“IP-owner Corp” had subsidiaries which used its intangibles in their distribution and manufacturing activities. The subsidiaries did not paid royalty. The tax authorities considered that they should have paid for use of the intangibles and added an arm’s length royalty to the taxable income of “IP-owner Corp”. An appeal was filed with the Seoul Appeals Commission. Decision The Appeals Commission dismisse the appeal and upheld the tax assessment issued by the authorities. Excerpt in English “1) Issue 1 a) A trademark holder has the exclusive and unrestricted right to use a trademark, and therefore, unless the trademark is economically worthless, the use of another’s registered trademark is considered to be an economic benefit in itself. It is economically reasonable for a trademark holder to receive consideration for allowing the use of its trademark, and it is an abnormal trade practice that lacks reasonableness to allow the use of a trademark without consideration. b) The applicant corporation is 20○○.○. After applying and registering the trademark, it has been registered as the sole trademark holder of the trademark in question. However, although it was necessary to collect royalties for the use of the trademark, the applicant corporation refused to collect royalties without economic rationality, which is subject to adjustment of normal price taxation under Article 4(1) of the International Taxation Adjustment Act or denial of calculation of wrongful acts under Article 52(1) of the Corporate Tax Act. c) Accordingly, we find no error in the original decision of the HMRC to deny the applicant a corporate tax credit. 2) Regarding Issue 2 a) The applicant company argues that the technical fees at issue should not be disallowed to the applicant company. b) The manufacturing technology of ○○○○, which the Applicant has developed for a long period of time by establishing a research and development team, constitutes non-public technical information, and the head of the research and development team and then the factory manager of the Chinese subsidiary stated that the research and development team’s findings played an important role for the Chinese subsidiary. The internally drafted contract stipulates the provision of drawings, etc. as technical information, and the amount of royalties to be received from the PRC corporation was considered to be about 3 to 4 per cent of the PRC corporation’s sales. c)The fact that the applicant transferred technical information and technical know-how related to the ○○○○ product to the PRC corporation and did not receive royalties in return is subject to taxation adjustment under Article 4(1) of the Law on International Taxation Adjustment, and the arm’s length price was reasonably calculated in light of the substance and practice of the transaction. d) Accordingly, we find no error in the original decision of the tax authorities to deny the claim for corporate tax credit to the applicant.” Click here for English translation“ Click here for other translation Korea 2023-0250 ...

“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to 30 September 2017, which resulted in an assessment of additional taxable income. The transfer pricing issues identified by the tax authorities were the remuneration received by the Hungarian company for its manufacturing activities and excessive interest payments to a group company in Luxembourg. Judgement of the Supreme Court The Supreme Court set aside the judgment of the Court of Appeal and ordered the court to conduct new proceedings and issue a new decision. In its decision, the Court of Appeal had relied on an expert opinion, which the Supreme Court found to to be questionable, because there were serious doubt as to its correctness. Therefore, according to the order issued by the Supreme Court, the Court of Appeal may not undertake a professional assessment of the expert opinion that goes beyond the interpretation of the applicable legislation, nor may it review the expert opinion in the new proceedings in the absence of expertise. Excerpt “[58] In relation to the adjustment of the profit level indicator for manufacturing activities, the expert found that comparable companies do not charge taxes such as the local business tax and the innovation levy as an expense to operating profit, the amount of which distorts comparability, this is a clearly identifiable difference in the cost structure of the company under investigation and the comparable companies, so an adjustment should be made in accordance with the OECD guidelines and the Transfer Pricing Regulation, because the statistical application of the interquartile range restriction cannot be used to increase comparability. However, the Court of First Instance held that it was not disputed that, even if the interquartile range as a statistical method was used, it might be necessary to apply individual adjustments, but that the applicant had not provided the audit with a detailed analysis of the justification for the adjustment and had not provided any documentary evidence in the course of the two administrative proceedings to show how the adjustment applied served to increase comparability. However, the application for review relied on the contradictory nature of the reasoning in this respect, since, while the Court of First Instance criticised the lack of documentation to support the adjustment {Ist judgment, paragraph 34}, it shared the expert’s view that this would indeed require an investment of time and energy which taxpayers could not reasonably be expected to make {Ist judgment, paragraph 35}. [59] On the other hand, the judgment at first instance explained that the applicant had only carried out research in the course of the administrative proceedings into whether the countries of the undertakings used as comparators had a similar type of tax burden to the Hungarian local business tax, and the expert had referred in his expert opinion to the fact that the applicant had only identified this one difference when carrying out the comparative analysis, but, if a detailed analysis is carried out, each difference can be individually identified and quantified and it is for this reason that the OECD guidelines also allow a range of results to be taken into account, because it reduces the differences between the business characteristics of the associated enterprises and the independent companies involved in comparable transactions and also takes account of differences which occur in different commercial and financial circumstances. Thus, the expert did not share the expert’s view that, while the narrowing to the interquartile range includes differences that are not quantifiable or clearly identifiable, individual adjustments should always be applied in the case of clearly identifiable and quantifiable significant differences. Thus, the trial court took a contrary view to the expert on this issue. [60] Nor did the Court of First Instance share the expert’s view in relation to the interest rate on the intercompany loan granted to the applicant by its affiliate and did not accept the expert’s finding that the MNB’s interest rate statistics were an averaging of the credit spreads of the debtor parties involved in the financing transactions, on an aggregated basis and, consequently, the use of the MNB interest rate statistics is not in itself capable of supporting or refuting the arm’s length principle of the interest rate applied in intra-group lending transactions, whether long or short-term. Nor did it accept the method used and described by the applicant in the comparability field, since it did not consider that the applicant should have used an international database to look for comparative data, since comparability was questionable. Furthermore, it considered irrelevant the expert’s reference to the fact that the average loan interest rates in Hungary in 2016 were strongly influenced by the low interest rates on subsidised loans to businesses and criticised the fact that the expert did not consider it necessary to examine the applicant’s current account loans under the cash-pool scheme. [61] It can thus be concluded that the Court of First Instance, in its judgment, did not accept the reasoning of the private expert’s opinion and made professionally different findings from those of the expert on both substantive points. [62] The opinion of the appointed expert is questionable if a) it is incomplete or does not contain the mandatory elements of the opinion required by law, b) it is vague, c) it contradicts itself or the data in the case, or d) there is otherwise a strong doubt as to its correctness [Art. 316 (1) of the Civil Code]. The private expert’s opinion is questionable if a) the case specified in paragraph (1) is present [Art. 316 (2) a) of the Civil Code]. Section 316 of the Private Expert Act specifies and indicates precisely in which cases the expert’s opinion is to be considered as a matter of concern. Thus, the expert’s opinion is of concern if it is incomplete, vague, contradictory or otherwise doubtful. The latter case ...

