Unilever Ghana Limited (UKL) filed an appeal with the High Court against an assessment of additional taxabel income issued by the tax authorities in 2019 on the following grounds. a) That the Respondent did not use a transfer pricing method as required by the Transfer Pricing Regulations, 2012 (LI 2188) in examining the Appellant Transfer Pricing Returns. b) That the Respondent misinterpreted, misunderstood and misapplied the OECD Transfer Pricing guidelines to arrive at a liability of Six Million, Two Hundred and Thirty-Six Thousand, Two Hundred Ghana Cedis (GHq:6,236,200.00) on the Advertising, Marketing and Promotion expenses incurred by the Appellant. c) That had the Respondent properly applied the OECD guidelines, the Appellant would not have been liable to pay tax on the Advertising, Marketing and promotion expenses. Judgment of the Court The High Court dismissed the appeal due to lack of statutory jurisdiction. “…I do not need to go further in this judgment than to dismiss the appeal on the grounds that the order granting leave to the Appellant to appeal against the objection decision was void. Therefore, the appeal has not properly invoked the jurisdiction of this court for the merits to be considered. The effect, is that the Appeal filed on 17th March, 2021 fails and same is dismissed. Consequently, the Respondent objection decision dated 19th September 2019 will continue to stand.” ...

Evaluation of alternative methods. (i) The facts are the same as in Example 17, except that FS has a patent on Compound Y, which the parties reasonably anticipate will be useful in mitigating potential side effects associated with Compound X and thereby contribute to the development of Oncol. The rights in Compound Y constitute a platform contribution for which compensation is due from USP as part of a PCT. The value of FS’s platform contribution cannot be reliably measured by market benchmarks. (ii) Under the facts, it is possible that either the acquisition price method and the income method together or the residual profit split method might reasonably be applied to determine the arm’s length PCT Payments due between USP and FS. Under the first option the PCT Payment for the platform contributions related to Company X’s workforce and Compound X would be determined using the acquisition price method referring to the lump sum price paid by USP for Company X. Because the value of these platform contributions can be determined by reference to a market benchmark, they are considered routine platform contributions. Accordingly, under this option, the platform contribution related to Compound Y would be the only nonroutine platform contribution and the relevant PCT Payment is determined using the income method. Under the second option, rather than looking to the acquisition price for Company X, all the platform contributions are considered nonroutine and the RPSM is applied to determine the PCT Payments for each platform contribution. Under either option, the PCT Payments will be netted against each other. (iii) Whether the acquisition price method together with the income method or the residual profit split method provides the most reliable evidence of the arm’s length price of the platform contributions of USP and FS depends on a number of factors, including the reliability of the determination of the relative values of the platform contributions for purposes of the RPSM, and the extent to which the acquisition price of Company X can be reliably adjusted to account for changes in value over the time period between the acquisition and the formation of the CSA and to account for the value of the rights in the in-process research done by Company X that does not constitute platform contributions to the CSA. In these circumstances, it is also relevant to consider whether the results of each method are consistent with each other, or whether one or both methods are consistent with other potential methods that could be applied. See § 1.482-7(g)(4)(vi), (5)(iv), and (7)(iv) ...

Evaluation of alternative methods. (i) The facts are the same as in Example 13, except that the acquisition occurred sometime prior to the CSA, and Company X has some areas of promising research that are not reasonably anticipated to contribute to developing Oncol. For purposes of this example, the CSA is assumed to divide divisional interests on a territorial basis. In general, the Commissioner determines that the acquisition price data is useful in informing the arm’s length price, but not necessarily determinative. Under the terms of the CSA, USP will undertake all R&D (consisting of laboratory research and clinical testing) and manufacturing associated with Oncol, as well as the distribution activities for its territory (the United States). FS will distribute Oncol in its territory (the rest of the world). FS’s distribution activities are routine in nature, and the profitability from its activities may be reliably determined from third-party comparables. At the time of the PCT, financial projections associated with the development of Oncol and its separate exploitation in each of USP’s and FSub’s assigned geographical territories are undertaken. (ii) Under the facts, it is possible that the acquisition price method or the income method using CPM might reasonably be applied. Whether the acquisition price method or the income method provides the most reliable evidence of the arm’s length price of USP’s contributions depends on a number of factors, including the reliability of the financial projections, the reliability of the discount rate chosen, and the extent to which the acquisition price of Company X can be reliably adjusted to account for changes in value over the time period between the acquisition and the formation of the CSA and to account for the value of the in-process research done by Company X that does not constitute platform contributions to the CSA. See § 1.482-7(g)(4)(vi) and (5)(iv)(A) and (C) ...

