Tag: OECD Transfer Pricing Guidelines

Canada vs Blackberry Limited, September 2023, Tax Court of Canada, Case No. 2023 TCC 137

The order relate to the admissibility of two expert reports that Blackberry Limited wanted to submit in an appeal filed with the tax court concerning an assessment of approximately $17.1 million of FAPI (for research and development services received from US affiliates) and a reduction of the US corporate tax paid by US affiliate corporations when determining the FAT deduction. The first report contained an opinion on the development of international tax principles in Canada and the second report contained an opinion firstly, on alternative hypothetical transfer pricing structures and secondly, on the policy ramifications of a “hypothetical†model receiving similar treatment as that which the Appellant received from the Minister. The tax authorities held, that the reports were irrelevant, unnecessary and prejudicial and therefore inadmissable. Order of the Tax Court The Court ruled in favor of the tax authorities. “The two-step test for determining expert evidence admissibility was initially articulated by the Supreme Court of Canada (“Supreme Courtâ€) in Mohan and subsequently clarified in White Burgess. The Supreme Court’s direction may be summarized below: 1. Threshold admissibility: This step consists of four questions: is the evidence logically relevant; is it necessary to assist the trier of fact; are there other exclusionary rules; and is the expert properly qualified. 2. Gatekeeper function / Residual discretion to exclude: This step is a cost-benefit analysis of the help and harm of the evidence. Does the probative value outweigh potential prejudice, confusion, and prolonged court time? This can be thought of as an application of the general exclusionary rule.â€.  According to the Court the expert reports did not pass the test, but in the order the Court states that “Both Dr. Mintz and Mr. Rolph will have their inadmissible opinions otherwise placed before the Court, just not in the form of expert evidence. Dr. Mintz will be heard through the authentic, unvarnished Technical Report he helped author 24 years ago. Mr. Rolph will be heard through the introduction in argument and submissions by Appellant’s counsel of the analogous “hypotheses†and conclusions he has provided in Section 3 of his report.” 4818_2019-1378_IT_G ...

Panama vs Banana S.A., June 2023, Administrative Tribunal, Case No TAT-RF-048

Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%. However, Banana S.A. had continuous losses and for 2016 its return on total costs (ROTC) was -1.83%. To this end, an “adjustment” was made by adding “unearned income” related to storm damage to the actual results, which increased the company’s ROTC from -1.83% to 3.57%. The tax authorities disagreed with both the transfer pricing method used and the “adjustment” made to the results. An assessment of additional taxable income in an amount of B/.20,646,930,51. was issued, where the CUP method (based on quoted commodity prices for bananas) had been applied. Judgement of the Court The Court agreed with the tax authorities that the “adjustment” for “unearned income” was not allowed. “….In this sense, we agree with the Tax Administration when questioning the adjustment made by the taxpayer, attending to the reality exposed by the itself in the appeal , explaining that —————– produces different types of bananas according to their characteristics which are direct consequence of the position of the banana in the bunch, so that in the scenario of having lost an approximate of 700,000 boxes due to climatic events, it is impossible to claim that the total of boxes lost would have had a cost of USD 8.30, already that this would represent that the lost bunches, only had bananas extra quality, so that of according to the taxpayer’s own explanations is impossible. …. Based on the above, we can conclude that the taxpayer did not disclose the weather event that affected its plantations in the audited income statement for the period 2016, nor in its audited financial statements, since at the information financial that is uses to make the adjustments of comparability,such events were not reported since there is no financial information that validates their existence and therefore they are rejected.” However, as regards the transfer pricing method, the Court agreed with the taxpayer that although the product was the same, other comparability factors were not. On this basis, the assessment of the additional taxable income was changed by the court to the result previously determined by the tax authorities using the TNMM, without taking into account the adjustment for unearned profits. “….Tax Administration undermined the conclusions and results presented in the Transfer Pricing Study of ———————- for the year 2016, which were established using the Transactional Net Margin Method (TNMM), by not accepting that the taxpayer’s income and margin, which would have been higher had the weather events that caused losses not occurred, notwithstanding, the taxpayer emphasises that the Tax Administration accepted all the comparables used in the Transfer Pricing Study. In this regard, the taxpayer adds that had the weather events that caused the loss of 719,531 boxes of bananas not occurred, the company’s margins would have been within the inter-quartile ranges of the comparables selected for the Transfer Pricing Study, and secondly, being weather events of an exceptional nature. In this regard, the appellant adds that by using the Transactional Net Margin Method (TNMM), it is possible to adjust the company’s revenues and costs in order to show what the margin would have been………………………. .The operating margin of —————— was -1.83% in 2016, due to the damages caused by the weather events, which, had they not occurred, the adjusted margin would have been 3.57%. Since the Directorate General Revenue did not accept this argument, it concluded that since the appellant’s margin is not within the inter-quartile range, which is 0.71%, up to 11.09%, it then proceeded to adjust the operating profit margin of ——————, to the value of the —————- of the operating margins of the comparable companies selected for the Transfer Pricing Study, which is 4.83% and in order to achieve this profit margin, it proceeded to increase the appellant’s revenues in the amount of B/.6,747,901.75.” Click here for English Translation Click here for other translation Panama resoluciones_2023_08_08_Exp-068-2020 ...

