An adjustment for FY 2013 and 2014 had been issued to a pharmaceutical company in Panama “Pharma Distributor S.A” that resulted in an income adjustment of 19.5 million dollars, which in turn resulted in additional taxes of 2.4 million dollars. The resale price method had been used by Pharma Distributor S.A. to determine the market value of an asset acquired from a related entity that was sold to an independent entity. This method was rejected by the tax authorities based on the fact that the analysis presented by the taxpayer did not meet the requirements for application of the method. The tax authorities instead applied a TNMM. The tax authorities also rejected tax deductions for expenses purportedly paid for administrative services due to the absence of supporting documentation. Provisions of article 762-G “Administrative services received” in the Tax Code in Panama contemplates tax deductibility for such expenses exclusively when services have actually been rendered to the benefit of the recipient. Decision of the Court The Court held in favor of the tax authorities. The Court ratified the position of the tax authorities regarding the non-deductibility of the expense paid for administrative services. In addition, the Court’s resolution indicates inconsistencies and imprecision in the delineation of the transaction within the comparability analysis, selection and application of the Resale Price Method, concluding that the level of comparability presented in the supporting documentation would be inadequate for application of the method. It was also indicated that Pharma S.A assumed operating expenses in excess of those of simple distributors. Hence Pharma Distributor S.A. should be characterized as a fully-fledged distributor and be compensated for the additional functions performed and risks assumed. Due to these methodological inconsistencies, the Court agreed that the TNMM – as suggested by the tax authorities – was the more appropriate method in the case at hand. Click here for English translation Click here for other translation ...

Société Générale S.A. had paid for costs from which its subsidiaries had benefited. The costs in question was not deducted by Société Générale in its tax return, but nor had they been considered distribution of profits subject to withholding tax. Following an audit for FY 2008 – 2011 a tax assessment was issued by the tax authorities according to which the hidden distribution of profits from which the subsidiaries benefited should have been subject to withholding tax in France Société Générale held that the advantage granted by the parent company in not recharging costs to the subsidiaries resulted in an increase in the valuation of the subsidiaries. It also argued that the advantages in question were not “hidden” since they were explicitly mentioned in the documents annexed to the tax return By judgment of 11 October 2018, the court of first instance discharged the withholding taxes as regards the absence of re-invoicing of costs incurred on behalf of the subsidiaries located in Mauritania, Burkina Faso and Benin. Judgement of the Court The Administrative Court of Appeal decided partially in favour of the tax authorities and partially in favour of Société Générale. It discharged Société Générale from withholding taxes relating to non-deductible expenses called “remuneration of DeltaCrédit’s managers” and to the costs incurred on behalf of its Moldovan and Georgian subsidiaries based on an interpretation of the articles on dividends in the relevant tax treaties. Excerpts “…Société Générale did not re-invoice “expenses borne by the head office for the subsidiaries”, expressly mentioned as such in the tables No. 2058 A of non-deductible expenses appended to its returns. Société Générale also assumed the costs of “personnel seconded to foreign subsidiaries”, the “remuneration of the managers of [its Russian subsidiary] Deltacrédit”, and, as mentioned in the previous point, “ITEC transfer prices”, which it spontaneously reintegrated into its taxable income, thus acknowledging the non-deductibility of these expenses. These facts reveal that Société Générale has incurred costs that are normally borne by its foreign subsidiaries. As a result, Société Générale is presumed to have made a transfer of profits to a company located outside France, within the meaning of the aforementioned provisions of Article 57 of the General Tax Code. It is therefore incumbent on it to prove that this transfer involved sufficient consideration for it and thus had the character of an act of normal commercial management.” “In this case, with regard to the “expenses borne by the head office for foreign subsidiaries”, the cost of “personnel seconded to foreign subsidiaries”, and “ITEC transfer prices”, the entries in the tables of non-deductible expenses, which do not specify the precise nature of the benefits granted, nor the beneficiary companies, do not in themselves reveal the existence of the gifts granted. On the other hand, the non-accounting mention made by Société Générale, in Table 2058 A of its income tax return, of the benefit granted to its Russian subsidiary DeltaCrédit by paying the remuneration of its managers, reveals both the purpose of the expense and its beneficiary. This advantage could not therefore be considered as a hidden advantage within the meaning of the provisions of Article 111c of the General Tax Code.” “Lastly, even though no financial transfer was made, the costs unduly borne lead to disinvestment for the company which bore them and to distributed income for the company which benefited from them. It follows that, in terms of French tax law, Société Générale is only entitled to argue that the Montreuil Administrative Court was wrong to reject its request for a discharge in respect of the non-deductible charges referred to as “remuneration of DeltaCrédit’s directors” ” Under Article 7 of the Convention between France and the former USSR, applicable to the income at issue: “1. Dividends paid by a resident of a State to a resident of the other State may be taxed in the first State. However, the tax so charged shall not exceed 15 per cent of the gross amount of such dividends. 