The tax authorities issued an assessment of additional taxable income for “D. sp. z o.o.” resulting in additional corporate income tax liability for 2014 in the amount of PLN 2,494,583. The basis for the assessment was the authority’s findings that the company understated its taxable income for 2014 by a total of PLN 49,732,274.05, as a result of the inclusion of deductible expenses interest in the amount of PLN 39,244,375.62, under an intra-group share purchase loan agreements paid to W. S.a.r.l. (Luxembourg) expenses for intra-group services in the amount of USD 2,957,837 (amount of PLN 10,487,898.43) paid to W. Inc. (USA) “D. sp. z o.o.” filed a complaint with the Administrative Court (WSA) requesting annulment of the assessment. In a judgment of 15 September 2020 the Administrative Court dismissed the complaint. In the opinion of the WSA, it was legitimate to adjust the terms of the loan agreement for tax purposes in such a way as to lead to transactions that would correspond to market conditions, thus disregarding the arrangements, cf. the OECD TPG 1995 para. 1.65 and 1.66. Furthermore, according to the court the company did not present credible evidence as to the ‘shareholder’s expenses’ and the fact that significant costs were incurred for analogous services purchased from other entities indicates duplication of expenses. Consequently, it is impossible to verify whether the disputed management services were performed at all. Not satisfied with the decision “D. sp. z o.o.” filed an appeal with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and the tax assessment and refered the case back to the tax authorities for a reexamination. According to the court, there was no legal basis in Poland in 2014 for the non-recognition or recharacterisation of controlled transactions. The Polish arm’s length principle only allowed the tax authorities to price controlled transactions. The provisions (Articles 119a § 1 and § 2 Op) allowing for the substitution of the effects of an artificial legal act, if the main or one of the main purposes of which was to achieve a tax advantage have been in force only since 15 July 2016. And the possibility provided for the tax authority to determine the taxpayer’s income or loss without taking into account the economically irrational transaction undertaken by related parties (Article 11c(4) of the CIT) came into existence even later, as of 1 January 2019. Excerpts “3.2 The tax authorities relied on section 11(1) of the Income Tax Act (as in force in 2014), under which the tax authorities could determine the taxpayer’s income and the tax due without taking into account the conditions established or imposed as a result of the relationship between the contracting entities. However, this income had to be determined by way of estimation, using the methods described in paragraphs 2 and 3 of Article 11 of the Income Tax Act. This is because these are not provisions creating abuse of rights or anti-avoidance clauses. They only allow a different determination of transaction (transfer) prices. The notion of ‘transaction price’ was defined in Article 3(10) of the Op, which, in the wording relevant to the tax period examined in the case, stated that it is the price of the subject of a transaction concluded between related parties. Thus, the essence of the legal institution stipulated in Article 11 of the CIT is not the omission of the legal effects of legal transactions made by the taxpayer or a different legal definition of those transactions, but the determination of their economic effect expressed in the transaction price, disregarding the impact of institutional links between the counterparties (…) It is therefore a legal institution with strictly defined characteristics and can only have the effects provided for in the provisions defining it (as the law stood in 2014). Meanwhile, the application of any provisions allowing the tax authorities to interfere in the legal relations freely formed by taxpayers must be strictly limited and restricted only to the premises defined in those provisions, as they are of a far-reaching interferential nature. Any broadening interpretation of them, as a result of which legal sanction could be obtained by the interference of public administration bodies going further than the grammatical meaning of the words and phrases used in the provisions establishing such powers, is inadmissible.” “3.3 The structure of the DIAS ruling corresponds to the hypothesis of the standard of Article 11c(4) of the 2019 CIT, which was not in force in 2014. Therefore, there was no adequate legal basis for its application with respect to 2014. This legal basis was not provided by Article 11 of the Corporate Income Tax Act in force at that time. This provision regulated the issue of so-called transfer prices, i.e. transaction prices applied between entities related by capital or personality. In this provision, the legislator emphasised the principle of applying the market price (also known as the arm’s length principle), requiring that prices in transactions between related parties be determined in such a way as if the companies were functioning as independent entities, operating on market terms and carrying out comparable transactions in similar market and factual circumstances. When the transaction under review deviates from those between independent parties, in comparable circumstances, then in the event of the occurrence of also other circumstances indicated in Article 11 of the updopdop, the tax authority may require an adjustment of profit. The legislative solutions adopted in Article 11 of the CIT Act (from 1 January 2019 in Article 11a et seq. of the CIT Act) refer to the recommendations contained in the OECD Guidelines on transfer pricing for multinational enterprises and tax administrations. The Guidelines were adopted by the OECD Committee on Fiscal Affairs on 27 June 1995 and approved for publication by the OECD Council on 13 July 1995 (they have been amended several times, including in 2010 and 2017). While the OECD Transfer Pricing Guidelines do not constitute a source of law in the territory ...