If the arm’s length amount was determined under any method other than the comparable uncontrolled transaction method, no allocation will be made under paragraph (f)(2)(i) of this section if each of the following facts is established – (1) The controlled taxpayers entered into a written agreement (controlled agreement) that provided for an amount of consideration with respect to each taxable year subject to such agreement, and such agreement remained in effect for the taxable year under review; (2) The consideration called for in the controlled agreement was an arm’s length amount for the first taxable year in which substantial periodic consideration was required to be paid, and relevant supporting documentation was prepared contemporaneously with the execution of the controlled agreement; (3) There have been no substantial changes in the functions performed by the transferee since the controlled agreement was executed, except changes required by events that were not foreseeable; and (4) The total profits actually earned or the total cost savings realized by the controlled transferee from the exploitation of the intangible in the year under examination, and all past years, are not less than 80% nor more than 120% of the prospective profits or cost savings that were foreseeable when the controlled agreement was entered into ...

Kellogg India Private Limited is engaged in manufacturing and sales of breakfast cereals and convenience foods and it operates as a licensed manufacturer under the Kellogg brand. During the year under consideration, Kellogg India had commenced business of distributing Pringles products in the Indian markets. Kellogg India purchases the Pringles product from its AE Pringles International Operations SARL, based in Singapore. Singapore AE does not manufacture pringles, but in turn gets it manufactured from a third party contract manufacturer. Thereafter, the goods are supplied at a cost plus mark up of 5% on third party manufacturer’s cost. These Pringles are later imported by Kellogg India from its AE and distributed in the Indian market. Kellogg India characterised itself as a distributor of Pringles products and is responsible for the strategic and overall management of Pringles business in India. Singapore AE, being the least complex entity, was selected as the tested party for benchmarking the international transaction of import of finished goods. Kellogg India conducted a search in the Asia Pacific region to identify manufacturers and based on benchmarking analysis carried out, an arithmetic mean of 14 comparable companies with Gross Profit / Direct and Indirect Cost as the Profit Level Indicator (PLI) was determined at 50.07%. The tax authorities disregarded the benchmarking approach adopted by Kellogg India and instead selected the Indian entity as the tested party. The Transactional Net Margin Method (TNMM) was chosen as the Most Appropriate Method (MAM) for the transaction and based on 8 comparable companies the arm’s length profit margin was determined at 4.33%. Singapore AE was rejected as tested party by the tax authorities on the ground that the financial details of the company and the foreign comparables were not available. Judgement of the Tax Appellate Tribunal The Tribunal decided in favor of Kellogg India and set aside the assessment. Excerpt “In view of the aforesaid observations, we hold that Singapore AE should be considered as the tested party, being the least complex entity, in the facts and circumstances of the case, which has been rightly done by the assessee. Hence no adjustment to ALP is required to be made. Even if the comparables chosen by the ld TPO are considered, undisputably since the assessee is only engaged in purchase and resale of goods without any substantial value addition thereon, RPM would be the MAM and in case of RPM only the gross margins are to be compared. We find that gross margins of assessee are much more than the gross margins of comparable companies chosen by the ld TPO. Hence no adjustment to ALP is to be made in respect of import of finished goods even if the comparable companies chosen by the ld TPO are upheld. Hence we hold that no adjustment to ALP is required to be made in the instant case in respect of import of finished goods in either case. Accordingly, the said adjustment of Rs 1,31,60,199/- is hereby directed to be deleted. Accordingly, the Additional Grounds raised by the assessee are allowed.” ...

The MAP APA proposal should provide a full description of the chosen methodology. In cases involving associated enterprises, the chosen methodology should also respect the guidance found in the Guidelines on applying the arm’s length principle of Article 9 of the OECD Model Tax Convention. It is stated at paragraph 2.11 of the Guidelines that “further, any method should be permitted where its application is agreeable to the members of the MNE group involved with the transaction or transactions to which the methodology applies and also to the tax administrations in the jurisdictions of all those members.” That guidance on use of transfer pricing methods is particularly relevant in the context of a MAP APA, because of the opportunity to obtain advance agreement on the method to be used. The application of the methodology should be supported by data which can be obtained and updated over the period of the MAP APA without imposing too great a burden on the taxpayer, and which can be reviewed and verified effectively by the tax administrations ...

It is not possible to provide specific rules that will cover every case. Tax administrators should hesitate from making minor or marginal adjustments. In general, the parties should attempt to reach a reasonable accommodation keeping in mind the imprecision of the various methods and the preference for higher degrees of comparability and a more direct and closer relationship to the transaction. It should not be the case that useful information, such as might be drawn from uncontrolled transactions that are not identical to the controlled transactions, should be dismissed simply because some rigid standard of comparability is not fully met. Similarly, evidence from enterprises engaged in controlled transactions with associated enterprises may be useful in understanding the transaction under review or as a pointer to further investigation. Further, any method should be permitted where its application is agreeable to the members of the MNE group involved with the transaction or transactions to which the methodology applies and also to the tax administrations in the jurisdictions of all those members ...

