incidence on the typical management of fixed operating costs, due to the start-up phase, which would have required the realisation of higher sales volumes in order to reach the break-even point. 8. The appeal must therefore be upheld and the contested judgment set aside, with reference back to the court a quo, in a different composition, also for the settlement of the costs of the proceedings.” Click here for English translation Click here for other translation Italy vs Skechers USA Italia SRL 2908-2022 ...

Italy vs INTERVET PRODUCTIONS SRL, January 2021, Corte di Cassazione, Case No 22539/2021

Intervet Productions SRL, a company resident in Italy, manufactures veterinary medicines and supplements. The Italian tax authorities issued a notice of assessment, relating to the 2004 tax year. In that notice, the tax authorities ascertained the inconsistency of the transfer prices concerning the sale of certain goods to a related party in Germany. For the determination of the transfer prices, the taxpayer had used two methods: the resale price method, for products subject to mere marketing, and the cost-plus method, for products subject to further processing by Intervet. The tax authorities had used the CUP method for the purpose of the adjustment. Intervet appealed against the assessment, contesting the comparability of the products compared by the tax authorities but lost in the proceedings on the merits An appeal was then filed with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court set aside the assessment. The Court stated that the tax authorities has to prove that the transactions, put in place by the taxpayer, would have generated greater taxable income if they had been conducted between third and independent parties, pursuant to Article 9(3) of the TUIR. In identifying the methods for determining transfer prices, the tax authorities must follow the indications contained in the OECD Transfer Pricing Guidelines and choose the method that is most appropriate in relation to the concrete case. The Court notes that in the judgment under appeal the functional analysis relating to the competing company was completely disregarded, since no assessment was made of the comparability and economic function performed by the latter. It is also noted that no reasons were given as to why the method applied by the taxpayer should be considered inadequate compared to the price comparison method applied by the Agency. Excerpts “…..” Click here for English translation Click here for other translation Italy vs Intervet Productions SRL 22539-2021 ...

Australia vs Glencore, May 2021, High Court, Case No [2021] HCATrans 098

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax authorities found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. The tax assessment was brought to court by Glencore. The Federal Court of Australia found in favor of Glencore. The ruling of the Federal Court was appealed by the Australian tax authorities. On 6 November 2020, a Full Federal Court in a 3-0 ruling dismissed the appeal of the tax authorities. The tax authorities then submitted a application for special leave to the High Court. This application was dismissed by the Court in a judgement issued 20. May 2021. Click here for translation Australia vs Glencore 2021 ...

South Africa vs ABC (PTY) LTD, January 2021, Tax Court of Johannesburg, Case No IT 14305

ABC Ltd is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts). Catalysts are used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, applicant requires, inter alia, some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (“the Swiss Entityâ€). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). ABC Ltd and the Swiss Entity are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2011 by an amount of R114 157 077. According to the revenue service the prices paid for the PGMs had not been at arm’s length. The assessment set aside the CUP method and instead applied the TNMM method using ROTC as the Profit Level Indicator. The assessment was based on a detailed analysis of the total cost base incurred by ABC Ltd in acquiring the PGMs and other raw materials, including the manufacturing and distribution costs of the catalysts. The role played by ABC Ltd in purchasing and manufacturing the catalysts, the assets and the risks involved, which risks applicant had accounted for in its financial statement was also taken into account. ABC Ltd held that the South African arm’s length provision in section 31(2) of the ITA only permitted tax authorities to adjust the consideration in respect of the transactions between it and the Swiss Entity to reflect an arm’s length price for the purchase and supply of PGMs; in the event the ‘jurisdictional facts’ called for by section 31 were established as a matter of fact. It also stated that even if it had been found that it had not paid an arm’s length price for the PGMs, which it denies, the tax authorities was only entitled to adjust the price/consideration paid for the PGMs as between applicant and the Swiss Entity, not the consideration between applicant and third parties. In this regard, the tax authorities’ adjustment of ABC Ltd’s profits pursuant to its application of the TNMM was not a legitimate exercise of transfer pricing power authorized by section 31(2). As a consequence, ABC Ltd argues, the additional assessment is legally impermissible. The issue which ABC seeks separated therefore, is whether the conduct of tax authorities fell within the powers set out in section 31(2). Decision of the Tax Court ABC Ltd’s application for separation was dismissed by the Tax Court. “Applicant [ABC Ltd] refers to the process of establishment of the arm’s length nature of a transaction between connected persons as jurisdictional facts. Plain from its own advocation of the CUP method is that it accepts that there are various methods that can be employed in establishing the arm’s length nature of a transaction. The appropriateness of a method to test the arm’s length nature of a transaction however, is determined by the circumstances of a case. See in this regard PN 7 and the TPGs. It cannot merely be artificially assumed as applicant argued during the hearing of this matter. In this regard, and for the purpose of advancing the separation application, applicant submitted that the court may accept (artificially so) that the price it paid for the PGMs to the Swiss Entity was not an arm’s length price, even though this is denied. But this cannot be done and applicant knows this. For example, in furtherance of its preferred CUP method, applicant went further and stated that there would have been no need for adjustment had respondent [COMMISSIONER FOR SOUTH AFRICAN REVENUE SERVICE] adopted the CUP method. From the preceding statement, it must be accepted that applicant is aware that the establishment as a fact whether a consideration is or is not at arm’s length precedes the question of adjustment, regardless of what method is employed. The establishment of the arm’s length nature of a transaction is the first step in transfer pricing matters and it involves a factual inquiry which culminates in a decision being made as to which of the methods endorsed by PN 7 is to be employed. Applicant is also wrong in its submission that the question of respondent’s powers – in terms of section 31(2) – can be determined without reference to the merits or to the question of whether the PGM transactions were or were not at arm’s length. As respondent puts it, the question of adjustment does not even arise prior to determining the arm’s length nature of a transaction. The inquiry into the arm’s length nature of a transaction is an overriding principle in transfer pricing matters and cannot be receded to the back. I agree. Respondent at one point likened applicant’s approach with the separation application to determining quantum in a damages claim prior to determining the question of liability. I agree. On the conspectus of evidence before this court, ordering a separation will not achieve any practical benefit. On the contrary, it would result in piecemeal litigation, increase costs, and delay finalisation of the matter. At first, one may be allured by the points raised by applicant. However, on close interrogation there is neither a cogent point worthy of testing nor will the objects set out in Blair Atholl be served with the separation.” Click here for translation SARS vs ABC (PTY) LTD January 2021 Case No IT 14305 ...