Arditi S.p.A. is an Italian group in the lighting industry. It has a subsidiary in Hong Kong which in turn holds the shares in a Chinese subsidiary where products are manufactured. Following an audit the tax authorities held that the entities in Hong Kong and China had used the trademark owned by the Italian parent without paying royalties, and on the basis of the arm’s length principle a 5% royalty was added to the taxable income of Arditi S.p.A. Arditi appealed against this assessment alleging that it had never received any remuneration for the use of its trademark by the subsidiary, and in any case that the tax authorities had not determined the royalty in accordance with the arm’s length principle. The Court of first instance upheld the appeal of Arditi and set aside the assessment. An appeal was then filed by the tax authorities. The Court of Appeal set aside the decision of the Court of first instance finding the assessment issued by the tax authorities regarding royalties well-founded. An appeal was then filed by Arditi with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court dismissed the appeal of Arditi and upheld the decision of the Court of Appeal and thus the assessment of additional royalty income issued by the tax authorities. Excerpts “1.1. The plea is unfounded. In fact, it should be recalled that “On the subject of the determination of business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence of “transactions” between related companies at a price apparently lower than the normal price, while it is the taxpayer’s burden, by virtue of the principle of proximity of proof pursuant to art. 2697 of the Civil Code and on the subject of tax deductions, the onus is on the taxpayer to prove that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, thus not excluding the usability of other means of proof” (Cass. 19/05/2021, n. 13571). Now, the use of a trade mark must be presumed not to have a normal value of zero, which can also be expressed, as the judgment under appeal does, by the exceptionality of the relative gratuitousness. This places the onus on the taxpayer to prove that such gratuitousness corresponds to the normal value, that is, to the normality of the fact that such use takes place without consideration.” (…) “3. The third plea alleges failure to examine a decisive fact, in relation to Article 360(1)(5) of the Code of Civil Procedure, since the appeal judges failed to assess the circumstance that a large part of the production of the Chinese subsidiary was absorbed by the Italian parent company. 3.1. This plea is inadmissible, since with it the taxpayer tends to bring under this profile the examination of the exceptional nature of the gratuitousness of the use of the mark, held by the CTR. In fact, the latter was well aware of the null value of the consideration for the use of the trade mark, while the fact that the trade mark itself was the subject of co-use was expressly taken into consideration by the appellate court, and the fact that its transfer free of charge in any case corresponded to a ‘valid economic reason’, constitutes a mere deduction, whereas the failure to mention the circumstance that the majority of the Chinese company’s transactions were directed to another subsidiary (this time a Brazilian one), without entering into the merits of its relevance, constitutes at most an aspect concerning the assessment of a single element of the investigation, which cannot be denounced under the profile under examination (Cass. 24/06/2020, n. 12387).” Click here for English translation Click here for other translation Italy vs Arditi SPA 20221221 n37437 ...

