Tomas Bodero S.A. added a 4% fee when re-invoicing goods purchased from unrelated manufacturers to its Panamanian subsidiary. The transfer pricing documentation stated that “this fee (4%) is very similar to the fee that brokers in the sector usually charge for brokering imports of goods, so it can be concluded that a market price is charged for the services that the parent company provides to the subsidiary”. Following an audit, the tax authorities issued a tax assessment which, among other adjustments to the taxable income, also adjusted the fee received from the subsidiary. The arm’s length fee for the service provided was set at approximately 26% of the purchase price. Appeals were filed by Tomas Bodero S.A. which ended up in the High Court. Judgement of the Court In regards of procurement fee, the Court ruled in favor of Tomas Bodero A.S. Excerpts “….the method used by the Inspectorate to calculate the transfer prices is sufficiently justified; the internal comparable method is the method which, in general and a priori, provides a greater degree of accuracy and legal certainty given that it is obtained from the prices established by the interested party. However, regardless of the objections raised by the appellant regarding the sampling used by the Inspectorate – limited to a single month of the financial year and including a single Latin American client – and the possible discrepancies as regards the correct identification of the goods, the fact is that the tax authorities have not at any time called into question the specific business/financial intermediation and management model developed between the Spanish parent company and the Panamanian subsidiary. …the Inspectorate [does not] question the fact that the goods are at no time at the physical disposal of the parent company, since the supplier’s dispatch is made directly in Latin America. …we must understand that the (higher) price compared by the Inspectorate, in addition to the commercial margin of the resale itself, includes the cost of intermediation of the independent agent, which is not the case with the (lower) price re-invoiced by the parent company to its filial, which acts as a commercial intermediary with the retailers in Latin America. In fact, in the only invoice compared by the Inspectorate issued directly by the plaintiff to a Latin American customer -FacVen/9758, dated 5 January 2015- the filial TB LATAM is listed as “agent”, whereas, as we said, in the invoices issued by the appellant to its filial the legend “re-invoicing” appears. In other words, we cannot consider logical or reasonable the criterion of the Inspectorate that the price invoiced by the appellant to retailers for resales with agent intermediation is comparable to the price re-invoiced directly by the parent company to its filial in an operation of mere financial intermediation and management -without the intervention of a commercial agent, a task carried out by the filial itself-, all of which leads us to annul the regularisation for this concept. Click here for English Translation Click here for other translation ...

If a controlled taxpayer is comparable to a purchasing agent that does not take title to property or otherwise assume risks with respect to ownership of such goods, the commission earned by such purchasing agent, expressed as a percentage of the purchase price of the goods, may be used as the appropriate gross profit markup ...

On 1 July 2022, the tax authorities in the Netherlands published Decree No. 2022-0000139020 of 14 June 2022 containing local guidance on application of the arm’s length principle. The Decree is based on article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines and also contains references to local case laws. In the Decree, particular focus is on areas that have been updated in the most recent releases of the OECD Transfer Pricing Guidelines – Legal ownership, DEMPE functions, Services, HTVI and Valuation Methods, Government policies (COVID-19), Remuneration of Procurement activities, Financial transactions etc. Click here for Unofficial English translation Click here for other translation ...

For example, a business restructuring may involve the setting up by an MNE group of a central procurement operation that replaces the procurement activities of several associated enterprises. Similar to the guidance at paragraph 1.180 the MNE group has taken affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts and potential savings in administrative costs. In accordance with the guidance in Chapter I, the benefits due to deliberate concerted group action should be allocated to the associated enterprises whose contributions create the synergies. However, in a business restructuring, the central procurement company may also contractually assume risk associated with buying, holding, and on-selling goods. As stated in the previous section, an analysis of risk under the framework provided in Section D. 1.2.1 of Chapter I will determine the economic significance of the risk and which party or parties assume that risk. Although the central procurement operation is entitled to profit potential arising from its assumption of the risk associated with buying, holding, and on-selling goods, it is not entitled to retain profits arising from the group purchasing power because it does not contribute to the creation of synergies (see paragraph 1.188) ...