Hungary vs “Electronic components Manufacturing KtF”, June 2023, Supreme Court, Case No Kfv.V.35.415/2022/7

“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 ...

Poland vs “Fertilizer Licence SA”, April 2022, Provincial Administrative Court, Case No I SA/Po 788/21

“Fertilizer Licence SA” (“A”) transferred its trademarks to “B” in 2013, previously financed the transfer through a cash contribution, and then, following the transfer, paid royalties to “A” in exchange for the ability to use the assets. According to the tax authorities, a situation where an entity transfers its assets to another entity, finances the transfer and then pays for access to use those assets does not reflect the conditions that unrelated parties would establish. An unrelated party, in order to obtain such licence fees from another unrelated party, would first have to incur the costs of manufacturing or acquiring the trademarks and to finance these costs itself without the involvement of the licensee. An independent entity which has finances the creation or purchase of an intangible asset, should not incur further costs for the use of that asset. Furthermore, in determining the licence fee to “B” for the use of trademarks, “A” relied on formal legal ownership, granting “B” a share in the revenues generated by “A” despite the fact that “B” did not take any part in the creation of these revenues. As a result, almost all the profits of “A” were transferred as royalties to company “B”. According to the authority, such an approach is inconsistent with the arm’s length principle. The remuneration of “B” (the legal owner of trademarks) did not take into account the functions performed by entities in creating the value of trademarks nor the risks and assets involved in the creation. The authority concluded that “B” was not entitled to share in the profit of “A”, because “B” was only the legal owner of internally created trademarks in the group and performed no significant DEMPE functions, had not used significant assets nor borne significant risks. This role of “B” entitled only to reimbursement of the costs incurred for the registration and legal protection of trademarks added a arm’s length margin for this type of services. As a result of the findings, the authority of first instance concluded that “A” had overstated tax deductible costs in connection with the disclosure of trademark licence fees as costs. “A” had reported income lower than it would have expected if the above-mentioned relationships had not existed. In the opinion of the authority of the second instance, an independent entity would not have entered, on the terms and conditions set by the company and its affiliates, into transactions leading to the divestment of ownership of valuable assets necessary for its operations, additionally financing their acquisition by another company, taking up shares in return with a nominal value significantly lower than the value of the lost assets (subsequently not receiving any dividends therefrom), and additionally being forced to incur additional costs as a result of the need to pay licence fees for the use of the trademarks held earlier. An appeal was filed by “A”. Judgement of the Court Excerpts “What is important in the case, however, is the conclusion of the authorities that in fact the legal relationship justifying the incurrence of expenses recognised as tax deductible costs is a contract for the provision of services consisting only in the administration of trademarks. The Court notes, however, that this conclusion is in conflict with the position of the authorities, which did not question the validity of the legal transactions resulting in the transfer of the rights to the trade marks to company ‘B’ and thus to another entity. As the applicant rightly submits, it cannot be disregarded in this case that the applicant was not the owner of the trade marks but acquired the right to use them on the basis of a licence agreement, for which it should pay remuneration to company ‘B’ (page […] of the application). In principle, the authorities did not present any arguments showing which interpretation rules they applied to reach the conclusion that this manner of applying the abovementioned provisions is legally possible and justified in the present case. It should be pointed out here that Article 11(1) in fine speaks of the determination of income and tax due without – ‘[…] taking into account the conditions resulting from the link …’, but does not permit the substitution of one legal transaction (a licence agreement) for another (an agreement for the provision of administration services) and the derivation of legal effects from the latter in terms of determining the amount of the tax liability. As the applicant rightly argued, such a possibility exists from 1 January 2019, since Article 11c(4) uses the expression- “[…] without taking into account the controlled transaction, and where it is justified, it determines the income (loss) of the taxpayer from the transaction relevant to the controlled transaction”. This is the so-called recharacterisation, i.e. reclassification of transactions, which was actually done by the tax authorities in this case. The company’s claims that the transfer of the trade mark into a separate entity was motivated by a desire to increase the company’s recognition and creditworthiness, which was a normal practice for business entities at the time, are unconvincing. On that point, it should be noted that, operating under the GKO with the same name, the applicant’s recognition and the name under which it operated were already sufficiently well established. As regards the increase in the creditworthiness or market power of the users of the trade mark, the applicant’s contentions on this point too are empty. Moreover, even if it were to be accepted, at least in the context of the activities of ‘A’, that the creditworthiness of ‘A’ had been increased, the advantage which the applicant derives from such an operation would appear to be of little significance. In fact, it obtained this benefit to a significant extent from the formation of relations with “A”, as a result of which the value of its income taxable income, and thus its tax liability in 2015, was significantly reduced. The benefits, mainly tax ones, are also indirectly pointed out by the applicant herself, indicating, inter alia, that there were no grounds ...

