Tag: Parent company guarantee

Greece vs “Loan Ltd”, May 2023, Tax Board, Case No 1177/2023

On 17 April 2015, “Loan Ltd” entered into a bond loan agreement with related parties. The effective interest rate charged to “Loan Ltd” (borrowing costs) in the years under consideration (2016 and 2017) was 8.1%. The interest rate had been determined based on the CUP method and external comparable data. The tax authorities determined the arm’s length interest rate for the loan to be 4,03% and issued an assessment of the additional taxable income resulting from the lower borrowing costs. A complaint was filed by “Loan Ltd” Decision of the Board The Board dismissed the complaint and upheld the assessment of the tax authorities. Excerpt “Because the applicant claims that the audit used inappropriate/non comparable data. Because, however, the audit chose the most reliable internal data in accordance with the OECD Guidelines, namely the interest rate agreed with a third independent bank for the provision of a credit facility (2.03%), which it adjusted by the percentage of the guarantee fee provided by the parent company (2%), resulting in an interest rate in accordance with the principle of equivalence equal to 4.03%. This adjustment is correct, in line with the OECD Guidelines and in the context of good administration. In particular, paragraph 10.177 of the OECD Guidelines states that: “The result of this analysis sets a maximum premium for the guarantee (the maximum amount the guarantee recipient will be willing to pay), i.e. the difference between the interest rate with the guarantee and the interest rate without the guarantee. […] The borrower would not have any incentive to enter into a guarantee agreement if, in total, he pays an amount (to the bank interest and to the guarantor commission) equal to what he would have paid to the bank without the guarantee (interest). Therefore, this maximum commission does not necessarily reflect the result of a negotiation made on a purely commercial basis, but represents the maximum that the borrower would be willing to pay’. The audit, in direct application of the OECD Guidelines, adjusted the lending rate by the maximum commission. Otherwise, the borrower would have paid an aggregate amount (interest to the bank and commission to the guarantor) higher than the amount he would have paid to the bank without the guarantee (interest). Because the audit, to corroborate the audit findings and its reasoning , also sought external comparable data (on an ancillary basis), namely, interest rates of comparable loans from the Bank of Greece and the Bank of Denmark. The Bank of Greece yielded an interest rate of 5.02% and from the Bank of Denmark 3.70% (3% plus 0.70% to reflect the country-Greece risk ). Because the above external comparables confirm the correctness of the audit approach, as they are close to the interest rate determined by the audit (4.03%) and at a significant deviation from the interest rate of the assessed intragroup transaction (8.1%). It should be noted that the reliance on central bank data is in line with a number of decisions of our Office (see, for example, BIT 4560/2021), but also a common methodology in numerous Documentation Files. As therefore, the claim of the applicant is rejected as unfounded.” Click here for English translation Click here for other translation gr-ded-2023-1177_en_ath-1177_2023 ...

Portugal vs “V… Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A.”, December 2022, Supreme Administrative Court, Case 02142/11.8BELRS

