The tax authorities had issued a tax assessment disallowing the deductibility of intra-group service costs charged to Gru Comedil s.r.l. because, in the opinion of the tax authorities, the company had not provided sufficient documentation and proof of the benefits of the alleged services received (management services). Gru Comedil, and later the tax authorities, appealed the decision, which eventually reached the Supreme Court. Judgment The court overturned the tax authorities’ assessment and ruled in favour of Gru Comedil s.r.l. Excerpts in English “According to an approach widely shared by this Court, in the matter of so-called intra-group costs, in order for the consideration paid to the parent company or to the company entrusted with the service for the benefit of another subsidiary to be deductible by the company receiving it, it is necessary that the subsidiary derives an actual utility from the remunerated service and that this utility is objectively determinable and adequately documented (Court of Cassation, n. 26/01/2023, n. 26/01/2023, n. 1795, followed by many others, including recently Supreme Court, n. 1921, 06/07/2021, n. 1919). 30/01/2023, no. 2689; Cass. 27/01/2023, no. 2599; Cass. 04/03/2020, no. 6820; Cass. 14/12/2018, no. 32422; Cass. 04/10/2017 no. 23164; Cass. 23/11/2015, no. 23027; Cass. 18/07/2014, no. 16480; Cass. 21/12/2009, no. 26851), even if those costs do not directly correspond to revenues in the strict sense (Cass. 05/12/2018, no. 31405; previously Cass. 01/08/2000, no. 10062). Moreover, the administrative practice (C.M. no. 32/9/2267 of 22 September 1980) that, beyond the flat-rate percentage of the costs charged by the parent company to the subsidiaries, subordinates the deductibility of costs deriving from contractual agreements on services to the actuality and inherent nature of the expense to the business activity carried out by the subsidiary and to the real advantage derived by the latter (Cass. 11/11/2015, no. 23027); it should be noted that the same circular expressly specifies that the control on the utility (and on the inherence) is prejudicial to the assessment of the normal value (and therefore the appropriateness of the consideration). This approach is in line with the OECD guidelines, according to which, on the subject of intra-group provision of services, it is necessary to proceed to the so-called. benefit test, i.e., to verify whether the activity in question confers on the enterprise an advantage aimed at improving its economic or commercial position (OECD Guidelines, 18 July 2010, Chapter VII), and with the rigorous approach, on the subject of OECD-derived arbitrages, of which there is ample – and not contradicted – trace in the sectional jurisprudence (Cass. 06/07/2021, no. 19001). The existence of the cost, its pertinence and usefulness, and finally its determinability are therefore different issues and all preceding its adjustment according to the normal value.” (…) “The first complaint relates to the profile of inherence, which must be understood as set out in the preamble;  On this point, it is untrue that the CTR did not assess the existence of a benefit for the company, holding instead explicitly that the management fees charged by the foreign parent company to the Italian subsidiary are deductible where they result from a written agreement containing the details of the services and specifying a congruous allocation criterion, << more if the subsidiary’s organisational structure does not appear to be suitable for the performance on its own of the services received from controllante>>, correctly pointing out that the inherent nature did not derive from a connection between costs and revenues but it was necessary to assess whether the former were functional to the business activity. The second objection, relating to the possible presence of non-deductible cost items, is inadmissible because it does not relate to the specific rationale of the decision on this point, the CTR having expressly pointed out the groundlessness of this objection since <<non is a mere reversal of costs incurred by the parent company on behalf of Gru Comedil but the cost of a management service whose quantification must be objectively determinabile>>. The third ground of appeal is unfounded, in that the CTR did not attribute any effect of reliance to the independent auditors’ report, indeed expressly stating that it did not even determine a relative presumption of the truthfulness of the records, and recalling this Court’s orientation according to which expenses and other negative components (costs) are allowed as deductions, if and to the extent that they are charged to the profit and loss account for the year in which they are incurred, which, which, especially when it is a matter of ascertaining facts that cannot be analytically proven, constitutes, as part of the financial statements, a relevant source of information and may be verified by the tax authorities in accordance with the criteria of congruity and consistency, also taking into account the auditor’s report, itself a relevant means of proof, because of the public control profiles and the auditor’s civil and criminal liability, and may only be rebutted by producing documents demonstrating the auditor’s error or breach (Cass. 12/03/2009, no. 5926; Cass. 26/02/2010, no. 4737). Above all, however, the CTR did not at all use the auditor’s report as the sole source of its own conviction, attributing overall relevance to the entire compendium of evidence produced by the company, and in particular acknowledging the examination of the cost-sharing agreement, the invoices issued by the parent company, the statements of account, the specifications of the criteria for the allocation of corporate charges the auditing firm’s annual report and also the auditing firm’s certification and the accounting records, which, according to the defence, had been produced with the indication of the name of each employee to whom the disputed services were to be referred, evidently in order to overcome the first, and indeed only, explicit ground of dispute contained in the notice of assessment. After examining these documents, the CTR, with reasons, albeit concise, that were certainly sufficient and consistent, found that they showed the nature of the services rendered, the allocation criteria, and the reality of the costs incurred by the parent company, making ...

Skechers US Inc. had formed a related party entity, SKII, in 1999 and transferred IP and $18 million in cash to the entity in exchange for 100 percent of the stock. Skechers then licensed the IP back from SKII and claimed a franchise tax deduction for the royalties and also deductions for management fees and interest expenses on the unpaid balance of royalty fees. The Wisconsin tax authorities held that these were sham transaction lacking business purpose and disallowed the deductions. Judgement of the Tax Appeals Commission The Tax Appeals Commission ruled in favor of the tax authorities. Excerpt “(…) The burden of proof is on Petitioner to prove that the Department’s assessment is incorrect by clear and satisfactory evidence. In this case, Petitioner must prove that it had a valid nontax business purpose for entering into the licensing transaction that generated the royalty deductions claimed on its Wisconsin tax returns and that the licensing transaction had economic substance. Both are required. Petitioner did not present persuasive evidence or testimony of either requirement being met. Therefore, the Department’s assessments are upheld. CONCLUSIONS OF LAW Petitioner did not have a valid nontax business purpose for the creation of SKII. Petitioner did not have a valid nontax business purpose for entering into the licensing transactions between Skechers and SKII that generated the royalty deductions claimed on its Wisconsin tax returns. Petitioner’s licensing transactions between Skechers and SKII did not have economic substance. (…)” ...

SGGE W T is a Spanish branch of SGG that carries out distribution and marketing activities related to the information technology network products and services. SGG is part of the KF group which “is an international group that provides solutions and services in the Information Technology (IT) sector, starting its activity in . .. as a distributor of access and communications networks”. The group “is the result of several corporate operations, mainly company acquisitions and mergers carried out to increase its share in world markets” and “is mainly organized in three divisions (SGG, QR and …) according to the IT areas (Technology, Integration and Consulting) in which they operate”. Following an audit of FY 2015 and 2016 the tax authorities issued assessments of additional income to the Spanish branch. One of the issues identified was SGGE’s remuneration for its sales and marketing activities. According to the tax authorities, the income of the Spanish branch was below the lower quartile of the range established under the TNMM. On this basis, the income was adjusted to the median. The tax authorities had also disallowed deductions for the cost of intra-group services. An appeal was filed by SGGE W T. Judgement of the Court The Court partially upheld and partially dismissed the appeal. Excerpt from the judgement concerning IQR and Median “Thus, this Court only appreciates, from the motivation of the Inspection, that there would be -according to the assessment- some defects of comparability that persist, unavoidable as a consequence of the selection process of comparable elements through databases, and of the limits of the available information, but it is not detailed what errors or circumstances concur in the selection of the comparable elements or what limits the available information has. It should be noted that when the Inspectorate, as transcribed above, refers to the fact that there are still defects in comparability, given that the resulting range does not include relatively equal results, it adds, paraphrasing the Guidelines, that these are defects that cannot be identified and quantified. Rule 3.57 of the OECD Guidelines – also transcribed above – refers to defects in comparability that cannot be identified or quantified and are therefore not susceptible to adjustment. Notwithstanding the foregoing, regardless of the possibility of identifying or quantifying such defects, the choice of the median, provided for in rule 3.62 of the OECD Guidelines, requires – as clearly stated by the Audiencia Nacional and this TEAC – that the Inspectorate must disclose the defects of comparability, and reasons must be given for the defect or defects of comparability that are found to persist and that cause the range not to include very reliable and relatively equal results. We have seen that when section 3.57 of the Guidelines refers to defects that cannot be identified or quantified, it immediately links it to the fact that this makes a specific adjustment impossible. This is perfectly logical, because if they could be concretely identified and quantified, the adjustment would be feasible. It is one thing if they cannot be identified in the sense of being precisely specified and quantified so that they can be adjusted or corrected, and another if elements or areas are detected which, due to their special circumstances or lack of documentation, allow us to conjecture that there is still a deficiency in comparability that cannot be corrected, for which reason there is no other recourse but to resort to the median. Therefore, the mere appeal to this generic reference cannot be considered sufficient; otherwise, the requirement to state reasons that the Audiencia Nacional and this TEAC maintain would be sterile. At the very least, it should be explained what errors or failures in the process of selecting comparables, or what limitations in the information available, determine, as a consequence, that there are such unidentifiable or unquantifiable defects in comparability. In the present case, the reasoning contained in the assessment notification -page 148- only talks about defects that are a consequence of the selection process and the limitations of the available information, but does not detail any aspects that could allow this reviewing body to assess which are the specific circumstances of the selection process that allow to consider that it will lead to unidentifiable or quantifiable defects of comparability; nor the specific circumstances of the available information from which it can be extracted that the limitations of the same (not identified by the Inspection in the aforementioned motivation) will lead to unidentifiable or quantifiable defects of comparability. Likewise, it is striking that the Inspection refers to defects derived from the process of selection of comparables when, in the Fourth Ground of Law of the agreement, in response to allegations, a table is drawn up in which five entities selected by the Inspection, which are the object of allegations by the taxpayer, are eliminated from the comparables, indicating that “the interquartile range derived from the remaining entities would not offer values very different from those resulting from the entities taken by the Inspection”. Also noteworthy is the statement made on page 209 of the contested resolution in which, in response to the allegation that the services of one of the comparable entities (…, S.A.) represent around 40% and 49% of the total income, in 2015 and 2016, respectively, it is stated that this “in no way implies that in all the other entities selected as comparable by the inspection this same circumstance is present”, indicating that in case it were so (that the percentage of 40% or 49% of the income from the provision of services were present in the other entities) “in no way would invalidate the sample of entities selected by the inspection since they are entities that carry out activities similar to those of the obligor and that constitute the best possible comparable”. It is striking that the Inspectorate states that the selected entities “constitute the best possible comparable” and that, nevertheless, the adjustment is based on the choice of the median “as the point in the range that ...

