Tag: Not a bank

Denmark vs. “H Borrower and Lender A/S”, January 2021, Tax Tribunal, Case no SKM2021.33.LSR

“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the deposits. Due to insufficient transfer pricing documentation, the tax authorities (SKAT) issued a discretionary assessment of taxable income where the interest rate on the loans had been adjusted based on the rate received on the deposits. Decision of the Court The National Tax Tribunal stated that the documentation was deficient to such an extent that it could be equated with a lack of documentation. The tax authorities had therefore been entitled to make a discretionary assessment. The National Tax Court referred, among other things, to the fact that the company’s transfer pricing documentation lacked a basic functional analysis of the group treasury company with which the company had controlled transactions. “The National Tax Tribunal finds that the company has not proved that SKAT’s estimates are not in accordance with the arm’s length principle. It is hereby emphasized that the company has received a loan from H4, where the interest rate is based on a base interest rate plus a risk margin of 130 bps. Thus, the interest paid on these loans has been higher than the interest received by placing liquidity with H4. The National Tax Tribunal does not find it proved by the company that these two cash flows should constitute different financing instruments with different risks, and that the interest rates must therefore be different. The lack of functional analysis for H4 in the TP documentation means, in the opinion of the National Tax Tribunal, that it cannot be considered to be in accordance with the arm’s length principle, that H4 must receive a proportionately higher interest payment from the company than what is paid to the company. In this connection, it is taken into account that H4 has no employees and thus cannot be considered to have control over the risks associated with the various controlled transactions. The fact that the company has entered into different contractual obligations for the two cash flows is given less weight due to the lack of a functional analysis for H4. The company’s argument that the interest rate for deposits with H4 according to the National Tax Court’s previous decision, published by SKM2014.53.LSR, must be determined without risk margin, as there is a full set-off against the company’s loan from H4, can not either taken into account, as the interest rates for the two cash flows in this way would be different. The National Tax Tribunal finds that the decision in SKM2014.53.LSR must be interpreted as meaning that the interest rates for comparable cash flows that are fully hedged between two group parties must bear interest at the same rate, as the cash flows in this way cancel out each other.” Click here for translation SKM2021-33-LSR ...