2. The term “dividends” as used in this Article means income from shares as well as other income which is subjected to the treatment of income from shares by the laws of the State of which the person making the distribution is a resident. “These stipulations do not cover income deemed to be distributed by virtue of the provisions of Article 111 c) of the General Tax Code which is not subject to the same regime as income from shares. Société Générale is therefore entitled to argue that this income was not taxable in France, pursuant to Article 12 of the same agreement, which provides that “income not listed in the preceding articles (…) received by a resident of a State and arising from sources in the other State shall not be taxable in that other State. “.” “Under the terms of Article 13 of the Franco-Mauritanian, Franco-Beninese and Franco-Burkinabe tax treaties: “income from securities and similar income (income from shares, founders’ shares, interest and limited partnership shares, interest from bonds or any other negotiable debt securities) paid by companies (…) having their tax domicile in the territory of one of the Contracting States may be taxed in that State”. These stipulations, which refer only to the income from securities and similar income they list, do not concern income deemed to be distributed within the meaning of Article 111 c) of the General Tax Code. The Minister is therefore not entitled to argue that the first judges wrongly discharged Société Générale from the withholding taxes applied to the benefits granted to its subsidiaries located in Mauritania, Benin and Burkina Faso, which were not taxable in France.” Click here for English translation Click here for other translation ...

At issue was deduction of VAT on purported costs incurred for intra-group services, which had been deemed non-deductible for tax as well as VAT purposes by the Italien Tax Authorities, as the taxpayer had not been able to prove the effectiveness and relevance of these services. The Supreme Court found that in order for intra-group cost to be deductible (and VAT deductible) taxpayer must prove that, a real service have been received which is objectively determinable and adequately documented. This burden of proof had not been lifted by the taxpayer and VAT payments on the purported services were consequently non-deductible. Click here for English translation ...

A shared service center in Poland both provided intra-group services to the group and in doing so also received and paid for services from other group companies. At issue was payments for the services that the Shared Service Center in Poland received. Under some circumstances intra-group service costs are non-deductible in Poland according to local anti-avoidance provisions aimed at base eroding payments, and according to the tax authorities the payments for intra group services received by the Shared Service Center were non-deductible according to these anti-avoidance provisions. The tax authorities had considered that the payments for the received services were non-deductible according to these provisions. Court decision Service costs that are directly connected with provision of services that generate income, and are included in the base for remuneration of the services provided are deductable and thus not covered by the non-deduction provisions. The Company’s revenues in connection with the support provided to related entities (domestic and foreign) was calculated based on the net transaction margin method or cost plus. This means that the cmpany determines the cost base (operating costs and in the case of the net transaction margin method general administrative costs) allocated appropriately to each recipient of the service to define revenues from services provided to related entities, and it is the cost base that is key to determine the Company’s remuneration for a given service. According to the Company, it operates a shared services center, and therefore provides support services. Therefore, the company bears a number of costs that are oriented towards the provision of the service for the person ordering the service. Although the costs incurred by the Company may have the nature of indirect costs (in accounting terms), in a business sense, individual cost elements affect the quality and nature of the service provided for the party ordering the service. This is the activity of shared service centers, which are cost centers that, through the skilful use of synergies, are able to create value (including value at the level of costs) for the service provider. The condition for excluding expenditure from cost limitation is that the expenditure as a tax deductible cost is directly related to the act of producing or purchasing a good or providing a service. In this case, a language interpretation outlines the boundaries of other interpretations, including functional ones. The interpretation of the provision of art. 15e paragraph 11 point 1, made by the authority in an unacceptable manner, inconsistent with the content of the norm contained therein, excludes service providers from the right to exclude from cost limitation referred to in art. 15e paragraph 1, despite meeting the conditions of this exclusion. The service expenditures were not artificial or economically unjustified, which should be counteracted by limiting costs (and thus limiting the right to classify expenditure as tax deductible costs). Therefore, it should be emphasized that functional (including teleological) interpretation of the limitation of being classified as tax deductible costs (Article 15e (1), which has a clear connection with the exclusion of this limitation (Article 15e (11) updop), leads to the conclusion, that the purpose of the restriction was to counteract aggressive optimization, the lack of economic justification for the expenditure incurred. This means that the exclusion of a restriction must be caused by the lack of such features of the expenditure incurred when considering the functional and systemic interpretation Click here for translation ...