A was the sole owner of “C-Advisory Business ApS” established in Denmark in 2003. The company advised and represented taxpayers in cases related to tax deductions for land improvements to immovable property. A was also the sole owner of a company established in Dubai in 2006. The Dubai company provided services for “C-Advisory Business ApS” in Denmark and a total of DKK 78,785,549 was expensed in FY 2006-2010 relating to the purchase of these services. The Danish tax authorities considered that the payments had not been at arm’s length and reduced the service fees to the Dubai company to DKK 20 million for the income years in question. This resulted in additional taxable income of “C-Advisory Business ApS” in a total amount of DKK 58,5 million. Following an unsuccessful complaint to the Tax Tribunal, “C-Advisory Business ApS” filed an appeal with the regional court where a judgement was issued in June 2021. The Regional Court found, that the tax authorities had been entitled to exercise discretion over the pricing of the controlled transactions as the transactions had not been priced at arm’s length and the transfer pricing documentation did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle had been complied with. An appeal was then filed by “C-Advisory Business ApS” with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Regional Court and found in favour of the tax authorities. The Court considered that the tax authorities had been entitled to exercise discretion in relation to pricing of the controlled transactions at issue and that there were no grounds for setting aside the tax assessment “(…) Whether the tax authorities were entitled to exercise a discretion in respect of the controlled transactions It is accepted, for the reasons given by the Court, that the tax authorities have established that the transfer pricing documentation is so deficient that it did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle was complied with. As stated by the Regional Court, in assessing whether the pricing between C and the Dubai company was at arm’s length, it must be borne in mind, inter alia, that it followed from the Service Agreement concluded and the allonge thereto that in 2006-07 the Dubai company received a management fee consisting of a fixed base fee of DKK 800,000 and a profit-based fee of 50-70% of C’s profits, and that in 2008-10 the Dubai company received a base fee with full cost recovery plus the same profit-based fee. The Supreme Court finds, as did the Regional Court, that it has been established that C would not have entered into an agreement on those terms with an independent company. The Supreme Court therefore holds that the tax authorities were entitled to set aside C’s pricing and instead exercise discretion in relation to the controlled transactions in order to determine what C would have paid to the Dubai company for the purchase of the services if they had been independent contracting parties. Whether there is a basis to set aside the estimate SKAT’s estimate of C’s payments for the services provided by the Dubai company is based on the TNM method as a pricing method. In applying the TNM method, SKAT calculated the Dubai company’s transfer prices for the provision of services to C by carrying out a benchmark analysis of 25 law firms and audit firms, using return on total cost (RoTC) as a profit level indicator. RoTC is calculated by dividing the firms’ profits (earnings before interest and tax) by their costs (total costs). The benchmark analysis showed a market RoTC with a median of 6.72% and on this basis the tax authorities have estimated that the Dubai company is entitled to a profit of 6.72% of the Dubai company’s expenses. C’s expenditure on the Dubai company was then estimated for tax purposes to be approximately DKK 20 million for the period 2006-10. For the reasons stated by the Regional Court, the Supreme Court finds that C and B have not demonstrated that the TNM method was not applicable as a pricing method. C and B submit that SKAT’s calculation does not take account of the fact that a partner in a law firm – as described, inter alia, in the Competition Council’s analysis report of 14 January 2021 on ‘Competition in the legal profession’ – receives both payment for his work and remuneration for ownership in the form of a share of the law firm’s profits. The Ministry of Taxation has submitted to the Supreme Court a calculation which, according to the Ministry, shows that a discretionary tax assessment based on the conclusions of the said report would not have resulted in a lower tax assessment than the tax assessment calculated by SKAT based on the application of the TNM method and RoTC as described above. The Supreme Court considers that, with regard to this calculation, C and B have not provided any evidence that the tax authorities’ estimate rests on an incorrect or inadequate basis or is manifestly unreasonable. There are therefore no grounds for setting aside the tax authorities’ assessment and referring the case back to the Court.” Click here for English translation Click here for other translation ...

“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 Łódź of 17 September 2020, I SA/Łd 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 ...

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and business risk assessment, do not provide financing (by loans or bonds) for the acquisition of their own assets, especially shares in subsidiaries, if these assets generate revenue for them. In regards to support services (management fee) these had been classified by the group as low value-added services. It appeared from the documentation, that services concerned a very large number of areas and events that occurred in the operations of the foreign company and the entire group of related entities. The US company aggregated these expenses and then, according to a key, allocated the costs to – among others – Sp. z o.o. The Polish subsidiary had no influence on the amount of costs allocated or on the verification of such costs. Hence, according to the authorities, requirements for tax deduction of these costs were not met. An appeal was filed by D. Sp. z oo with the Administrative Court requesting that the tax assessment be annulled in its entirety and that the case be remitted for re-examination or that the proceedings in the case be discontinued. Judgement of the Administrative Court The Court dismissed the complaint of D. Sp. z oo and upheld the assessment issued by the tax authorities. Excerpt in regards of interest on intra-group loans “The authorities substantively, with reference to specific evidence and figures, demonstrated that an independent entity would not have agreed to such interest charges without obtaining significant economic benefits, and that the terms of the economic transactions adopted by the related parties in the case at hand differ from the economic relations that would have been entered into by independent and market-driven entities, rather than the links existing between them. One must agree with the authority that a loan granted to finance its own assets is free from the effects of the borrower’s insolvency, the lender does not bear the risk of loss of capital in relation to the subject matter of the loan agreement, since, in principle, it becomes the beneficiary of the agreement. This in turn demonstrates the non-market nature of the transactions concluded. The lack of market character of the transactions demonstrated by the authorities cannot be justified by the argumentation about leveraged buyout transactions presented in the complaint (page 9). This is because the tax authorities are obliged to apply the provisions of tax law, which in Article 15(1) of the A.l.p. outline the limits within which a given expense constitutes a tax deductible cost. In turn, Article 11 of the A.l.t.d.o.p. specifies premises, the occurrence of which does not allow a given expense to be included in tax deductible costs. This is the situation in the present case. Therefore, questioning the inclusion of the above-mentioned interest as a tax deductible cost, the authorities referred to Article 11(1), (2), (4) and (9) of the A.p.d.o.p. and § 12(1) and (2) of the Ordinance of the Minister of Finance of 10 September 2009 and the findings of the OECD contained in para. 1.65 and 1.66 of the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the Guidelines were adopted by the OECD Committee on Fiscal Affairs on […] and approved for publication by the OECD Council on […]). According to these guidelines: 1.65. – However, there are two specific situations where, exceptionally, it may be appropriate and justified for a tax administration to consider ignoring the construction adopted by the taxpayer when entering into a transaction between associated enterprises. The first arises when the economic substance of the transaction differs from its form. In this case, the tax administration may reject the parties’ qualification of the transaction and redefine it in a manner consistent with its substance. An example could be an investment in a related company in the form of interest-bearing debt, and according to the principle of the free market and taking into account the economic situation of the borrowing company, such a form of investment would not be expected. In this case, it might be appropriate to define the investment according to its economic substance – the loan could be treated as a subscription to capital. Another situation arises where the substance and form of the transaction are consistent with each other, but the arrangements made in connection with the transaction, taken as a whole, differ from those that would have been adopted by commercially rational independent companies, and the actual structure of the transaction interferes with the tax administration’s ability to determine the appropriate transfer price; 1.66. – In both of the situations described above, the nature of the transaction may derive from the relationship between the parties rather than be determined by normal commercial terms, or it may be so structured by the taxpayer to avoid or minimise tax. In such cases, the terms of the transaction would be unacceptable if the parties were transacting on a free market basis. Article 9 of the OECD Model Convention, allows the terms and conditions to be adjusted in such a way that the transaction is structured in accordance with the economic and commercial realities of the parties operating under the free market principle. Bearing in mind the aforementioned guidelines, in the ...

A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D. The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for. A complaint was filed by A S.A. with the Administrative Tribunal (CAAD). Judgement of the CAAD The complaint of A S.A was dismissed and the assessment upheld. Excerpts regarding the interest rate “Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this effort was unsuccessful. On the contrary, it seems to result from the request for arbitration award that the Claimant and its shareholders have immediately assumed that, given the financial situation that the country was still experiencing in 2014, any request for financing made by a newly created entity and without business expectations would be rejected outright by all banks. For that reason, the Claimant did not prove, nor could it, that the interest it contracted with its shareholders was more favourable to it than what the banks would demand from it. In short, it cannot but be stated that, in view of this, the Defendant could not assume any other position than to investigate whether the shareholders of the Claimant had taken advantage of the socio-financial context of the country to contract a fixed spread of 14%. … As the Respondent summarized very well in its allegations (no. 58) That is, if an independent bank agreed to provide financing to the Claimant, of similar amount and term to the shareholder loans, remunerated at an annual nominal interest rate (TAN) calculated according to the monthly average of the 6-month Euribor rate of the previous month, plus a spread of 3 percentage points, then nothing justifies that the partners require from the company a remuneration for the shareholder loans that includes a spread of 14 percentage points.” Excerpts regarding the services “But it was not only the formal issue that justified the position of the AT and that leads this Court to agree with it. The absence of material evidence that the work had been performed is further compounded by the fact that, during the inspection, the AT found invoices (which the Claimant has registered in its accounts under account “62213 – Specialized work”), issued by the accounting firm “H…, Lda, as well as other “Specialized work”, for services related to the execution and management of the contracts, issued by suppliers B… and I…, which indicates that entities other than D… were involved in the provision of services. The management services for the … and of …, which were ongoing in 2017, and whose invoicing started that year, were performed by B… and I… and not by D… . Thus, the association of all the facts necessarily leads to the non-deductibility of D…’s invoice, since it was up to the Claimant to prove that the work was performed by D… and it failed to do so. As recently decided by the South Administrative Central Court in its ruling of 27 May 2021 in case no. 744/11.1BELRA (available at www.dgsi.pt) I- Invoices are not only relevant documents for the purpose of exercising the right to deduct, but also relevant for the purpose of exercising the AT’s control powers. II- There is no hierarchy between the various requirements imposed on invoices. III- The CJEU has held that the right to deduct is admissible even if some formal requirements are not met by invoices, provided that the material situation is demonstrated. IV- The failure to scrupulously comply with the formalities required in terms of issuing invoices may not compromise the exercise of the right of deduction, provided that the substantive requirements have been complied with and that the AT has all the elements to substantively characterise the transaction, it being understood that the burden of proof will rest with the taxable person. V- As no documentary evidence has been submitted containing a content that enables the gaps in the invoices to be overcome, the right to deduct is not admissible. Therefore, as the Claimant has not complied with the provisions of nos. 3 and 4 of article 23 of the CIRC, by virtue of paragraph c) of no. 1 of article 23-A, the invoice for the provision of services in the amount of €30,000.00, which determines the correction of the taxable income in that amount, cannot be deductible.” “Based on these grounds, the Court decides to consider the request made by the Claimant as totally unfounded” Click here for English translation Click here for other translation ...

Rayonnages de France paid royalties and management fees to a related Portuguese company. Following an audit for FY 2010 – 2012 the French tax authorities denied tax deductions for the payments by reference to the the arm’s length principle. The court of first instance decided in favor of the tax authorities and Rayonnages de France then filed an appeal with the CAA of Douai. Judgement of the CAA The Court of appeal upheld the decision of the court of first instance and decided in favor of the tax authorities. Excerpt “However, as the Minister points out, in order to be eligible for deduction, the management services invoiced by VJ Trans.Fer to SARL Rayonnages de France must necessarily cover tasks distinct from those relating to the day-to-day management of the latter company, which were the responsibility of Mr B. as statutory manager of SARL Rayonnages de France, it being for the latter to determine, where appropriate, the remuneration to be paid to Mr B. in this connection. However, as the Minister points out, SARL Rayonnages de France, whose allegations tend to confirm that the management services invoiced by the company VJ Trans.Fer are the same as the tasks covered by its statutory management, does not provide any evidence to justify the provision of additional or even complementary services by this company, in a situation in which it is not disputed that SARL Rayonnages de France had, in the premises rented by it at the address of its registered office, the necessary means to enable it to keep its accounts and manage its invoicing, and that it had commissioned an accounting firm to assist it. Furthermore, it is not disputed that SARL Rayonnages de France no longer employed any employees after the transfer of its production activity to Portugal in July 2009, so that, as the Minister also points out, it cannot justify any need for management services in respect of the financial years ending in 2011 and 2012. As a result, SARL Rayonnages de France cannot be regarded as providing the proof, which is incumbent on it at this stage, of the existence of a consideration, effective and favourable to its own operation, for the sums it paid, during the two tax years in question, to the company VJ Trans.Fer as fees for management services, regardless of the assessment made by the Portuguese tax authorities as to the nature of those sums and even if they did not constitute additional remuneration for Mr B…. Consequently, C.. was entitled to consider the sums paid in this respect by SARL Rayonnages de France to the company VJ Trans.Fer, established in Portugal and placed under its control, as an indirect transfer of profits. Consequently, it was right to tax these sums in the hands of the company paying them, SARL Rayonnages de France, on the basis of the aforementioned provisions of Articles 57 and 39 of the General Tax Code.” Click here for English translation Click here for other translation ...