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 ...

“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 Poland vs LVAS - I SA_Go 234_22 z 2022-09-08 ORG ...

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 ...

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 CAA de DOUAI, 4ème chambre, 10_02_2022, 19DA01682, Inédit au recueil Lebon - Légifrance ...

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 Spain vs Sierra Jan 2022 AN 151-2022 NW ...

“Construction Service S.A.” is active in Design, Repair and Construction of buildings. During the FY 2011-2013 it paid for services – management services and construction services – rendered from related parties. Following an audit the tax authorities issued an assessment where payments for these services had been adjusted by reference to the arm’s length principle. According to the authorities the benchmark studies in the company’s transfer pricing documentation suffered from comparability defects and moreover it had not been sufficiently demonstrated that the services had been effectively provided. The tax authorities pointed out that since the company is not considered comparable to the taxpayer, the interquartile range would be from 5.15% to 8.30% with a median of 5.70%; therefore, the taxpayer’s operating margin of 4.07% is outside the interquartile range. Not satisfied with the adjustment “Construction Service S.A.” filed an appeal with the Tax Court Judgement of the Tax Court The court ruled in favour of “construction S.A” and revoked the decision of the tax authorities. Excerpts “Without prejudice to the foregoing, we must clarify that the adjustments to the financial information must use, precisely, the financial information, which leads us to disagree with the decision of the taxpayer’s expert to use the information from the income tax return for the calculation of the operating margin, knowing that there are quantitative and qualitative differences with respect to the financial information (page 565 of the Court’s file), and even with the information contained in the transfer pricing studies, which makes his answers to questions 1 and 2 less reliable, since the information used to determine the interquartile range is based on financial information (not tax information) of the comparables.” “In this regard, this Court considers that although the OECD Transfer Pricing Guidelines indicate in the section entitled “Multi-year data” of the Comparability Analysis Section, in paragraphs 3.75 to 3. 79, the possibility of using data relating to several years for the profitability analysis or multi-year data, the Tax Administration, used information from 2010 to 2012 of comparable companies since the appellant itself indicated in the 2012 Transfer Pricing Study, the total transactions carried out with its related parties abroad, taking into account that it was in this period, in which the transactions were carried out, according to the global financial information of the audited Financial Statements as of 31 December 2012 by , therefore the operating margin that should be adjusted to the median of free competition, the costs of the operations with related parties of ———— to the year 2012, but we agree with the Tax Administration that the additional liquidation for the Income Tax is the one declared for the fiscal period 2013, since it was in that period due to the opted method where the