Moreover, MNE groups retain the freedom to apply methods not described in these Guidelines (hereafter “other methods”) to establish prices provided those prices satisfy the arm’s length principle in accordance with these Guidelines. Such other methods should however not be used in substitution for OECD-recognised methods where the latter are more appropriate to the facts and circumstances of the case. In cases where other methods are used, their selection should be supported by an explanation of why OECD-recognised methods were regarded as less appropriate or non- workable in the circumstances of the case and of the reason why the selected other method was regarded as providing a better solution. A taxpayer should maintain and be prepared to provide documentation regarding how its transfer prices were established. For a discussion of documentation, see Chapter V ...

Key End Es Energy concluded a share purchase and sale agreement of 20.12.2012 with a related party LUKERG BULGARIA GmbH, under which KEY END EU ENERGY transferred to its parent company LUKERG BULGARIA GmbH the ownership of the shares in eight subsidiaries. The subsidiaries owned a total of 15 wind turbines for the production of electricity and operated them on the Bulgarian energy market. According to the Purchase and Sale Agreement the price of the shares were BGN 20 935 937,75. Following an audit of the transaction the tax authorities issued an assessment of additional taxable income for FY 2012 related to the sale of shares. According to the authorities the arm´s length value of the shares were BGN 38 609 215,00. This value was determined based on a CUP/CUT method. As support/sanity check for the valuation the DCF method and the DuPont Analysis was also applied. The additional value was added to the taxable income of Key End Es Energy. A complaint was filed by Key End Es Energy with the Administrative court where, by decision No. 5477 of 09.09.2019, the assessment was annulled. The tax authorities then filed appel with the Supreme Administrative Court. In the appeal the tax authorities argued that the court erred in ignoring the valuation of the independent valuer, Raiffeisen Investment AG, on which the transaction was based and erred in holding that the agreed price was a market price. Further, it is submitted that the court erred in holding that the market price of the controlled sale and purchase transaction dated 20.12.2012 was as set out in the 2013 Share Transfer Pricing Documentation prepared by KPMG Bulgaria after the 20.12.2012 transaction. It also contested the court’s conclusions that the expert prepared in the course of the audit only formally used the CUP/CUT method, while in reality it used the discounted cash flow method, which was not provided for in Regulation No. N-9 of 14.08.2006. In view of the tax authorities, the priority should not be the formal application of the transfer pricing methods in Regulation N-9/2006, but instead arriving at actual values by means of the mechanisms of the various methods. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case to another panel of the court of first instance for reconsideration. Excerpt “Since the burden of proving the substantive grounds for the issuance of the RA rests with the revenue administration, in the presence of a material difference between the conclusions of the valuation experts appointed in the course of the audit and the court proceedings, the defendant in the first instance proceedings has requested by an application filed in open court on 21.02.2018 the appointment of a valuation expert, which, having familiarized itself with all the evidence in the case, to give a conclusion under item 13 of the application in three options for the market. By admitting only the appellant’s questions and refusing to admit the questions formulated by the respondent in the proceedings at first instance to the appointed expert examination by order of 18.04.2018, the court violated a fundamental principle under Article 8(1) of the APC – the arm’s length principle and at the same time limited the right of the respondent to engage evidence in support of the thesis it defends. The infringement constitutes a material breach of the rules of court procedure and a ground for cassation under Article 209(3) of the Code of Civil Procedure and, in so far as the dispute has not been clarified from the factual point of view, the case must be referred back to another formation of the court of first instance. In the new hearing, the court should appoint a expert, which independently, using one of the applicable rules under Regulation No H-9 of 14.08.2006. The court should, in accordance with the provisions of Article N-9 of the Law on the procedure and methods for the application of methods for determining market prices, derive the market value of the shares of the eight subsidiaries owned by the audited entity, the subject of the sale both under the transaction of 20.12.2012 between related parties and as part of the subject of the sale under the transaction of 14.06.2012 concluded between unrelated parties.” Click here for English Translation Click here for other translation ...

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 ...