“Drinks Distributor S.A.” was involved in purchase, sale and distribution of alcoholic beverages in Mexico. “Drinks Distributor s.a” had entered into a non-exclusive trademark license agreement with a related party for the sale of its product. Following a restructuring process, the related party moved to Switzerland. Following an audit the Mexican tax administration, determined that deductions for marketing and advertising costs related to brands and trademarks used under the licensing agreement, were not “strictly indispensable” and therefore not deductible, cf. requirement established by the Income Tax Law in Mexico. Drinks Distributor S.A on its side held that the marketing and advertising costs were strictly indispensable and that the tax deductions should be accepted. The dispute ended up in the Federal Court of Administrative Justice. Judgement: The Court determined what should be understood as “strictly indispensable“. To establish this concept the purposes of the specific company and the specific costs must first be determined – in particular that the costs are directly related to the activity of the enterprise the costs are necessary to achieve the aims of its activity or the development of this activity; in the absence of the costs, the commercial activity of the taxpayer will be hindered. “ADVERTISING AND PUBLICITY EXPENSES. THE DEDUCTION IS INAPPROPRIATE, AS THEY ARE NOT STRICTLY INDISPENSABLE FOR THE COMPANY SELLING PRODUCTS UNDER TRADEMARKS WHOSE USE AND EXPLOITATION WERE GRANTED TO IT BY MEANS OF A NON-EXCLUSIVE LICENSE AGREEMENT. Article 31, section I of the Income Tax Law provides that the deductions must comply with various requirements, including that they are strictly indispensable for the purposes of the taxpayer’s activity; the latter being understood to mean that said expenses are directly related to the activity of the company, that they are necessary to achieve the purposes of its activity or the development thereof and that if they do not occur they could affect its activities or hinder its normal operation or development. Therefore, in order to determine whether such expenditure satisfies that requirement, account must be taken of the aims of the undertaking and the specific expenditure itself. Therefore, if a company has as its object the sale of a certain product, and to this end has entered into a non-exclusive license agreement for the use and exploitation of intangibles, which grants it the use and exploitation of a brand name to sell this product; The latter is prevented from deducting advertising and publicity expenses, since, as it does not own the trademark it uses to sell its product, the aforementioned expenses – understood as the acts through which something is made known in order to attract followers or buyers through the means used to disseminate or spread the news of things or facts – are not strictly indispensable for the development of its activity, as they increase the value of the trademark for the benefit of a third party; That is to say, the owner of the trade mark, since they are not aimed at the article, but at positioning the trade mark on the market, in order to give it notoriety, fame and recognition among the consumer public.” Click here for English Translation Click here for other translation ...