The tax authorities had issued a notice of assessment in which payments for a parent company guarantee had been adjusted on the basis of the arm’s length principle. The Administrative Court of Appeal annulled the assessment. The tax authorities filed an appeal with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court upheld the decision of the Administrative Court of Appeal and dismissed the appeal of the tax authorities. According to the Court, I – The Tax Administration may, under the provisions of article 58 of the CIRC, make corrections to the taxable income whenever, by virtue of special relations between the taxpayer and another person, whether or not subject to IRC, different conditions have been established in certain operations from those that are generally agreed upon between independent persons and these particular conditions have led to the profit ascertained on the basis of accounting being different from that which would have been ascertained had such special relations not existed. II – It is incumbent on the Tax Administration to allege and prove both the existence of special relations and the “normal circumstances” under which certain transactions take place, that is, the conditions under which, as a rule, those transactions take place between independent legal persons. III – As the assessment of comparability of transactions, required by Article 4(3) of Ministerial Order 1446-C/2001, is based on an economic criterion, the assessment issued under Article 58 of the CIRC must be annulled if the tax authorities were unable to demonstrate that, in the specific case, the transactions present relevant economic and financial characteristics that are sufficiently similar to ensure the high degree of comparability legally required in order for corrections to be made to the taxable amount via the transfer pricing regime. IV – The rules of hermeneutics of tax law do not allow Article 17 EBF to be interpreted as meaning that, in cases where employment contracts that are eligible under the aforementioned article terminate or commence during the tax period, the maximum limit of the increase provided for in no. 1 should be restricted in proportion to the time the contracts have been in force. V – In tax benefits that depend on the behaviour of the taxpayer, who may freely choose to fulfil the legally established conditions in order to enjoy them, the question of the principle of equality should be posed in relation to the conditions of access to the benefit and not in relation to the contours in which they are provided. VI – There is no discriminatory treatment, or even arbitrariness of the legal solution, if it is placed at the disposal of the taxpayer to optimise the variable effects of the tax benefit. Extracts from the judgement “In view of the provisions of article 5 of Ministerial Order no. 1446-C/2001, especially paragraph d), one cannot ignore the fact that the relationship between the Impugnant and its controlled companies cannot be comparable to the relationships established between entities that are independent from each other, as the latter are normally prevented under the terms of article 6(3) of the CSC from providing this type of guarantees to third parties, this function being reserved for credit institutions. In this regard, it should also be noted, as pointed out in the appealed decision, that the economic risk borne in the two operations is significantly different and “although the guarantee and the autonomous bank guarantee may share common characteristics, the way in which the risk falls on the guarantor and on the guarantor of the autonomous bank guarantee potentially generates differences that significantly affect their comparability” (emphasis added). 3.2.5.6 In conclusion, as it is the responsibility of the Tax Administration to demonstrate the verification of the prerequisites for applying the transfer price regime enshrined in Article 58(1) of the CIRC – which is the responsibility of the Portuguese Tax Authorities – it is important that the transfer price regime is applied. In conclusion, as it is the Tax Authorities’ duty to demonstrate the verification of the assumptions of application of the transfer pricing regime set forth in article 58, no. 1 of the CIRC – which, in this case, would translate into proving that the provision of guarantee by the Appellant and the provision of autonomous bank guarantees whose costs were supported by the Appellant, meet conditions to be considered comparable, as they present sufficiently similar relevant economic and financial characteristics -, which proof it failed to do, it is necessary to conclude, as did the appealed sentence, for the existence of error on the factual and legal assumptions of the assessment leading to its annulment in this part. The present appeal should, therefore, be dismissed in this part, on the grounds set out above.” Click here for English translation. Click here for other translation Portugal-vs-Servicos-de-Telecomunicacoes-e-Multimedia-SGPS-SA-December-2022-SAC-ORG ...

UK vs BlackRock, July 2022, Upper Tribunal, Case No [2022] UKUT 00199 (TCC)

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. An appeal was filed by the BlackRock Group. In November 2020 the First Tier Tribunal found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issueâ€). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issueâ€). An appeal was then filed with the Upper Tribunal by the tax authorities. Judgement of the Upper Tribunal The Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. Transfer Pricing “The actual provision of the loans from LLC4 to LLC5 differed from any arm’s length provision in that the loans would not have been made as between independent enterprises. The actual provision conferred a potential advantage in relation to United Kingdom taxation. The profits and losses of LLC5, including the allowing of debits for the interest and other expenses payable on the Loans, are to be calculated for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision. In this case, no arm’s length loan for $4 billion would have been made in the form that LLC4 made to LLC5 and hence HMRC’s amendments to the relevant returns should be upheld and confirmed.” Unallowable Purpose “The FTT did not err in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose in entering into the Loans. However, it was wrong to decide that the just and reasonable apportionment was solely to the commercial purpose. But for the tax advantage purpose there would have been no commercial purpose to the Loans and all the relevant facts and circumstances lead inexorably to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and so disallowed.” HMRC_v_Blackrock_Holdco_LLC5_UT-2021-000022_-_final_decision_ ...

Australia vs Singapore Telecom Australia Investments Pty Ltd, December 2021, Federal Court of Australia, Case No FCA 1597

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The loan notes issued totalled approximately $5.2 billion to the subscriber. The terms of the LNIA was amendet on three occasions – the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575% Following an audit the tax authorities issued an amended assessment under the transfer pricing provisions and denied interest deductions totalling approximately $894 million in respect of four years of income. According to the tax authorities the conditions agreed between the parties differed from the arm’s length principle. Singapore Telecom Australia appealed the assessment to the Federal Court. Judgement of the Federal Court The court upheld the the assessment issued by the tax authorities and dismissed the appeal of Singapore Telecom Australia. Click here for translation Singapore Telecom Australia Investments Pty Ltd FCA 1597 ...