Sierra Spain Shopping Centers Services S.L.U. is part of a multinational group that manages shopping centres. Sierra Spain had deducted expenses for services rendered from a related party in Portugal. According to Sierra Spain, the services were related to strategic management and marketing. The tax authorities considered the expenses non-deductible and issued an assessment of additional taxable income. With respect to the strategic business management services, the tax authorities found that there was no contract between the parties. In addition, the authorities found the justification for the actual provision of services was insufficient. With regard to the marketing services, these were contracted by the Portugal-based entity to an external supplier and subsequently re-invoiced to the related parties receiving the service in Portugal, Brazil and Spain. The tax authorities considered that these services were shareholder costs and therefore not deductible in Sierra Spain. Sierra Spain appealed to the Tax Court, which upheld the assessment of the tax authorities. An appeal was then lodged with the National Court. Judgement of the Court The Court dismissed Sierra’s appeal regarding fees for management services, but ruled in favour of Sierra regarding fees for marketing services. According to the Court, Sierra had not provided sufficient supporting documentation for the management services. The Court considered that the invoices submitted were too general and that the description of the services in the invoices referred to an intercompany agreement that had not been provided. In addition, the Court considered that the internal correspondence submitted as evidence of the services provided only supported the existence of habitual and ordinary relations between the employees of the Spanish and Portuguese companies. Therefore, the requirements laid down in the Spanish legislation to support the deductibility of the management services had not been met. With regard to the expenses for marketing services, the Court stated. “Both the general purpose of the market studies (as described, for example, on p. 16 of the contested decision) and their content, in which the references to the activity carried on in Spain are of significant relevance, support the claimant’s assertion that the marketing services at issue would be subsumed under paragraph 7.14 of the OECD Guidelines, as intra-group services (specifically, as marketing assistance), and not under point 7.9 as shareholder costs (p. 31 of the complaint). Consequently, given the reality of the service, its relation to the Appellant’s activity and the utility or advantage it brings or may bring to its recipient, the deductibility of the expense incurred in 2008 for this specific item must be accepted. In order to consider the latter to be established, that is to say, that we are dealing with shareholder costs which would benefit the group and not the appellant, it is necessary to provide a statement of reasons and a greater effort of argument than that made in the present case by the Tax Inspectorate and by the contested decision. Thus, the reasons given by the tax authorities are not sufficient to establish that the basic and essential premise underlying the concept of shareholder costs is met, that is to say, that we are dealing with an activity for which the appellant entity has no need and which, therefore, it would not be prepared to pay if it were dealing with independent undertakings.” Click here for English translation Click here for other translation ...

The fact that a payment was made to an associated enterprise for purported services can be useful in determining whether services were in fact provided, but the mere description of a payment as, for example, “management fees” should not be expected to be treated as prima facie evidence that such services have been rendered. At the same time, the absence of payments or contractual agreements does not automatically lead to the conclusion that no intra-group services have been rendered ...

IAB Company had deducted fees paid for services to its parent, IAL. Following an audit the tax authorities denied these deductions as sufficient evidence had not been provided for provision of the services. An appeal was filed by IAB Company. Judgement of the High Court. The Court upheld the assessment of the tax authorities concerning management fees and dismissed the appeal of IAB Company in this regard. Excerpts from the judgement: “In a nutshell the issue here is whether or not the appellant received management services from IAL for the tax years 2010 to 2015. ” (…) “The authorities must not look at the matter from their own view point but that of a prudent business an – SA Builders Ltd v CIT (2006) 289 ITR 26 (SC).  Further, I agree with what was stated by Australia’s Full Federal Court on the function of the tax authorities and fiscal legislation.  In FC of T v BHP Billion Finance Ltd 2010 ATC 20169 at paragraph [18] the said court quoted with approval from Tweddle v FCT (1942) 180 CLR at 7 where WILLIAMS J staid that: “it is not suggested that it is the function of the Income Tax Acts or those who administer them to dictate to tax payers in what business they should engage or how to run their business profitably or economically.  The Act must operate upon the result of a tax payer’s activities as it finds them.  If a tax payer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interests and although it certainly would be better in the interests of the Commissioner if he did as: Toohey’s Ltd v Commissioner of Taxation (NSW) (1922) 22 SR (NSW) 432 at pp 44044,]” Further, in Income Tax case number (1847) 73 SATC 126 the court reminded the Commissioner of SARS after the latter had disallowed management and marketing fees paid by a subsidiary to its holding company that: “it is not for the court or the Commissioner to say, with the benefit of hindsight be disallowed on the basis that it was not strictly ‘necessary’, or that it was not as effective as it could have been.  If the purpose of the expenditure was to produce income, in the course of trade, and the expenditure was not of a capital nature, then that is sufficient.  Accordingly, the respondent was wrong in his assessment of these fees.”  In this said case the court accepted that, many a time a subsidiary is utterly dependent on its holding company for its effective functioning.  The holding company had used its muscle, as a long established public company, to raise capital for the tax payer and from the evidence it was clear the tax payer needed the management input of the holding company and received it.  It need the global vision and strategic advice of the cosmopolitan, internationally experienced team from the holding company.  The management service fees charged by the holding company to the subsidiary were held to be in line with the norm in the industry. I will now consider the evidence before me in light of the above principles.” (…) “Firstly, the determination is whether the conclusion of a contract for service necessarily means that the services had been rendered.  Put differently, the question is whether a payment made pursuant to the conclusion of service level contract amounts to incurring expenditure for purposes of deductions permissible in terms of s15 (2)(a) of the Act.  In my view, the signing of the service level contract is not sufficient for the appellant to incur obligation to pay management fees.  In the circumstances I have to determine the second issue i.e. whether in fact any services were rendered by IAL, and if so, what the services were and how much was charged in respect of services.  This two-stage inquiry is evinced by the splitting of the issues in the joint minute of the parties.  The first issue being the question management services were rendered by IAL and the second being a determination of the extent of such services. I am in agreement with the contention of the respondent that the execution of a service level agreement between the appellant and its holding company, IAL, does not amount to incurring any legal obligation in respect of management fees.  Like any other contract, the incurrence of a legal obligation depends on the performance by the parties of their obligations in terms of the contract.  There being no evidence that the appellant received specified services from IAL during the tax period under consideration (and if so the extent thereof) no legal obligation was incurred by the appellant in respect of management fees.” (…) “The Finance Director for appellant testified and his testimony remarkably contradicted that of the Group Finance Director of IAL on the fundamental premise upon which the notices in issue were raised.  He contended that the invoices were issued on the basis of services rendered and by implication suggested that if services were not rendered for any particular portion of the period concerned, the appellant would not be obliged to pay IAL.  In contradiction the Group Finance Director had testified that the rendering of a service was not a pre-requisite for the charge which IAL raised on a monthly basis to the appellant.  The evidence of these witnesses was therefore, mutually destructive.  The appellant’s Finance Director stated that the yearly fees were registered and agreed upon the commencement of the year.  He, however, had no documents as proof of such negotiations on the fees.  He did not provide any rational basis for the charge which was raised by IAL to the appellant.  He also admitted IAL exists for its own purposes and does not exist to provide service to the subsidiary only.  It was therefore, necessary to separate the functions ...

An assessment was issued for FY 2017, whereby additional income tax was imposed on “GSS Ltd” in the amount of 843.344,38 €, plus a fine of 421.672,19 €, i.e. a total amount of 1.265.016,57 €. Various adjustments had been made and among them interest rates on intra group loans, royalty payments, management fees, and losses related to disposal of shares. Not satisfied with the assessment, an appeal was filed by “GSS Ltd.” Judgement of the Tax Court The court dismissed the appeal of “GSS Ltd.” and upheld the assessment of the tax authorities Excerpts “Because only a few days after the entry of the holdings in its books, it sold them at a price below the nominal value of the companies’ shares, which lacks commercial substance and is not consistent with normal business behaviour. Since it is hereby held that, by means of the specific transactions, the applicant indirectly wrote off its unsecured claims without having previously taken appropriate steps to ensure its right to recover them, in accordance with the provisions of para. 4 of Article 26 of Law 4172/2013 and POL 1056/2015. Because even if the specific actions were suggested by the lending bank Eurobank, the applicant remains an independent entity, responsible for its actions vis-à-vis the Tax Administration. In the absence of that arrangement, that is to say, in the event that the applicant directly recognised a loss from the write-off of bad debts, it would not be tax deductible, since the appropriate steps had not been taken to ensure the right to recover them. Because on the basis of the above, the audit correctly did not recognise the loss on sale of shareholdings in question. The applicant’s claim is therefore rejected as unfounded.” “Since, as is apparent from the Audit Opinion Report on the present appeal to our Office, the audit examined the existence or otherwise of comparable internal data and, in particular, examined in detail all the loan agreements submitted by the applicant, which showed that the interest rates charged to the applicant by the banks could not constitute appropriate internal comparative data for the purpose of substantiating the respective intra-group transactions, since the two individual stages of lending differ as to the nature of the transactions. (a) the existence of contracts (the bank loans were obtained on the basis of lengthy contracts, unlike the loans provided by the applicant for which no documents were drawn up, approved by the Board of Directors or general meetings), (b) the duration of the credit (bank loans specify precisely the time and the repayment instalments, unlike the applicant’s loans which were granted without a specific repayment schedule), (c) the interest rate (bank loans specify precisely the interest rate on the loan and all cases where it changes, unlike the applicant’s loans, (d) the existence of collateral (the bank loans were granted with mortgages on all the company’s real estate, with rental assignment contracts in the case of leasing and with assignment contracts for receivables from foreign customers (agencies), unlike the applicant’s loans which were granted without any collateral), (e) the size of the lending (the loans under comparison do not involve similar funds), (f) security conditions in the event of non-payment (the bank loans specified precisely the measures to be taken in the event of non-payment, unlike the applicant’s loans, for which nothing at all was specified), (g) the creditworthiness of the borrower (the banks lent to the applicant, which had a turnover, profits and real estate, unlike the related companies, most of which had no turnover, high losses and negative equity), (h) the purpose of the loan (83 % of the applicant’s total lending was granted to cover long-term investment projects as opposed to loans to related parties which were granted for cash facilities and working capital). Since, in the event that the applicant’s affiliated companies had made a short-term loan from an entity other than the applicant (unaffiliated), then the interest rate for loans to non-financial undertakings is deemed to be a reasonable interest rate for loans on mutual accounts, as stated in the statistical bulletin of the Bank of Greece for the nearest period of time before the date of the loan (www.bankofgreece.gr/ekdoseis-ereyna/ekdoseis/anazhthsh- ekdosewn?types=9e8736f4-8146-4dbb-8c07-d73d3f49cdf0). Because the work of this audit is considered to be well documented and fully justified. Therefore, the applicant’s claim is rejected as unfounded.” Click here for English translation Click here for other translation ...

