If a controlled transaction is reasonably anticipated to contribute to developing intangibles pursuant to an arrangement that is not a CSA described in paragraph (b)(1) or (5) of this section, whether the results of any such controlled transaction are consistent with an arm’s length result must be determined under the applicable rules of the other sections of the regulations under section 482. For example, an arrangement for developing intangibles in which one controlled taxpayer’s costs of developing the intangibles significantly exceeds its share of reasonably anticipated benefits from exploiting the developed intangibles would not in substance be a CSA, as described in paragraphs (b)(1)(i) through (iii) of this section or paragraph (b)(5)(i) of this section. In such a case, unless the rules of this section are applicable by reason of paragraph (b)(5) of this section, the arrangement must be analyzed under other applicable sections of regulations under section 482 to determine whether it achieves arm’s length results, and if not, to determine any allocations by the Commissioner that are consistent with such other regulations under section 482. See § 1.482-1(b)(2)(ii) (Selection of category of method applicable to transaction) and (iii) (Coordination of methods applicable to certain intangible development arrangements) ...

In the absence of a written agreement, the district director may impute a contractual agreement between the controlled taxpayers consistent with the economic substance of the transaction. In determining the economic substance of the transaction, greatest weight will be given to the actual conduct of the parties and their respective legal rights (see, for example, § 1.482-4(f)(3) (Ownership of intangible property)). For example, if, without a written agreement, a controlled taxpayer operates at full capacity and regularly sells all of its output to another member of its controlled group, the district director may impute a purchasing contract from the course of conduct of the controlled taxpayers, and determine that the producer bears little risk that the buyer will fail to purchase its full output. Further, if an established industry convention or usage of trade assigns a risk or resolves an issue, that convention or usage will be followed if the conduct of the taxpayers is consistent with it. See UCC 1-205. For example, unless otherwise agreed, payment generally is due at the time and place at which the buyer is to receive goods. See UCC 2-310 ...

Once the existence or absence of an indemnification clause in favour of the restructured entity upon termination, non-renewal or substantial renegotiation of the agreements has been determined, the analysis should then focus on assessing whether such indemnification clause and its terms (or absence thereof) are arm’s length. Where comparables data evidence a similar indemnification clause (or absence thereof) in comparable circumstances, the indemnification clause (or absence thereof) in a controlled transaction will be regarded as arm’s length ...

As noted at paragraph 1.46, in transactions between independent enterprises, the divergence of interests between the parties ensures that: (i) contractual terms are concluded that reflect the interest of both parties, (ii) the parties will ordinarily seek to hold each other to the terms of the contract, and (iii) that contractual terms will be ignored or modified after the fact generally only if it is in the interests of both parties. However, this same divergence of interest may not exist in the case of associated enterprises or any such divergences may be managed in ways facilitated by the relationship between the associated enterprises and not solely or mainly through contractual agreements. For this reason, when the facts of the case differ from the written terms of the agreement between the parties or when no written terms exist, the absence or existence (and its terms) of an indemnification clause should be deduced from the conduct of the parties. For instance, it may be that, on the basis of the facts of the case and of the actual conduct of the associated enterprises, it is determined that the term of the contract is longer than established in the written contract, which would entitle the terminated party to some indemnification in case of early termination ...

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

Where no written terms exist, or where the facts of the case, including the conduct of the parties, differ from the written terms of any agreement between them or supplement these written terms, the actual transaction must be deduced from the facts as established, including the conduct of the parties (see Section D. 1.1 of Chapter I). It is, therefore, good practice for associated enterprises to document their decisions and intentions regarding the allocation of significant rights in intangibles. Documentation of such decisions and intentions, including written agreements, should generally be in place at or before the time that associated enterprises enter into transactions leading to the development, enhancement, maintenance, protection, or exploitation of intangibles ...

Where no written terms exist, the actual transaction would need to be deduced from the evidence of actual conduct provided by identifying the economically relevant characteristics of the transaction. In some circumstances the actual outcome of commercial or financial relations may not have been identified as a transaction by the MNE, but nevertheless may result in a transfer of material value, the terms of which would need to be deduced from the conduct of the parties. For example, technical assistance may have been granted, synergies may have been created through deliberate concerted action (as discussed in Section D.8), or know-how may have been provided through seconded employees or otherwise. These relations may not have been recognised by the MNE, may not be reflected in the pricing of other connected transactions, may not have been formalised in written contracts, and may not appear as entries in the accounting systems. Where the transaction has not been formalised, all aspects would need to be deduced from available evidence of the conduct of the parties, including what functions are actually performed, what assets are actually used, and what risks are actually assumed by each of the parties ...