Transfer of intangible to offshore manufacturer. (i) DevCo is a U.S. developer, producer and marketer of widgets. DevCo develops a new “high tech widget” (htw) that is manufactured by its foreign subsidiary ManuCo located in Country H. ManuCo sells the htw to MarkCo (a U.S. subsidiary of DevCo) for distribution and marketing in the United States. The taxable year 1996 is under audit, and the district director examines whether the royalty rate of 5 percent paid by ManuCo to DevCo is an arm’s length consideration for the htw technology. (ii) Based on all the facts and circumstances, the district director determines that the comparable profits method will provide the most reliable measure of an arm’s length result. ManuCo is selected as the tested party because it engages in relatively routine manufacturing activities, while DevCo engages in a variety of complex activities using unique and valuable intangibles. Finally, because ManuCo engages in manufacturing activities, it is determined that the ratio of operating profit to operating assets is an appropriate profit level indicator. (iii) Uncontrolled taxpayers performing similar functions cannot be found in country H. It is determined that data available in countries M and N provides the best match of companies in a similar market performing similar functions and bearing similar risks. Such data is sufficiently complete to identify many of the material differences between ManuCo and the uncontrolled comparables, and to make adjustments to account for such differences. However, data is not sufficiently complete so that it is likely that no material differences remain. In particular, the differences in geographic markets might have materially affected the results of the various companies. (iv) In a separate analysis, it is determined that the price that ManuCo charged to MarkCo for the htw’s is an arm’s length price under § 1.482-3(b). Therefore, ManuCo’s financial data derived from its sales to MarkCo are reliable. ManuCo’s financial data from 1994-1996 is as follows: 1994 1995 1996 Average Assets $24,000 $25,000 $26,000 $25,000 Sales to MarkCo 25,000 30,000 35,000 30,000 Cost of Goods Sold 6,250 7,500 8,750 7,500 Royalty to DevCo (5%) 1,250 1,500 1,750 1,500 Other 5,000 6,000 7,000 6,000 Operating Expenses 1,000 1,000 1,000 1,000 Operating Profit 17,750 21,500 25,250 21,500 (v) Applying the ratios of average operating profit to operating assets for the 1994 through 1996 taxable years derived from a group of similar uncontrolled comparables located in country M and N to ManuCo’s average operating assets for the same period provides a set of comparable operating profits. The interquartile range for these average comparable operating profits is $3,000 to $4,500. ManuCo’s average reported operating profit for the years 1994 through 1996 ($21,500) falls outside this range. Therefore, the district director determines that an allocation may be appropriate for the 1996 taxable year. (vi) To determine the amount, if any, of the allocation for the 1996 taxable year, the district director compares ManuCo’s reported operating profit for 1996 to the median of the comparable operating profits derived from the uncontrolled distributors’ results for 1996. The median result for the uncontrolled comparables for 1996 is $3,750. Based on this comparison, the district director increases royalties that ManuCo paid by $21,500 (the difference between $25,250 and the median of the comparable operating profits, $3,750) ...

Aggregation of interrelated manufacturing and marketing intangibles governed by different statutes and regulations. The facts are the same as in Example 8 except that P transfers only the ROW intangibles related to manufacturing to S1 in an exchange described in section 351 and, upon entering into the CSA, then transfers the ROW intangibles related to marketing to S1 in a platform contribution transaction described in § 1.482-7(c) (rather than transferring all ROW intangibles only upon entering into the CSA or only in a prior exchange described in section 351). The value of the ROW intangibles that P transferred in the two transactions is greater in the aggregate, due to synergies among the different types of ROW intangibles, than if valued as two separate transactions. Under paragraph (f)(2)(i)(B) of this section, the arm’s length standard requires these synergies to be taken into account in determining the arm’s length results for the transactions ...