El Salvador vs “E-S Cosmetics Corp”, December 2020, Tax Court, Case R1701011.TM

“Cosmetics Corp” is active in wholesale of medicinal products, cosmetics, perfumery and cleaning products. Following an audit the tax authorities issued an assessment regarding the interest rate on loans granted to the related parties domiciled in Cayman Islands and Luxembourg. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Excerpt “In this sense, it is essential to create a law that contains the guidelines that the OECD has established to guarantee the principle of full competition in transactions carried out between national taxpayers with related companies, for the purpose of applying the technical methods and procedures that they provide; The express reference made by Article 62-A of the TC cannot be considered as a dimension of the principle of relative legal reserve, insofar as there is no full development of the methods or procedures contained therein, nor a reference to an infra-legal rule containing them, but rather a reference that does not have a legal status, i.e. they are not legally binding, but only optional and enunciative to be incorporated into the legal system of each country. Hence, at no time is the legality of the powers of the Directorate General to determine the market price being questioned, since, as has been indicated, the law itself grants it this power, what is being questioned in the present case is the failure of the Directorate General to observe the procedures and forms determined by law to proceed to establish the market price, by using the OECD Guidelines, which, it is reiterated, for the fiscal year audited, did not have a legal status, nor were they binding, since they were not contained in a formal law; Therefore, even if the appellant itself used them, this situation constitutes a choice of the company itself, for the purpose of carrying out an analysis of its transfer prices, but in no way implies that this mechanism is endorsed by law, the Directorate General being obliged to lead or guide the taxpayer in the application of the regulations in force and adjust its operations to the provisions thereof, and if it considered that there was indeed an impediment to determine the market price, it should have documented it and proceeded in accordance with the provisions of the aforementioned legal provisions, which it did not do. Finally, it should be clarified that article 192-A of the Tax Code, cited by the DGII at folios 737 of the administrative file, as grounds that the interest rates applied by the appellant were not agreed at market price, is not applicable to the case at hand, inasmuch as it regulates a legal presumption of obtaining income (income) from interest – which admits proof to the contrary – in all money loan contracts of any nature and denomination, in those cases in which this has not been agreed, which shall be calculated by applying the average active interest rate in force on credits or loans to companies applied by the Financial System and published by the ————— on the total amount of the loan; on the other hand, in the present case, as has been shown above, the determination made by the DGII has been through the application of the transfer prices regulated in article 62-A of the TC, which is completely different from the said presumption; in addition to the fact that, as evidenced in folios 82 to 93 and 309 to 314 of the administrative file, the Revolving Credit Line contracts presented by the appellant, entered into with the companies ————— and — ———— contain the clause “Interest Rate”, in which it is established that the interest rate of each loan will be the market rate agreed by the parties, which was 3% for the first company and 1% for the second, which was effectively verified by the DGII both in the accounting records of the appellant, in the loan amortisation tables, as well as in the referred Transfer Pricing Study, as mentioned above. Consequently, this Court considers that in the present case there has been a violation of the Principles of Legality and Reservation of Law, by virtue of the fact that in the instant case the Directorate General did not follow the procedure established by the legal system in force, and therefore, in issuing the contested act, it acted outside the legally established procedures, and consequently, the decision under appeal, with respect to this point, is not in accordance with the law; it is unnecessary to rule on the other grievances invoked by the appellant in its appeal brief. The aforementioned is in accordance, as pertinent, with precedents issued by this Tribunal with references R1810029TM, of the eleventh hour of September fourth, two thousand and twenty; R1505018TM, of the thirteenth hour and two minutes of May twenty-seventh, two thousand and nineteen; R1511005TM, dated ten o’clock ten minutes past ten on the thirty-first day of August two thousand and eighteen; R1405013T, dated eleven o’clock five minutes past five on the twentieth day of April of the same year; R1405007TM, dated eleven o’clock five minutes past five on the twenty-seventh day of the same month and year; and, R1704001T, dated eleven o’clock five minutes past five on the twenty-ninth day of May of the aforementioned year.” Click here for English translation Click here for other translation TAIIA-R1701011TM ...