Costa Rica vs GlaxoSmithKline Costa Rica S.A., February 2022, Supreme Court, Case No 4-001638-1027-CA

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 ...

Kenya vs Oracle Technology Systems (Kenya) Limited, December 2021, Tax Appeals Tribunal, Appeals No 149 of 2019

Following an audit of Oracle Technology Systems (Kenya) Limited, a distributor of Oracle products in Kenya, the tax authority issued an assessment for FY2015-2017 relating to controlled transactions. In assessing the income, the tax authority had used a CUP method instead of the TNMM. Dissatisfied with the assessment, Oracle Technology Systems (Kenya) Limited appealed to the Tax Appeals Tribunal on the basis that the return on its related party transactions was at arm’s length and did not require adjustment. Judgement of Tax Appeals Tribunal The Tribunal referred the case back to the tax authority for an appropriate reassessment. Excerpts “The question that arises is which method was the most suitable one. The OECD TP Guidelines state that the preferred method is CUP. But this only applies where there are appropriate comparables. Internal comparables are of course always preferred where they are reliable or can be reliably adjusted. From our understanding, the TP Policy implied that the reason internal comparables could not be used was due to differences in the functions of the independent distributors as compared with those of the Appellant. 127. We however note that during the hearing and in its submissions, the Appellant went out of its way to show that its functions are routine and not much different from those carried out by other distributors. The Appellant for example states in Paragraph 76 of its Statement of Facts as follows:- ‘The Appellant would like to note that the IT industry itself is a very competitive market and that the Appellant’s functional profile is not different from other value-added distributors in the same competitive market … ”  128. Similarly, the expert witness Dr Neighbour stated in his review of the Appellant’s role as a distributor as thus:- “In my experience, these are standard functions that would be expected of a typical distributor, i.e one that provides some local sales and marketing activity to support the sales as well as provision of customer support and services in respect of the distributed products … “ 129. The arguments offered by the Appellant seem to imply its functions are no different from any other distributor. This seems to contradict what its TP Policy suggests that the reasons it could not use the internal comparables was because the functions carried out by the Appellant and the  independent distributors were different and could not be reliably adjusted. 130. If indeed as the Appellant and its expert witness suggests its functions are routine and much in line with those of other distributors in the industry, we are at a loss as to why the internal comparables could not be used, and where such internal comparables were available why the CUP method which as both parties have admitted is the preferred method could not be used. (…) 132. It is unclear to the Tribunal both from the Appellant’s and the Respondent’s arguments and the documentation made available whether the Appellant is indeed a routine distributor as it averred during the hearing or if the services it offers are distinct as stated in the TP Policy. 133. Accordingly, we are of the view that the matter ought to be referred back to the Respondent to carry out a proper audit and in particular a functional analysis to determine what the exact functions of the Appellant are and if these are fundamentally different from those of independent distributors. Only then is it possible to determine the proper method to be applied.” ”Oracle_Systems_Limited_(Kenya_Branch)_v…Taxes-_TAT_149_of_2019_[2021”] ...

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 ...

El Salvador vs “E-S. Sales Corp”, December 2020, Tax Court, Case No R1705038.TM

Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Click here for English translation Click here for other translation TAIIA-R1705038TM ...

Mexico vs “TP doc-Lawsuit”, June 2019, Supreme Court, Case No. 14039/17-17-10-3/2502/18-PL-07-04

In this case a group of taxpayers filed a lawsuit for the nullity of the new Mexican transfer pricing documentation obligations introduced in 2017 by rules 3.9.11, 3.9.14, 3.9.15, 3.9.16 and 3.9.17 of the First Resolution of Amendments to the Tax Miscellaneous published in the Official Gazette of the Federation, issued by the Head of the Tax Administration Service. Article 76-A of the Mexican Income Tax Law states that the taxpayers referred to in Article 32-H, Sections I, II, III and IV of the Federal Tax Code who enter into transactions with related parties must provide the tax authorities with annual related party information returns: 1) master file; 2) local file and 3) a country-by-country report. This three tiered documentation package provides the tax authorities with information related to transactions between related parties on transfer pricing, in order to identify conduct that could imply a risk of tax avoidance or evasion, improve the exchange of information with authorities of the same nature at the international level and carry out economic and statistical analyses. Supreme Court Judgement The Supreme Court predominantly dismissed the claim of unlawfulness of the Mexican documentation obligations. Click here for English Translation Click here for other translation MEX DOC SC 2019 ...