Business restructurings may often involve the centralisation of intangibles, risks, or functions with the profit potential attached to them. They may typically consist of: Conversion of full-fledged distributors (that is, enterprises with a relatively higher level of functions and risks) into limited-risk distributors, marketers, sales agents, or commissionnaires (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Conversion of full-fledged manufacturers (that is, enterprises with a relatively higher level of functions and risks) into contract manufacturers or toll manufacturers (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Transfers of intangibles or rights in intangibles to a central entity (e.g. a so-called “IP company”) within the group, The concentration of functions in a regional or central entity, with a corresponding reduction in scope or scale of functions carried out locally; examples may include procurement, sales support, supply chain logistics ...

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ...

In a case where there is a chain of distribution of goods through an intermediate company, it may be relevant for tax administrations to look not only at the resale price of goods that have been purchased from the intermediate company but also at the price that such company pays to its own supplier and the functions that the intermediate company undertakes. There could well be practical difficulties in obtaining this information and the true function of the intermediate company may be difficult to determine. If it cannot be demonstrated that the intermediate company either assumes an economically significant risk or performs an economic function in the chain that has increased the value of the goods, then any element in the price that is claimed to be attributable to the activities of the intermediate company would reasonably be attributed elsewhere in the MNE group, because independent enterprises would not normally have allowed such a company to share in the profits of the transaction ...

Under these circumstances, Country B would be entitled to make a transfer pricing adjustment reducing the expenses of the Country B manufacturing affiliate by USD 2 500. The transfer pricing adjustment is appropriate because the pricing arrangements misallocate the benefit of the group synergy associated with volume purchasing of the widgets. The adjustment is appropriate notwithstanding the fact that the Country B manufacturing affiliate acting alone could not purchase widgets for a price less than the USD 50 000 it paid. The deliberate concerted group action in arranging the purchase discount provides a basis for the allocation of part of the discount to the Country B manufacturing affiliate notwithstanding the fact that there is no explicit transaction between the Country B and Country C manufacturing affiliates ...

The purchasing employee at the shared services centre then places orders for the required widgets and requests that the supplier invoice the Country B manufacturing affiliate for 5 000 widgets at a total price of USD 50 000 and invoice the Country C manufacturing affiliate for 5 000 widgets at a total price of USD 45 000. The supplier complies with this request as it will result in the supplier being paid the agreed price of USD 95 000 for the total of the 10 000 widgets supplied ...

The independent supplier sells widgets for USD 10 apiece and follows a policy of providing a 5% price discount for bulk purchases of widgets in excess of 7 500 units. A purchasing employee in the Country D shared services centre approaches the independent supplier and confirms that if the Country B and Country C manufacturing affiliates simultaneously purchase 5 000 widgets each, a total group purchase of 10 000 widgets, the purchase discount will be available with respect to all of the group purchases. The independent supplier confirms that it will sell an aggregate of 10 000 widgets to the MNE group at a total price of USD 95 000, a discount of 5% from the price at which either of the two manufacturing affiliates could purchase independently from the supplier ...

Assume a multinational group based in Country A, has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30% and Country C has a tax rate of 10%. The group also maintains a shared services centre in Country D. Assume that the manufacturing subsidiaries in Country B and Country C each have need of 5 000 widgets produced by an independent supplier as an input to their manufacturing processes. Assume further that the Country D shared services company is consistently compensated for its aggregate activities by other group members, including the Country B and Country C manufacturing affiliates, on a cost plus basis, which, for purposes of this example, is assumed to be arm’s length compensation for the level and nature of services it provides ...

Assume facts similar to those in Example 3, except that instead of actually purchasing and reselling the widgets, Company A negotiates the discount on behalf of the group and group members subsequently purchase the widgets directly from the independent supplier. Under these circumstances, assume that the comparability analysis suggests that Company A would be entitled to a service fee of USD 5 per widget for the coordinating services that it performed on behalf of other group members. (The lower assumed service fee in Example 4 as compared to Example 3 may reflect a lower level of risk in the service provider following from the fact that it does not take title to the widgets or hold any inventory.) Group members purchasing widgets would retain the benefit of the group purchasing discount attributable to their individual purchases after payment of the service fee ...