Australia vs Glencore, November 2020, Full Federal Court of Australia, Case No FCAFC 187

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the February 2007 Agreement were within an arm’s length range and accordingly the taxpayer has discharged the onus of proof on it.” “In view of my conclusions, the objection decisions should be set aside and the amended assessments for the 2007, 2008 and 2009 income years set aside.“ The ruling of the Federal Court was appealed by the Australian tax authorities. On 6 November 2020, a Full Federal Court in a 3-0 ruling dismissed the appeal. Australia vs Glencore November 2020 ...

Luxembourg vs “HDP Lux SA”, July 2019, Administrative Court, Case No 42043C

“HDP Lux SA acquired a building in France and financed the acquisition with a shareholder loan at an interest rate of 12%. The tax authorities issued a tax assessment for FY 2011 and 2012 in which the market interest rate was set at 3.57% and 2.52% respectively and the excess payments were considered as hidden distribution of profit on which withholding tax was applied. Decision of the Administrative Court The court upheld the tax authorities adjustment of the interest paid on the loan and the qualification of the excess payment as a hidden distribution of profits subject to a withholding tax of 15%. In addition, the court held that the OECD Guidelines could not influence the interpretation of the provision on hidden profit distributions, as the domestic provision had been adopted long before the OECD Guidelines, while at the same time recognising that the OECD Guidelines could be used as an “element of appreciation”. Click here for English translation Click here for other translation LUX 42043C ...

Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory on sales of blueberries (2.56%) did not cover the costs of consumption of materials and energy, third party services, depreciation and other costs, which resulted in a loss for 2012. (PLN 218,838.03), and losses for 2011 and 2013. The application of excessive fruit purchase prices from the Company’s shareholders (4 persons running fruit farms and 1 farm owner), with family, personal and capital ties, also resulted in the Blueberry Factory taking out 6 loans from it’s shareholders for the total amount of PLN 877,697.70. in 2012. The average gross margin of the Blueberry Factory when selling goods (blueberries) in 2012 was 2.2%. Meanwhile, unrelated entities, selected in the course of the proceedings, which were involved in the purchase and sale of blueberries, having the relevant certificates necessary to sell fruit abroad, had gross margins ranging from 3.5% to 21.87%. The tax authorities held that the average gross margin in comparable transactions was 11.35% and PLN 2.27 per kilogram. The tax authorities determined the Blueberry Factory’s corporate income tax liability for 2012 at PLN 22,114, instead of the declared loss (PLN 218,838.03). The Court of first instance agreed with the tax authorities that there were capital, personal and family ties between these entities. In the opinion of the court, all the conditions referred to in Art. 11.1 of the Polish Act on Public Offering, which authorises the determination of the income and tax payable by way of estimation, had been fulfilled. The Court also considered the pricing method used by the authorities – resale prices – to be appropriate. The comparability analysis took into account both the type and quality of fruit traded (the fact of holding certificates). The average margin applied by independent entities was calculated. In estimating the cost of blueberry fruit purchased by the Company, favourable assumptions were made, as the basis for the estimation was the margins applied by entities (fruit producer groups) which purchased blueberry fruit, holding only the G-certificate and applying the lowest margins among the surveyed entities. The comparability analysis also took into account, among others, such factors as the certificates held, type of recipients of the goods (domestic and foreign), type of entity, production process, technologies used, type and time of transactions. The Court also deemed it appropriate that DUKS issued a provision under Art. 179.1 of the Polish Corporate Governance Act, which excluded information on entities conducting business competitive to the Company. The Blueberry Factory filed a complaint against the decision. The Supreme Administrative Court considered that the appeal was justified and therefore had to be granted. The gist of the dispute in the case at hand is to assess whether, in fact, the procedure for estimating income [Article 11 of the Act] was carried out correctly, as claimed by the authority and accepted by the Court of First Instance, or, as the applicant argues in cassation – with a breach of the provisions of the Act and the Regulation – which is linked to the authority’s analysis of the comparability of transactions. “All this allows us to conclude that, although the OECD Transfer Pricing Guidelines do not contain standards of generally applicable law (Article 87(1) of the Polish Constitution), when interpreting the provisions governing the prerequisites for the use of transfer pricing and the general conditions for determining income by means of estimation (Article 11(1) to (3) of the Act), the indications of those guidelines should be taken into account as a kind of “set of good practices” and a point of reference for choosing the right interpretative direction.” “In the light of the above, contrary to what the WSA suggested, the aforementioned guidelines will be relevant to the assessment of the assessment method used by the authority and, in particular, of its implementation.” The Court of first instance did not sufficiently consider the proceedings conducted by the authorities – in particular with regard to the comparability analysis. It was principally assumed that the Company’s business model was the basis for its market strategy – which in its opinion was to generate losses in order to maximise profits of its shareholders. At the same time, despite arguments consistently raised by a party in the course of proceedings, the court did not address issues regarding comparability factors. First of all, the key issue in this case, namely that the party has the status of an agricultural producer group. This, in turn, raises other relevant issues: – the specific nature of the entity, the principles and essence of the group’s operation, the scope of the objectives it should pursue, the strategy of producer groups – the use of aid measures, the issue and importance of the Recognition Plan, the issue of the group’s market strategy during the recognition period. The Supreme Administrative Court referred the case back to the Court of first instance for reconsideration. Poland II FSK 1665-16 en Poland II FSK 1665-16 ...