Finland vs A Group, December 2018, Supreme Administrative Court, Case No. KHO:2018:173

During fiscal years 2006–2008, A-Group had been manufacturing and selling products in the construction industry – insulation and other building components. License fees received by the parent company A OY from the manufacturing companies had been determined by application of the CUP method. The remuneration of the sales companies in the group had been determined by application of the resale price method. The Finnish tax administration, tax tribunal and administrative court all found that the comparable license agreements chosen with regard to determining the intercompany license fees had such differences regarding products, contract terms and market areas that they were incomparable. With regard to the sale of the finished products, they found that the resale price method had not been applied on a sufficiently reliable basis. By reference to the 2010 version of the OECD’s Transfer Pricing Guidelines, they considered the best method for determining the arm’s length remuneration of the group companies was the residual profit split method. The Supreme Administrative Court found that the choice of transfer pricing method constituted the central starting point for the assessment of whether the companies’ tax declarations were to be regarded as incorrect. In this respect special attention should be paid to the version of the OECD Transfer Pricing Guidelines published at the time where the tax return had been submitted. The arm’s length remuneration could be determined by applying the transfer pricing methods used by the companies, and the tax declarations for the years in question were not incorrect in terms of the transfer pricing method applied. The court further noted that the OECD Transfer Pricing Guidelines act as an important source of interpretation. However, in regard to the choice of transfer pricing method, the court did not approve of using guidance provided in the 2010 for fiscal years 2006 – 2008. The later 2010 version of the guidelines contained fundamentally new interpretative recommendations (best method) compared to the 1995 version, where the traditional methods were considered superior to the transactional profit methods, and where the profit split method was reserved to exceptional circumstances. Click here for translation Finland vs taxpayer 2018 HFD ...

Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi. The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length. However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines. Eastern Produce Limited complained to the High Court and argued that: “The decision and proceeding by MRA to use OECD (Organisation for Economic Cooperation and Development) guidelines whilst performing transfer pricing analysis and as a basis for effecting amendments to tax assessments was illegal. CONSIDERATIONS OF THE COURT, EXCERPS “With regard to transfer pricing in 2014, the law was contained in Section 127A. Section 127A provides as follows:“where a person who is not resident in Malawi carries on business with a person resident in Malawi and the course of such business is so arranged that it produces to the person residentin Malawi either no profits or less than profits which might be expected from that he had been no such relationship, then the profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons“. “Section 127A of the Taxation Act is not a stand-alone provision. The Taxation (Transfer Pricing) Regulations, 2009 guide the application of Section 127A of the Taxation Act on transfer pricing issues in Malawi.” “The methods shall be applied in determining the price payable for goods and services in transactions between related enterprises for the purposes of Section 127A of the Act; and A person shall apply the method most appropriate for his enterprise, having regard to the nature of the transaction, or class of transaction, or class of related persons or function performed by such persons in relation to the transaction.” “…there is no dispute between the applicant and the respondent that the law on transfer pricing issues in Malawi was governed by Section 127A and the Taxation (Transfer Pricing) Regulations, 2009, as cited above. This legal position was even accepted and confirmed by the deponent in crossexamination. What this means is that any transfer pricing issues arising from controlled transactions between related enterprises, as is the case at hand, was to be resolved by the Act and the Regulations, and not OECD Guidelines.” “In its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010 edition, page 206), the OECD states that there are two main issues in the analysis of transfer pricing for intra group services (which the Agreement purports)….’ The deponent in cross-examination admitted that Section 127A has to be applied together with the 2009 Regulations. The deponent admitted that the Guidelines are sometimes used as an interpretation tool/aid.” “I have to mention that, looking at ET 2, ET4 and ET6, it is very clear that the respondent did not make any reference to the Transfer Pricing Regulations, 2009. Instead, the respondent placed much emphasis on the OECD Guidelines as cited above. I am even at pains to note that the respondent did not even use the OECD Guidelines as an interpretation tool to the local Transfer Pricing Regulations. ET2, ET4 and ET6 are not showing that the OECD Guidelines were only used as an interpretation aid. Any person reading these exhibits will definitely conclude that the respondent applied the law contained in the OECD Guidelines.” “The use of these Guidelines at the expense of the Transfer Pricing Regulations, 2009 is illegal.” “The other issuel have to resolve is the rejection and its aftermath of the method used by the applicant. There is no dispute that the transaction involved herein is a controlled transaction. There is therefore no dispute that it involves transfer pricing issues. Definitely, the transfer price that was to be set between the applicant and its parent company was to be based on the arm’s length principle as per Section 127A of the Taxation Act read together with Taxation (Transfer Pricing) Regulations, 2009.” “Section 6(2) of the Transfer Pricing Regulations, 2009 have placed the burden of choosing a Transfer Pricing method on the taxpayer. In the present case, that burden was with the applicant. Again, Section 7 of the Regulations provides for documentation that may be required by the Commissioner General where a taxpayer has applied a transfer price. In the present case, it was submitted by the deponent that they rejected the transfer price set by the applicant and disallowed the commission on humanitarian grounds. In the first place, let me state that enterprises are under an obligation to keep documentation that assist them in arriving at appropriate transfer price basing on the arm’s length principle. This information may as well be requested by the Commissioner General to assist in assessing whether the correct analysis was done before arriving at an appropriate transfer price as provided for in Section 7 of the Transfer Pricing Regulations, 2009. I am of the considered view that where a taxpayer fails to provide such information, the Commissioner General is indeed at liberty to reject the transfer price or method used by the taxpayer. It is my humble view that though the Regulations places the burden on the taxpayer to choose a method, after the Commissioner General has rejected the method, the Commissioner General has to arrive at an appropriate method to be used.” THE JUDGEMENT The court ordered the applicant [company] within the next 14 days, to submit to the respondent all the necessary documentation pursuant to Section 7 of the Regulations, 2009 for the respondent [tax administration] to undertake a comprehensive analysis of the transfer pricing issues and arrive at an appropriate transfer price method. The respondent to communicate its decision after 21 days of its receipt of such documentation. Thereafter, the respondent to communicate the correct tax payable by the applicant. An order similar to certiorari quashing the notice of amended assessment for ...

Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory on sales of blueberries (2.56%) did not cover the costs of consumption of materials and energy, third party services, depreciation and other costs, which resulted in a loss for 2012. (PLN 218,838.03), and losses for 2011 and 2013. The application of excessive fruit purchase prices from the Company’s shareholders (4 persons running fruit farms and 1 farm owner), with family, personal and capital ties, also resulted in the Blueberry Factory taking out 6 loans from it’s shareholders for the total amount of PLN 877,697.70. in 2012. The average gross margin of the Blueberry Factory when selling goods (blueberries) in 2012 was 2.2%. Meanwhile, unrelated entities, selected in the course of the proceedings, which were involved in the purchase and sale of blueberries, having the relevant certificates necessary to sell fruit abroad, had gross margins ranging from 3.5% to 21.87%. The tax authorities held that the average gross margin in comparable transactions was 11.35% and PLN 2.27 per kilogram. The tax authorities determined the Blueberry Factory’s corporate income tax liability for 2012 at PLN 22,114, instead of the declared loss (PLN 218,838.03). The Court of first instance agreed with the tax authorities that there were capital, personal and family ties between these entities. In the opinion of the court, all the conditions referred to in Art. 11.1 of the Polish Act on Public Offering, which authorises the determination of the income and tax payable by way of estimation, had been fulfilled. The Court also considered the pricing method used by the authorities – resale prices – to be appropriate. The comparability analysis took into account both the type and quality of fruit traded (the fact of holding certificates). The average margin applied by independent entities was calculated. In estimating the cost of blueberry fruit purchased by the Company, favourable assumptions were made, as the basis for the estimation was the margins applied by entities (fruit producer groups) which purchased blueberry fruit, holding only the G-certificate and applying the lowest margins among the surveyed entities. The comparability analysis also took into account, among others, such factors as the certificates held, type of recipients of the goods (domestic and foreign), type of entity, production process, technologies used, type and time of transactions. The Court also deemed it appropriate that DUKS issued a provision under Art. 179.1 of the Polish Corporate Governance Act, which excluded information on entities conducting business competitive to the Company. The Blueberry Factory filed a complaint against the decision. The Supreme Administrative Court considered that the appeal was justified and therefore had to be granted. The gist of the dispute in the case at hand is to assess whether, in fact, the procedure for estimating income [Article 11 of the Act] was carried out correctly, as claimed by the authority and accepted by the Court of First Instance, or, as the applicant argues in cassation – with a breach of the provisions of the Act and the Regulation – which is linked to the authority’s analysis of the comparability of transactions. “All this allows us to conclude that, although the OECD Transfer Pricing Guidelines do not contain standards of generally applicable law (Article 87(1) of the Polish Constitution), when interpreting the provisions governing the prerequisites for the use of transfer pricing and the general conditions for determining income by means of estimation (Article 11(1) to (3) of the Act), the indications of those guidelines should be taken into account as a kind of “set of good practices” and a point of reference for choosing the right interpretative direction.” “In the light of the above, contrary to what the WSA suggested, the aforementioned guidelines will be relevant to the assessment of the assessment method used by the authority and, in particular, of its implementation.” The Court of first instance did not sufficiently consider the proceedings conducted by the authorities – in particular with regard to the comparability analysis. It was principally assumed that the Company’s business model was the basis for its market strategy – which in its opinion was to generate losses in order to maximise profits of its shareholders. At the same time, despite arguments consistently raised by a party in the course of proceedings, the court did not address issues regarding comparability factors. First of all, the key issue in this case, namely that the party has the status of an agricultural producer group. This, in turn, raises other relevant issues: – the specific nature of the entity, the principles and essence of the group’s operation, the scope of the objectives it should pursue, the strategy of producer groups – the use of aid measures, the issue and importance of the Recognition Plan, the issue of the group’s market strategy during the recognition period. The Supreme Administrative Court referred the case back to the Court of first instance for reconsideration. Poland II FSK 1665-16 en Poland II FSK 1665-16 ...