Interoil Colombia Exploration and Production S.A. paid it foreign parent for cost related to exploration and administrative services, and for tax purposes these costs had been deducted in the taxable income. In total $3,571,353,600 had been declared as operating expenses for geological and geophysical studies carried out in the exploratory phase of an oil project and $5.548.680.347 had been declared for administrative services rendered from its parent company abroad Following an audit the tax authorities issued an assessment where these deductions was denied. In regards of cost related to exploration, these should have been recorded as a deferred charge amortisable over up to five years, according to articles 142 and 143 of the Tax Statute. In accordance with Article 142, these investments are recorded as deferred assets and are also declared for tax purposes. (…) According to the general accounting regulations – Decree 2649 of 1993 – deferred assets are part of the company’s assets, and correspond to anticipated expenses or goods and services from which benefits are expected to be obtained in other periods. These items are recorded as assets until the corresponding economic benefit is fully or partially consumed or lost. In other words, as deferred assets are utilised, they are transferred to amortised expense. Expenses that have not been used by the company must be kept in the assets. But once the deferred asset starts to help generate income, it can be incorporated as an expense. In regards of deductions of $5.548.680.347 for payments made by Interoil Colombia to its parent company abroad for administration services, these were denied because Interoil Colombia did not, as required by law, withhold tax at source. Decision of the Administrative Court In a split decision the appeal of Interoil Colombia was dismissed and the assessment upheld. Excerpts Disallowed deductions for payments related to exploration “… as there is a precise regulation within the tax regulations on the form and requirements needed to make the amortisation of investments deductible, the application of accounting rules is not appropriate, in accordance with the provisions of article 136 of Decree 2649 of 1993 and in application of the special rules that are applied in preference to the general rules. Likewise, with regard to the method for the amortisation of investments, the Section pointed out that : “Article 143 E.T. contains, in a perfectly independent and separate manner, the requirements for the amortisation of each of the situations set out therein. Thus, in subsection 1° it refers to the investments described in article 142 and, with respect to these, it orders that ‘they may be amortised in a term of no less than five (5) years, unless it is demonstrated that, due to the nature or duration of the business, the amortisation must be made in a shorter term’. “It then sets out, in paragraphs 2 and 3, special cases of amortisation different from the general one, for which it determines particular requirements. Subsection 2 refers to when it is intended to amortise ‘Costs of acquisition or exploration and exploitation of non-renewable natural resources’, in which case, amortisation may be made ‘based on the system of technical estimation of the cost of operating units or by straight-line amortisation, over a period of not less than five (5) years’; and paragraph 3 refers specifically to ‘contracts where the taxpayer contributes goods, works, installations or other assets such as concession, shared risk or joint venture contracts’, in which case, the term for amortisation is limited to the duration of the contract until the moment of transfer, and, for the latter, it orders that the amortisation be carried out ‘by the straight line or balance reduction methods, or by another method of recognised technical value authorised by the National Tax and Customs Directorate’. The application of the successful efforts method is therefore rejected, taking into account that, as stated above, articles 142 and 143 of the E.T. are applicable, which indicate how the expenses incurred by the plaintiff in the exploratory stage should be treated. It is reiterated that the cited rules mention the accounting technique regarding the registration of the investment, either as a deferred asset or cost, and do not refer to the accounting to determine the conditions of amortisation, which are clearly described in Article 143 of the E.T. In this way, the Court finds that the accused acts are in accordance with the law in that they rejected the deduction for operating expenses for $3,571,353,600 and took this value as a deferred asset that can be amortised so that once the expected income is generated, it is incorporated as an expense and recognised as such. In this sense, article 69 of Decree 187 of 1975, which refers to the amortisation of investments or losses, foresees that in cases in which the explorations are unsuccessful or non-productive, the expenses in exploration, prospecting or installation of wells or mines can be amortised with income from other productive exploitations of the same nature. In other words, in the event that the project associated with the expenditure for geological and geophysical studies proves to be unsuccessful, the claimant can amortise these values with the income from other productive exploitations of the same nature.” Disallowed deductions for payments related to administrative services “Payments made to parent companies or offices abroad for administration or management expenses, as well as those recognised for royalties and exploitation or acquisition of intangibles, are deductible from their income as a cost or deduction, provided that the respective withholding at source of income tax and remittances has been made on such payments, and furthermore, that the same constitutes national source income for the person who receives it. Therefore, if the payments to the parent companies are taxable in Colombia and, therefore, are subject to withholding tax, they will be deductible for whoever pays them, obviously in the case of income considered to be of national source; on the contrary, if the payments referred to are of foreign source and, therefore, are not taxable through the withholding ...

By judgment of 19 January 2021, the Administrative Court upheld an assessment for FY 2012-2017 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. The tax assessment resulted from disallowed deductions for Intra group services provided under a general administrative, legal and financial assistance contract of 22 October 2012 Costs invoiced for the preparation of consolidated accounts Expenses related to “Technical services” for which no explanations had been provided An appeal was filed by Central Hydroelectric de Bulgari EOOD with the Supreme Administrative Court in which the company stated that the decision of the Administrative Court was incorrect. Judgement of the Supreme Administrative Court The Supreme Administrative Court partially upheld the decision of the Administrative Court. Excerpts “The present Court of Cassation finds the judgment of the ACGC valid and admissible. The argument of the applicant that the same is inadmissible is unfounded in the part in which the RA was confirmed concerning the increase of its financial result for 2012 by an expense of BGN 188 924.92 for the reason “MECAMIDES technical services”, as well as by an expense of BGN 19 724.92 for a technical expertise under invoice No 13519637/12.04.2012 issued by EDF, France. By its appeal to the ACGC, CENTRAL HYDROELECTRIC DE BULGARI EOOD has appealed against the RA in the part confirmed by the decision of the adjudicating authority. Since the act was confirmed in its entirety in the part of the established corporate tax and interest liabilities for 2012 by the decision No 367/09.03.2020 of the Director of the EITD Directorate – Sofia, the first instance court correctly held that the appeal was also lodged against this part of the RA. The appellant has not explicitly specified the amount of the corporate tax liability and interest established by the RA as a result of the above-mentioned increases in the financial result for 2012 and has not stated that it does not contest the act in this part. The arguments in the cassation appeal that the administrative court committed material breaches of the rules of court procedure, consisting, according to the appellant, in the absence of its own reasoning and failure to consider the material breaches of the administrative procedure rules in the audit proceedings alleged in the appeal, are also unfounded.“ “The decision of the ACCC contains sufficiently substantial and detailed grounds to ensure effective cassation review and to enable the party adversely affected by it to defend itself. The fact that the court considered the defendant’s legal conclusions to be correct does not mean that it did not state its own reasons.” Click here for English Translation Click here for other translation ...

The case concerned a Danish company that provided legal services regarding tax deductions for improvements to real estate, etc. In 2006, the owner of the Danish company moved to Y2 city and in the process established a company in Y2 city, which would then provide services to the Danish sister company, including legal advice. The tax authorities had increased the Danish company’s taxable income by an estimated total of approximately DKK 58.4 million, as the tax authorities considered that the company’s transfer pricing documentation was sufficiently deficient, in accordance with Section 3 B(8) of the Tax Control Act, cf. Section 5(3), and that the service agreements were not concluded at arm’s length in breach Danish arm’s length provisions. Judgement of the High Court The tax authorities were entitled to exercise discretion over pricing of the controlled transactions as the transactions had not been priced at arm’s length and the transfer pricing documentation was deficient. “The case shows that SKAT’s estimate of H2 ApS’s payment (management fee) for the services provided by G1 is based on the TNM method as a pricing method, which is justified in particular by the fact that G1 was a simple service/service provider. Furthermore, the case shows that in calculating G1’s transfer prices for the provision of services to H2 ApS, SKAT carried out a benchmark analysis of 25 comparable law firms and audit firms using Return on Total Cost (hereinafter RoTC) as a profit level indicator. It is stated that RoTC is calculated by dividing the companies’ profits (earnings before interest and tax) by their costs (total costs). The benchmark analysis showed a market RoTC median of 6,72 %, which implied that the tax authorities considered G1 eligible to earn a profit of 6,72 % in relation to G1’s expenses and that G1’s expenses with the said mark-up could be approved as the amount of H2 ApS’s expenses to G1 for tax purposes for the period 2006-2010 (approximately DKK 20 million). The High Court accepts, after an overall assessment, that the services provided by G1 to H2 ApS are comparable to the services provided by law firms and auditing companies and that the applicants have not demonstrated that the TNM method was not applicable as a pricing method, also referring to the above-mentioned reason why, in the High Court’s view, the profit-split method was not the appropriate pricing method to apply in relation to the controlled transactions. The High Court considers that, on the basis of the evidence submitted – in particular in the light of the calculation of the profit rate in the legal sector contained in the Competition Council’s analysis report of 14 December 2005 – the applicants have not established that the profit-split method was applied. In the light of the evidence, including the evidence of the profitability analysis carried out by the tax authorities, as set out in the Competition Authority’s report of 14 January 2021 on ‘Competition in the legal sector’, the applicant submits that the tax authorities’ estimate in the present case is based on an incorrect or inadequate basis capable of influencing the estimate, having regard also to the fact that the Y2 company mainly provided legal services and that approximately half of the companies included in the SKAT benchmark analysis are law firms. In this respect, the Court of Appeal has emphasised in particular that it follows from the above-mentioned analysis report that a partner in a law firm receives a salary for work performed as well as a remuneration for ownership in the form of a share of the law firm’s profits, that if the partners’ income is calculated on the basis of their personal income – which includes both a salary for work performed as well as a remuneration for ownership – the profit rate in the legal sector was between 30 and 35 %. in the years 2012 to 2018, and that the profit rate was around 20 per cent in those years if the remuneration for the partners’ work is adjusted. The High Court thus considers that the calculation method used by SKAT does not take proper account of the remuneration structure of law firms and that SKAT’s benchmark analysis thus arrived at a profit rate which is not accurate. In doing so, the High Court also took into account that it follows from TPG 2010, points 2.90-2.91, 2.92 and 2.97, that profit level indicator may be, inter alia, net profit in relation to turnover (sales), costs (costs) or assets (assets), see also section C.D.11.4.1.4 of the Legal Guide 2021-1. On the basis of the above, the High Court remands the tax assessment for Rafn & Søn ApS and, consequently, the determination of the joint taxable income for PB Holding ApS for the income years 2006-2010, as regards the amount of DKK 33,699,860, to be reviewed by the Tax Agency in order for the Tax Agency to take due account of the remuneration structure of the law firms in the discretionary assessment.” Click here for English translation Click here for other translation ...