El Salvador vs “E-S Cosmetics Corp”, December 2020, Tax Court, Case R1701011.TM

“Cosmetics Corp” is active in wholesale of medicinal products, cosmetics, perfumery and cleaning products. Following an audit the tax authorities issued an assessment regarding the interest rate on loans granted to the related parties domiciled in Cayman Islands and Luxembourg. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Excerpt “In this sense, it is essential to create a law that contains the guidelines that the OECD has established to guarantee the principle of full competition in transactions carried out between national taxpayers with related companies, for the purpose of applying the technical methods and procedures that they provide; The express reference made by Article 62-A of the TC cannot be considered as a dimension of the principle of relative legal reserve, insofar as there is no full development of the methods or procedures contained therein, nor a reference to an infra-legal rule containing them, but rather a reference that does not have a legal status, i.e. they are not legally binding, but only optional and enunciative to be incorporated into the legal system of each country. Hence, at no time is the legality of the powers of the Directorate General to determine the market price being questioned, since, as has been indicated, the law itself grants it this power, what is being questioned in the present case is the failure of the Directorate General to observe the procedures and forms determined by law to proceed to establish the market price, by using the OECD Guidelines, which, it is reiterated, for the fiscal year audited, did not have a legal status, nor were they binding, since they were not contained in a formal law; Therefore, even if the appellant itself used them, this situation constitutes a choice of the company itself, for the purpose of carrying out an analysis of its transfer prices, but in no way implies that this mechanism is endorsed by law, the Directorate General being obliged to lead or guide the taxpayer in the application of the regulations in force and adjust its operations to the provisions thereof, and if it considered that there was indeed an impediment to determine the market price, it should have documented it and proceeded in accordance with the provisions of the aforementioned legal provisions, which it did not do. Finally, it should be clarified that article 192-A of the Tax Code, cited by the DGII at folios 737 of the administrative file, as grounds that the interest rates applied by the appellant were not agreed at market price, is not applicable to the case at hand, inasmuch as it regulates a legal presumption of obtaining income (income) from interest – which admits proof to the contrary – in all money loan contracts of any nature and denomination, in those cases in which this has not been agreed, which shall be calculated by applying the average active interest rate in force on credits or loans to companies applied by the Financial System and published by the ————— on the total amount of the loan; on the other hand, in the present case, as has been shown above, the determination made by the DGII has been through the application of the transfer prices regulated in article 62-A of the TC, which is completely different from the said presumption; in addition to the fact that, as evidenced in folios 82 to 93 and 309 to 314 of the administrative file, the Revolving Credit Line contracts presented by the appellant, entered into with the companies ————— and — ———— contain the clause “Interest Rate”, in which it is established that the interest rate of each loan will be the market rate agreed by the parties, which was 3% for the first company and 1% for the second, which was effectively verified by the DGII both in the accounting records of the appellant, in the loan amortisation tables, as well as in the referred Transfer Pricing Study, as mentioned above. Consequently, this Court considers that in the present case there has been a violation of the Principles of Legality and Reservation of Law, by virtue of the fact that in the instant case the Directorate General did not follow the procedure established by the legal system in force, and therefore, in issuing the contested act, it acted outside the legally established procedures, and consequently, the decision under appeal, with respect to this point, is not in accordance with the law; it is unnecessary to rule on the other grievances invoked by the appellant in its appeal brief. The aforementioned is in accordance, as pertinent, with precedents issued by this Tribunal with references R1810029TM, of the eleventh hour of September fourth, two thousand and twenty; R1505018TM, of the thirteenth hour and two minutes of May twenty-seventh, two thousand and nineteen; R1511005TM, dated ten o’clock ten minutes past ten on the thirty-first day of August two thousand and eighteen; R1405013T, dated eleven o’clock five minutes past five on the twentieth day of April of the same year; R1405007TM, dated eleven o’clock five minutes past five on the twenty-seventh day of the same month and year; and, R1704001T, dated eleven o’clock five minutes past five on the twenty-ninth day of May of the aforementioned year.” Click here for English translation Click here for other translation TAIIA-R1701011TM ...

Hungary vs “Lender” Kft, February 2020, Budapest Administrative Court, Case No. 16.K.33.691/2019/18