Costa Rica vs Corrugados del Guarco S.A., March 2018, Supreme Court, Case No 13-002632-1027-CA

Corrugados del Guarco S.A. had declared losses on controlled transactions for FY 2003, 2004 and 2005 as export prices for these transactions had been set below cost and without profit margin, and also different from the price charged for that product to other independent or unrelated companies, in favour of its related company Envases Nicaragüenses S.A. According to the Corrugados del Guarco S.A. the reason why the prices of these controlled transactions had been set low was that unfair competition had made it necessary to use a commercial strategy of selling at preferential prices to the group company in Nicaragua. The tax authorities issued an assessment whereby the prices of the controlled transactions were adjusted in accordance with the arm’s length principle. Furthermore a fine was issued to the company for gross negligence. Judgement of the Supreme Court The Court dismissed the appeal of Corrugados del Guarco S.A. Excerpts from the Judgement “…Finally, and in relation to transfer pricing, on which the plaintiff argues reservation of law, it is necessary to indicate that guideline 20-03, called “Fiscal Treatment of Transfer Pricing, according to Normal Market Value”, issued by the Director General of Taxation on June 10, 2003, refers to the rules of the Organisation for Economic Co-operation and Development (hereinafter OECD), for the setting of prices between related companies. This international organisation is dedicated to contributing to the peaceful and harmonious development of relations between peoples, with an emphasis on collaboration in the global economy. In this regard, the Constitutional Chamber explained the content of the aforementioned body of norms as follows: “The guideline in question is based on the assumption that if these operations have some kind of artificial manipulation, and this is detrimental to the tax authorities, it allows the application of articles 8 and 12 of the Code of Tax Rules and Procedures to establish that certain transactions correspond to a market value as if they had been established between independent persons or entities that compete freely. Although there are different methodologies, to conclude that a price corresponds to a certain reality or not, the problem before the Chamber is an issue closely linked to one that arises for any operator of law that must apply rules that seek to compensate forms of abuse of law or that do not correspond to an economic reality to avoid tax liabilities” (Ruling 2012-4940 of 15 hours 37 minutes of 18 April 2012). The aforementioned court also added, on the constitutionality of the rule “our country does not need to be a member of that body to make use of certain rules or practices that contain a high degree of consensus, especially if, as in the case at hand, articles 15 and 16 of the General Law on Public Administration establish the limits to discretion, even in the absence of a law, which is precisely what is happening in the present case. This Court agrees with the Attorney General’s Office and the Minister of Finance that these are rules with a high degree of subjection to science and technique, as in the case of the general principles of accounting, where a law would not be necessary to reach a technical consensus. In this sense, those methods or techniques make it possible to arrive at a result that is as close to reality as possible, without it being necessary for them to be formally incorporated into the legal system” (ibidem). The above shows that the principle of legal reservation is not violated in the application of OECD transfer pricing methods, such as those analysed here. V.- As a second allegation, it was argued that the financial penalty was imposed without previously following a sanctioning procedure, since it only faced a determinative one.“ ” In the opinion of this Court, the arguments of the appellant also fail to break this aspect of the judgement. The court took for granted that with intent, the plaintiff sold at prices below cost and that she used an agreement with another private individual to defraud the tax authorities, therefore it cannot be indicated in this court that she did not qualify the conduct, establishing that even article 71 of the Code of Tax Rules and Procedures, allows the sanction when it has acted with intent or mere negligence, that is to say, by negligence. The law seeks to ensure that the self-assessments, on which the country’s entire tax system is based, are made seriously and carefully, and therefore penalises fraud and negligence in the self-assessment with 25 percent of what has not been paid to the Treasury. This procedure is necessarily linked to the assessment procedure, where it is defined whether what was declared and paid by the taxpayer is in accordance with the legal system and this is clearly stated by the sentencing body, which also refers that the sanctioning procedure was carried out in the terms established by the said numeral 150 CNPT and that the right of defence was guaranteed by giving the taxpayer a hearing and resolving his appeals.” Click here for English translation Click here for other translation Costa-Rica-vs-Corrugados-del-Guarco-2018-Corte-Suprema-de-Justicia ...