In 2013, Snowy Owl Energy Inc entered into a Consultancy Agreement (Subconsultant Services Agreement) with Rolenergy Inc. – a Hong Kong-based corporation organized and registered in the British Virgin Islands. Based on the Agreement, Rolenergy would serve as Snowy Owl Energy Inc’s sub-consultant. The tax authorities issued an assessment for deficiency income tax (IT), final withholding tax (FWT) and compromise penalty in relation to the sub-consultant fees it paid for taxable year 2013. Judgement of the Tax Court The Court decided in favour of Snowy Owl Energy Inc. Section 23(F)36 in relation to Section 42(C)(3)37 of the NIRC of 1997, as amended, provides that a non-resident foreign corporation is taxable only for income from sources within the Philippines, and does not include income for services performed outside the Philippines. Excerpts: “Indubitably, the payments made in exchange for the services rendered in Hong Kong are income derived from sources outside of the Philippines, thus not subject to IT and consequently to FWT.” ...

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the group’s prices has not changed and compliance with the arm’s length principle has been demonstrated by a study by the firm Taj using the transactional net margin method and the criticisms of its prices are unfounded. The results must be analyzed in the context of heavy investments made by the Bluestar Silicones International sub-group, 80% of which it financed, and which are at the root of the heavy losses recorded in the sub-group’s first fiscal years for the years 2007 to 2009. Furthermore, the business tax adjustments was considered unjustified by the company since, the transfer prices charged did not constitute transfers of profits; Decision of the Court No charge of management fees from Brazil and Hong Kong: “Under these conditions, the administration was justified in considering that BSF’s renunciation to invoice management fees to the Chinese and Brazilian companies of the Bluestar Silicones International group constituted an abnormal act of management. It was thus entitled to correct the company’s profit and also to correct the company’s added value for the determination of its business tax.” No charge of cost of provision of employees in China: “While BSF claims that it derived a direct benefit from the provision of these three expatriates through the development of sales by the Chinese subsidiary, it does not establish this, even though it has been shown that the project manager and the two technicians worked at the Jiangxi site, which was acquiring the technology needed to manufacture products similar to those previously purchased by the Chinese subsidiary from BSF and therefore potentially competing with it. The impossibility of charging such fees due to Chinese legislation has also not been demonstrated, nor has any compensation resulting from insufficient transfer pricing. Under these conditions, the applicant company does not demonstrate that the advantage granted to the Chinese company had sufficient consideration in the interest of its operations and, consequently, was justified by normal management of its own interests.” Additional withholding tax and business tax However, the Court did find that the company was “entitled to argue that the Montreuil Administrative Court wrongly refused to discharge it from the additional withholding tax contributions charged to it for the financial year ended in 2007 and the additional business tax contributions for the year 2007 resulting from the correction made by the tax authorities of its transfer prices practiced with the company BSI Hong Kong.” Click here for English Translation Click here for other translation ...

Montupet EOOD is a Bulgarian subsidiary in the French Montupet Group which specializes in the production of aluminum components for the automotive industry. In February 2016, the French Group became part of the Canadian LINAMAR Group, which specializes in the manufacture and assembly of components for the automotive industry. The French group and its production facilities (plants in France, Bulgaria, Northern Ireland, Mexico and Spain) retained their core business as part of one of LINAMAR’s five main business areas – light metal casting. Effective 01.01.2017, Montupet SAS and Montupet EOOD entered into a Services Agreement, which canceled a previous agreement of 21.12.2009 in the part concerning the corporate and management services provided. Pursuant to the new agreement, Montupet SAS undertakes to provide Montupet EOOD with business advisory services in various areas such as business strategy and development advice; financial strategy advice; legal advice; human resources strategy advice; pricing advice and price negotiations with global customers; supply chain management assistance and advice; marketing strategy advice; engineering and methods assistance and advice; technical advice; customer contact development. According to the new contract, the pricing mechanism for the services is based on a cost allocation key for the services provided. The revenue authority formed the conclusion that the majority of the services provided by the French company after 01.01.2017 were of a general administrative nature and did not differ significantly in their nature and/or volumes from the services provided to Montupet EOOD under the previous agreement of 21.12.2009. On the basis of the evidence available, no specific additional benefits for the Bulgarian company resulting from the services received in 2017 an going forward could be identified. Furthermore some of the services were not related to the activities of Montupet EOOD, but instead categorized as “shareholder activities” carried out wholly for the benefit of the parent company or other members of the group, which should not be recognised as intra-group services. The tax authorities also disregarded the evidence submitted concerning the market nature of the price of the services in question. An assessment was issued where the deductions for payments under the new service contract had been adjusted based on the arm’s length provisions. Montupet filed an appeal with the Administrative court which was dismissed. An appeal was then filed with the Supreme Administrative Court Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court. Excerpts “In the light of the evidence in the case, it is established that the performance of services was agreed between Montupet SAS and Montupet EOOD The NRA Transfer Pricing Manual (fiche 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. According to paragraph 7.5 of the OECD Transfer Pricing Manual for Multinational Enterprises and Tax Administrations (the “OECD Manual”), the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. Paragraph 7.6 of the OECD Guidance states that, under the arm’s length principle, whether an intra-group service is effectively performed where an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial benefit to improve its trading position. This can be determined by analysing whether an independent undertaking on comparable terms would have been willing to pay for the activity if it had been carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. In the instant case, it is apparent from the reasoning of the opinion rendered by the revenue authorities and the ultimate conclusion of the trial court that part of the income paid for the services constituted a disguised distribution of profits within the meaning of § 1(5)(b). “a” of the Tax Code and as such subject to taxation under the Tax Code. However, the contested decision does not set out any specific considerations in this respect, and there is no analysis of the type of services performed, the actual performance of those services, and the manner in which the remuneration for the services was priced. On the other hand, the conclusion of the revenue administration, which is fully accepted by the national court, that part of the income is not taxable under Article 195(1)(b) of the Code of Conduct. 1 of the Income Tax Act, as well as the impossibility of determining the exact amount of the income falling within the scope of Article 12 of the Income Tax Act is unjustified, as it remains unclear what part of the income earned should not be taxed under Article 195(1) of the Income Tax Act. 1 of the Income Tax Act, respectively do not fall within the scope of the DTT. In the course of the administrative appeal, as well as in the course of the court proceedings, the foreign company submitted evidence, including a list of corporate services for 2017, documentation of Linamar’s transfer pricing for fiscal 2017, a cost allocation statement, evidence of specific benefits received in relation to the services provided, as well as a statement of business trips made by employees of other companies in the Montupet Group in the city of Montupet. Ruse for 2017. Thus, the documents listed were not discussed by the first instance court, leaving unclarified the circumstances concerning the actual performance of the intra-group services, their direct and long-term effect and, accordingly, ...

The Oyu Tolgoi copper-gold mine is a joint venture between Turquoise Hill Resources (which is 50.8 per cent owned by Rio Tinto), and the Mongolian Government. The Mongolian government has not been satisfied by the result of the joint venture and has concerns that increasing development costs of the Oyu Tolgoi project has eroded the economic benefits it anticipated receiving. “It is calculated that Mongolia will not receive dividend payments until 2051 and will incur debts of US$22 billion,” said Mongolia’s deputy chief cabinet secretary, Solongoo Bayarsaikhan. “In addition, Oyu Tolgoi is estimated to pay profit taxes or corporate income taxes only in four years until 2051.” The Mongolian authorities has put forward proposals to coordinate and lower management services received from Rio Tinto and increase Mongolia’s benefits by reducing shareholder loan interest rates. On December 23, 2020 the Mongolian Tax Authority issued a press release concerning the results of a completed transfer pricing audit of Oyu Tologi LLC. “The Mongolian Tax Authority has recently completed an audit of Oyu Tolgoi LLC’s 2016-2018 tax returns and identified a number of violations and breaches of relevant laws and the International Rules. As a result, Oyu Tolgoi LLC was notified of MNT 649.4 billion (approximately US$228 million) of additional taxes, inclusive of penalty and default interests, that are due to be paid in cash to the Government of Mongolia. In addition, the MTA has reduced Oyu Tolgoi LLC’s operating loss carry forward balance by MNT 3.4 trillion (approximately US$ 1.2 billion). The Mongolian Tax Authority concluded that certain transactions between Oyu Tolgoi LLC and Rio Tinto and its affiliates were not done at an arm’s length basis and were in violation of the International Rules. Accordingly, the value of such transactions was adjusted, for tax purposes, to reflect the actual value that would have been paid had the transactions occurred between unrelated parties dealing at an arm’s length basis. Major adjustments were made to a series of transactions between Oyu Tolgoi LLC and affiliated entities of Rio Tinto whereby economic value was transferred.” The 2016-2018 audit of Oyu Tologi LLC follows up on a previous assessment for FY 2013-2015. According to an announcement from Turquoise Hill Resources, the previous assessment has now been referred to international arbitration ...

Mantra Limited is engaged in mineral exploration in Tanzania. In carrying out its business, it procured services from non-resident service providers mostly from South Africa. In 2014, Mantra Limited wrote to the tax authorities requesting for a refund of withholding taxes of USD 1,450,920.00 incorrectly paid in relation to services that were performed outside Tanzania by non-resident service providers for the period between July, 2009 and December, 2012. The tax authorities refused the request maintaining that, the services in question were rendered in Tanzania and Article 7 of the DTA was irrelevant in as much as it was limited to business profits and not business transactions. Unsuccessfull appeals were filed by Mantra and in 2020 the case ended up in the Court of Appeal where Mantra argued based on the following grounds:- 1. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that the Board was correct in holding that payments for services rendered/ performed abroad by non-resident suppliers had a source in the United Republic of Tanzania; 2. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that Article 7 of the Double Taxation Agreement does not apply on the Appellant’s case; and 3. That the Tax Revenue Appeals Tribunal erred in law by holding that the Appellant was not justified to claim refund o f incorrectly paid withholding tax. Judgement of the Court of Appeal The Court of Appeal decided in favor of the tax authorities. On the first ground “On our part, we fully subscribe to this recent position of law and differ with the previous position in Pan African Energy Tanzania Limited (supra) for two main reasons. First, as correctly held in Tullow Tanzania BV (supra), the respective authority, much as it was based on an Indian decision construing a statute which is not worded similarly to ours, is istinguishable and thus inapplicable in the instant case. Second and more importantly is the fact that, the position in Tullow Tanzania BV (supra) is the more recent position. The settled position as it stands today is such that, where there are two conflicting decisions of the Court on the similar matter, the Court, unless otherwise justified, is expected to follow the more recent decision. … In view of the foregoing discussion therefore, we dismiss the first ground of appeal. “ On the second ground “Guided by the above authority therefore, it is our firm opinion that the Tribunal was right in holding that the exemption under Article 7 of the DTA was not applicable to the appellant’s business transactions. We thus dismiss the second ground for want of merit.” On the third ground “Since we have held in relation to the first and second grounds that, the charging of withholding taxes was correct, there is consequently nothing to refund and, therefore, the third ground becomes redundant because there remains no withholding tax to refund.” ...