In 2009, Walmart acquired a majority in Distribución y Servicio D&S S.A., Chile’s leading food retailer. With headquarters in Santiago, Walmart Chile operates several formats including hypermarkets, supermarkets and discount stores. Following an audit by the tax authorities related to FY 2015, deduction of interest payments in the amount of CH$8.958,304,857.- on an “intra-group loan” was denied resulting in a tax payable of Ch$1,786,488,290. According to Wallmart, the interest payments related to debt in the form of future dividend payments/profit distributions. Decision of the Tax court “…this Court concludes that the claimant has not been able to prove the existence of a current account between Inversiones Walmart and Walmart Chile, nor has it been able to prove the appropriateness of the reduction in expenses in the amount of CH$8.958,304,857.- for interest paid to its related company, because it did not justify the need for such disbursement for the purpose of getting into debt in order to distribute profits among the partners, nor did it prove that such disbursement generates income subject to first category tax, as provided for in article 31 No. 1 of the LIR.In addition, the claimant also failed to prove that it was in a situation that would make the tax authority’s pronouncement in Official Letter No. 709 of 2008 applicable to it, pursuant to Article 26 of the Tax Code.That, due to the justifications mentioned above, which meet the criteria of consistency, reasonableness, sufficiency, clarity, and in general with the principles that enshrine healthy criticism, is that this judge has concluded that the complainant did not overturn the objections of the tax authority and, consequently, has not been able to prove the appropriateness of the reduction of the expenditure in question.It is therefore concluded that the contested assessment was issued in full compliance with the legal provisions governing the matter, which is why the Tax and Customs Court considers it appropriate not to proceed with the claim presented in the proceedings.” Click here for English translation ...

At issue in this case was whether a deposit in a cash pool constituted a loan. According to the company, cash transfers made as part of cash pooling cannot be considered a loan agreement because they do not contain elements that are material to the content of such contracts. In 2018 the provincial court issued a decision stating that a cash pool deposit constituted the granting of a loan irrespective of lacking written contracts. This decision was then appealed to the Supreme Administrative Court by the company. From the decision of the Supreme Administrative Court From an economic point of view, the financial system presented in the application involves the granting of loans because, as a result of financing the negative balance shown by the contractual participant by a surplus of funds accumulated by other participants, the participant is not obliged to pay interest to the bank for his debit an invoice that would have arisen if the shortcoming had not been covered by another contracting party. In place of debt debit crediting, which appears on the account maintained by a given participant, such crediting is carried out under a cash pooling agreement with the funds not of the bank, but of other or other participants of the agreement, who showed a positive balance and who thereby also financed the negative balance of other participants. In the light of the above, it should be considered that the actual purpose of the cash pooling agreement is to provide cash between entities of the group and to obtain benefits in the form of interest by these entities. Therefore, it is a type of loans granted between entities participating in this system. The form of carrying out the cash pooling agreement is irrelevant, since its purpose is to provide cash between entities from the group and to obtain benefits in the form of interest by these entities. It is widely accepted that a cash pooling agreement is a form of effective financial management, used by entities belonging to one capital group or entities affiliated economically in any other way. It amounts to concentrating cash from individual accounts of individual entities on a joint group account and managing the amount accumulated in this way, using economies of scale . This allows offsetting the temporary surpluses shown by one of the entities with temporary shortages in other entities. Thanks to this, the costs of crediting the activities of the group’s entities are minimized by crediting with the use of the group’s own funds. As part of the cash pooling agreement, participants indicate an entity organizing cash pooling and managing the system, the so-called Pool Leader ( agent ), which can be a specialized bank, as well as a unit from a group. The system manager under the agreement provides financial resources for all system participants to cover negative balances, and in the event of positive balances on participants’ accounts, funds are credited to his account (see K. Szymaniak, Cash pooling and insufficient capitalization and transfer pricing documentation obligation) in the light of NSA judgments – the beginning of a new case-law or isolated decisions, Monitor Podatkowy 2016, No. 5, p. 18). Contrary to the company’s view, the cash pooling agreement described in the application for individual interpretation meets the necessary conditions (essentialia negotii) of the loan agreement referred to in art. 16 clause 7b. Therefore, it can not reasonably be demanded that a cash pooling agreement , which should be included in unnamed contracts under Polish civil law, should fulfill all the material elements relevant to the contract named in a literally accepted manner in civil law. The lack of loan agreements prepared on the basis of the provisions of the Civil Code between participants of cash pooling does not preclude the possibility of recognizing certain transactions as meeting the definition in art. 16 clause 7b. This provision introduces its own definition of the aforementioned contract for the purposes of the provisions on so-called thin capitalization . It is also impossible to agree with the company’s arguments that in the agreement described in the application there is no obligation necessary for recognizing it as a type of loan an obligation to transfer a certain amount of money to the entity specified in the agreement , because the participants of this agreement do not know whether these funds will be used , in what amount and by which participant the other party to the transaction is not specified , there is no requirement to obtain the consent of the participant with a positive balance to transfer a specific amount of funds . On the contrary , the agreement described in the application expressly consented to the transfer of a certain amount of money to a specific entity – only by specifying the method of identifying and determining that entity . As the Court of First Instance rightly pointed out , in the same way it was indicated that there would be an agreement to commit to transfer funds to a specific entity . The other party to the transaction was determined by indicating how it was determined . Since the criteria and zeroing of balances are given , and the number of group members is constant , it is known in advance who and to what extent will be the other party to the transaction . Each of the participants in the agreement also agreed in advance to transfer the specified amount and method of funds in a positive cash balance . Therefore, the position of the Court of First Instance does not raise any objections that in the facts described in the application we are dealing with a loan agreement referred to in art. 16 clause 7b. Acknowledgment that the provisions of Art. 16 clause 1 point 60 and point 61 in connection with art. 16 clause 7. causes the applicant to be obliged to draw up the documentation referred to in art. 9a. The position of the Provincial Administrative Court in Warsaw in this ...