A group company, PI, purportedly provided management services to the Ashin Steel Trading House. During the audit for FY 2013-2015 the tax authority came to the conclusions that Ashin Steel Trading House and the PI had “deliberately created a management relationship scheme so that service providers are listed on the staff of an entrepreneur who pays tax on the ONS with the object of taxation “income””. Significant sums of money was transferred to PIs in the form of payments for the provision of management services for their subsequent withdrawal and to the accounts of an individual (from the accounts of the PI), which allowed the Company to minimize tax revenues. The tax authority recalculated the Company’s expenses for the management services, using a combination of transfer pricing methods – cost plus and comparable profitability. The Decision of the Court of Appeal: The CUP method has priority, but in cases where it is not subject to application, the tax authority has the right to use one of the other methods:“Thus, the provisions of Article 105.7 of the Russian National Assembly do not establish the mandatory consistent application of methods for determining the market price of goods established by subparagraphs 2-5 paragraphs 1 of Article 105.7 of the Russian Federation, in the event that the method of comparable market prices cannot be applied. The tax authority in this case is entitled to choose from any remaining methods, as well as their « combination.” Due to the specifics of the PI’s activities, it was not possible to apply the CUP method, so instead the tax authorities had used a combination of methods. On this issue the Court stated: “the method used by the tax authority to determine costs is not contrary to tax law“. The court also referred to the industry-based performance measures summarized by the Federal Tax Service: The profitability of similar activities in 2013-2015 is significantly lower than the indicators used by the tax authority, in connection with which the court correctly stated that the measures applied by the tax authority do not violate the rights of the taxpayer. Click here for translation ...

It is not possible to provide specific rules that will cover every case. Tax administrators should hesitate from making minor or marginal adjustments. In general, the parties should attempt to reach a reasonable accommodation keeping in mind the imprecision of the various methods and the preference for higher degrees of comparability and a more direct and closer relationship to the transaction. It should not be the case that useful information, such as might be drawn from uncontrolled transactions that are not identical to the controlled transactions, should be dismissed simply because some rigid standard of comparability is not fully met. Similarly, evidence from enterprises engaged in controlled transactions with associated enterprises may be useful in understanding the transaction under review or as a pointer to further investigation. Further, any method should be permitted where its application is agreeable to the members of the MNE group involved with the transaction or transactions to which the methodology applies and also to the tax administrations in the jurisdictions of all those members ...

Moreover, MNE groups retain the freedom to apply methods not described in these Guidelines (hereafter “other methods”) to establish prices provided those prices satisfy the arm’s length principle in accordance with these Guidelines. Such other methods should however not be used in substitution for OECD-recognised methods where the latter are more appropriate to the facts and circumstances of the case. In cases where other methods are used, their selection should be supported by an explanation of why OECD-recognised methods were regarded as less appropriate or non- workable in the circumstances of the case and of the reason why the selected other method was regarded as providing a better solution. A taxpayer should maintain and be prepared to provide documentation regarding how its transfer prices were established. For a discussion of documentation, see Chapter V ...

McKesson is a multinational group engaged in the wholesale distribution of pharmaceuticals. Its Canadian subsidiary, McKesson Canada, entered into a factoring agreement in 2002 with its ultimate parent, McKesson International Holdings III Sarl in Luxembourg. Under the terms of the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for approximately C$460 million and committed to purchase all eligible receivables as they arise for the next five years. The receivables were priced at a discount of 2.206% to face value. The funds to purchase the accounts receivable were borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent company in Luxembourg. At the time the factoring agreement was entered into, McKesson Canada had sales of $3 billion and profits of $40 million, credit facilities with major financial institutions in the hundreds of millions of dollars, a large credit department that collected receivables within 30 days (on average) and a bad debt experience of only 0.043%. There was no indication of any imminent or future change in the composition, nature or quality of McKesson Canada’s accounts receivable or customers. Following an audit, the tax authorities applied a discount rate of 1.013%, resulting in a transfer pricing adjustment for the year in question of USD 26.6 million. In addition, a notice of additional withholding tax was issued on the resulting “hidden” distribution of profits to McKesson International Holdings III Sarl. McKesson Canada was not satisfied with the assessment and filed an appeal with the Tax Court. Judgement of the Tax Court The Tax Court dismissed McKesson Canada’s appeal and ruled in favour of the tax authorities. The Court found that an “other method” than that set out in the OECD Guidelines was the most appropriate method to use, resulting in a highly technical economic analysis of the appropriate pricing of risk. The Court noted that the OECD Guidelines were not only written by persons who are not legislators, but are in fact the tax collecting authorities of the world. The statutory provisions of the Act govern and do not prescribe the tests or approaches set out in the Guidelines. According to the Court, the transaction at issue was a tax avoidance scheme rather than a structured finance product ...

Traditional transaction methods are the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm’s length. As a result, traditional transaction methods are preferable to other methods. However, the complexities of real life business situations may put practical difficulties in the way of the application of the traditional transaction methods. In those exceptional situations, where there are no data available or the available data are not of sufficient quality to rely solely or at all on the traditional transaction methods, it may become necessary to address whether and under what conditions other methods may be used. This issue, in particular the role of transactional profit methods and conclusions about their use, is discussed in Chapter III ...