Kenya Fluospar Company Ltd (KFC) had been issued an assessment related to VAT and transfer pricing – leasing of mining equipment, mining services and management services. The assessment was later set aside by the Tax Tribunal and an appeal was then filed by the tax authorities with the High Court THE JUDGEMENT The High Court dismissed the appeal of the tax authorities and decided in favour of KFC. Excerpts “B. Whether the Commissioner was right in the using Transactional Nett Margin Method (TNMM) instead of Split Profit Method (SPM) in determining how to share the income tax between KFC EPZ. 48. Rule 7 thus gives the various methods of choice, one of them being the profit split method. In this regard also, Rule 8(2) provides as follows – 8(2). A person shall apply the method most appropriate for his enterprise, having regard to the nature of the transaction, or class of related persons or function performed by such persons in relation to the transaction. 49. In my view, it follows from the above provisions that the choice of the most favourable tax assessment method is that of the tax payer and not the Commissioners. In this regard, I agree with the reasoning in the case of Unilever Kenya Ltd – vs – The Commissioner of Income Tax [2005]eKLR wherein it was held that the tax payer is entitled to choose the most favourable method to their advantage as far liability to tax is concerned. 50. I however, agree that the Commissioner can intervene where there is evidence of fraud or evasion of taxes. The Commissioner can also intervene and re-asses income tax of a taxpayer and raise additional assessments – see Pilli Management Consultants Ltd – vs – Commissioner of Income Tax – Mombasa HC Misc. Application No.525 of 2016. 51. The main issue that has arisen herein is that instead of addressing the objection raised using the selected profit margin method, the Commissioner changed to the Transactional Nett Margin Method without indicating the law that confers on the Commissioner the power to change the method. 52. Even in this appeal the Commissioner has not pointed the section of the law that gives it the right to change the choice method elected by the taxpayer. The Commissioner maintains that it has general power to change the method because they found new intangible assets of KFC. 53. First of all, there is no evidence that the mining and prospecting licences were new assets not known in the profit split method. Secondly, even if they were new intangible assets, the Commissioner would have to back his change of method with the law, which they have not. I thus find that the Commissioner had no legal power to change to a new method of Transaction Nett Margin method. The Commissioner could only use the Profit Split method chosen by the tax payer. The Commissioner was thus right in using the Transactional Nett Margin Method.” “C. Whether the alleged non benchmarked management services offered to KFC by a related non – resident company (KCMC) do in fact exist, and if so what value could be attributed to the same. 54. It is not in dispute that KFC entered into a management consultancy agreement with Kestrel Capital Management Limited (KCMC), such services to be provided upon requests. The Commissioner contends that no such management consultancy services were provided as no requests were made by KFC to KCMC for such services. KFC on the other hand maintains that they were provided with such management consultancy services by KCMC through meetings and other interactions on financial, investment and human resources matters, and relied on minutes of meetings held which were not disputed by the Commissioner. 55. In my view though indeed there is no evidence that any formal written requests for such management consultancy services was produced by KFC, there was evidence of interactions and meetings held. Such interactions and meetings between KFC and KCMC in my view were adequate proof of consultancy services provided. An adviser is an adviser and the final decision will still have to be made by the principal. If an adviser and a principal hold meetings and discuss items on the operations and management of the business affairs of the principal, in my view, that is adequate to satisfy the provision of consultancy services by the consultant. The fact that members of one corporate institution are the same in another corporate institution does not make a difference in law. As for the value to be attributed to the professional services provided, that will go according to the respective contract, and this court is not suited to determine the same with the facts placed before it.” “63. Consequently, and for the above reasons, I find that both appeals have no merits. I thus dismiss Appeal No. 2 of 2018 and No.3 of 2018 herein. Each of the parties will bear their respective costs of appeal.” Click here for other translation ...

A French subsidiary, SAS Groupe Lagasse Europe, of the Canadian Legasse Group had paid service fees to another Canadian group company, Gestion Portland Vimy. The French tax authorities held that the basis for the payments of service fees had not been established, and that there was no benefit to the French subsidiary. The payments constituted an indirect transfer of profits within the meaning of the ‘article 57 of the general tax code; Excerps from the judgement of the Court: “11. Under the terms of article 57 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “For the establishment of income tax due by the companies which are dependent or have control of companies located outside of France, the profits indirectly transferred to the latter, either by increasing or decreasing the purchase or sale prices, or by any other means, are incorporated into the results recognized by the accounts (…) “. These provisions, which provide for the taking into account, for the establishment of the tax, of the profits indirectly transferred to a foreign enterprise which is linked to it, establish, as soon as the administration establishes the existence of an arm’s length and from a practice included in their forecasts, a presumption of indirect transfer of profits which can usefully be opposed by the taxable business in France only if this provides proof that the benefits which it has granted have been justified by obtaining counterparties. 12. In addition, under the terms of article 39 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “1. The net profit is established after deduction of all charges, these comprising, subject to the provisions of 5, in particular: 1 ° General expenses of any kind (…) “. If, under the rules governing the allocation of the burden of proof before the administrative judge, applicable unless otherwise provided, it is in principle for each party to establish the facts which it invokes in support of its claims, evidence that only a party is able to hold can only be claimed from that party. It is therefore up to the taxpayer, for the purposes of the abovementioned provisions of the General Tax Code, to justify both the amount of the charges he intends to deduct from the net profit defined in Article 38 of the General Tax Code as well as the correction of their accounting entry, that is to say the very principle of their deductibility. The taxpayer provides this justification by producing all sufficiently precise elements relating to the nature of the charge in question, as well as to the existence and the value of the consideration which he has derived from it. … 14. Secondly, SAS GROUPE LAGASSE EUROPE and Gestion Portland Vimy (the service provider), signed, on May 17, 2005, a service agreement which provides that “the service provider undertakes towards the beneficiary, who accepts it, to provide its assistance and advice in the performance of the services listed below, it being specified that this list is not exhaustive “. The services provided by Gestion Portland Vimy to SAS GROUPE LAGASSE EUROPE are defined in article 2 of the agreement and concerned assistance and advice in the areas of commercial prospecting and marketing, IT, finance, business development for the subsidiaries of SAS GROUPE LAGASSE EUROPE and the general administration. 15. The tax authorities questioned the deductibility of the sums paid within the framework of the execution of this agreement to the company GPV by the SAS GROUPE LAGASSE EUROPE by noting that this company, which has no turnover that the “management fees” paid by its French and German subsidiaries, the companies LCetI and LCetI GmbH and for financial products that the dividends distributed by the company LCetI, achieved respective operating results of 604,239 euros and 1,394,256 euros during 2009 and 2010, due to the very high cost of the fees invoiced by the company GPV, up to 937,901 euros in 2009 and 1,237,526 euros in 2010, even though it partially invoiced these fees to its subsidiaries, without the reality of the services billed by GPV being really established. 16. If the applicant has produced a certain number of invoices issued by the company GPV and relating either to services of the nature of those provided for in the aforementioned agreement of May 17, 2005, or to travel or subsistence expenses which would have been exposed for the provision of these services, it does not however provide any information, such as, for example, diaries, meeting minutes, legal acts relating to the management and administration of the subsidiaries concerned or more generally any other document relating to the services in question, which would be such as to justify their actual performance. The materiality of these services is not more established by the certificate obtained from the tax services of the province of Quebec and the terms of the memorandum and the report written, after the period verified, by the consulting firm, “Cinq Mars Conseil “, Which only relate to the relationships maintained by SAS GROUPE LAGASSE EUROPE with its French subsidiary, the company LCetI without justifying the existence of services rendered for the benefit of this subsidiary by the company GPV and the assumption of responsibility of the cost of such services by SAS GROUPE LAGASSE EUROPE. In these conditions, the existence of a real counterpart to the sums paid by this company to the company GPV cannot be regarded as demonstrated. 17. Consequently, the tax authorities were right to regard the sums paid to the company GPV as having the nature of an indirect transfer of profits within the meaning of article 57 of the general tax code and the has been reintegrated into the taxable income of SAS GROUPE LAGASSE EUROPE in application of these provisions and those of article 39 of the same code.” Click here for translation ...

A Swiss bank had a subsidiary in Guernsey that administered a number of funds and received a management fee of 1.5% of the net value of the assets under management and a performance fee of 10–20% of the funds’ performance. The activities of the Guernsey company were delegated to the Swiss parent and third parties. Both the third parties and the Swiss parent received an management fee of 0.75%, but only the third parties also received a performance fee. The tax administration claimed that 70% of the performance fees and a remuneration for other activities should have been paid to the Swiss parent. Judgement of the Supreme Court The Court found that the agreed conditions with third-party service providers were at arm’s length, and should also have been applied in relation to the Swiss parent company. Hence, the court dismissed the appeal of Click here for English translation Click here for other translation ...

A Spanish subsidiary, ARW Enterprise Computin Solution SA, had deducted intra-group management fees paid according to two service contracts with two french group companies – Distrilogie SA and DCC France Holding SAS. For an expense to be deductible it is required not only that invoice, account, payments have been imputed correctly, but also that the expense have been held for obtaining income and to the direct benefit of the subsidiary. The Spanish tax authorities found, that these requirements had not been sufficiently proved by Computin Solution SA and issued a tax assessment. Click here for other translation ...

Following an audit Broker A SRL was ordered to submit corrective statements on the corporate income tax for the tax years 2016 and 2017, and not to take over the tax loss from previous years, in the amount of RON 62,773,810 in 2016 and 2017. The tax authorities had found shortcomings in the comparability study drawn up by the company and replaced it with their own study. According to Broaker A SRL the transfer pricing adjustment was unlawful: the measure of reworking the comparability study has no legal basis and was not reasoned by the tax authorities; the findings of the tax inspection bodies are based on a serious error concerning the accounting recognition of A. BV’s income in its records; unlawfulness as regards the adjustment of income in respect of support services. ANAF has made serious errors of calculation by reference to its own reasoning in establishing the adjustments. unlawfulness of the tax decision in relation to the adjustment of expenditure on strategic management services. The findings of the tax inspection team lead directly and directly to double taxation at group level of this income, to which the following criticisms are made: the tax authorities erroneously adjusted income relating to strategic management services which were not the subject of the Support Services Contract between A. SRL and A. BV and which were not provided by the company; the imposition of the obligation to re-invoice A. BV for management services leads to double taxation at group level. Judgement of Supreme Court The Supreme Court found the appeal of Broker A SRL unfounded and upheld the assessment of the tax authorities. Click here for English translation Click here for other translation ...

Aggreko International Projects (AIP branch) operates in Tanzania as a branch of Aggreko International Projects Limited, a UK company engaged in generation of emergency/temporary power, and working mainly with Tanzania National Electricity Supply Company Limited (TANESCO) as the main customer. In FY 2011 to 2012, the head office provided a number of services for which the AIP branch paid management fees. In the financial year 2013-2014, the tax authorities conducted an audit. The tax authorities concluded that head office costs are part of the management fees attributed to AIP branch’s operations in the country and consequently subject to withholding tax. Following an appeal, the tax assessment was set aside by the Tax Revenue Appeals Tribunal. This decision was then brought to the Court of Appeal by the tax authorities. Judgement of the Court of Appeal The Court of Appeal decided in favor of the tax authorities. Excerpt “Perusing through the above provisions, we entirely subscribe to the holding in Tullow Tanzania BV case (supra), a position restated in the Shell Deep Water TZ BP case (supra), there is no doubt in our minds that when reading through sections 6(1)(b), 69(i)(i) and 83(1)(b) of ITA 2004, all together gives two conditions for payment to a non-resident to be subjected to withholding tax. These are: (1) the service of which the payment is made must be rendered in the United Republic of Tanzania and (2) the payment should have a source in the United Republic of Tanzania. This stance has not been challenged by either counsel in this appeal. … We firmly subscribe to the position held by this Court as expounded in Tullow Tanzania BV case (supra) a position also adopted in Shell Deep Water Tanzania BV (supra) on the issue of “the source” and “service rendered” and also where it was stated that, as the recipient of the service is the actual payer for such services, the “source of payment” has to be where the payer resides. Applying the findings from the cases cited above to the present appeal, where the management services were conducted from Dubai, by a branch company situated in Tanzania, the situation is similar in that the said services were utilized or consumed in the United Tanzania and thus without doubt can be said to be “sourced” in the United Republic of Tanzania. There being no dispute that for the years 2011-2012, the respondent paid management fees for service rendered on its behalf by its head office situated outside Tanzania, that is, Dubai and that during the period the respondent was engaged in operations in Tanzania, we are thus satisfied that the respondent made payment for management services rendered by non-resident service providers, for services sourced in Tanzania, and that this imposed a duty to the respondent to withhold tax on the payment made. In the event, we find that the 1st and 3rd ground of appeal are meritorious and that the Tribunal erred in law by not having a proper construction of sections 6(1)(b), 69(i)(i) and 83(1)(b), especially the fact that read together, withholding tax is imposed on payment of service to non- resident service providers. We think it is important to also discuss albeit briefly the four issues raised by the respondent when submitting and imploring this Court to find the decision in Tullow Tanzania BV case (supra) bad in law. We wish to state that the duty of this Court in this appeal was not one of reviewing our decision in Tullow Tanzania BV case (supra), there are remedies available under the Appellate Jurisdiction Act, Cap 141 RE 2002 where a person aggrieved by a decision of this Court may undertake to move the Court to review its decision and that was not our task in this appeal before us. In the final analysis, having allowed the 1st and 3rd ground of the appeal consequential to this is the duty for the respondent to pay interest for the principal sum and for the delay in payment of commensurate tax. Thus the 2nd ground of appeal has merit and is therefore allowed.” Click here for translation ...