total gross income, costs and expenses were allocated, which includes as already mentioned the adjustment of the operating margin (See fs. 221 to 244 of Volume 1 of the DGI’s file). Therefore, it is not possible for the taxpayer, at this stage, to point out that the Tax Administration should have used the information from the periods of the companies selected as comparable, in accordance with the Transfer Pricing guidelines, taking into consideration the income tax return for the 2013 tax period, which includes the 3 years of operations of the work, i.e. from 2011 to 2013 (instead of 2010-2012), and which yields a profitability indicator or operating margin according to ————, (even though the company ——————– has been rejected, and maintaining those that the DGI did accept), of 4. 58%, a median of 4.67% and 7.85%, which, in its opinion, would place it within the range of compliance with the arm’s length principle. Similarly, we consider it important to point out that in the same way that the taxpayer cannot claim to use its aggregated financial information, ignoring the analysis made in its transfer pricing report submitted in the 2012 period, neither is it correct for the tax authorities to make an adjustment to the taxpayer’s segmented financial information (2012), and use, for the purposes of the additional assessment, the taxpayer’s accumulated income tax return, corresponding to the entire project. It is essential that any adjustment to the taxpayer’s financial/tax information is made in a congruent manner, i.e. taking into account the accumulated activity and not in a partial manner.” “preceding paragraphs and on the OECD’s guidelines in points 1.42, 1.52, 1.53, 1.55, 1.57 and 1.59 of Chapter I, which deals with the Arm’s Length Principle of the Transfer Pricing Guidelines.” “In this sense, this Court has stated in Resolution n.° TAT-RF-002 of 10 January 2020, regarding the possible manipulation of comparables known by the Anglo-Saxon expression “cherry picking”, in the following terms: “just as the criteria for discarding must be applied uniformly by the taxpayer, they must also be applied uniformly by the Tax Administration, regardless of whether the results of the analysis are in favour of or against the Treasury (The three companies challenged by the Tax Administration were those that presented the lowest operating margins: 1. 00%; -0.03% and -23.64% respectively), concluding that “it is incongruous to object to comparables that are in similar circumstances with others that have been accepted, i.e. that have a reasonable level of comparability with the examined party”.” “By virtue of the allegations made by both parties, we consider from the procedural evidence in the file that the process followed to identify potential comparables by both parties has been systematic and verifiable; however, we agree with the taxpayer that the companies selected by them are comparable with ————, and comply with the Principle of Full Competition, therefore, they should be taken into account within the interquartile range, since we consider that the elements of the comparability analysis, indicated by the DGI, are not compromised. In view of the above, as we do not agree with the objection made to this comparable company by the Tax Administration, and as the taxpayer is within the range of full competence, this Court must revoke Resolution no. 201-3306 of ...

