One possible approach is to split the relevant profits based on the division of profits that actually is observed in comparable uncontrolled transactions. Examples of possible sources of information on uncontrolled transactions that might usefully assist the determination of criteria to split the profits, depending on the facts and circumstances of the case, include joint-venture arrangements between independent parties under which profits are shared, such as development projects in the oil and gas industry; pharmaceutical collaborations, co-marketing or co-promotion agreements; arrangements between independent music record labels and music artists; uncontrolled arrangements in the financial services sector, etc ...

At issue is the selection of the most appropriate transfer pricing method for sale of coal mined by Carbones El Tesoro S.A. in Colombia to its related party abroad, Glencore International AG. Carbones El Tesoro S.A. had determined the transfer price by application of the TNMM method. The tax authorities found that the most appropriate method for pricing the transactions was the CUP method. To that end, the tax authorities applied a database (McCloskey price list) in which the price, was determined by referring to a good similar to that traded (thermal coal) and to the Btus (British Thermal Unit) thereof. On 29 April 2011, the Settlement Management Division of the Barranquilla Regional Tax Directorate issued an assessment by which it modified the income tax return for the taxable year 2007, in the sense of disregarding as a net loss for the year the amount of $30. 509.961.000 and imposed a penalty for inaccuracy of $16.597.418.784, based on the questioning of the method that the taxpayer chose to establish the profit margin in the coal supply operation with its economic partner abroad. Carbones El Tesoro S.A. filed an appeal with the Administrative Court Judgement of the Administrative Court The Court decided in favour of Carbones El Tesoro S.A. and set aside the assessment of the tax authorities. Excerpts “4.4 In accordance with the above, and in accordance with the information provided by the plaintiff in the supporting documentation, the Chamber finds that the plaintiff set out in detail the economic reality of its operation of exploitation, production and sale of coal to its related party abroad, including the business and commercial structure, and the activities that each of the parties involved carried out. From this, it can be seen that the plaintiff operated as a producer with limited risks insofar as the risks assumed were limited to those related to its functions of exploitation, production and transport from the mine to delivery at the port, so that all those risks related to the functions of negotiating the price with the final customer, invoicing, collection, commercialisation, marketing, marketing, sales and distribution of the coal to the final customer were limited to those related to its functions of exploitation, production and transport from the mine to delivery at the port, collection, commercialisation, marketing, logistics and transport – including the contracting of vessels and the respective insurances – from the port of the vessel in Santa Marta to the delivery to the final client, were assumed by the foreign affiliate, since it was the one with the necessary infrastructure and expertise for such work, as indicated in the supporting documentation. 4.5. Considering the supporting documentation submitted by the applicant, the Board notes that the applicant presented the criteria used to eliminate possible comparables on the basis of the functions performed. To this end, it eliminated companies whose function in addition to coal mining was to carry out other activities such as electricity generation and/or distribution, or gas exploration and/or production, companies whose mining activity corresponded to products other than coal, companies that leased coal mines, or that were active in the oil industry without segmenting their financial statements by activity, companies that were in Chapter 11, and companies that did not have sufficient descriptive information on the business (…). This demonstrates that the plaintiff undertook a functional level analysis to support that, under the TNMM method, the information available and used presented a high level of comparability that was more suited to its particular situation. In the same vein, in its functional analysis, the complainant presented aspects related to the company’s management, production planning, mine contracting services, coal mining operations and the way it transported coal. He further stated that his responsibility was to plan the production of the El Tesoro mine, coordinate the receipt of coal purchased from local suppliers and transport it to Santa Marta, where it was loaded onto vessels contracted by his company. In addition, it included information about the market and sales, where it stated that it had not carried out any marketing, sales or distribution activities in relation to the exported products, given that 100% of the sales were made to its related party abroad, the latter being the one who decided the sales strategy. It added that the distribution and logistics of the delivery from the port in Santa Marta was the responsibility of its related party and the risks related to the coal were transferred to it once the coal was loaded onto the vessels (…). 4.6. On the other hand, as stated in legal basis 3, the CUP method compares the price of goods or services agreed between independent parties in comparable transactions. Its use implies that the economic characteristics of the transactions being compared must be analysed to determine a high degree of comparability. Thus, the CUP method is not the most appropriate when the conditions of the good are not sufficiently similar, or when the functions, including the risks assumed by the parties, cannot be adjusted in the particular case. When using commodity price lists (in a recognised and transparent commodity market), relevant circumstances such as the nature of the commodity, volume discounts, timing of transactions, terms of insurance, terms of delivery, and currency, among others, must be considered. In this case, the agreements and contracts that fix the terms of these factors are contrasted with those of third parties, in order to verify whether they coincide with those that would have been agreed in comparable circumstances. Under these premises, the Court finds that the defendant, through the use of the CUP method, applied a database in which the price, even though it referred to a good similar to the one traded – thermal coal – and to the Btus of this, was not sufficient to prove that the prices set in said database were for transactions in which the parties assumed similar functions, risks and negotiation terms as those of the transaction analysed. Nor is there any analysis of the appropriateness ...