Costa Rica vs Corrugados del Guarco S.A., March 2018, Supreme Court, Case No 13-002632-1027-CA

Corrugados del Guarco S.A. had declared losses on controlled transactions for FY 2003, 2004 and 2005 as export prices for these transactions had been set below cost and without profit margin, and also different from the price charged for that product to other independent or unrelated companies, in favour of its related company Envases Nicaragüenses S.A. According to the Corrugados del Guarco S.A. the reason why the prices of these controlled transactions had been set low was that unfair competition had made it necessary to use a commercial strategy of selling at preferential prices to the group company in Nicaragua. The tax authorities issued an assessment whereby the prices of the controlled transactions were adjusted in accordance with the arm’s length principle. Furthermore a fine was issued to the company for gross negligence. Judgement of the Supreme Court The Court dismissed the appeal of Corrugados del Guarco S.A. Excerpts from the Judgement “…Finally, and in relation to transfer pricing, on which the plaintiff argues reservation of law, it is necessary to indicate that guideline 20-03, called “Fiscal Treatment of Transfer Pricing, according to Normal Market Value”, issued by the Director General of Taxation on June 10, 2003, refers to the rules of the Organisation for Economic Co-operation and Development (hereinafter OECD), for the setting of prices between related companies. This international organisation is dedicated to contributing to the peaceful and harmonious development of relations between peoples, with an emphasis on collaboration in the global economy. In this regard, the Constitutional Chamber explained the content of the aforementioned body of norms as follows: “The guideline in question is based on the assumption that if these operations have some kind of artificial manipulation, and this is detrimental to the tax authorities, it allows the application of articles 8 and 12 of the Code of Tax Rules and Procedures to establish that certain transactions correspond to a market value as if they had been established between independent persons or entities that compete freely. Although there are different methodologies, to conclude that a price corresponds to a certain reality or not, the problem before the Chamber is an issue closely linked to one that arises for any operator of law that must apply rules that seek to compensate forms of abuse of law or that do not correspond to an economic reality to avoid tax liabilities” (Ruling 2012-4940 of 15 hours 37 minutes of 18 April 2012). The aforementioned court also added, on the constitutionality of the rule “our country does not need to be a member of that body to make use of certain rules or practices that contain a high degree of consensus, especially if, as in the case at hand, articles 15 and 16 of the General Law on Public Administration establish the limits to discretion, even in the absence of a law, which is precisely what is happening in the present case. This Court agrees with the Attorney General’s Office and the Minister of Finance that these are rules with a high degree of subjection to science and technique, as in the case of the general principles of accounting, where a law would not be necessary to reach a technical consensus. In this sense, those methods or techniques make it possible to arrive at a result that is as close to reality as possible, without it being necessary for them to be formally incorporated into the legal system” (ibidem). The above shows that the principle of legal reservation is not violated in the application of OECD transfer pricing methods, such as those analysed here. V.- As a second allegation, it was argued that the financial penalty was imposed without previously following a sanctioning procedure, since it only faced a determinative one.“ ” In the opinion of this Court, the arguments of the appellant also fail to break this aspect of the judgement. The court took for granted that with intent, the plaintiff sold at prices below cost and that she used an agreement with another private individual to defraud the tax authorities, therefore it cannot be indicated in this court that she did not qualify the conduct, establishing that even article 71 of the Code of Tax Rules and Procedures, allows the sanction when it has acted with intent or mere negligence, that is to say, by negligence. The law seeks to ensure that the self-assessments, on which the country’s entire tax system is based, are made seriously and carefully, and therefore penalises fraud and negligence in the self-assessment with 25 percent of what has not been paid to the Treasury. This procedure is necessarily linked to the assessment procedure, where it is defined whether what was declared and paid by the taxpayer is in accordance with the legal system and this is clearly stated by the sentencing body, which also refers that the sanctioning procedure was carried out in the terms established by the said numeral 150 CNPT and that the right of defence was guaranteed by giving the taxpayer a hearing and resolving his appeals.” Click here for English translation Click here for other translation Costa-Rica-vs-Corrugados-del-Guarco-2018-Corte-Suprema-de-Justicia ...