A. Romania S.R.L. had purchased services from A. Nederland BV and A. CZ Holding sro, and the costs of the services had been deducted for tax purposes. At issue was whether these services had actually been provided to the benefit of A. Romania S.R.L. and if so whether the costs were deductible under Romanian tax provisions. According to the tax authorities it was not possible to identify the services actually provided, as the documentation provided was only general data on the types of services invoiced, such as: group services, taxes and contributions, other group services. No supporting documents had been submitted to show that the services were actually provided. Furthermore, according to Romanian tax provisions – paragraph 41 of H.G. no. 44/2004 – the costs of administration, management, control, consultancy or similar functions are borne by the parent company and no remuneration can be claimed for these activities from the affiliated persons, thus the expenses are not deductible for tax purposes. Hence an assessment was issued where deductions of the intra-group service costs had been denied. The court of first instance set aside the tax assessment and concluded that without those services the applicant would not be able to operate in optimal parameters and would not be able to carry out its object of activity. Judgement of Supreme Administrative Court The Supreme Administrative Court set aside the decision issued by the court of first instance and decided in favor of the tax authorities. Excerpts “- A first criticism concerns aspects related to the non-deductibility of management, consultancy and similar services expenses, in the amount of RON 13,072,643, as well as the related VAT in the amount of RON 3,197,379. The High Court holds that between the appellant-claimant and the companies A. Nederland BV and A. CZ Holding sro concluded service contracts for the provision of group services to A. S.R.L. (of Romania). These contracts related to general management assistance, legal, tax, financial, accounting, HR support services, marketing, sales and purchasing services. Since there is an affiliation relationship between these companies, according to the provisions of Articles 11 and 21 of the Tax Code and point 48 of H.G. no. 44/2004 approving the methodological rules for the application of the Tax Code, the necessity of the purchase of the services, their actual provision, must be proven, and the deductibility of expenses is only possible if services are additionally provided to the affiliated persons or if the price of the goods and the value of the services provided take into account the services and administrative costs. Such expenses cannot be deducted by the Romanian subsidiary if the services would not have been used in the case of a self-employed person, and it is not sufficient simply to prove the existence of the services; the actual provision of the services must also be proved. In other words, the services contracted with the two companies (in the Netherlands and the Czech Republic) must be in addition to the affiliation relationship. The first court held that the services purchased from the two companies were provided and were necessary for the applicant, since it did not have support departments enabling it to carry out the specific activity. The High Court holds that the deductibility of expenses for management, consultancy and similar services depends on the existence of supporting documents leading to the conclusion that the services provided are not group-wide services, since they are deducted centrally or regionally through the parent company on behalf of the group as a whole and are not invoiced to the other companies in the group. These services have been highlighted in the documents on file as “group services”, without any supporting documents being submitted to show the nature of the service provided and whether they are in addition to those relating to the affiliation relationship. The first court, certifying the conclusions of the forensic expert’s report, pointed out that, on page x, the expert had set out the contractual framework and the services to which the Netherlands and Czech companies were committed. The expert also, analysing all the categories of services purchased, showed that they were actually provided and were necessary for the company. The High Court notes from all the evidence in the file that, although the services were provided, it is not known whether they were in addition to those relating to the affiliation relationship, and it has not been shown in concrete terms, for example, with regard to the HR support services, in terms of coordinating personnel policies, remuneration and promotion of training programmes. With regard to marketing, sales and purchasing services, it is not clear from the attached documents what the name, brand, logo, etc. services consisted of. From the content of the expert report, it appears that reports, emails, plane tickets, bus tickets, etc. are listed, in the annexes to the report supporting documents, invoices, receipts, sales statements, activity reports, projects, extracts from manuals, etc. are presented, but all this does not lead to the conclusion that the services were provided in addition to the affiliation relationship, especially as they represent data of a general nature. In conclusion, it is noted that the tax authorities were correct in finding that the expenditure on the abovementioned services was not deductible. As regards the VAT relating to those services, in so far as they have not been identified by documents showing that they were provided for the benefit of taxable transactions, in accordance with Articles 145-1471 of the Tax Code, the right to deduct cannot be granted. – The second criticism relates to the corporation tax on the adjustment of expenses following the reconsideration of the transfer pricing records for transactions with related parties. It is apparent from the documents in the file that the applicant, in order to substantiate the methods of establishing the transfer prices charged between the group companies, chose the net margin method (for services) and the price comparison method (for goods). The net margin method, according to the appellants-respondents, was not properly ...

