The Intevac group initially focused on designing and producing thin-film production systems for the manufacturing of hard disk drives (“HDD”). However, sometime in or around the mid-2000s, Intevac Asia Pte Ltd received a purchase order for a tool designed for the manufacturing of solar cells. Intevac Asia Pte Ltd did not possess the relevant R&D capabilities to develop such a tool and therefore entered into a Research and Development Services Agreement with Intevac US dated 1 October 2008 (“the RDSA”). The RDSA provided that Intevac US would undertake R&D activities in the US for the benefit of Intevac Asia Pte Ltd. In 2009, the management of the Intevac group decided to plan for the possibility that Intevac Asia Pte Ltd would expand its R&D capabilities in relation to non-HDD products. Accordingly, Intevac Asia Pte Ltd and Intevac US entered into a Cost-Sharing Agreement dated 1 November 2009 (“the CSA”), which superseded the RDSA. The purpose of the CSA was to allow Intevac Asia Pte Ltd and Intevac US to combine their R&D efforts and to share the costs and risks of their R&D activities. It differed from the RDSA in the following respects. (a) Under the RDSA, the Appellant was to acquire all beneficial and economic rights to the Intellectual Property (“IP”) developed in the performance of the RDSA. However, under the CSA, the Appellant and Intevac US would each acquire the right to exploit any IP and intangible property generated in the performance of the CSA within their respective sales territories. (b) The Appellant was the only party that would benefit from the outcome of the R&D activities carried out under the RDSA. However, under the CSA, both the Appellant and Intevac US had a direct stake in any R&D developed for the joint benefit of the parties. Under the new cost-sharing agreement, Intevac Asia Pte Ltd made payments to the U.S. company during FY 2009 and 2010 and claimed tax deductions for payments. Following an audit, the tax authority concluded that deductions for R&D expenses incurred under the cost-sharing agreement was governed exclusively by Section 19C until FY 2012, and that the payments made by the taxpayer under the cost-sharing agreement were not deductible under Section 14D. Hence an assessment was issued where the additional deductions was added back to the taxable income of Intevac Asia Pte Ltd. Judgement of the High Court The court decided in favour of the tax authorities. The R&D payments made to the U.S. parent did not qualify as deductible costs under Section 14D(1)(d). Click here for translation ...

Maderas Anchile exported wood chips to a Japanese corporation, Itochu, which indirectly owned 9.8499% of the shares in Maderas Anchile through another company, Forestal Anchile. At issue was whether these transactions between Maderas Anchile and Itochu were controlled. Based on the wording of the transfer pricing provisions in force at the time (Article 38 of the LIR), the tax authorities concluded that the transactions were controlled, and had issued a transfer pricing adjustment based on this assumption. >Judgement of the Supreme Court The Supreme Court applied a restrictive interpretation of the rule in article 38 of the LIR and decided in favour of Maderas Anchile. Excerpts “Ninth: That with regard to the validity of assessment No. 35, issued to Daio Paper Corporation, it is consequential to those affecting Maderas Anchile, and therefore, since the existence of transfer prices lower than those that would be set between independent companies has not been established, there are no tax differences in favour of the Treasury or sums that could be considered withdrawn by Daio Paper, in accordance with the provisions of Article 21 of the Income Tax Law. Tenth: That the judgment of appeal added that the hypotheses of “relationship” are not limited or restricted by the assumptions of relationship contained in Laws Nos. 18.045 and 18.046, because it is legally improper for the Internal Revenue Service to limit or restrict the express will of the legislator. In any case, Circular No. 3 of the Internal Revenue Service of 6 January 1998, which gives instructions on the amendments introduced to article 38 of the Income Tax Law by Law No. 19.506, does not indicate that this was the intention of the administration. But what is missing in this case is the basic assumption of “relationship”, which is the control exercised by one company over the other and which ultimately influences the determination of transfer prices. Eleventh: As can be seen, the point on which the liquidations are based arises from the text of article 38, third paragraph, of the Income Tax Law, modified by Law No. 19.506, of 30 July 1997, which at the time the audited operations took place, was as follows: “…. When the prices charged by the agency or branch to its parent company or to another agency or related company of the parent company are not in line with the values charged for similar operations between independent companies, the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the operation, or the production costs plus a reasonable profit margin…”. Consequently, it was necessary to elucidate whether there was a “relationship” between the companies that carried out the audited and liquidated acts, for which reason it was reasoned about the elements provided by the precept to define whether there were operations carried out by related entities and, if so, whether the values charged by Maderas Anchile to Itochu Corporation were equivalent to those that in similar operations would be agreed between independent companies. Twelfth: That in the preceding grounds it has been described how the judges were convinced that these were not related companies, so that the challenge of the Internal Revenue Service was not founded, in fact and in law, because the assumptions for the application of article 38 of the Income Tax Law were not met. Thirteenth: That without prejudice to this, although unnecessary, the judgement also declared that the price was not influenced by the alleged relationship between the contracting companies, since the price stipulated in the audited operations corresponded to those that could be legitimately fixed by independent companies, a conclusion that arose from the inaccuracies of the Service, reflected in the liquidations, when assessing the transfer price. Fourteenth: That in the situation described above, it is not possible to see how the infringements of the rules that the appeal points out could occur, since neither the “relationship” nor the fixing of a transfer price lower than that of the same market developed by independent companies has been declared, which arose from the application of the rule of article 132, paragraph 14 of the Tax Code, a precept that has not been denounced as having been transgressed. Fifteenth: That in this way, the factual conclusions reached by the first instance judge, which the second instance judges adopted, appear to be in accordance with the merits of the proceedings and cannot be altered in cassation if it has not been demonstrated that the laws regulating evidence have been violated in order to establish the facts that were decisive to accept the claims in the case.” Click here for English translation Click here for other translation ...