Assume that Company A is assigned the role of central purchasing manager on behalf of the entire group. It purchases from independent suppliers and resells to associated enterprises. Company A, based solely on the negotiating leverage provided by the purchasing power of the entire group is able to negotiate with a supplier to reduce the price of widgets from USD 200 to USD 110. Under these circumstances, the arm’s length price for the resale of widgets by Company A to other members of the group would not be at or near USD 200. Instead, the arm’s length price would remunerate Company A for its services of coordinating purchasing activity. If the comparability and functional analysis suggests in this case that in comparable uncontrolled transactions involving a comparable volume of purchases, comparable coordination services resulted in a service fee based on Company A’s costs incurred plus a mark-up equating to a total service fee of USD 6 per widget, then the intercompany price for the resale of the widgets by Company A would be approximately USD 116. Under these circumstances, each member of the group would derive benefits attributable to the group purchasing power of approximately USD 84 per widget. In addition, Company A would earn USD 6 per widget purchased by members of the group for its service functions ...

If important group synergies exist and can be attributed to deliberate concerted group actions, the benefits of such synergies should generally be shared by members of the group in proportion to their contribution to the creation of the synergy. For example, where members of the group take deliberate concerted actions to consolidate purchasing activities to take advantage of economies of scale resulting from high volume purchasing, the benefits of those large scale purchasing synergies, if any exist after an appropriate reward to the party co-ordinating the purchasing activities, should typically be shared by the members of the group in proportion to their purchase volumes ...

For example, if a group takes affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts, and that group company resells the items it purchases to other group members, a deliberate concerted group action occurs to take advantage of group purchasing power. Similarly, if a central purchasing manager at the parent company or regional management centre performs a service by negotiating a group wide discount with a supplier on the condition of achieving minimum group wide purchasing levels, and group members then purchase from that supplier and obtain the discount, deliberate concerted group action has occurred notwithstanding the absence of specific purchase and sale transactions among group members. Where a supplier unilaterally offers one member of a group a favourable price in the hope of attracting business from other group members, however, no deliberate concerted group action would have occurred ...