S.C. A. had paid for intra group services in FY 2013 and 2014 and deducted the costs for tax purposes. The purchases of services were made on the basis of a management services contract concluded with related party C. S.A. and a production service contract, logistics service contract, product management service contract and service contract concluded with related party B. The tax authorities had issued an assessment where deductions for the costs had been denied. The court of first instance set aside the tax assessment. Judgement of Supreme Administrative Court The Supreme Administrative Court upheld the decision from the court of first instance and decided in favor of S.C. A. Excerpts “As regards the necessity of providing the services The High Court finds that the expert held, with regard to that aspect, that by the contracts concluded, C. S.A. and B. undertook to carry out for the applicant multiple and complex activities requiring the allocation of a large amount of time and human resources, the strategic decisions concerning the development of the product range, the most appropriate technology to be used, the identification of sources of financing for the acquisition of that technology, the quantities to be manufactured, the market segment to which they were addressed, the innovation part, the software part, being taken by the members of the management on the basis of the services provided by the business partners C. S.A. and B.. The expert stated that A. produced the product range developed by the product managers of C. S.A. in the quantities and at the request of the customers identified through the services provided by B. respectively C. SAU, using the manufacturing technology identified by B. for the plaintiff without any overlap between the services provided by B. respectively C. SAU with those provided by other suppliers or by the company’s own staff. The High Court finds that the manner in which the first instance assessed the evidence cannot be criticised in the context of the ground for annulment in Article 488(8) of the EC Treaty. (The appellants have not proved the existence of a misapplication of the law by the first instance when the expert evidence was administered or when its conclusions were assessed. On the other hand, the tax authority takes a contradictory position: it held as grounds for refusing the deductibility of expenses both the lack of proof of actual provision and the lack of proof of the necessity of the services; however, in the appeal, it is stated that the tax inspection authorities did not mention in the contested act that the intra-group management/consultancy services are not necessary for the activity which the company S.C. A. carries out, and as proof, of the total intra-group services of 64,781. 915 RON, recorded by the company in the period 2009-2014, the tax inspection bodies granted the right to deduct expenses in the total amount of 44,725,484 RON related to intra-group services of the nature specified by the company, which the company justified with documents, and did not grant the right to deduct expenses in the total amount of 20,056,431 RON related to intra-group services for which the company did not submit supporting documents showing that they were performed for the benefit of the contested company. The tax authority also certainly imputed to the applicant the lack of necessity of those services, but in the light of the analysis carried out by the tax authority, the first instance correctly rejected that criticism. With regard to the provisions of the OECD Guidelines (OECD Transfer Pricing Guidelines), the tax inspection authorities state in the Transfer Pricing File that the audited company does not demonstrate that “the transactions relating to management services and consultancy services have a real economic justification and that they would have been decided on the same conditions as between independent enterprises, within the framework of free competition”. It was argued that the cost-plus method is not appropriate for assessing compliance with the market value principle in the case of the provision of management services between B. and A., on the one hand, and in the case of the provision of consultancy services between C. and A., on the other, because the comparability of gross margins depends on the similarity of the functions performed, the risks assumed and the contractual terms, and the application of the net margin method is the most appropriate for assessing compliance with the market value principle of the costs incurred by A. in the purchase of management and consultancy services. However, no additional information was requested from S.C. A. on this point because, following the tax inspection, it was found that the audited company did not submit supporting documents showing that management, consultancy, assistance, production management, product management and logistics services in the amount of RON 20,056,430.90 were performed. The High Court finds that, according to the expert’s report, the price paid by the Company to the affiliates for the purchased services met the conditions to be considered within the market price range, in accordance with the transfer pricing legislation. Furthermore, in view of the provisions of paragraph 2.39 of Chapter II, lit. D).1 of the OECD Guidelines, which states that the cost plus method is probably most useful when semi-finished products are traded between affiliated companies, when affiliated companies have entered into joint arrangements for certain facilities or long-term sale and purchase agreements or when the transaction consists of the provision of services, the tax expert considered that the use of the cost plus method in respect of management services was justified. He also pointed out that the legislation does not stipulate a minimum percentage for the mark-up to be applied, but only that it exists, so that invoicing at cost plus a 10% mark-up is justified. As the respondent-claimant rightly pointed out, the cost-plus method was selected only in respect of management services, and the method of pricing for consultancy services was cost-plus billing with a 10% profit margin. Thus, in relation to consultancy services an additional analysis was ...