Once the existence or absence of an indemnification clause in favour of the restructured entity upon termination, non-renewal or substantial renegotiation of the agreements has been determined, the analysis should then focus on assessing whether such indemnification clause and its terms (or absence thereof) are arm’s length. Where comparables data evidence a similar indemnification clause (or absence thereof) in comparable circumstances, the indemnification clause (or absence thereof) in a controlled transaction will be regarded as arm’s length ...

As noted at paragraph 1.46, in transactions between independent enterprises, the divergence of interests between the parties ensures that: (i) contractual terms are concluded that reflect the interest of both parties, (ii) the parties will ordinarily seek to hold each other to the terms of the contract, and (iii) that contractual terms will be ignored or modified after the fact generally only if it is in the interests of both parties. However, this same divergence of interest may not exist in the case of associated enterprises or any such divergences may be managed in ways facilitated by the relationship between the associated enterprises and not solely or mainly through contractual agreements. For this reason, when the facts of the case differ from the written terms of the agreement between the parties or when no written terms exist, the absence or existence (and its terms) of an indemnification clause should be deduced from the conduct of the parties. For instance, it may be that, on the basis of the facts of the case and of the actual conduct of the associated enterprises, it is determined that the term of the contract is longer than established in the written contract, which would entitle the terminated party to some indemnification in case of early termination ...

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

Where no written terms exist, or where the facts of the case, including the conduct of the parties, differ from the written terms of any agreement between them or supplement these written terms, the actual transaction must be deduced from the facts as established, including the conduct of the parties (see Section D. 1.1 of Chapter I). It is, therefore, good practice for associated enterprises to document their decisions and intentions regarding the allocation of significant rights in intangibles. Documentation of such decisions and intentions, including written agreements, should generally be in place at or before the time that associated enterprises enter into transactions leading to the development, enhancement, maintenance, protection, or exploitation of intangibles ...

Where no written terms exist, the actual transaction would need to be deduced from the evidence of actual conduct provided by identifying the economically relevant characteristics of the transaction. In some circumstances the actual outcome of commercial or financial relations may not have been identified as a transaction by the MNE, but nevertheless may result in a transfer of material value, the terms of which would need to be deduced from the conduct of the parties. For example, technical assistance may have been granted, synergies may have been created through deliberate concerted action (as discussed in Section D.8), or know-how may have been provided through seconded employees or otherwise. These relations may not have been recognised by the MNE, may not be reflected in the pricing of other connected transactions, may not have been formalised in written contracts, and may not appear as entries in the accounting systems. Where the transaction has not been formalised, all aspects would need to be deduced from available evidence of the conduct of the parties, including what functions are actually performed, what assets are actually used, and what risks are actually assumed by each of the parties ...

In the Filinvest case an assessment had been issued where the tax authorities had imputed interest on an interest free loan. Judgement of the Tax Court The Court set aside the assessment. The tax authorities power to allocate gross income does not include the power to impute ‘theoretical interest’ because there must be actual or, at the very least, probable receipt or realisation by the taxpayer of the income that is being allocated ...