GlaxoSmithKline Costa Rica S.A. manufactures pharma products which is sold to both independent customers in the region and to group companies abroad. For FY 2004 and 2005 pricing of the controlled transactions had been determined based on the TNMM method using return on total costs (ROTC) as PLI. GSK said the range of return on total costs “for the comparable independent companies ranges from 4.7 per cent to 14.5 per cent, with a median of 9.6 per cent. GSK CR obtained an average ROTC of 50.6 percent during fiscal years 2004 and 2005, which was not below the range identified for comparable independent companies. Accordingly, the transfer prices used by GSK CR in its controlled transactions did not distort GSK CR’s profitability and satisfied the arm’s length principle set out in the OECD Guidelines. In 2009 the tax authorities issued an assessment for FY 2004 and 2005 based on the internal CUP method. “…between the transactions under study, namely sales to related and unrelated customers, there is complete similarity in terms of the characteristics of the product that is addressed to both types of customers, it is the same product, i.e. with identical characteristics…” “the taxpayer GSK sells at different prices with its related companies, taking into account the following branded products: Andrews, SB Analgesics, Oxy, Panadol Concept (RT) and Phillips Mom. It found that some products were sold at 34% of the price to an independent. Thus during the period 2004 it found that products such as Sal Andrews Cja X 50’s, code 200041010 was sold to independents at ¢1,366.57 and to affiliated companies at ¢468.68. The average profit margin over standard cost for products sold to independent customers was 285.33% and for affiliates it was 28.22%.” Applying the internal CUP method resulted in an adjustment of taxable profits in an amount of ¢394,638,821.00. Not content with the tax assessment an appeal was filed by GlaxoSmithKline with the tax court. The appeal was dismissed in 2013 and later in 2019 by the Court of appeal. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Court dismissed the appeal of GlaxoSmithKline and upheld the assessment of the tax authorities. Excerpts from the Judgement “The principle of economic reality, provided for in precepts 8 and 12 of the CNPT, essentially allows the Tax Administration to depart from the forms adopted by the taxpayer to unravel the true tax scope of the contract, in order to avoid tax evasion and thus determine what the business between the parties really consisted of. In the case under study, several aspects can be extracted from the evidence in the case file and referred to above. Firstly, the application of the CUP method is not outside the scope of administrative discretion based on due technical discretion, in proper compliance with paragraphs 15 and 16 of the LGAP. Discretion allows the Administration to determine the best technical criterion to be used. It is a detailed study in which the comparison of the same products is reflected. Secondly, the PwC reports show the possibility of using other methods to determine the actual transfer pricing situation. Indeed, PwC’s work is very comprehensive and justified on each of the points it raises. It is clear to this House that these documents were prepared by experts with extensive knowledge of the subject. Thirdly, the expert opinion is not a study that helps to solve the conflict, as it is basically dedicated to indicate whether the system used by the TA complies or not with the Guidelines, in order to deduce that the best work was that of PwC. However, as has been seen, as explained throughout this judgment, it is not in dispute whether the TA had to apply the Guidelines as they are established; with the obligation to follow each of the guidelines set out therein. The shortcomings that this Chamber detects in the evidence provided by GSK, lies in the fact that the study carried out by the expert PwC, takes into account variables, which do not appear in the file and which the TA did not have, specifically those private reports adduce preponderant factors that influence and directly affect the sale price and analyse elements such as: sales volumes, brands, economic conditions of each country, price controls established in some regions, names under which the products are sold, specifications of the respective packaging, geographic issues, development and market size; which from their point of view make the products incomparable. However, as the auditor indicates, when he carried out his study and asked GSK directly for information on the elements that could influence the prices of related companies with respect to independent companies, in which a clear difference was noted, the taxpayer’s response was that the only factor that affected prices was advertising. This response was given even though the taxpayer was aware that a transfer pricing study was being carried out on the company. PwC’s work goes beyond this statement made by the taxpayer during the audit process, and that is why, even if they are complete and technical studies, they are elaborated with completely different parameters than those available to the TA, as expressly indicated by the plaintiff. None of the elements referred to were arguments made by the taxpayer when the study was carried out. Likewise, it is unacceptable the position used by the plaintiff that when GSK responded to the auditor that “other” elements were also part of the aspects that varied the transfer prices with the related parties, it was the TA’s obligation to find out what those “other” elements consisted of; it is up to the taxpayer to provide all the required information. Thus, it is not possible to affirm that the work carried out by the TA was deficient, unreliable or incomplete; since, all things being equal, it has not been possible to disprove that this study is erroneous or unreliable, in such a way that, in the present case, it is not evident that the ...