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 Kenya vs KFC ITA_3_&_2_of_2018__ Feb 2020 ...

A group company, PI, purportedly provided management services to the Ashin Steel Trading House. During the audit for FY 2013-2015 the tax authority came to the conclusions that Ashin Steel Trading House and the PI had “deliberately created a management relationship scheme so that service providers are listed on the staff of an entrepreneur who pays tax on the ONS with the object of taxation “income””. Significant sums of money was transferred to PIs in the form of payments for the provision of management services for their subsequent withdrawal and to the accounts of an individual (from the accounts of the PI), which allowed the Company to minimize tax revenues. The tax authority recalculated the Company’s expenses for the management services, using a combination of transfer pricing methods – cost plus and comparable profitability. The Decision of the Court of Appeal: The CUP method has priority, but in cases where it is not subject to application, the tax authority has the right to use one of the other methods:“Thus, the provisions of Article 105.7 of the Russian National Assembly do not establish the mandatory consistent application of methods for determining the market price of goods established by subparagraphs 2-5 paragraphs 1 of Article 105.7 of the Russian Federation, in the event that the method of comparable market prices cannot be applied. The tax authority in this case is entitled to choose from any remaining methods, as well as their « combination.” Due to the specifics of the PI’s activities, it was not possible to apply the CUP method, so instead the tax authorities had used a combination of methods. On this issue the Court stated: “the method used by the tax authority to determine costs is not contrary to tax law“. The court also referred to the industry-based performance measures summarized by the Federal Tax Service: The profitability of similar activities in 2013-2015 is significantly lower than the indicators used by the tax authority, in connection with which the court correctly stated that the measures applied by the tax authority do not violate the rights of the taxpayer. Click here for translation A76-19287-2018 ...

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. 2017_GIZ_Transfer_Pricing_Risk_Tool_EN ...

The tax authorities had issued an assessment where deductibility of service costs charged to an Italien company had been disallowed for tax purposes, as the Italien company – according to the tax authorities – had not provided sufficient proof of the alleged benefits from the purported services received (marketing, telephone, EDP and legal, accounting and tax consultancy services). Judgement of the Supreme court. The Court dismissed the appeal of Alfa Gomma. Excerpts from the Judgement “By the second ground, alleging infringement of Article 2697 of the Civil Code, the appellant criticises the judgment of appeal in so far as it finds that Alfa Gomma Sud did not discharge its burden of proof, since the documentation produced does not make it possible to carry out an adequate check as to the existence, relevance and usefulness of the costs of the services charged by the parent company Alfa Gomma SpA. It submits that, in so doing, the court of second instance wrongly burdened the taxpayer with the burden of proving facts and legal relationships relating to other entities, since it was only required to offer evidence of the contractual source of the costs charged by the parent company and of their regular invoicing to the taxpayer subsidiary.” “In fact, the OECD Guidelines on the provision of intra-group services already state in §7.25 that “the allocation [of costs] may be based on turnover” and in §7.27 they clarify that, however, “when an indirect allocation method is used, the relationship between costs and services appears unclear and therefore it may be difficult to assess the benefit obtained”. The legitimacy of the administrative practice (Ministerial Circular No. 32/9/2267 of 22 September 1980) which justifiably subordinates the deductibility of costs deriving from contractual agreements on services rendered by the parent company (cost-share agreements) to the actuality and inherent nature of the expense to the business activity exercised by the subsidiary and to the real advantage derived by the latter, without the control requirements of the parent company, peculiar to its function as shareholder, being relevant in this regard. In such a perspective, it is not sufficient to show the contract concerning the services provided by the parent company to the subsidiaries and the invoicing of the fees, since those elements necessary to determine the actual or potential benefit obtained by the subsidiary receiving the service must specifically emerge.” “…In the present case, the services concretely provided to Alfa Gomma Sud remained in the appeal at the level of a purely abstract statement..” The Court ruled in favor of the tax administration. Click here for English translation Click here for other translation Italy Supreme-Court-18-July-2014-No.-16480.pdf ...