In 2008 Lender Kft. entered into a loan agreement with its foreign domiciled affiliated company Kft. 1. According to the terms of the contract, the loan amounted to 53,174,516, the maturity date of the loan was 31 January 2013 and the interest was paid semi-annually at the semi-annual CDI rate fixed in the contract plus 200 basis points per annum. In the years 2009-2011, Kft. 1 paid 15 % of the interest as withholding tax, and Lender Kft. received 85 % of the interest. In its books, Lender Kft. entered 100 % of the interest as income, while the 15 % withholding tax was recorded as other expenses. According to Lender Kft’s transfer pricing records, the normal market interest rate range was 8,703 % to 10,821 % in FY 2009, 10,704 % to 12,598 % in the FY 2010 and 10,704 % to 12,598 % in FY 2001, and the interest rates applied in the loan transaction were 10,701 % to 12,529 %, 12,517 % to 14,600 % and 12,517 % to 14,600 % in the same years. In other words, according to the records, the interest rates applied to the transaction were partly within and partly above the market price range. Lender Kft. used the CUP method to determine the transfer price, taking into account external and internal comparables. As an external comparison, it used a so-called risk premium model based on the rating of the debtor party and the terms and conditions of the loan, taking into account publicly available data. For the credit rating of the related company, it used the risk model of the name, on the basis of which it classified the company between A1 and A3. It defined the range of interest rates to be applied in the loan terms and conditions, then the default rate and the rate of return, and finally, by substituting these data into the risk premium model formula, it defined the risk premium rates for each risk rating. In doing so, it used subordinated bonds. The benchmark interest rate range was defined as the sum of the risk-free rate and the risk premium. As an internal comparison, the applicant requested quotations from various commercial banks, as independent parties, before granting the loan, as to the amount of profit it could expect to obtain if it deposited its money with them (Bank1, Bank2) The Tax tax authorities carried out an audit of Lender Kft for FY 2009, 2010 and 2011. In the view of the tax authority at first instance, the CUP method, although appropriate for determining the arm’s length price, was not the method used by the applicant. According to the tax authorities the rating of a debtor using public rating models may differ greatly from the rating carried out by the rating agency which created the model, which results in a high degree of uncertainty as to the method used by the applicant. A further problem was that Lender Kft had based its pricing on a rate for subordinated bonds, whereas a bank loan and a bond are two different financial instruments and cannot be compared. In this context, it was stated that the transaction under examination was a loan contract and not a bond issue. The tax authorities explained that the unit operating costs are the lowest in the banking market and that it had not been demonstrated that the cost of the applicant’s lending was lower than that of a bank loan. It also stated that the mere existence of information through a relationship does not imply a lower risk exposure. In relation to the internal comparables, it stressed that the loan granted by Lender Kft could not be classified as a deposit transaction and that the comparison with the deposit rate was therefore incorrect. According to the tax authority, for the purposes of determining the normal market price, the … banking market best reflects the conditions under which the related undertaking would obtain a loan under market conditions, and therefore the so-called “prime rate” interest rate statistics calculated by the Central Bank of the country in question are the most appropriate for its calculation. This statistic shows the average interest rate at which commercial banks lend to their best customers. Accordingly, the tax authority at first instance took this rate as the basis for determining the difference between the interest rate applied to the transaction at issue and the normal market rate. As a result, the applicant’s corporate tax base was increased by HUF 233,135,000.00 in the financial year 2009, HUF 198,638,000.00 in the financial year 2010 and HUF 208,017,000.00 in the financial year 2011, pursuant to Article 18(1) of Act LXXXI of 1996 on Corporate Tax and Dividend Tax (‘Tao Law’). Lender Kft. filed a complaint against the decision and requested that the decision be altered or annulled and that the defendant be ordered to commence new proceedings. In the complaint it stated that the method used by the tax authorities did not comply with points 1.33, 1.35 and 2.14 of the OECD TPG, nor with Article 7(d) of the PM Regulation. By judgment of 20 April 2018, the Court of First Instance annulled the tax authorities first assessment and ordered the authority to initiate new proceedings in that regard. The court stated that the tax authority must determine whether the pricing of the loan at issue in the case was in line with the arm’s length price, taking into account the OECD Transfer Pricing Guidelines and the expert’s opinion in this context. Under the revised audit process the tax authorities found other issued which were added to the new assessment. Lender Kft. then filed an appeal with the Administrative Court. Judgement of the Administrative Court The Administrative court found the appeal well founded. Excerpts “The tax authority was only legally able to implement the judgment of the court in the retrial ordered by the court. The subject-matter of the action was the finding of the tax authority as a result of the audit ...