The Danish tax authorities had issued a discretionary assessment of the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and continuous losses. Judgement of the Supreme Court The Supreme Court found that the TP documentation provided by the company did not comply to the required standards. The TP documentation did state how prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis, as required under the current § 3 B, para. 5 of the Tax Control Act and section 6 of the Danish administrative ordinance regarding transfer pricing documentation. Against this background, the Supreme Court found that the TP documentation was deficient to such an extent that it had to be equated with missing documentation. The Supreme Court agreed that Tetra Pak’s taxable income for FY 2005-2009 could be determined on a discretionary basis. According to the Supreme Court Tetra Pak had not proved that the tax authorities’ discretionary assessments were based on an incorrect or deficient basis, or that the assessment had led to a clearly unreasonable result. Hence, there was no basis for setting aside the assessment. The Supreme Court therefore upheld the prior High Court’s decision. In the decision reference is made to OECD 2010 Transfer Pricing Guidelines Importance of Transfer Pricing documentation and comparability analysis: Para 1.6, 2.22, 2.23, 2.78, 3.1, 3.22 and 5.17 Choice of tested party: Para 3.18 Exceptional and extraordinary costs and calculation of net profit indicator/profit level indicator: Para 2.80 Click here for translation bs-19502-dom-til-hjemmesiden ...

At issue was the question of whether the Danish tax authorities had been entitled to make a discretionary assessment of the taxable income of Icemachine Manufacturer A/S due to inadequate transfer pricing documentation and continuous losses. And if such a discretionary assessment was justified, the question of whether the company had lifted the burden of proof that the tax authorities’ estimates had been clearly unreasonable. The Court ruled that the transfer pricing documentation provided by the company was so inadequate that it did not provide the tax authorities with a sufficient basis for determining whether the arm’s length principle had been followed. The tax authorities had therefore been entitled to make a discretionary assessment of the taxable income. For that purpose the Court found that the tax authorities had been justified in using the TNM method with the Danish company as the tested party, since sufficiently reliable information on the sales companies in the group had not been provided. Click here for translation (Part I) Click here for translation (Part II) DK Icemachine manufacturer june 2020 ...

Toyota Kirloskar Auto Parts Private Limited manufactures auto parts and sold them to Toyota Kirloskar Motors Limited, another Indian corporation in the Toyota Group. In FY 2013-14 Toyota Kirloskar Auto Parts Private Limited paid a 5% royalty to the Japanese parent Toyota Motor Corporation for use of know-how. The royalty rate had been determined by application of the TNMM method. The Indian tax authorities did not agree with the choice of method and argued that the most appropriate method was the Profit Split Method (PSM). Judgement of the Tax Appellate Tribunal The Tribunal decided in favor of Toyota Kirloskar Auto Parts and set aside the assessment. Excerpt “17. It is clear from the above OECD guidelines that in ‘order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the “heart of the application of the arm’s length principle”, likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely IT(TP)A Nos.1915/Bang/2017 & 3377/Bang/2018 linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. 18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon’ble High Court of Karnataka in ITA No.104/2015, judgment dated 16.7.2018, which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. 19. The facts in AY 2014-15 are identical and the reasoning given in AY 2013-14 will equally apply to the AY 2014-15 also and the TPO is directed to compute the ALP for AY 2014-15 by applying TNMM as the MAM , after affording due opportunity to the assessee. 20 The other issues with regard to the objections regarding the manner in which ALP was determined by applying PSM as the MAM does not require any adjudication because of the conclusion that TNMM is the MAM.” Click here for other translation 1584520273-3377-18-1915-17-Toyota Kirloskar ...

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal closures. The tax authorities had issued an tax assessment for FY 2009 – 2012 based on a benchmark study. Decision of the Administrative Court The Court upheld the decision of the tax authorities concerning income for the tax year from 01/01/2012 to 31/12/2012. In 2012, the Polish manufacturing site operated by producing lids for jars. In the course of the audit proceedings against the Party regarding corporate income tax for 2012, the first instance authority determined – based on a comparative analysis of the financial results of similar independent manufactures operating in the packaging industry on the market in Central and Eastern Europe, that this market showed an upward trend and in none of the years 2009-2012 this industry recorded a downward trend, reaching in the audited year 2012 In the case of three selected domestic entrepreneurs selected for analysis profitability based on EBIT from 8.52 % to 13.13%, and in the case of companies operating on markets in Central and Eastern European countries – the interquartile range determined on the basis of the EBIT ratio: upper quartile 10.30%, median: 8.69%, lower quartile 7.74%. The above circumstances allowed the authority of first instance to state that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities Thus, in the opinion of the Court, it became necessary to determine the Party’s income. The above conclusions – regarding the lack of application by the Party in transactions with related entities of market prices of goods sold – the authority derived from the conducted comparative analysis of entities dealing with identical activities of the Party (i.e. the production of food packaging). The tax authorities subjected this analysis to the entities selected by it that have no connections with other entities, selected in terms of criteria such as: area of ​​activity, PKW codes, turnover, period of activity, and then (due to the fact that the above typing criteria allowed to obtain a comparative base consisting of only three units) extended them by a geographical criterion, then is other Central […] countries, obtaining a database of six entities in total. Profitability based on the EBIT ratio was compared in this group (according to the formula: operating profit (operating loss / operating income x 100%). obtaining a database of six entities in total. Profitability based on the EBIT ratio was compared in this group (according to the formula: operating profit (operating loss / operating income x 100%). obtaining a database of six entities in total. Profitability based on the EBIT ratio was compared in this group (according to the formula: operating profit (operating loss / operating income x 100%). Click here for translation Poland 2019 ...