In 2010 the tax authorities issued an assessment, in the part concerning a service contract entered by X EOOD with a related party. In regards of the service contract, the tax authority established that some of the services were actually performed as X EOOD did not have the necessary staff and resources to perform them. The dispute was related to management services allegedly performed by the related party. An appeal was filed by X EOOD The Administrative Court referred to the provision of Article 16(2)(4) of the Income Tax Act, according to which the payment of remuneration or benefits for services without those services having actually been rendered is also regarded as an evasion of taxation, and therefore held that the complaint in that part was unfounded. An appeal was then filed with the Supreme Administrative Court Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the Administrative Court and decided in favour of the tax authorities. Excerpts “As correctly held by the AAC, the Transfer Pricing Report annexed to the case establishes the existence of management services, but there is no evidence of their performance, accordingly, they are included in Table 14of the groups of services and the corresponding mark-ups, as well as in the following Annex 1 concerning the cost centres and allocation keys. In this respect, the argument in the appeal that the services in question are included under code 7415 is unfounded, as is the footnote concerning the specification of the services. The court’s finding that there was no evidence as to what the services consisted of and what the value of the services was by line item and type of service as set out in Schedule 1 to the contract is correct. In this respect, the argument in the appeal relating to the fact that the services are carried out on a daily basis and cannot be set out in writing is unfounded. Pursuant to Article 16(2) of the Income Tax Act, the payment of remuneration or benefits for services without their having actually been rendered is deemed to be an evasion of taxation. In the present case, the service is rendered, therefore the result of the service must be certified to the recipient, or evidence of the use of the service must be provided, i.e. the actual existence of the result of the service is required, taking into account the application of the accounting principle of comparability between income and expenses, pursuant to Article 4(1)(4) of the Accounting Act. Pursuant to that provision, expenditure incurred in connection with a transaction or activity is recorded in the financial result in the period in which the enterprise derives benefit from it, and revenue is recorded in the period in which the expenditure incurred in obtaining it is recognised. Therefore, when analysing individual services, a check should be made as to whether the particular supplier has recorded revenue in relation to the service performed and whether a counterpart cost has been recorded that is comparable to the revenue and what it represents (material, labour, subcontractor costs, etc.). On the other hand, it is necessary to check whether the cost has been recorded in the accounts of the recipient of the supplier, that is to say, whether the latter has recorded a cost in relation to the specific supply and whether there is revenue recorded which is comparable to that cost. The onus is on the TPO to certify that it benefits from the result of a service rendered. In this case, no evidence has been produced to establish that the management services were actually performed. It is apparent from the conclusion of the SSE admitted in the case that the cost base includes several main categories of expenditure: staff salaries, travel and accommodation, external service costs, administrative expenses, metier costs and other costs. According to the expert’s review of the management services cost sheet for 2007, it was found that the costs under the cost centre ‘board of directors’, according to the annexed extracts and invoices, were: costs for auxiliary materials – office, security, rent, consultancy services, salaries and social security contributions, travel. Expenditure under the cost centre ‘General cost centre services’ is presented by type, the more significant of which are: ancillary supplies-fuel, property costs, telephone services, consultancy services, provision costs. These costs were rightly held by the AAC not to relate to management services, since it was not established what the nature of the specific services under Annex 1 to the contract was, how and by what specific actions the types of services referred to in the 16 points of Annex 1 were carried out, and thus it was not made clear what resources were required to carry them out. It cannot be reasonably inferred from the existence of a written contract alone that the specific management services have been performed and that there is an inherent cost of security, rent, consultancy services, salary and social security contributions, travel, etc., which are the subject matter of the expenditure recorded but not recognised for tax purposes. There is no merit in the appellant’s arguments relating to the determination of the costs on the basis of a transfer pricing report and that, in determining the remuneration, the expert’s conclusion shows that the parties acted on terms which should also apply between unrelated parties. The subject-matter of the dispute in the case is not the amount of the remuneration for management services, but the type of expenses invoiced by the company, which are not related to the services agreed in Annex 1 to the contract, due to the lack of evidence of their actual performance, given the nature of the same and their agreement in general terms, without further specifics. Thus, under item 1 of Annex 1 to the contract, the scope of the service is ‘company development strategy’. There is no evidence as to what the specific service consisted of, what actions were taken and how the development strategy of [company] was ...

Korea vs Levi’s – Supreme Court case No. 2004두7955 Management support services Click here for translation Korean-TP-case-Levis-2004두7955 ...