Bulgaria vs “K-Bul”, March 2016, Supreme Administrative Court, Case No 2690

K-Bul is a Bulgarian subsidiary in the K Group. In the years 2007 to 2013 certain financial intra-group contracts were entered (Two financial service contract – concluded on 02.10.2007 and a Loan agreement concluded on 26.01.2010). Following an audit, the market interest rate was determined by the tax authorities on the basis of the Bulgarian National Bank (BNB)’s interest rate statistics published on the Bank’s website, and for the first two contracts a market interest rate of 8.22% was adopted, as reported by the BNB for October 2007 for euro loans to non-financial corporations for a period of one to five years. The loan agreement concluded on 26.01.2010 has a market interest rate of 6,88 %, which corresponds to the BNB interest rate statistics for January 2010 for euro loans to non-financial corporations for a period of up to one year. On that basis the taxable income of K-Bul was restated by amounts representing the difference between the interest charged by the company for the relevant year and the market interest determined in the course of the audit proceedings. K-Bul then filed a complaint with the Administrative Court. The court held that the statistical data of the BNB used in the course of the audit did not constitute a proper method for establishing the market interest on the loans in question. The court held that the interest statistics maintained by the BNB cannot take into account the quantitative and qualitative characteristics of the specific transaction, which is an essential feature of market interest. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case for a new trial. Excerpts “”In the light of that procedural conduct of the parties, it may be assumed that the court referred to the evidence adduced in the course of the appeal, but, as stated above, that evidence was not discussed. Further, the appellant’s argument in the appeal that the judgment is devoid of reasons as to why the court found it lawful to determine the interest rates under the contracts at issue and why those interest rates should be determined by applying LIBID and EURIBOR, given the undisputed fact that the Bulgarian company carries on its business in Bulgaria, is well founded. The above-mentioned infringements of the rules of reasoning are of a fundamental nature, since they lead to the conclusion that the disputed relations may have developed in a different manner from that accepted by the court. The Court of First Instance should not consider for the first time the evidence admitted in the case and should not establish new facts, since the right of the parties to two-instance proceedings would be infringed. On a retrial, the nature of the contractual relationship between the parties must be determined, taking into account the finding in the course of the audit that the provision of the funds took the form of a deduction of part of the sums owed by customers of the K. group to the Bulgarian company for sales of products made by the latter to them. The rest of the sales amounts were remitted to the LPF and were accounted for as repayment on credit granted, i.e. it has to be considered whether there is a K. Pooling Agreement in this case, taking into account also the manner of accounting of the amounts in question, namely, synthetic accounting of the long-term loans granted in foreign currency in account 226, as well as the description of the activity /page 12 of the evidence book admitted in the course of the proceedings/. If such an arrangement is established, then to the extent that each Participant in the K. Pooling will be able to both provide funds to the Leader and to use the other Participants’ funds through the Leader, any benefits that the individual Participant derives from its presence in this construct should be taken into account in determining whether the prices at which these transactions occur are market-based, and, if necessary, special knowledge should be used to determine the interest that the Participant receives for the funds provided” Click here for English Translation Click here for other translation Bulgaria-Case-no-2690-SAC-March-2016 ...

India vs Cotton Naturals (I) Pvt. Ltd., March 2015, High Court of Delhi, ITA No. 233/2014

Loan agreements were entered into between Cotton Naturals (I) Pvt. and a US subsidiary on 13th April, 2002, 7th May, 2003 and then on 8th September, 2003. The rate of interest had been fixed at 4% per annum on the principal sum. The CUP method had been applied to determine the rate. The tax authorities held that the arm’s length interest rate should instead be set at 14% p.a. Following an objection to the assessment, at partial relief was granted in the form of a reduction of the rate to 12,20%. An appeal was filed by Cotton Naturals with the Tax Appellate Tribunal Cotton Naturals (I) Pvt. Ltd. where in February 2013 the assessment was set aside. An appeal was then filed with the High Court by the tax authorities. Decision of the High Court The High Court decided in favor of Cotton Naturals (I) Pvt. Ltd. and set aside the tax assessment. Excerpts “Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction, though this is permissible under two exceptions. Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessed to take  commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured.” “Transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. The first step in this exercise is to ascertain the international transaction, which in the present case is payment of interest on the money lent. The next step is to ascertain the functions performed under the international transaction by the respective AEs. Thereafter, the comparables have to be selected by undertaking a comparability analysis. The comparability analysis should ensure that the functions performed by the comparables match with the functions being performed by the AE to whom payment is made for the services rendered. These aspects have been elucidated in detail in Sony India Ltd. (supra) by referring to the OECD Guidelines as well as United Nations Practical Manual of Transfer Pricing for Developing Countries.” “The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected.” “We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest.” “In the light of the aforesaid discussion, the substantial question of law mentioned above has to be answered against the appellant i.e. the Revenue and in favour of the respondent-assessee. The appeal is accordingly disposed of. There will be no order as to costs.” India vs cotton naturals - fin trans case no 233-2014 BW ...