The question in this case was whether or not year-end-adjustments/profit adjustments should be considered part of the market price for acquisition of raw materials used in the production of non-wovens products in the Polish company operating partially under a tax exempt zone. The Court of First Instance had come to the conclusion, that the payment of year end adjustments were part of the price for acquisition of raw materials and thus not tax deductible as related to tax exempt activities. This decision was appealed by the company. The Supreme Administrative Court considered the following : The appeal should be upheld. It should be noted that one of the assumptions of transfer prices is respect for the so-called market price rules. It consists in the fact that when transactions are concluded by related entities , the agreed conditions should be consistent with the conditions applied in comparable transactions by independent entities. The means of implementing this principle are the so-called profitability adjustments. In accordance with the OECD Guidelines (OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017), the compensating adjustment is a correction made by the taxpayer in which the taxpayer himself determines the transfer price for tax purposes , i.e. one that in his opinion corresponds to the arm’s length principle in relation to the transaction concluded with a related entity. The so-called profitability adjustments are therefore an issue closely related to transfer prices . It should be noted that in the legal status in force until the end of 2018, the Corporate Income Tax Act did not contain provisions directly referring to the possibility of applying the transfer price adjustments described above. It was not until January 1, 2019 that the legislator regulated in art. 11e. rules for making periodic adjustments that bring the result or transfer price to market level. This means that at the date of issuing the individual interpretation being the subject of the assessment in these proceedings , it should be considered unacceptable to interpret the tax law in a manner that would lead to the application of the indicated institution despite its non-regulation by the national legislator. In the opinion of the Supreme Administrative Court, in the panel hearing the present case, in the legal status in force on the day of issuing the contested individual interpretation, the profitability adjustment described in the application for its issue, which aimed to guarantee the Seller an adequate level of profitability, had to be qualified as a separate economic event, with all the resulting of this circumstance with tax consequences. Therefore, the position presented in the justification of the judgment of the Court of First Instance, according to which profitability adjustment is not an independent economic event and should be considered in connection with the original purchase or sale of goods or services should be considered incorrect. The case was sent back to the Administrative Court for re-examination under the considerations contained in the ruling. Click here for translation Poland nonwoven II FSK 3433-18 ...

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 最高行政法院107年判字第691號判決 ...