Haier Europe Trading Srl, an Italien subsidiary of the Chinese Haier group (active within home appliances and consumer electronics), challenged an assessment for FY 2007, with which the tax authorities had recovered for taxation the difference with respect to the normal value in relation to transactions of goods with other companies of the group not resident in Italy. An appeal was filed by Haier with the Tax commission which was considered well-founded. The tax authorities then filed an appeal with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court found that the appeal in regards of transfer pricing was well founded and set aside the Judgement of the Tax Commission. Excerpt “3.2 Now, in the case at hand, the CTR affirms that “in the case at hand, as demonstrated, the prices paid are correct and in line with (i.e. lower than) those of the domestic market”. This ruling, moreover, is followed by the observation that the payment of monetary contributions (for € 11,612,189.50) by the Chinese parent company “as a partial adjustment of the transfer prices” was functional “to support its economic results and ensure that the profitability of the taxpayer company corresponds to that of the market”. In other words, on the one hand an apparent congruence of the transfer prices with market values seems to be affirmed – and therefore with an asserted “normal” value, a value which, moreover, is related to purchases from the subsidiary alone on the domestic market and not in free market conditions between independent parties – while on the other hand the achievement of a profitability corresponding to that of the market requires a substantial monetary contribution by the parent company, the allocation and purpose of which remains unclear in practice. 3.3. It follows, therefore, that the appellate court, in assessing the congruity of the transfers, i.e. whether they took place at a normal price, did not take into account that the alleged normality did not take place in a condition of competitiveness and in the absence of any adequate corrective and applied, in reality, a criterion of normalisation “a posteriori”, having considered the price “normal” not because it complied with the criteria of the law but because it was supplemented, subsequently, by the parent company. It must be reiterated, moreover, that it is settled case law that “the ‘normal value’ of the consideration, in transactions between companies belonging to the same multinational group, pursuant to Article 76 (now 110) of Presidential Decree No. 917 of 22 December 1986, must be inferred from the “normal value” of the consideration of the transaction. 917, must be deduced from a comparison that is highly contextualised in qualitative, commercial, temporal and local terms, aimed at identifying an average value from which only the destabilising factor of non-competitiveness must be expunged, so that the price lists or tariffs of the entity that provided the goods or services constitute the priority criteria, and in the absence thereof, the price lists or tariffs of the chambers of commerce and the professional tariffs, taking into account customary discounts, or, in the case of imposed prices, the measures in force, and, finally, in the absence of such elements, the objectively significant and numerically appreciable data, which it is the taxpayer’s burden to attach” (Cass. No. 17953 of 19/10/2012). 3.4. The CTR, therefore, erred in applying Article 110, Paragraph 7, tuir and the criteria set forth in Article 9, Paragraph 3, tuir, as it was totally incomprehensible whether or not the value of the transactions corresponded to the normal value.” Click here for English translation Click here for other translation ...

Dell Spain is part of a multinational group (Dell) that manufactures and sells computers. Dell Ireland, operates as distribution hub for most of Europe. Dell Ireland has appointed related entities to operate as its commissionaires in several countries; Dell Spain and Dell France are part of this commissionaire network. The group operates through a direct sales model and sales to private customers in Spain are conducted by Dell France, through a call centre and a web page. Dell Spain use to operate as a full-fledged distributor, but after entering into a commissionaire agreement Dell Spain now served large customers on behalf of Dell Ireland. A tax assessment was issued by the tax authorities. According to the assessment the activities in Spain constituted a Permanent Establishment of Dell Ireland to which profits had to allocated for FY 2001-2003. Judgement of the Supreme Court The Supreme Court concludes that the activities of Dell Spain constitutes a Permanent Establishment of Dell Ireland under both the “dependent agent” and “fixed place of business” clauses of the treaty. The expression “acting on behalf of an enterprise” included in article 5.5 of the Spain-Ireland tax treaty does not necessarily require a direct representation between the principal and the commissionaire, but rather refers to the ability of the commissionaire to bind the principal with the third party even when there is no legal agreement between the latter two. Furthermore, the Supreme Court considers that Dell Spain cannot be deemed as an independent agent since it operated exclusively for Dell Ireland under control and instructions from the same. Regarding the “fixed place of business”, the Supreme Court states that having a place at the principal’s disposal also includes the use of such premises through another entity which carries out the principal’s activity under its supervision. This Court also explained that considering a company as a PE is not only based on its capacity to conclude contracts that bind the company but also on the functional and factual correlation between the agent and the company in the sense that the agent has sufficient authority to bind the company in its day to day business, following the instructions of the company and under its control. In regards to question of Employee stock option expences,  the Court partially upheld the claim of Dell and stated “”expenses that are correlated with income” are deductible expenses. Consequently, any expense correlated with income is an accounting expense, and if any accounting expense is a deductible expense in companies, with no exceptions other than those provided for by law” Click here for English translation Click here for other translation ...