Korea vs “K-GAS Corp”, November 2021, Daegu District Court, Case No 2019구합22561

K-GAS Corp had issued loans and performance guarantees to overseas subsidiaries but received no remuneration in return. The tax authorities issued an assessment where additional taxable income was determined by application of the arm’s length principle. An appeal was filed by K-GAS with the district court. Decision of the Court The court upheld the decision of the tax authorities and dismissed the appeal of K-GAS Corp. Excerpts related to loans “In light of the following circumstances, which can be known by the above acknowledged facts, in light of the above legal principles, it is not economically reasonable for the Plaintiff to decide not to receive interest on the self-financing portion of the case loan to the subsidiaries in question 1 until the end of the exploration phase, and there is no illegality in the method of calculating the normal price of the Defendant. … …the Plaintiff lent the money raised from the outside to the subsidiaries in the first issue, and in this type of financial transaction, it is the most reasonable and direct method to view the interest obtained by adding a certain profit to the borrowing interest corresponding to the procurement cost according to the cost plus method as the normal price (the Plaintiff also argued for the above effect on the normal price on the premise of ‘general loan and loan transactions’ (page 18 of the Complaint)). However, the Defendant not only calculated the normal price by applying the interest rate on the loan in this case, which is lower than the borrowing interest rate of the self-funding in this case, but also the price is lower than the interest rate calculated according to the Comparable Third Party Price Act when the Plaintiff lends funds for overseas resource development projects to Australian subsidiaries at the same time, so it cannot be considered that the normal price calculated by the Defendant exceeds the range of the price that is applied or is expected to be applied in ordinary transactions.” Excerpts related to performance guarantees “In light of the following circumstances, which can be seen by the above acknowledged facts, in the light of the legal principles seen in Paragraph (1) of A.A., it is not economically reasonable for the Plaintiff to not receive the performance guarantee fee from the subsidiaries, etc. of the third issue on the performance guarantee in this case, and there is no illegality in the method of calculating the normal price of the Defendant. … As seen earlier, the Plaintiff has received a performance guarantee fee when he/she guarantees the performance of the liability to pay the price under a gas sales contract of another overseas subsidiary or second-tier company. In cases of the performance guarantee in this case, it is deemed that there exists a reasonable ground not to receive the performance guarantee fee, in distinction from the above transaction, only a difference in the details of the principal obligation subject to the guarantee exists. The Plaintiff also explains that the above transaction is a payment guarantee for the business of an overseas subsidiary in the same position as an independent third-party company, so it is natural to receive a commission in return for the risks borne by the Plaintiff. There is no reason to deem otherwise in that the performance guarantee in this case is also for the business carried out by the subsidiary, etc., which is independent from the Plaintiff. The calculation of the reasonable performance guarantee fee by the Defendant for the provision of performance in this case is based on the risk approach that is the method of calculation of the performance guarantee fee that the Plaintiff has actually received from the overseas subsidiary, and as seen earlier, it is hard to deem that there is any illegality in the method of calculation of the reasonable performance guarantee fee by the Defendant, unless it is impossible to deem that the Plaintiff has no risk of performance guarantee in this case.” Click here for English translation Click here for other translation Korea 22561 Nov 2021 ORG ...

Albania vs Energji Ashta sh.p.k., September 2021, High Court, Case No. 00-2021-1426

At issue was whether a payments for an intra group loan guarantee was deductible. In 2008 an agreement was concluded between Verbund AG and the former Albanian Ministry of Economy, Trade and Energy, with the object of construction, operation, maintenance and transfer of the project of a new hydropower plant in Ashta. Based on this agreement, the local company Energji Ashta received a loan in the amount of 140 million euros from two Austrian banks. Having no assets to guarantee the loan, the foreign banks have accepted guarantees for the fulfillment of obligations by Energji Ashta from two group companies EVN AG and Verbund AG. The guarantee for Energji Ashta was made against a commission of 2% of the disbursed amount. Following a tax audit Energji Ashta was informed that the commission paid to EVN AG and Verbund AG would not be allowed as a deductible expense. Not agreeing with the above decision Energji Ashta appealed. Judgement of the Supreme Administrative Court The Court set aside the assessment of the tax authorities and decided in favor of Energji Ashta. Excerpt “In the dispute under trial, the plaintiff [Energji Ashta] essentially opposes judicially, the non-recognition as a deductible expense of the credit commission. It turns out that “non-recognition of the credit commission” is not materialized in the act/action of the tax administration, from which it has been derived or has created legal consequences for the plaintiff. As the courts of fact rightly reason, the opinions of tax inspectors or the Tax Appeals Directorate do not constitute the official position of the public body, much less produce consequences for the plaintiff. In the conditions where the facility (hydropower plant) is in the investment phase and has not yet produced tax effects for the plaintiff, the latter can not challenge the still unborn tax liabilities which are not based on notice concrete estimates.” Click here for other translation 00-2021-1426 ...