Netherlands vs “Dutch Low Risk Treasury B.V.”, August 2003, District Court, Case No 01/04083, ECLI:NL:GHAMS:2003:AJ6865

This case concerns a Dutch treasury company with a low risk intra-group borrowing and on-lending activity. The interested party was incorporated on 5 August 1995 by a legal person named V Limited, under Canadian law. Its subscribed and paid-up capital amounted to NLG 40,000 in the years under review. The claimant is part of the V group. Its actual activities are described in its “Declaration of data on business start-ups” submitted to the tax authorities as “intra-group financing”. It maintained a bank account with the Bank of Montreal. In the financial years in question, the interested party lent substantial amounts of pounds sterling to its sister company Y Plc, incorporated under the laws of the United Kingdom, in the form of promissory notes and a revolving credit facility with effect from 31 January and 1 February 1996 respectively. The stakeholder obtained the necessary pounds by way of a loan from its sister company Z B.V. The funds borrowed and lent by the stakeholder were transferred to its bank account with the Bank of Montreal. The loan conditions in the relationship between the interested party (lender) and Y (borrower) ran completely parallel to the conditions under which the interested party borrowed the relevant funds from Z. The money flows – such as repayment and interest payments – also ran completely parallel. The interested party did not therefore run any interest or exchange rate risk. It did not carry out any other activities. Before the interested party became active as such – on 31 January 1996 – loans to Y were provided by Z, which borrowed funds for that purpose within the V-group. Z has a very large own capital. For its holding and financing activities, Z concluded a ruling; with regard to the financing activities this ruling implied that there would be fees determined at arm’s length if it would declare a gross margin of at least 1% of the borrowed and on-lent funds as a contribution to its taxable profit. In the current financial years Z has lent out the funds to the interested party at its subsidiary D N.V. established in the Netherlands Antilles. In dispute is the manner in which the profits of the interested party should be determined. – Does the interested party act as a finance company, and if so, should its profit, as the tax inspector primarily argues, be set at 1/8% of the borrowed and on-lent amounts, in accordance with the so-called ruling policy, or should the interest paid by it be excluded from deduction pursuant to Article 9(1)(b) of the Corporation Tax Act 1969 (the Act), as the tax inspector alternatively argues? – If the interested party is not a finance company in the strict sense of the word, can the interested party’s profit be determined in accordance with the tax return, as the interested party primarily maintains, or at least can its profit be determined in accordance with the cost-plus method, as the interested party maintains in the alternative and the Inspector maintains in the further alternative? – If none of the aforementioned profit determination methods is correct, is it then possible, as the interested party argues in the alternative, to use the advice of two trust offices which it obtained to determine its profit? Judgement of the Court According to the court, a cost-plus surcharge of 10% was appropriate in this case. “Based on the facts established – including the circumstance that its risk-bearing capital did not exceed NLG 40,000 – the Court deems it sufficiently plausible that the interested party in fact acted as an intermediary between Z and Y, that it borrowed and lent money and received and passed on interest in this context almost without any risk, and that as such it essentially only fulfilled a cashier’s function for the benefit of Z. The applicant cannot therefore be regarded as a finance company in the proper sense of the term. The primary and subsidiary arguments of the Inspector are therefore rejected by the Court. The reason(s) why the interested party was thus engaged and the question whether the loans and interest are rightly included in its balance sheet or profit and loss account, respectively, can be left open in the context of the present dispute. It is part of the economic function performed by the interested party – see 5.1 – that the interested party passes on its costs to Z with a profit surcharge. Since the interested party’s profit must be determined according to the cost-plus method, the Court agrees with the parties’ arguments – shared in so far as they are not unreasonable – that a mark-up of 10% must be applied, so that the taxable amount for the 1995/1996 financial year is NLG 2,350 and for the 1996/1997 financial year NLG 26,693. The Court will rule accordingly.” Click here for English translation Click here for other translation ECLI_NL_GHAMS_2003_AJ6865 ...