ARPTe Ltd had paid a subsidiary for management services and use of intangibles. The benefit of those payments were challenged by the tax authorities and an assessment was issued where these deductions had been denied. An appeal was filed with the tax court Judgement of the Tax Court The Court set aside the assessment of the tax authorities and decided in favor of ARPTe Ltd. According to the Court ARPTe Ltd had been able to provide sufficient evidence that the management services and intangibles provided by the subsidiary had actually benefited the company. “ Click here for translation ...

Intracom Taiwan had deducted losses on intra-group receivables and management fees in its taxable income. These deductions had been partially denied by the Taiwanese tax administration due to lack of documentation and economic substance. Intracom brought the case to court. The Supreme Administrative court dismissed Intracom’s appeal and upheld the assessment. On the issue of deduction for bad debt the court states:“The Appellee’s request for such documents was in accordance with the law. However, the Appellant was unable to produce documents that met the statutory requirements, and from this point of view, the Appellee’s refusal to allow the recognition of the doubtful accounts could not be considered an error.(3) The appellant’s argument that the tax authorities should accept the recognition of doubtful debts as long as the appellant obtains the documentary evidence of the “foreign office certification” which proves the objective fact that “the debtor of the receivable has gone into liquidation” is clearly inconsistent with Article 94 of the R.O.C.“ On the issue of management fee the court states:“Under the aforesaid objective circumstance that “the authenticity and necessity of this management fee expenditure is highly doubtful” Click here for English Translation ...

The Canada Revenue Agency had issued a reassessments related to Loblaw’s Barbadian banking subsidiary, Glenhuron, for tax years 2001 – 2010. The tax authorities had determined that Glenhuron did not meet the requirements to be considered a foreign bank under Canadian law, and therefore was not exempt from paying Canadian taxes. “Loblaw took steps to make Glenhuron look like a bank in order to avoid paying tax. Government lawyers said Glenhuron did not qualify because, among other things, it largely invested the grocery giant’s own funds and was “playing with its own money.“ Tax Court found the transactions entered into by Loblaw regarding Glenhuron did result in a tax benefit but “were entered primarily for purposes other than to obtain the tax benefit and consequently were not avoidance transactions.” The Tax Court concludes as follows: “I do not see any extending the scope of paragraph 95(2)(l) of the Act. No, had there been any avoidance transactions the Appellant would not be saved by the fact it is not caught by a specific anti-avoidance provision.“ “The FAPI rules are complicated, or convoluted as counsel on both sides reminded me, though I needed no reminding. GAAR can be complicated. Taken together they weave a web of intricacy worthy of the 400 pages of written argument presented to me by the Parties. It has not been necessary for me to cover in exhaustive detail every strand of the web. Once I determined how to interpret the financial institution exemption, the complexity disappeared and the case could be readily resolved on the simple basis that Loblaw Financial’s foreign affiliate, a regulated foreign bank with more than the equivalent of five full time employees was conducting business principally with Loblaw and therefore could not avail itself of the financial institution exemption from investment business.“ “With respect to the calculation of the FAPI that arises from my determination, I agree with Loblaw Financial that the financial exchange gains/losses should not be treated on capital account but on income account. It does not matter whether the management fees from the Disputed Entities fall within paragraph 95(2)(b) of the Act as they would be part of GBL’s investment business caught by FAPI in any event.“ ...

This case concerned a tax scheme where taxable income was eliminated using factoring and management fees to shift profits. The Tax Court held that the scheme was in essence an attempt to eliminate the taxes. Factoring and management fees were not deductible expenses but rather disguised distributions of corporate profits and generally currently taxable to the individual shareholders as constructive dividends or as income improperly assigned to the corporations. In the TC Memo interesting views on the arm’s length nature of factoring and management fees is elaborated upon. TC memo 2018-131 ...

CF (Pvt) Ltd’s main business was import, distribution and marketing of motor vehicles and spare parts of a specified brand. Following an audit CF had been issued a tax assessment related to the transfer pricing and VAT – import prices, management fees, audit costs etc. Judgement of the High Court The High Court issued a decision predominantly in favor of the tax authorities. In its judgement, the court stated that either the general deduction provision under section 15 (2) or section 24 or section 98 of the Income Tax Act could be employed to deal with transfer pricing matters. Excerpts: “It seems to me that the unsupported persistent assertions maintained by the appellant even after the concession of 14 November 2014 were indicative of both corporate moral dishonesty and a lack of good faith. I therefore find that the appellant through the mind of its management evinced the intention to evade the payment of the correct amount of tax as contemplated by s 46 (6) of the Income Tax Act by claiming the deduction of management fees paid to the intermediary, who was not entitled to such fees. The Court or the Commissioner have no option but to impose a 100% penalty. The penalty imposed by the Commissioner is accordingly confirmed.” “It seems to me that the Commissioner may very well have been justified in invoking the provisions of s 24 of the Income Tax Act by the acts of commission and omission of the appellant in respect of both management fees and goods in transit at the time he did. However, in accordance with the provisions of s 65 (12) of the Income Tax Act I did not find the claim of the Commissioner unreasonable even in respect of the interest issue that the Commissioner conceded at the eleventh hour or the grounds of appeal frivolous. I will therefore make no order of costs against either party other than that each party is to bear its own costs. Disposal Accordingly, it is ordered that: 1. The amended assessments number 20211442 for the year ending 31 December 2009, 20211443 for the year ending 31 December 2010, 202211446 for the year ending 31 December 2011 and 20211448 for the year ending 31 December 2012 that were issued against the appellant by the respondent on 27 June 2014 are hereby set aside. 2. The Commissioner is directed to issue further amended assessments against the appellant in respect of each year of assessment in compliance with this judgment and in doing so shall: a. Add back to income 7% interest on the cost of services rendered by the appellant for the consignment stock in transit to Zambia, Malawi and Tanzania in the sum of US$2 240 for 2009, US$ 2 505.87 for 2010, US$ 2 198.13 for 2011 and US$3 273.20 for 2012 tax years, respectively. b. Add back to income management fees that were deducted by the appellant in each year in the sum of US$130 000 for 2009, US$140 000 for 2010, US$ 256 629 for 2011 and US$ 140 000 for 2012 tax year, respectively. c. Bring to income the provisions for leave pay in the sum of US$10 000 for 2009, US$ 9 960 for 2010, US$2 049 for 2011 and US$ 491 for 2012 tax year. d. Bring to income provisions for audit fees in the sum of US$ 10 199.17 for 2009, US$12 372 for 2010, US$10 575 for 2011 and US$ 1 260 for the 2012 tax year, respectively. e. Discharge the notional interest he sought to impose on loans and advances made to ADI and GS, respectively. 3. The appellant is to pay 100% additional tax on management fees, 4. The appellant shall pay additional penalties of 10% in respect of leave pay and audit fee provisions. 5. The tax amnesty application is dismissed. 6. Each party shall bear its own costs.” Click here for other translation ...

The African Tax Administration Forum (ATAF) and the German Federal Ministry for Economic Cooperation and Development (BMZ), through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, have developed this toolkit for African tax authorities seeking to assess transfer pricing risk in the mining industry. The purpose is to strengthen authorities’ capacity to determine whether they should audit particular high-risk “related party transactions.” The toolkit employs a specific risk review approach, which focuses on particular transfer pricing issues that present a high risk to revenue (as distinct from a comprehensive risk review, which tax authorities use when they cannot detect where transfer  pricing issues are likely to arise). A loss of even 1 percent of the value of these transactions is likely to be significant for developing country revenues. These issues are also very prevalent: many African tax authorities report corporate services, including procurement and management, as common causes of tax loss. The four issues of focus are: 1. Marketing arrangements. A related company, for example a marketing hub, buys mineral products from the mine. The key issue is whether the mineral products are transferred to a fully fledged related party marketer that takes ownership of the product, performs value-adding functions and assumes entrepreneurial risk, or, more commonly, a hub that merely provides a support function. 2. Intercompany debt. A subsidiary receives debt from a parent or an affiliate company, often a corporate treasury located in a low-tax jurisdiction, to finance geological exploration or mine development. Debt generates interest payments, which are tax deductible. Most African countries currently limit the maximum amount of debt on which deductible interest payments are available, by way of a debt-to-equity ratio. However, the cost of related party debt (i.e., the interest rate) is difficult for tax authorities to price, leaving the tax base vulnerable to excessive interest deductions. 3. Procurement services. A company purchases mining goods and services on behalf of its subsidiary; the price charged to the subsidiary will include the direct cost, plus a “mark-up.” Usually in such cases the cost base should be the cost of providing the service, not the value of the goods. 4. Management services. The subsidiary pays a fee to a related party in return for a range of administrative, technical and advisory services ...