Ecuador vs JFC Ecuador S.A., November 2014, National Court, Case No. 488-2012

JFC Ecuador is active in coordination and logistic operations for the transfer of Ecuadorian fruit to related parties in the Russian JFC Group. Following an audit the tax authorities issued an assessment where the prices of these transactions had been determined based on quoted prices issued by the authorities in the SOPISCO NEWS database. However, according to JFC Ecuador, SOPISCO NEWS does not correspond to a publicly available international trade exchange or price database. On the contrary, it is a bulletin that lists quotations that involve price estimates, established through unidentified sources. The price quotations listed by SOPISCO NEWS correspond to prices that the bulletin presumes were agreed upon by companies that have carried out the management and marketing and sales for the placement of the product, while JFC Ecuador did not carry out such activities. Judgment of the Court The Court concludes that the use of the SOPISCO NEWS database by the Tax Administration, as it is an internationally recognized source of price information used by international organizations as a source of information, is appropriate depending on the method applied. In conclusion, this Chamber considers that the Tax Administration acted in accordance with its determining power as set forth in Article 68 of the Tax Code and Article 23 of the Internal Tax Regime Law, and that its acts are subject to the presumption of legitimacy and enforceability as set forth in Article 82 of the same law…”. Click here for English Translation Click here for other translation 488-2012 ...

Mexico vs “Pro-rata S.A.”, March 2014, Supreme Court, Case No. 2424/2012

According to article 32, Section XVIII of the Mexican Income Tax Law, costs determined on a pro-rata basis and paid to non-residents are not deductible. In this case it is argued that the provision violates the non-discrimination provision included in Mexico’s income tax treaties. Supreme Court JudgementThe Supreme Court concludes that the Mexican Income Tax Law must take into account the OECD transfer pricing guidelines, and that these guidelines under certain circumstances acknowledges pro rata cost allocations. On that basis pro rata costs are deductible in Mexico, where certain requirements are met. According to the Mexican Supreme Court, these requirements are: a) The corresponding transaction has been concluded in accordance with the transfer pricing rules (paragraphs 151 to 154 of this judgment). b) All documentation supporting the transaction is available so that its authenticity can be verified, as well as the amounts to which it amounted and that it is a strictly indispensable expense (structural deduction) that was made based on objective tax and accounting criteria and for real business reasons. c) There is a reasonable relationship between the expense incurred and the benefit received or expected to be received by the taxpayer participating in the expense. In other words, the contract and supporting documentation must be analysed to determine whether there is an adequate and reasonable relationship between the expense incurred and the benefit obtained, so that the benefit cannot unreasonably exceed that amount. Click here for English Translation MEX SC 2014 pro-rata cost ...

Costa Rica vs Polymer S. A., June 2012, Supreme Court, Case No 11-010227-0007-CO

Polymer S.A. had been issued an assessment of taxable income based on the arm’s length principle. In the assessment the tax authorities had based the adjustment on the guidance provided in the OECD TPG. Polymer S.A. was of the opinion that this was unconstitutional since the OECD TPG had not been implemented by law and Costa Rica was not an OECD member country. Judgement of the Supreme Court The Court dismissed the appeal of Polymer S.A. Excerpts from the Judgement “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility that other – better – techniques may be admitted. What is important is that the contested Interpretative Guideline does not aim to eliminate multiple other scenarios arising from different forms of business organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt a certain technique or several techniques to regulate a certain behaviour of companies, or recognise legal practices to reduce taxes, it is possible to admit that if there are clashes with tax law and reality, in the absence of a law, it is ultimately up to the judge to decide on the correct application of the technical rules. Thus, in the absence of any particular legislation, this fact does not prevent the parties in conflict from presenting their arguments, producing evidence and demonstrating the need to apply other criteria that allow for the non-application of the technical rule that adopts the guideline in question, or of another possible method, a situation that evidently makes the discussion a matter of ordinary legality. For all of the above reasons, the action must be dismissed, as indeed it is. A., the contested Guideline interprets Articles 8 and 12 of the Code of Tax Rules and Procedures, disregarding the legal forms to assess the true economic intention of the parties. It allows to assess transactions between related entities, where transfer prices exist, and to make the respective income tax adjustments. It does not aim to eliminate other multiple scenarios arising from different forms of business organisation, but rather targets transfer pricing between related companies. Moreover, our country does not need to be a member of the Organisation for Economic Co-operation and Development (OECD) to make use of certain rules or practices that contain a high degree of consensus, under the provisions of articles 15 and 16 of the General Law of Public Administration that establish the limits to discretion, even in the absence of law. By virtue of the foregoing, and there being no reasons to justify a change of criterion, it is considered that the contested Directive does not infringe the principles of the reservation of law, regulatory power and legal certainty, and therefore the action is rejected on the merits.“ Click here for English translation Click here for other translation Costa Rica June 2012 Sentencia nº 08739 de Sala Constitucional de la Corte Suprema de Justicia ...