India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

In this case Aegis Ltd had advanced money to an assosiated enterprice (AE)  and recived preference shares carrying no dividend in return. The Indian Transfer Pricing Officer (TPO) held that the “acqusition of preference shares” were in fact equivalent to an interest free loan advanced by Aegis Ltd to the assosiated enterprice and accordingly re-characterised the transaction and issued an assessment for 2009 and 2010 where interest was charged on notional basis. Aegis Ltd disagreed with the assessment of the TPO and brought the case before the Tax Tribunal. The Tribunal did not accept the conclusions of the TPO. “The TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.” The Indian Revenue Service then filed an appeal to the High Court of Bombay challenging the dicision of the Tax Tribunal. The High Court of Bombay dismissed the appeal. According to the High Court “The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis.” India-vs-Aegis-Ltd-280119-High-Court-of-Bombay ...

US vs Container Corp., May 2011, US COURT OF APPEALS, No. 10-60515

In this case a US subsidiary, Container Corp, had paid guaranty fees to its foreign parent company Vitro in Mexico. In the US tax return, the fee had been considered analogous to payments for services, and the income was sourced outside the United States and not subject to withholding tax. The IRS held that the guaranty fees were more closely analogized to interest and thus subject to withholding taxes of 30 %. The Tax Court issued an opinion siding with Container Corp. The Commissioner brought the opinion before the US Court of Appeals. The Court of Appeals also found in favor of Container Corp. “To determine what class of income guaranty fees fall within or may be analogized to, the court must look to the “substance of the transactionâ€. The Commissioner contends the guaranty fees are more closely analogized to interest, while Container Corporation argues that the fees are more closely analogous to payment for services.” “The source of payments for services is where the services are performed, not where the benefit is inured. The Tax Court held that the parent company’s promise to pay in the event of default produced the guaranty fees. The parent company guaranty was the service. Thus, the services were performed in Mexico, and International did not have to withhold thirty percent of the guaranty fees paid.” “Under these factual circumstances, the guaranty fees are more analogous to payments for services, and the income was properly sourced outside the United States. As we find no reversible error of fact or law, the judgment of the Tax Court is AFFIRMED.” The decision from the Court of Appeal US vs Container Corp10-60515.0.wpd The opinion from the Tax Court US vs Container Corp Opinion ...

Canada vs. General Electric Capital. November 2010

In the case of General Electric Capital, Canada, the issue was if a 1% guarantee fee  paid by General Electric Capital Canada Inc. to its AAA-rated US parent company satisfied the arm’s length test. The Canadian tax administration argued  that implicit support resulted in General Electric Canada having a AAA credit rating, so that the guarantee provided by the US parent had no value. Taxpayer argued that the 1% guarantee fee did not exceed arm’s length pricing and that implicit support from the US parent should be ignored since it stemmed from the non-arm’s length relationship. The Tax Court agreed with the tax administration that implicit support should be taken into account and applied a “yield approach,” comparing the interest rate the Canadian company would have paid with and without the guarantee. The Tax Court found that credit rating of the Canadian company – with implicit support but without the guarantee – was at most BBB-/BB+ and the 1% guarantee was arm’s length. The Federal Court of Appeal approved of both the Tax Court’s yield approach and its conclusion that the guarantee fee did not exceed an arm’s length price. On the issue of implicit support the Court concluded that under the arm´s length principle implicit support had to be taken into account . Determining arm’s length pricing “involves taking into account all the circumstances which bear on the price whether they arise from the relationship or otherwise.” Hence, Circumstances that are themselves inherently non-arm’s length in nature must also be considered. The relevant question is what an arm’s length guarantor would charge to provide a guarantee to a comparable subsidiary of a comparable AAA-rated US parent Company. Comparing prices of loans without regard to implicit support from the US parent, fails to recognize all of the relevant economic circumstances of the controlled transaction. Canada-vs-General-Electric-2010-federal-Court-of-Appeal-FCA-344 Canada_2010fca290 ...