Spain vs McDonald’s, March 2017, Spanish Tribunal Supremo, Case no 961-2017

An adjustments had been made by the tax authorities to a series of loans granted by GOLDEN ARCHES OF SPAIN SA (GAOS), domiciled in Ireland, to RESTAURANTES MC DONALDS, S.A. (RMSA), throughout the period 2000/2004 for amounts ranging between 10,000,000 and 86,650,000 €, at interest rates between 3,450% and 6,020%. The tax administration held that GAOS “has no structure or means to grant the loan and monitor compliance with its conditions … it does not have its own funds to lend, it receives them from other companies in the group”. The Administration refers to a loan received by GAOS from the parent company at a rate of 0%, which is paid in advance to receive another with an interest rate of 3.3%. The Administration indicates that “nobody, under normal market conditions, cancels a loan to constitute another one under clearly worse conditions”. The arm’s length interest rate was determined by reference to the interest rate RMSA would have paid to an independent bank. In 2005 there were external bank loans in the same company for more than 100,000,000 euros at an average interest rates of 2.57%. Judgement of the Court: “As regards the valuation at market price of the interest rate on the loans or lines of financing …, it has already been shown above that the loans were granted throughout the period 2000/2004 for amounts between 10,000,000 and 86,650,000 euros, with different interest rates ranging between 3.450% and 6.020%. These rates are notably higher than those demanded from RMSA by the banks – independent third parties – that granted it loans, so that in the financial year 2005 there are credit lines of more than 100,000,000 euros at average rates of 2.57% (credit lines for one year and renewable). “This being so, the reasonableness of the judgment cannot be disputed in appealing to the credit obtained by RMSA from independent entities, even though the conditions were different in some of their distinctive features to those of the loans received from GAOS, especially when the Court of First Instance rightly expresses the reasons why such alleged differences are irrelevant.” “…As regards the OECD Guidelines cited as infringed in the plea, this Court has already held that they are not sources of law and therefore cannot be relied on in cassation. Moreover, the reference in Article 16 TRLIS to them as rules inspiring application was introduced in Law 36/2006, which is not applicable ratione temporis to this case. Indeed, as we have recently stated (judgment of 19 October 2016, handed down in appeal no. 2558/2015), article 88.1.d) of the Law of this Jurisdiction allows for the complaint of defects in iudicando in which the contested judgment may have incurred, stating that “1. The appeal must be based on one or some of the following grounds: …d) Infringement of the rules of the legal system or case law that were applicable to resolve the issues under debate”. The infringement invoked in cassation, therefore, must refer precisely to the rules of the legal system, that is to say, to the formal sources which comprise it and which are set out in Article 1.1 of the Civil Code, which establishes that “…the sources of the Spanish legal system are the law, custom and the general principles of law”. Within the material concept of law expressed in the precept, it is possible to include the different manifestations, hierarchically ordered, of normative power (Constitution, international treaties, organic law, ordinary law, regulations, etc.). ), but it is not possible to base a ground of appeal on the infringement of the aforementioned OECD Guidelines, given their lack of normative value, that is to say, of a binding legal source for the Courts of Justice that can be predicated on them, and which this Supreme Court had already declared previously (thus, the Judgment of 18 July 2012, handed down in appeal no. 3779/2009 ), in which such guidelines are considered as mere recommendations to the States and, elsewhere in that judgment, it assigns them an interpretative value. Such a function, that of interpreting legal rules, derives, moreover, from the very role assigned to them by the Explanatory Memorandum to Law 36/2006, of 29 November, on measures for the prevention of tax fraud, which states the following: “…As far as direct taxation is concerned, this reform has two objectives. The first refers to the valuation of these operations according to market prices, thus linking them to the existing accounting criteria applicable to the recording in individual annual accounts of the operations regulated in article 16 of the Consolidated Text of the Corporate Income Tax Law, approved by Royal Legislative Decree 4/2004, of 5 March. In this respect, the acquisition price at which these transactions must be recorded for accounting purposes must correspond to the amount that would be agreed by independent persons or entities under conditions of free competition, understood as the market value, if there is a representative market or, failing that, the amount derived from applying certain generally accepted models and techniques and in harmony with the principle of prudence. In short, the tax regime for related-party transactions is based on the same valuation criterion as that established in the accounting field. In this sense, the tax administration could correct the book value when it determines that the normal market value differs from that agreed by the related persons or entities, with regulation of the tax consequences of the possible difference between the two values. The second objective is to adapt Spanish transfer pricing legislation to the international context, in particular to the OECD guidelines on the subject and to the European Transfer Pricing Forum, in the light of which the amended legislation must be interpreted. In this way, the actions of the Spanish tax authorities are brought into line with those of other countries in the region, while at the same time providing greater security for verification procedures by regulating the obligation of the taxpayer to document the determination of the market value agreed in the related-party transactions ...

Slovakia vs Coca-Cola s.r.o., April 2015, Supreme Court of the Slovak Republic No. 2Sžf/76/2014

At issue was deductions of management fees paid by a Coca-Cola s.r.o. – a Slovakian subsidiary of the Coca-Cola group – to Coca Cola Management Services GmbH & Co. AG. in Switzerland. The assessment sas issued by the tax authorities based on the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administration, which according to the tax authorities was a generally accepted supplementary interpretative tool to Art. 9 of the Treaty on the avoidance of double taxation within the meaning of the Vienna Convention on contract law. Documents and information submitted in the course of a tax inspection showed that in addition to the fee for the provision of management services, Coca-Cola s.r.o. also paid for the provision of employment services and IT services. In total, payments for provision of services in 2005 was € 1,463,385.46. In regards to MTC article 9 and application of the OECD Transfer pricing guidelines in Slovakia the Supreme Court stated: “… the OECD TP Guidelines, unless duly published, shall not be regarded as binding source of law under Slovak legal order … it is not binding on the taxpayers or the tax authority … the same applies for the OECD Commentary that has not been published in the collection of laws and therefore shall be regarded as non-binding recommendation that can only be used for the interpretation of international treaties … ” Click here for translation Rozsudok_8S_f-15-2015 ...