A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments. “Alfa represents that it is part of a multinational Group (hereinafter, the “Group”). The Group is implementing a new integrated development plan, aimed at the joint creation of products and platforms necessary for the production and marketing of goods under brand X. The legal and economic ownership of the X trademark and of the relevant know-how belongs to the non-EU company Beta, which acts as “Principal” and assumes all risks connected to the production and marketing of the goods, granting the trademark and the know-how free of charge to the subsidiaries engaged in the production and marketing of the X goods. The plaintiff entered into an intra-group agreement (the ‘Agreement’) with Beta, whereby Beta undertakes to act as contract assembler for the purpose of manufacturing X products, putting its own equipment at the disposal of Gamma (a company incorporated under Italian law which acts as a contract manufacturer). In particular, Alfa has contractually assumed the task of coordinating all production factors relating to the production of the goods, as well as those relating to the marketing of the same, through the Group’s distribution network, and the task of managing logistics and quality control activities, in the interests of Beta. The X goods, produced by the company Gamma, are therefore purchased by the company Alfa at a price in line with the policy adopted by the Group in terms of transfer prices, consistent with the criterion of free competition (the so-called “Arm’s length”). Subsequently, they are marketed, through Beta, in the North American and Rest of the World markets and, through Delta, in the European, Middle Eastern and African markets (the so-called EMEA market). In this regard, the questioning Company points out that also the sales made by it to Beta and Delta take place at a price in line with the Group’s policy in terms of transfer prices, consistently with the criterion of free competition. In accordance with the transfer pricing model followed by the Group, the Agreement provides that, if the actual profits recorded by the respondent company in a given year falls outside the interquartile range of reference, specific adjustments must be made in order to comply with the above-mentioned arm’s length criterion. As a result of this, Beta undertakes to recognise, where necessary, the payment of a contribution in favour of Alfa whenever the latter incurs operating losses, such as those resulting from the activities carried out and from the considerable costs incurred for the purchase of equipment used in the production cycle. In light of the above, the Company asks to know whether or not the contribution possibly recognised by Beta in favour of the latter, in case of a difference between the profit realised by the latter and the profit determined according to the arm’s length criterion, can be considered relevant for VAT purposes pursuant to Article 3 of Presidential Decree No. 633 of 1972.” Tax Ruling of the Italian Revenue Agency ” … In order for transfer pricing adjustments to affect the determination of the taxable amount for VAT, by increasing or decreasing the consideration for the sale of the goods or the provision of the service, it is therefore necessary that: (a) there must be consideration, i.e., a monetary or in-kind adjustment for such an adjustment; (b) the supply of goods or services to which the consideration relates is identified; (c) there is a direct link between the supplies of goods or services and the consideration. As pointed out by the European Commission itself in the aforementioned document no. 923, “while the principle of free competition must generally be observed in all intra-group transactions, on the basis of the transfer pricing rules applied for the purposes of direct taxation, the scope of the principle of free competition laid down by the VAT Directive seems much more circumscribed. In fact, such a rule is susceptible to optional application by Member States and can only be applied for the purpose of preventing tax evasion and avoidance under well-defined circumstances” (see paragraph 3.1.1). Such circumstances are specifically identified by Article 80 of Directive 2006/112/EC – implemented in Italy by Article 13, third paragraph, of Presidential Decree No. 633 of 1972 – as an exception to the general criteria for determining the VAT taxable amount set forth in Article 73 of the Directive. In this respect, according to the case-law of the EU Court of Justice, “the conditions for the application of the latter article [Article 80 of Directive 2006/112/EC] are mandatory and national legislation may not provide, on the basis of that provision, that the taxable amount is to be equal to the open market value in cases other than those listed in that provision” (see the judgment of 8 May 2013, in case C-142/12, and the judgment of 26 April 2012, in cases C-621/10 and C-129/11). This orientation is, moreover, confirmed by the most recent case law of the Supreme Court of Cassation, according to which “transfer pricing is based on the concept of normal market value pursuant to Presidential Decree no. 917 of 22 December 1986, Article 9 and Article 76, paragraph 5 (now 110, paragraph 7) (…) and responds to the need for a fair division of profits in the various countries where multinational groups operate. For VAT, on the other hand, the consideration actually received is a pivotal element of the mechanism for applying the tax, based on the principle of neutrality of the tax (which would be violated if the taxable base were calculated as an amount per hypothesis higher than the consideration received: a principle that has always been derived from the EU directives (most recently made explicit in Article 73 of Directive 112/2006/Cee) and implemented in Italy by Presidential Decree No. 633, Article 13 of 26 October 1972″ (Judgment No. 2240 of 2018). On the basis of these principles, with reference to the present case, the Agreement between ...

In the case of Sharp Semiconductor Indonesia the tax authorities had disallowed deductions for royalties paid by the local company to the Japanese Sharp Corporation. Judgement of the Tax Court The court decided predominantly in favour of the tax authorities. According to the court Sharp Semiconductor Indonesia had not been able to prove the existence of know-how, the existence of training provided, the value of intangible property owned by Sharp Corporation. Moreover, Sharp Semiconductor Indonesia only sells its product to related parties and royalty fees are first relevant once the product is sold to independent parties. Finally Sharp Semiconductor Indonesia was not able to prove the economic benefit it had received from the trademark “Sharp”. Click here for translation putusan_put.49339_pp_m.xii_15_2013_20210530 ...

In the case of Panasonic Indonesia the tax authorities had disallowed deductions for services and royalties paid for by the local company to the Panasonic Corporation Japan. The tax authorities held that Panasonic Indonesia did not received the purported services and that the company should not pay royalty due to its status as a contracting manufacturer. Judgement of the Tax Court The Court decided predominantly in favour of the tax authorities. The court found that Panasonic Indonesia had been unable to prove that actual ‘services’ had been received for an amount equal to 3% of net sales of all product manufactured and 1% of net sales for technical assistance and brand fees. Furthermore it was notet that Panasonic Indonesia reported consistent losses. Click here for translation putusan_put.45162_pp_m.xv_15_2013_20210530 ...

Fulford India Ltd. imported active pharmaceutical ingredients (APIs) from related group companies and sold them in India. The TNM method was used for determening transfer prices. The tax administration found the CUP method to be the most appropriate. Fulford India argued that the CUP method requires stringent comparability and any differences which could materially affect the price in the open market should be taken into consideration. In the pharmaceutical world, APIs whith similar properties may still be different in relation to quality, efficiancy, impurities etc. Therefore, the two products cannot be compared. In court, it was further explained that Fulford also performed secondary manufacturing functions, converting the APIs into formulations. Hence, Fulford could be descriped as a value added distributor. The Court concluded that the selection of the best method should be based on functional analysis and the characterisation of the transactions and the entities. The fact that Fulford had secondary manufacturing activities had not previously been explained to the tax authorities. Accordingly, the case was returned to tax administration for a revised assessment. Fulford_(I)_Ltd,_Mumbai_vs_Assessee ...

