Tag: Libor

Belgium vs R.B. NV, June 2023, Court of First Instance, Case No. 2021/2991/A

R.B. NV had entered into a loan agreement with a group company in Switzerland. The interest rate on the loan had been determined by applying the method used by the credit agency, Standard & Poor’s. Moreover, it had been concluded that R.B. NV was a “moderately strategic entity”, and a one-notch correction was applied to the “stand-alone credit rating”. Following an audit, the tax administration concluded that the company had not applied the S&P method consistently and that the company’s credit rating should have been the same as that of the group as the company was a “core entity” in the group. On that basis, the interest rate were reduced. Judgement of the Court The court ruled predominantly in favour of the tax authorities. The court found several unjustified deviations in the way R.B. NV had applied the S&P method and on that basis several adjustments were made by the court. According to the court, R.B. NV was not a “core entity” in the group whose credit rating should be the same as that of the group (as held by the tax authorities), but rather a “highly strategic entity” whose credit rating should be one notch lower than that of the group. Click here for English Translation Click here for other translation BELG 2021-2991-A ...

Malaysia vs Watsons Personal Care Stores Holding Limited, April 2023, High Court, Case No WA-14-20-06/2020

In 2003, Watsons Personal Care Stores Holding Limited borrowed USD 36,842,335.00 from Watson Labuan in order to acquire a substantial number of shares in Watson Malaysia and in 2012, the Company borrowed another USD 1,276,000.00 from Watson Labuan to finance the acquisition of shares. According to the loan agreement the annual interest rate was 3% plus the London Interbank Offered Rate (LIBOR) and the principal amount was to be paid on demand by Watson Labuan. In 2013 the tax authorities (DGIR) requested information from Watsons Personal Care Stores Holding Limited relating to cross border transactions for transfer pricing risk assessment purposes and following an audit for FY 2010-2012 the tax authorities informed the Company that the interest would be adjusted under section 140A of the ITA (Malaysian arm’s length provision). Furthermore, the interest expenses paid would not be allowed as a deduction because the transaction as a whole would not have been entered into between unrelated parties. Watsons Personal Care Stores Holding Limited filed a complaint against the assessment and in a decision handed down in 2020 the Special Commissioners of Income Tax (SCIT) allowed the appeal and set aside the assessment of the tax authorities. The tax authorities then filed a Notice of Appeal against the decision with the High Court. Judgement of the Court The Court upheld the decision of the Special Commissioners of Income Tax and set aside the assessment issued by the tax authorities. Excerpts “20. Having read Rule 8 (1) and 8(2) of the TP Rules together, it is clear that while the DGIR has the power to disregard structures that differ from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the DGIR from determining an appropriate transfer price, if DGIR so chooses to disregard the structure under Rule 8(1), Rule 8(2) requires the DGIR to make the adjustment as it thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length.” (…) “36. In contrast I find that the DGIR has not put forward any evidence to refute the Company’s TP analysis, and there is no basis on which the DGIR would have concluded that the interest charged is higher than what would have been agreed between independent persons. Therefore, I view that the DGIR’s rejection of the comparables amounts to a bare denial, lacking in any evidence or basis as the SCIT had correctly held in its Grounds of Decision. 37. In the circumstances, the DGIR did not substantiate its allegations in any documentary form to show that the interest rate is not at arm’s length. What is available is only the TP Documentation prepared by the Company, which was entirely disregarded by the DGIR in coming to its Decisions. 38. I view that the SCIT’s decision is founded on a correct application of the law and inference of facts that are consistent with the primary facts and evidence of the case as the SCIT had set out in its Grounds of Decision dated 19.5.2021. 39. This court is of the view that the DGIR is utilizing section 140A of the ITA to disregard the transactions undertaken. Thus, the DGIR did not act within the powers conferred to it under the said section. 40. It is to be noted that section 140A of the ITA does not give the DGIR the power to disregard/ignore any transactions. Instead, section 140A clearly requires the DGIR to substitute the price in respect of the transaction to reflect an arm’s length price for the transaction where it has reasons to believe that the transactions were not carried out at arm’s length. 41. Therefore, I view that the SCIT correctly held that the DGIR’s failure to make any adjustments to the Loans or substitute an arm’s length rate is contrary to section 140A of the ITA: – [14] The Respondent also did not make any adjustments to the structure of the loan transactions or substitute the interest rate that would have been expected between an independent persons to the loan transaction between the Appellant and Watson Labuan as stipulated in Section 140A of the ITA and Rule 8(1) and (2) of the Income Tax TPR. The Respondent merely substituted the interest rate with 0% on the basis that no independent party would carry out such transaction. (See: page 11 of the Additional Record of Appeal (Enclosure 29)) 42. I find that the DGIR’s insistence that it can substitute a price with zero is misconceived and in effect, disregarding the transaction without substituting an arm’s length price. This shows that the DGIR failed to read Rule 8 of the TP Rules in its entirety. The DGIR only chose to apply Rule 8(1) of the TP Rules but failed to consider Rule 8(2). For ease of convenience Rules 8(2) is reproduced below: – “(2) Where the Director General disregards any structure adopted by a person in entering into a controlled transaction under subrule (1), the Director General shall make adjustment to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regards to the economic and commercial reality” (emphasis added) 43. The DGIR in its submissions attempts to argue that it ‘substituted’ the interest with 0% because no independent person or Company would enter into similar transaction. Therefore, the interest rate ought to be 0%. 44. I find that the DGIR’s arguments is devoid of merits for the following reasons: – 44.1 The test under Rule 8(2) is not whether an independent person would enter into a similar transaction. The test is a price which “… would have been adopted by an independent person dealing at arm’s length… ” The DGIR’s argument is legally inconsistent with the language of Rule 8(2); and 44.2 The language in Rule 8(2) notwithstanding, the DGIR has not provided any evidence to support its allegations that no commercial ...

Korea vs Finance Corp, December 2010, Seoul High Court, Case No 2009누39126

At issue in this case is the determination of arm’s length interest rates. Click here for translation 2009누39126 ...