Slovenia vs “Benchmark Corp”, January 2017, Administrative Court, Case No UPRS Sodba I U 632/2016-7

The Court of Justice concluded that the tax authority had acted correctly when, in the course of a tax inspection, it adjusted the tax base on the basis of the transfer pricing documentation submitted by the taxpayer, even though the taxpayer subsequently requested that the entire case be re-examined after it had ascertained the tax consequences of the primary and secondary adjustments. The tax authority was also correct in following the comparability analysis and the taxable person’s proposal and in adopting the contested decision on that basis. “30. In its observations on the record, in the appeal and in the application, the applicant complains that the contested decision is not adequately reasoned and that the Appellate Body also failed to address the appellant’s objections in relation to transfer pricing. The reasons given by the appellate authority are indeed deficient in the light of the appellant’s objections, but, in the Court’s view, do not constitute a substantive breach of the procedural rules. In its grounds of appeal, the appellate authority follows the reasoning of the appellate authority at first instance and thereby (implicitly) rejects as unfounded objections which are of a substantive nature. As regards the objections of a factual nature, the defendant explains that the facts and circumstances relied on in the appeal are not sufficiently proven, and thus states the main reason for their disregard or rejection. In the Court’s view, the decisions of both the appellate and the appellate authorities have all the elements required by law. Pursuant to Article 214 of the Administrative Procedure Act, the statement of reasons for an administrative decision must include a statement of the facts, the findings of fact and the evidence on which they are based, the reasons which were decisive for the assessment of the particular evidence, a reference to the provisions of the regulations on which the decision is based and the reasons which, in the light of the findings of fact, dictate such a decision, as well as the reasons for not upholding a claim. The contested decision is also reviewable. The reasoning of the contested decision gives extensive and clear reasons why the first-instance authority did not take into account the analysis of the so-called non-optimal costs, which the applicant explains are exceptional costs linked to the implementation of the new production programme and that no data on such costs of comparable companies are available. These costs have already been taken into account by the complainant, which follows from the complainant’s reasons why the median is not appropriate for it. The first-instance authority also reasoned its rejection of the functional analysis submitted by the applicant on 19.12.2014 after the applicant withdrew its proposal to adjust the transfer prices. In its reply to the applicant’s comments, the tax authority explained at length, on a function-by-function basis, the reasoned reasons why the new functional analysis was not acceptable. In the Court’s view, the reasoning of the contested decision also shows the reasons for the decision. The Court also agrees with the assessment of the evidence made by the two tax authorities. Both tax authorities have also provided reasoned responses to the applicant’s comments and objections. The applicant’s submissions and explanations were addressed by the first-instance tax authorities both in the minutes of the DIN and in the statement of reasons of the contested decision. As the defendant rightly points out, the DIN case at issue was not about witness statements, as the applicant submits, but about the giving of reasons in the DIN proceedings. However, since the explanations were extensive, the tax authority was justified in requesting written documentation or written explanations, which it then took a decision on. 31. There is also no infringement of substantive law in the present case. The tax authority took its decision on transfer pricing on the basis of the substantive provision of Article 16 ZDDPO-2 and correctly applied that provision. The applicant’s objection that the tax authority did not take into account the OECD Guidelines is unfounded. The OECD Transfer Pricing Guidelines are not binding on international companies and tax administrations. They are a document focusing on the main issues of principle that arise in transfer pricing (paragraph 19 of the Preface to the 2010 Guidelines), and they encourage OECD Member States to follow them in their administrative transfer pricing practices and taxpayers to follow them when assessing for tax purposes whether transfer pricing is consistent with the arm’s length principle (16 ). The Court observes that the OECD Guidelines are not part of the Slovenian legal order and constitute only a legal act of an international organisation of which the Republic of Slovenia is a member. 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 not directly binding on the State, as is also clear from the OECD’s internal acts (Article 18 of the OECD Rules of Procedure). However, the provisions of the ITA-2 and the TC Rules indisputably follow the provisions of the OECD Guidelines, as the tax authorities have already correctly explained to the claimant (as did the Supreme Court of the Republic of Slovenia in its judgment of 25.8.2016 in Case X Ips 452/2014). In the present case, however, the tax authority based its decision on Article 16 and Article 17 ZDDPO-2, which, in the Court’s view, also constitutes the relevant legal provision for the decision. As regards the disguised payment of profits, in the Court’s view, the first-instance authority also correctly applied the provision of Article 74(7) ZDDPO-2, which it also correctly interpreted. 32. Since the contested decision is correct and lawful and the action is unfounded, and the Court has not found any violations of constitutional rights, nor any violations of the rules of procedure which it is obliged to observe ex officio, it dismissed the ...

Spain vs. ZERAIM IBÉRICA, SA, Oct. 2016, Spanish Supreme Court, Case no 4675-2016

In this case ZERAIM IBÉRICA SA argues that the OECD Transfer Pricing Guidelines has not been applied propperly, as secret comparables have been used in determining the arm’s length price of controlled transactions between the Spanish company and its Dutch parent company. The court concludes that the “..Guidelines are considered to be merely recommendations to States, which are given an interpretative value.” The appeal filed by the company is dismissed by the court. Click here for other translation Spain vs Zeraim 191016 Spanish Supreme Court 4675-2016 ...

Slovenia vs “AFK Corp”, October 2016, Administrative Court, Case No I U 328/2016

The Administrative Court held that the facts of the case were correctly established and that, on the basis of Article 16 of the ZDDPO-2, the expenditure was not tax deductible in the period under consideration. The Court also clarified that the provisions of the ZDDPO-2 and the PTC undisputedly follow the OECD Guidelines (the same is also the case of the Supreme Court of the Republic of Slovenia in its judgment X Ips 452/2014 of 25.08.2016).The Court also held that the provisions of the ZDDPO-2 and the PTC undisputedly follow the OECD guidelines. Click here for English translation Click here for other translation UPRS_sodba_I_U_328_2016-04.10.2016 ...