Maruti Suzuki India manufactures and sells cars and spare parts. A license agreement had been entered with the group parent for use of licensed information and trademark for the manufacture and sale of the products. Hence, Maruti Suzuki paid royalties to the parent for trademark and technology. The tax administration made an adjustment where the royalty paid for use of the trademark was disallowed and where a reimbursement with mark-up for non-routine advertising, marketing and promotion of the brand name was imputed. The High Court, referred the case back to the tax administration with observations. If there is an agreement between the group parent and the taxpayer which carries an obligation on the taxpayer to use the trademark owned by the group parent. Such agreement should be accompanied either by an appropriate payment by the group parent or by a discount provided to the taxpayer. Appropriate payment should be made on account of benefit derived by the group parent in the form of marketing intangibles obtained from such mandatory use of the trademark. However, if the agreement between the group parent and Maruti Suzuki for the use of the trademark is discretionary, no payment is required to the foreign entity. Maruti_Suzuki_India_Ltd_vs_Additional_Commissioner_Of_..._on_1_July,_2010 ...

During the years in issue, 1975 through 1981, the worldwide operations of Perkin-Elmer (P-E) and its subsidiaries were organized into five operating groups, each of which was responsible for the research, manufacturing, sales, and servicing of its products. The five product areas were analytical instruments, optical systems, computer systems, flame spray equipment and materials, and military avionics. P-E and PECC entered into a General Licensing Agreement dated as of October 1, 1970, by the terms of which P-E granted PECC an exclusive right to manufacture in Puerto Rico and a nonexclusive right to use and sell worldwide the instruments and accessories to be identified in specific licenses. P-E also agreed to furnish PECC with all design and manufacturing information, including any then still to be developed, associated with any licensed products. PECC agreed to pay royalties on the products based upon the “Net Sales Price”, defined as “the net amount billed and payable for *** [licensed products] excluding import duties, insurance, transportation costs, taxes which are separately billed and normal trade discounts.” In practice, P-E and PECC interpreted this definition to mean the amount PECC billed P-E rather than the amount P-E billed upon resale. The specified term of this agreement was until the expiration of the last license entered into pursuant to the agreement. Following an audit the tax authorities issued an assessment of additional income taxes related to controlled transactions between the above parties. The issues presently before the Tax Court for decision were: [1) Whether the tax authorities’s allocations of gross income to P-E under section 482 were arbitrary, capricious, or unreasonable; (2) whether the prices FE paid for finished products to a wholly owned subsidiary operating in Puerto Rico were arm’s-length amounts; (3) whether the prices the subsidiary paid to P-E for parts that went into the finished products were arm’s-length amounts; (4) whether the royalties the subsidiary paid to P-E on sales of the finished products to P-E were arm’s-length amounts; and (5) for prices or royalties that were not arm’s length, what the arm’s-length amounts are. US vs Perkin-Elmer TCMemo 1993-414 ...

In Caterpillar, a 5% royalty was found to be an arm’s-length rate for the manufacturing and assembling operations. The court did not accept that there should be different rates for the two different activities. Excerpt from the Judgement “…According to the administration, the rate of the royalty paid by the company “Caterpillar France” is admissible only when it applies to the selling price of equipment entirely manufactured by the company, but not when it affects the gross margin made on equipment that the company has only assembled, since the assembly operations make less use of the technology and know-how acquired by the American company than the machining operations themselves; that, however, the details provided and the documents produced in this respect by the company do not make it possible to make such a distinction between the operations that successively contribute to the production of the finished products; that the uniform rate of the fee cannot, in the circumstances of the case, be regarded as excessive; that, consequently, the Minister is not justified in maintaining that the Administrative Court was wrong to hold that, as regards the tax years 1969 to 1972, the company ‘Caterpillar France’ provided proof that, contrary to what the departmental commission considered, the amount of the royalty paid by it to the company ‘Caterpillar Tractor’ was justified in the light of the rights granted and the services rendered, that, as regards the tax years 1973 to 1976, the administration did not establish that the royalty could have constituted a means of transferring profits, and that, for all these years, the disputed increases could not find a legal basis in the provisions of Article 57 of the General Tax Code;” Click here for English translation Click here for other translation France vs Caterpillar Oct 1989 CE No 65009 ...