“B-Production” is a subsidiary in a US multinational group and engaged in production and sales. “B-Production” pays services fees and royalties to its US parent. Following an audit, the tax authorities issued an assessment where deductions for these costs had been reduced which in turn resulted in additional taxabel income. An appeal was filed by “B-Production” with the Administrative court which in a judgement of June 2015 was rejected. An appeal was then filed by “B-Production” with the Supreme Administrative Court. In the appeal “B-Production” contested the findings of the Administrative Court that there was a hidden distribution of profits by means of the payment of management fees and duplication (overlapping) of the services at issue under the management contract and the other two agreements between the B-Production and the parent company. B-Production further argued that the evidence in the case refutes the conclusions in the tax assessment and the contested decision that the services rendered did not confer an economic benefit and in addition argues that the costs of royalties and the costs of engineering and control services under the other two contracts are not a formative element of the invoices for management services, a fact which was not considered by the court. Judgement of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities and dismissed the appeal of B-Production as unfounded. Excerpts “The dispute in the case concerned the recognition of expenses for intra-group services. The NRA Transfer Pricing Manual (Fact Sheet 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. In the present case, the costs in question relate to a contract for the provision of management services dated 26.11.2002, paid by the subsidiary [company], registered in the Republic of Bulgaria, to the parent company, [company], registered in the USA. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘the OECD Guidelines’) should therefore be taken into account in the analysis of those costs and, accordingly, in the interpretation and application of the substantive law. According to paragraph 7.5 of the OECD Guidelines, the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. In the present case, the dispute in the case relates to the answer to the first question, since it is apparent from the reasoning of the audit report, the revenue authorities and the ultimate conclusion of the court of first instance that the services did not confer an economic benefit on the domestic company and constituted a disguised distribution of profits within the meaning of section 1(5)(b) of the Act. “a” of the Tax Code. Therefore, the arguments in the cassation appeal for material breaches of the rules of court procedure – lack of instructions concerning the collection of evidence related to the amount of the price of the intra-group service and the allocation of the burden of proof to establish this fact – are irrelevant to the subject matter of the dispute. Paragraph 7.6 of the OECD Guidelines states that, according to the arm’s length principle, whether an intra-group service is actually performed when an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial advantage to improve its commercial position. This can be determined by analysing whether an independent undertaking would, on comparable terms, be willing to pay for the activity if it were carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. It is correct in principle, as stated in the appeal in cassation, that the analysis of intra-group services and their recognition for tax purposes is based on the facts and circumstances of each particular case. For example, the OECD Guidelines lists activities which, according to the criterion in point 7.6, constitute shareholding activities. According to paragraph 7.10, b. “b” of the OECD Guidance, expenses related to the accounting requirements of the parent company, including consolidation for financial statements, are defined as such. The evidence in this case established beyond a reasonable doubt that the management services covered by the contract at issue in this case included the compensation of a responsible financial and accounting manager, including cash flow planning and reporting, preparation of monthly, quarterly and annual reports (American Accounting Standards accounting. These activities, which there is no dispute that they were performed, fall within the definition of Section 7.10 for “shareholder activities.” The remaining activities included in management services, including the costs associated with the use of the software programs referred to in the expert report, are imposed by the parent company’s requirements for control and accountability of the subsidiary under the three sets of activities – managing director, production and finance. There is no merit in the objection in the cassation appeal that the management contract services do not duplicate the costs of the other two contracts. It is established from the conclusion of the FTSE that the costs of engineering and control services and royalties (know-how and patent) are not a formative element of the invoices for management services. The conclusion of the experts was based only on the fact that separate contracts had been concluded for the individual costs and not on an analysis of the elements that formed the fees. According to Annex 6 to the expert report, ...

The fact that a payment was made to an associated enterprise for purported services can be useful in determining whether services were in fact provided, but the mere description of a payment as, for example, “management fees” should not be expected to be treated as prima facie evidence that such services have been rendered. At the same time, the absence of payments or contractual agreements does not automatically lead to the conclusion that no intra-group services have been rendered ...

Herbalife International India is a subsidiary of HLI Inc., USA. It is engaged in the business of dealing in weight management, food and dietary supplements and personal care products. The return of income for the assessment year 2006-07 was filed declaring Nil income. The Indian company had paid royalties and management fees to its US parent and sought to justify the consideration paid to be at arm’s length. In the transfer pricing documentation the Transactional Net Margin Method (TNMM) had been selected as the most appropriate method for the purpose of bench marking the transactions. The case was selected for scrutiny by the tax authorities and following an audit, deductions for administrative services were denied and royalty payments were reduced. Disagreeing with the assessment Herbalife filed an appeal. Decision of the Income Tax Appellate Tribunal The Tax Appellate Tribunal dismissed the appeal of Herbalife and upheld the tax assessment. Excerpts “The appellant had not filed any additional evidences to prove the administrative services/technical knowhow are actually received by the appellant and thus the assessee company had failed to discharge this onus of proving this aspect. Therefore, even as per the provisions of Indian Evidence Act, the presumption can be drawn that the assessee has no evidence to prove this aspect. Therefore, the AO/TPO was justified in adopting the ALP in respect of payment of administrative services and royalty at Nil. Thus, the grounds of appeal in ground Nos. 2 to 7 are dismissed. In respect of the other grounds of appeal, since we held that there was no proof of receipt of administrative services as well as technical knowhow which is used in the process of manufacturing activity, the question of bundling of transaction or aggregating all other transactions does not arise.” “Thus all the grounds of appeal relating to the royalty and administrative services have been dismissed. Then the only ground of appeal that survives is ground IT(TP)A No.1406/Bang/2010 IT(TP)A No.924/Bang/2012 relating to uphold of disallowance on account of doubtful advance written off of Rs.1,20,16,395/-. The brief facts surrounding this addition are as under:” ...

The Court of Appeal upheld decisions of the High Court confirming the Commissioner of Inland Revenue’s disallowance of a $1,116,000 management fee for income tax purposes. The Court of Appeal dismissed Honk Land Trustees Limited’s (“HLT”) appeal on the following alternative grounds: (1) there was no satisfactory evidence to show that management services were in fact provided; (2) there was no sufficient nexus shown; and (3) in the event the management fees were deductible, they were nevertheless part of a void tax avoidance arrangement. Additionally, the Court of Appeal agreed that the Commissioner was entitled to impose abusive tax position shortfall penalties ...

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 ...

The tax authorities had disallowed royalty payments of 3% of net sales from Cussons Indonesia to its parent company in the UK, PZ Cussons International Ltd. According to the tax authorities Cussons had been unable to prove that the payment was at arm’s-length, as well as unable to provide transfer pricing documentation supporting the pricing. Cussons claimed that the royalty payments was supported with documents such as a royalty agreement, documentation for VAT payments, and withholding tax on royalty. Judgement of the Tax Court The court decided in favour of Cussons and set aside the assessment of the tax authorities Click here for translation ...

The 2013 Draft Handbook on Transfer Pricing Risk Assessment is a detailed, practical resource that countries can follow in developing their own risk assessment approaches. The handbook supplements useful materials already available with respect to transfer pricing risk assessment. The OECD Forum on Tax Administration published a report entitled “Dealing Effectively with the Challenges of Transfer Pricing” in January 2012. One chapter of that report also addresses transfer pricing risk assessment ...

This case is about extensive tax evasion set up by the tax manager of the Asian Agri Group. According to the tax authorities income from export sales had been manipulated. Products were sent directly to the end buyer, whereas the invoices recorded that the products were first sold to companies in Hong Kong and then sold to a company in Macau or the British Virgin Islands before they were finally sold to the end buyer. The intermediary companies were proven to have been used only for the purpose of lowering the taxable income by under-invoicing the sales prices compared to the sales price to the end buyer. Various fees had also been deducted from the companies income to further lower the tax payment. These included a “Jakarta fee”, a Hedging fee and a Management fee. Judgement of the Supreme Court The court ruled that the tax manager was guilty of submitting an incorrect or incomplete tax return. On that basis the tax manager was sentenced to a probationary imprisonment for two years on condition that, within one year, Asian Agri Group’s 14 affiliated companies paid a fine of twice the underpaid tax amount – 2 x Rp. 1.259.977.695.652,- = Rp. 2.519.955.391.304,-. Click here for translation (Hundreds of pages from the judgement containing lists of thousands of invoices and payments have been omitted in the translated version) ...

Spedition Gmbh entered a written agreement – at year-end – to pay management fees to its Dutch parent for services received during the year. The legal question was the relationship between arm’s-length principle as included in double tax treaties and the norms for income assessments in German tax law. The assessment of the tax office claiming a hidden distribution of profits because of the “retrospective” effect of the written agreement, was rejected by the Court. According to the Court the double tax treaty provisions bases the arm’s length standard on amount, rather than on the reason for, or documentation, of a transaction. Click here for English translation Click here for other translation ...

Kenco Restaurants was part of an intra-group cost-sharing arrangement and paid ‘management fees’ to a related service company. Following an audit, the tax deductions for the fees were adjusted by the tax authorities as the method used to calculate the fees was not in line with the arm’s length principle. Kenco Restaurants took the matter to court. Judgement of the Court. The Court upheld the decision of the tax authorities. Excerpt “We conclude that Petitioners’ allocations are not an arm’s-length charge because Petitioners provide no evidence of an independent transaction between unrelated parties in similar circumstances. Also, the facts support our conclusion that Petitioners were not dealing at arm’s length but were, instead, allocating their costs based on an ability to pay. Petitioners charged Wapak, a Restaurant Corporation, no management fee in 1990, but when its income increased in 1991 and 1992, so did its fees.5 GMK’s fees increased more than 900% between 1990 and 1992, and its share of the total fees increased by a factor of seven. However, no evidence was presented that there was a corresponding increase in Owner hours. In 1990, Kenco required special attention to rebuild the restaurant. Yet, in 1991, the fee allocated to it was higher than 1990. There is no claim that K-K required special attention in 1992, but its fee was higher in 1992 than in 1991. Perrysburg was charged $29,000 in 1990, $60,415 in 1991, and $42,700 in 1992, but Petitioners provided no explanation, in terms of services, that would account for these differences.” Click here for other translation ...

If the assessment of the abnormal nature of a management act poses a question of law, it is, as a general rule, up to the administration to establish the facts on which it bases itself to invoke this abnormal nature. However, this principle can only be applied in compliance with the legislative and regulatory provisions governing the burden of proof in tax litigation. The determination of the burden of proof stems mainly, in the case of companies subject to corporation tax, from the nature of the accounting operations to which the management acts challenged by the administration gave rise. If the act contested by the administration has resulted, in the accounts, in an entry relating, as is the case here, to travel expenses, to charges of the nature of those referred to in Article 39 of the same Code and which are deducted from the net profit defined in Article 38 of the Code, the administration must be deemed to provide the proof which is incumbent on it if the taxpayer is not, himself, able to justify, in principle as well as in amount, the accuracy of the entry in question, even if, because of the procedure implemented, he would not have been required to provide such a justification in this respect. When there is a disagreement between the taxpayer and the administration on questions of fact, whether it concerns the materiality of the facts themselves or the assessment that should be made of the facts, particularly with regard to the real situation of the company or the trade or industry practices to which it belongs, this disagreement may, by virtue of the provisions of Article 1649 quinquies A of the CGI included in Article L.59 of the tax procedure book, be submitted to the assessment of the departmental commission of direct taxes and turnover taxes at the taxpayer’s initiative or that of the administration. When the latter has followed the duly expressed opinion of the commission, it is, in any case, up to the taxpayer to demonstrate, before the tax judge, the factual elements he is relying on. As the taxes were established in accordance with the opinion of the departmental commission, it is up to the company to prove the contrary, with regard to the adjustments made by the administration on the basis of Article 57 of the CGI. Excerpt from the Judgement “.. Considering that, with regard to the “commissions” paid by the company “BOUTIQUE 2M” to the Swedish company “Hennes-Mauritz AB”, the administration establishes the existence of the link of dependence of the former with regard to the latter, of which it avails itself, as well as the materiality and the amount of the payments; that, however, the company “BOUTIQUE 2M” justifies, for its part, that the Swedish firm gave it effective support to develop sales in France while invoicing it for the goods on the basis of its own purchase prices plus only transport costs; that, in view of the particularly advantageous conditions that it had thus been granted in the interest of its own business, ‘BOUTIQUE 2M’ provides proof that, contrary to what the departmental tax commission considered, the payments made to ‘Hennes-Mauritz AB’ actually involved commercial considerations of at least equivalent value for it, which prevented them from being reintegrated by application of the above-mentioned provisions of Article 57 ; that, consequently, the applicant company is entitled to maintain that it is wrongly that, by the contested judgment, the administrative court rejected its request insofar as it relates to the reintegration of the said commissions….” Click here for English translation Click here for other translation ...