Costa Rica vs Nestlé, April 2012, Supreme Court, Case No 10-017768-0007-CO Res. Nº 2012004940

In an appeal to the Supreme Court in Costa Rica, Nestlé claimed that the basis for an arm’s length adjustment was unconstitutional, since the arms length principle as described in the OECD transfer pricing guidelines had not been incorporated into the laws of Costa Rica. Judgement of the Supreme Court The Court dismissed the appeal of Nestlé. “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility of admitting “other -better- techniques”. What is important is that the contested Interpretative Guideline does not aim to eliminate other multiple scenarios arising from different forms of company organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt a certain technique or several techniques to regulate a certain behaviour of companies, or recognise legal practices to reduce taxes, it is possible to admit that if there are clashes with tax legislation and with reality, in the absence of a law, it is ultimately up to the judge to decide on the correct application of the technical rules. Thus, in the absence of any particular legislation, this fact does not prevent the parties in conflict from presenting their arguments, producing evidence and demonstrating the need to apply other criteria that allow for the non-application of the technical rule that adopts the guideline in question, or of another possible method, a situation that evidently makes the discussion a matter of ordinary legality. For all of the above reasons, the action should be dismissed, as it is in fact being dismissed.” Click here for English translation Click here for other translation Costa Rica vs Nestlé April 2012 SP ...

Czech Republic vs. B.p., s.r.o., June 2007, Supreme Administrative Court , Case No 8 Afs 152/2005 – 72

The subject-matter of the dispute was the exclusion of the rent for lease of machinery and equipment. It referred to the lease and sublease agreements for non-residential premises, machinery and equipment with the companies B.p., s.r.o. and M.-T., s.r.o., by which the parties agreed that the objects of the lease agreements would be used free of charge for a certain period of time – during the trial period. Bp s.r.o. disputed the use of transfer prices in accordance with the arm’s length principle and the question of the tenant’s payment behaviour. It argued economic aspects – the possibility of making a real profit over a longer period of time. According to the taxpayer the tax authority should have examined the possibility of obtaining a total profit for the taxpayer over a five-year period and not simply applied ‘the most ideal course of market economics (i.e. the business partners are always solvent and the market situation is optimal)’. It also supplemented the application with a profit forecast, from which it concluded that ‘from a long-term profitability point of view, it was therefore worthwhile to support the related parties during the transitional period’. According to the tax authorities, although the procedures and methods set out in the OECD Directive are not directly enshrined in domestic tax law (nor is there a direct reference to the OECD Directive), the binding nature of the OECD Directive in the interpretation of arm’s length under double taxation treaties derives from the Vienna Convention on the Law of Treaties, Article 31 of which contains rules of interpretation. In this respect, the OECD Directive is an interpretative document on double taxation treaties. Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities. Excerpt “In addition to the above, the Supreme Administrative Court notes that the above-mentioned guidelines (Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations) are part of the OECD Declaration of 21 June 1976 on International Investment and Multinational Enterprises (available, for example, at www.oecd.org) , which is only a recommendation by governments to multinational companies; it is therefore not a legal regulation (soft law). With regard to the objection to the application of section 23(7) of the Income Tax Act, it should be noted that the complainant does not dispute that the rent is subject to that tax in accordance with sections 18(1) and 22(1)(e) and (g)(5) of the Income Tax Act, nor does it dispute the court’s conclusion that the parties were personally and economically linked, nor the notion of consideration in rental and sublease agreements. In other words, the complainant does not refute the legal conclusions of the court and the tax authorities, which formed the basis for the application of Article 23(7) of the Tax Code. of the Act. The conceptual features of the contracts concluded by the complainant are precisely the aforementioned consideration. Therefore, the dispute as to whether a ‘foreign’ entity would have been willing to conclude a contract on the same terms, including the argumentation of economic aspects, is inappropriate. Hypothetical circumstances (relating, moreover, to third parties), which have no direct connection with the grounds on which the Regional Court based its decision, cannot lead to the conclusion that the appeal is well-founded. The objection concerning the need to take account of the applicant’s costs of further renting of premises, machinery and equipment is not admissible under Article 104(4) of the Code of Civil Procedure, since the applicant did not raise it in the proceedings before the Regional Court whose decision is under review, nor does it claim that it could not have done so. Therefore, the Court could not deal with that objection. For the reasons set out above, the Supreme Administrative Court concludes that the complainant’s cassation complaint is unfounded and therefore dismisses it…” Click here for English Translation Click here for other translation 8-Afs-152-2005-–-72 ...