Slovenia vs “Marketing Distributor”, August 2016, Administrative Court, Case No VSRS Sodba X Ips 452/2014

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 VSRS_Sodba_X_Ips_452_2014-25.08.2016 ...

Sweden vs. taxpayer april 2016, Swedish Supreme Administrative Court, HFD 2016 ref. 23

The Swedish Supreme Administrative Court makes it clear that OECD guidelines can be used for interpreting Swedish domestic legislation in cases where the domestic legislation is based on OECD guidance and principles. It is also concluded, that the fact that an agreement is given a certain legal term does not mean that the Court is bound by that classification. It is the substance of the agreement – based on the facts and circumstances – that matters. Click here for translation Sweden-vs-Corp-HFD-2016-ref.-23 ...

Slovakia vs Ruhrgas Slovakia, April 2015, Supreme Court of the Slovak Republic No. 2Sžf/76/2014

At issue was the concept of beneficial ownership of income flowing to non-residents from sources in the Slovak Republic. The application of this concept was questionable in a situation where the relevant international treaty did not require the non-resident to be the “beneficial” owner of the source of income. In assessing the transaction under examination, the Financial Report referred to the application of the concept of beneficial ownership of income, through the Commentary on the OECD Model Agreement (“Commentary”). The Supreme Court states that from the perspective of international law, the rules stated in the commentary are not legally binding but are adopted with the purpose of achieving the practical effect and can be transformed to legally binding if applied within the national system by the tax authorities and courts. From the perspective of national law, the OECD commentaries do not exist as standards and can only influence the interpretation of international treaties. Under the circumstances where the legal norm has not been duly published, where there is an absence of well-established practice, where the OECD Model and commentaries are not available in the official language and where there are contradictory opinions on the binding nature of the interpretative rules it cannot be expected from the taxpayer to follow such interpretative rules, until they become part of the international tax treaty. Click here for translation Rozsudok_2S_f_76_2014 ...

Canada vs McKesson Canada Corporation, December 2013, Tax Court of Canada, Case No. 2013 TCC 404

McKesson is a multinational group engaged in the wholesale distribution of pharmaceuticals. Its Canadian subsidiary, McKesson Canada, entered into a factoring agreement in 2002 with its ultimate parent, McKesson International Holdings III Sarl in Luxembourg. Under the terms of the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for approximately C$460 million and committed to purchase all eligible receivables as they arise for the next five years. The receivables were priced at a discount of 2.206% to face value. The funds to purchase the accounts receivable were borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent company in Luxembourg. At the time the factoring agreement was entered into, McKesson Canada had sales of $3 billion and profits of $40 million, credit facilities with major financial institutions in the hundreds of millions of dollars, a large credit department that collected receivables within 30 days (on average) and a bad debt experience of only 0.043%. There was no indication of any imminent or future change in the composition, nature or quality of McKesson Canada’s accounts receivable or customers. Following an audit, the tax authorities applied a discount rate of 1.013%, resulting in a transfer pricing adjustment for the year in question of USD 26.6 million. In addition, a notice of additional withholding tax was issued on the resulting “hidden” distribution of profits to McKesson International Holdings III Sarl. McKesson Canada was not satisfied with the assessment and filed an appeal with the Tax Court. Judgement of the Tax Court The Tax Court dismissed McKesson Canada’s appeal and ruled in favour of the tax authorities. The Court found that an “other method” than that set out in the OECD Guidelines was the most appropriate method to use, resulting in a highly technical economic analysis of the appropriate pricing of risk. The Court noted that the OECD Guidelines were not only written by persons who are not legislators, but are in fact the tax collecting authorities of the world. The statutory provisions of the Act govern and do not prescribe the tests or approaches set out in the Guidelines. According to the Court, the transaction at issue was a tax avoidance scheme rather than a structured finance product. Canada_Tax_Court_McKesson ...

Costa Rica vs Polymer S. A., June 2012, Supreme Court, Case No 11-010227-0007-CO

Polymer S.A. had been issued an assessment of taxable income based on the arm’s length principle. In the assessment the tax authorities had based the adjustment on the guidance provided in the OECD TPG. Polymer S.A. was of the opinion that this was unconstitutional since the OECD TPG had not been implemented by law and Costa Rica was not an OECD member country. Judgement of the Supreme Court The Court dismissed the appeal of Polymer S.A. Excerpts from the Judgement “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility that other – better – techniques may be admitted. What is important is that the contested Interpretative Guideline does not aim to eliminate multiple other scenarios arising from different forms of business organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt a certain technique or several techniques to regulate a certain behaviour of companies, or recognise legal practices to reduce taxes, it is possible to admit that if there are clashes with tax law and reality, in the absence of a law, it is ultimately up to the judge to decide on the correct application of the technical rules. Thus, in the absence of any particular legislation, this fact does not prevent the parties in conflict from presenting their arguments, producing evidence and demonstrating the need to apply other criteria that allow for the non-application of the technical rule that adopts the guideline in question, or of another possible method, a situation that evidently makes the discussion a matter of ordinary legality. For all of the above reasons, the action must be dismissed, as indeed it is. A., the contested Guideline interprets Articles 8 and 12 of the Code of Tax Rules and Procedures, disregarding the legal forms to assess the true economic intention of the parties. It allows to assess transactions between related entities, where transfer prices exist, and to make the respective income tax adjustments. It does not aim to eliminate other multiple scenarios arising from different forms of business organisation, but rather targets transfer pricing between related companies. Moreover, our country does not need to be a member of the Organisation for Economic Co-operation and Development (OECD) to make use of certain rules or practices that contain a high degree of consensus, under the provisions of articles 15 and 16 of the General Law of Public Administration that establish the limits to discretion, even in the absence of law. By virtue of the foregoing, and there being no reasons to justify a change of criterion, it is considered that the contested Directive does not infringe the principles of the reservation of law, regulatory power and legal certainty, and therefore the action is rejected on the merits.“ Click here for English translation Click here for other translation Costa Rica June 2012 Sentencia nº 08739 de Sala Constitucional de la Corte Suprema de Justicia ...