Determination of the criterion “decisive influence” or controlling interest. There is no basis for a general conclusion that, where two persons have the same ability to influence decision-making, they both exercise joint control. Otherwise, Section 12(2) of the Corporation Tax Act should apply to any case where two or more persons exercise equal control over the management of a company, even if the only way in which decisions could ever be taken in the company is if they are taken in concert. It is not excluded that two persons have established a mechanism for exercising influence on an equal footing precisely in order to ensure that neither has a decisive influence. In order to apply Section 12(2) of the Law on Corporate Income Tax in accordance with its meaning, i.e. to identify cases where the decisive influence of a person has been the basis for entering into transactions which are not in line with market prices, it should be possible to identify a set of circumstances in circumstances of equal influence which makes it possible to consider that two or more persons are acting jointly. Such circumstances may be apparent, inter alia, from the activities of the undertaking over an extended period of time, from the location of the disputed transactions in the context of the other business activities, from the links between the persons concerned, in particular in the long term. Excerpt from the Judgement of the Supreme Court “[16] As can be seen, the Supreme Court in the above-mentioned case did not find any difference in principle between the direct or indirect interpretation of decisive influence contained in the Law on Concerns and other laws. There would be no reason to find such a difference in the present case, since, in view of the general meaning of the concept of decisive influence, it must be established that one person can take decisions (control) in relation to the company and, in the absence of specific agreements on other arrangements, such a situation must be established in the first place by a participation, from which, in ordinary cases, further derive the corresponding voting rights and the possibility to appoint and dismiss the management body. The Regional Court, too, in interpreting Article 1(12) of the Credit Institutions Law and concluding that decisive influence means the ability to control the decisions of the governing body of the company with regard to the conclusion of economic transactions and their value, has not in fact changed this general understanding, i.e. it has emphasised the ability to control decision-making. Moreover, any interpretation of the concept of ‘decisive influence’ cannot contradict its immediate general meaning, namely that the person concerned has the power to make a difference in the decision-making, in the determination of issues. In accordance with the general principles of commercial companies, this will normally be secured by an appropriate share in the share capital. At the same time, it should be noted that the Regional Court has used the concept (control) explained in Article 1(12) of the Credit Institutions Law to explain the concept of “decisive influence”, which is used in the provision as a means of clarification, but insofar as it does not detract from the meaning – the characteristic of being able to decisively influence decisions – the interpretation is not incorrect. One can agree with the representative of the State Revenue Service at the hearing that it is important to apply the concept of ‘decisive influence’ contained in Section 1(5) of the Law on Corporate Income Tax in its own right in accordance with its meaning. [17] The judgment of the District Court, after a legal analysis, further assesses the circumstances of the case. The Court finds that the status of the members of the applicant’s board of directors in the applicant, as well as their participation in the capital of the applicant’s parent company (50 per cent each) and their status as members of the parent company’s board of directors, created a set of circumstances which ensured decisive influence over the applicant and the ability to exercise (joint) control over the applicant. It follows from the above that the Regional Court, although it had previously examined the question of the elements of decisive influence of a single person, reached its conclusion by finding that two persons exercised control jointly. The assessment is thus based on an aspect which goes beyond the concept of decisive influence as contained in the Law on Concerns and the Law on Credit Institutions. The question of joint control requires consideration of whether decisive influence can be said to exist even if each person individually does not formally possess it under either definition and whether it is possible to consider the possibility of control by those persons together. The conclusion that, where two persons have the same ability to influence decision-making, they both exercise joint control is not self-evident. Otherwise, Section 12(2) of the Corporation Tax Act should apply to any case where two or more persons exercise equal control over the management of a company, even if the only way in which decisions could ever be taken in the company is by a decision agreed between them. It is not excluded that two persons have established a mechanism for exercising influence on an equal footing precisely in order to ensure that neither has a decisive influence. [18] At the same time, it cannot be excluded that, in a situation of equal influence, more than one person knowingly implements a common economic plan with a common objective, and it is precisely this conscious cooperation which makes it safe to assume that one person can count on the other in decision-making. That is to say, a plan or objective and the cooperation within it make it possible to regard them as a single entity. [19] In order to apply Section 12(2) of the Law on Corporation Tax in accordance with its meaning, namely to identify cases where the decisive influence of a person has been the ...

One possible approach is to split the relevant profits based on the division of profits that actually is observed in comparable uncontrolled transactions. Examples of possible sources of information on uncontrolled transactions that might usefully assist the determination of criteria to split the profits, depending on the facts and circumstances of the case, include joint-venture arrangements between independent parties under which profits are shared, such as development projects in the oil and gas industry; pharmaceutical collaborations, co-marketing or co-promotion agreements; arrangements between independent music record labels and music artists; uncontrolled arrangements in the financial services sector, etc ...

The UN Transfer Pricing Manual does not address industry-specific issues, but, in 2017 a guidance note was developed by a subcommittee looking into transfer pricing issues in extractive industries, both relating to the production of oil and natural gas and relating to mining and minerals extraction. The note draws on materials that have been published in other fora, including the Platform for Cooperation on Tax (hereafter: “the Platform”), reflecting enhanced collaboration between the IMF, OECD, UN and WBG for the benefit of developing countries. Reference can be made to the Discussion Draft published by the Platform on Addressing the Information Gaps on Prices of Minerals Sold in an Intermediate Form and the Discussion Draft presenting A Toolkit for addressing Difficulties in Accessing Comparable data for Transfer Pricing Analyses. Reference can also be made to the WBG’s Extractive Industries Transparency Initiative and materials3 and the publication Transfer Pricing in Mining with a Focus on Africa. Table 1 in the first part of the note identifies some of the transfer pricing issues that often arise in the extractive industries. The table is organized by reference to the various major stages in the extractive industry value chain. The table makes some general suggestions on methods and approaches that might be used in addressing the identified issues. Thereafter, the guidance note provides several case examples, some of which result from discussions with tax inspectors working in developing countries. Taken together, the table and the examples provide useful background information for developing countries to utilize in addressing transfer pricing issues in extractive industries. The note does not aspire to provide comprehensive transfer pricing guidance for the extraction industries, but should provide a useful summary and checklist of some of the issues that commonly arise. It is recommended that this extractive industry guidance note and the Manual be consulted together ...