Costa Rica vs Nestlé, April 2012, Supreme Court, Case No 10-017768-0007-CO Res. Nº 2012004940

In an appeal to the Supreme Court in Costa Rica, Nestlé claimed that the basis for an arm’s length adjustment was unconstitutional, since the arms length principle as described in the OECD transfer pricing guidelines had not been incorporated into the laws of Costa Rica. Judgement of the Supreme Court The Court dismissed the appeal of Nestlé. “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility of admitting “other -better- techniques”. What is important is that the contested Interpretative Guideline does not aim to eliminate other multiple scenarios arising from different forms of company organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt a certain technique or several techniques to regulate a certain behaviour of companies, or recognise legal practices to reduce taxes, it is possible to admit that if there are clashes with tax legislation and with reality, in the absence of a law, it is ultimately up to the judge to decide on the correct application of the technical rules. Thus, in the absence of any particular legislation, this fact does not prevent the parties in conflict from presenting their arguments, producing evidence and demonstrating the need to apply other criteria that allow for the non-application of the technical rule that adopts the guideline in question, or of another possible method, a situation that evidently makes the discussion a matter of ordinary legality. For all of the above reasons, the action should be dismissed, as it is in fact being dismissed.” Click here for English translation Click here for other translation Costa Rica vs Nestlé April 2012 SP ...

Slovenia vs “Inventory-Corp”, March 2010, Supreme Court, Case No Sodba X Ips 1138/2006

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 Sodba_X_Ips_1138_2006-17.03.2010 ...

Czech Republic vs. B.p., s.r.o., June 2007, Supreme Administrative Court , Case No 8 Afs 152/2005 – 72

The subject-matter of the dispute was the exclusion of the rent for lease of machinery and equipment. It referred to the lease and sublease agreements for non-residential premises, machinery and equipment with the companies B.p., s.r.o. and M.-T., s.r.o., by which the parties agreed that the objects of the lease agreements would be used free of charge for a certain period of time – during the trial period. Bp s.r.o. disputed the use of transfer prices in accordance with the arm’s length principle and the question of the tenant’s payment behaviour. It argued economic aspects – the possibility of making a real profit over a longer period of time. According to the taxpayer the tax authority should have examined the possibility of obtaining a total profit for the taxpayer over a five-year period and not simply applied ‘the most ideal course of market economics (i.e. the business partners are always solvent and the market situation is optimal)’. It also supplemented the application with a profit forecast, from which it concluded that ‘from a long-term profitability point of view, it was therefore worthwhile to support the related parties during the transitional period’. According to the tax authorities, although the procedures and methods set out in the OECD Directive are not directly enshrined in domestic tax law (nor is there a direct reference to the OECD Directive), the binding nature of the OECD Directive in the interpretation of arm’s length under double taxation treaties derives from the Vienna Convention on the Law of Treaties, Article 31 of which contains rules of interpretation. In this respect, the OECD Directive is an interpretative document on double taxation treaties. Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities. Excerpt “In addition to the above, the Supreme Administrative Court notes that the above-mentioned guidelines (Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations) are part of the OECD Declaration of 21 June 1976 on International Investment and Multinational Enterprises (available, for example, at www.oecd.org) , which is only a recommendation by governments to multinational companies; it is therefore not a legal regulation (soft law). With regard to the objection to the application of section 23(7) of the Income Tax Act, it should be noted that the complainant does not dispute that the rent is subject to that tax in accordance with sections 18(1) and 22(1)(e) and (g)(5) of the Income Tax Act, nor does it dispute the court’s conclusion that the parties were personally and economically linked, nor the notion of consideration in rental and sublease agreements. In other words, the complainant does not refute the legal conclusions of the court and the tax authorities, which formed the basis for the application of Article 23(7) of the Tax Code. of the Act. The conceptual features of the contracts concluded by the complainant are precisely the aforementioned consideration. Therefore, the dispute as to whether a ‘foreign’ entity would have been willing to conclude a contract on the same terms, including the argumentation of economic aspects, is inappropriate. Hypothetical circumstances (relating, moreover, to third parties), which have no direct connection with the grounds on which the Regional Court based its decision, cannot lead to the conclusion that the appeal is well-founded. The objection concerning the need to take account of the applicant’s costs of further renting of premises, machinery and equipment is not admissible under Article 104(4) of the Code of Civil Procedure, since the applicant did not raise it in the proceedings before the Regional Court whose decision is under review, nor does it claim that it could not have done so. Therefore, the Court could not deal with that objection. For the reasons set out above, the Supreme Administrative Court concludes that the complainant’s cassation complaint is unfounded and therefore dismisses it…” Click here for English Translation Click here for other translation 8-Afs-152-2005-–-72 ...