BenQ Italy SRL is part of a multinational group headed by the Taiwanese company BenQ Corporation that sells and markets technology products, consumer electronics, computing and communications devices. BenQ Italy’s immediate parent company was a Dutch company, BenQ Europe PV. Following an audit the tax authorities issued a notice of assessment for FY 2003 in which the taxpayer was accused of having procured goods from companies operating in countries with privileged taxation through the fictitious interposition of a Dutch company (BenQ Europe BV), the parent company of the taxpayer, whose intervention in the distribution chain was deemed uneconomic. On the basis of these assumptions, the tax authorities found that the recharge of costs made by the interposed company, were non-deductible. The tax authorities also considered that, through the interposition of BenQ BV, the prices charged by the taxpayer were aimed at transferring most of the taxable income to the manufacturing companies of the BenQ Group located in countries with privileged taxation. Thirdly, the costs recharged by the Dutch company to the taxpayer for the insurance of the solvency risk of its customers was denied. Not agreeing with the assessment BenQ Italy filed a complaint which was rejected first by the provincial court and later by the regional court. The regional court held – in relation to purchases from non-EU countries – that there were no economic reasons for the interposition of the parent company in relation to such purchases. Secondly, the court found that the taxpayer did not allocate the income earned in Italy according to the market values of the goods purchased from the group’s distribution chain, which resulted from the variability of the unit prices and the application by the seller under Dutch law of negative mark-up prices, constituting circumstantial evidence of the transfer of the economic advantage to group companies located in other countries. Finally, it held that the insurance costs were not inherent. BenQ then filed an appeal with the Supreme Court based on ten grounds. In the forth ground of appeal BenQ Italy alleged that the judgment under appeal held that the rules on transfer prices had been infringed. BenQ Italy argues that the burden of proof is on the tax authorities, in order to overcome the documentary (and negotiated) element of the purchase price agreed between the seller and the other companies in the group, to provide evidence that such price constitutes a breach of the arm’s length principle. BenQ also points out that none of the methods advocated on the basis of the OECD Guidelines and the Circular of the tax authorities No 32/9/2267 of 1980 has been applied in the present case, with a consequent breach of the rules governing placement of the burden of proof. Judgement of the Supreme Court The Supreme Court granted the appeal on the fourth ground. The judgment of the regional court was therefore set aside and referred back to the regional court for reconsideration. Excerpts “5 – The fourth ground is well-founded. 5.1 – The judgment appealed against found, on the basis of the contested notice, that “the interposition of the parent company appears to be for the purpose of circumventing the tax rules – which is not economically justifiable – and consequently the mark-up applied to the aforementioned imports loses the requirement of inherence in that it is not necessary or causally/mente connected with the income-producing activity under Article 11O(7) of the TUIR”. While drawing inspiration from the recovery of the non-deductibility of the cost of recharge (based on the different and distorted assumption of the uneconomic nature of the interposition of the company under Dutch law), the CTR hypothesizes the existence of an element of alleged tax avoidance and evaluates in this sense the “inconsistent and unexplained marked variability of the prices charged by the parent company, as well as [. …] the application of the alleged negative margins’, in order to derive the ‘presumption’ that the BenQ Group ‘did not allocate the income earned in Italy according to market values […] but concentrated it in the producers’ countries of residence’. Therefore, despite the fact that the Office did not adopt any method of calculating normal value (by comparing, for example, the prices charged by the taxpayer with the other non-resident companies in the group with respect to transactions concluded by and with independent parties), the CTR found that the normal value pursuant to art. 110, seventh paragraph, TUIR, the excessive variability of unit prices and the application of negative mark-ups by the parent company, as a “symptom of pathological conduct”, inducing evidence of the “transfer of the actual economic advantage to companies with lower production costs”. 5.2 – The CTR arrives, therefore – after deducting the negative mark-up percentage of a 5% flat-rate margin – to consider the burden of proof met by the Office regarding the assessment of a normal value of the prices charged (generically indicated as “both in purchase and sale”), as an exception to the contractual prices charged by the taxpayer, in terms of the indicated provisions of the TUIR (art. 76, paragraphs 2 and 5 of the TUIR, corresponding to Article 110, paragraphs 2 and 7 of the TUIR pro tempore and Article 9 of the TUIR) without having made any reference to the methodologies which, according to the OECD Guidelines, allow the comparison of the margin of the resident intra-group company with that which would be achieved by the same in case of transactions with independent companies (such as, for example, the resale price method and the cost-plus method). 5.3 – It should be noted that this Court has long pointed out that the rule of assessment of the normality of the transaction price, as well as the relative burden of proof, are the responsibility of the Office (Court of Cassation, Section V, 2 March 2020, No. 5645), without the taxpayer’s avoidance purpose being relevant, since the tax authorities do not have to prove the assumption of higher domestic taxation compared to cross-border taxation. What the tax ...

In July 2018 Center for Global Development published a study of special transfer pricing practices in the oil sector, and their potential application to hard rock minerals. According to the study, governments of mining countries are vulnerable to investors manipulating transfer prices as a means of avoiding paying taxes. The two main risks are mining companies undercharging for mineral exports sold to related parties, and overpaying for goods and services. The “solution” has been to apply the “arm’s length principle,” which gives governments the right to adjust the value of a related party transaction so that it accords with similar transactions carried out between independent parties. However, it has been apparent for many years that the arm’s length principle, with its reliance on “comparables” that in practice can rarely be found, is an inadequate response. The paper looks at whether special practices in the oil sector that provide materially greater protection against transfer pricing risk could be applied to hard rock minerals. These are (1) administrative pricing, where government, rather than the taxpayer sets the price for crude oil; and (2) the no-profit rule, which prevents joint venture partners from charging a profit mark-up on the cost of providing goods and services to the group. The paper finds that administrative pricing may be effective at curtailing undercharging of specific mineral products, for example, base and precious metals. The no-profit rule is a less obvious “fit” for mining given the lack of joint ventures, and alternative rules to limit cost overstatement may be required instead ...

The Handbook on Effective Tax Risk Assessment explores how information contained in CbC reports can be used for risk assessment and which types of tax risk indicators that may be identified using the information contained in CbC Reports. In chapter 4 some of the main tax risk indicators that may be identified using CbC Reports are described: The footprint of a group in a particular jurisdiction A group’s activities in a jurisdiction are limited to those that pose less risk There is a high value or high proportion of related party revenues in a particular jurisdiction The results in a jurisdiction deviate from potential comparable The results in a jurisdiction do not reflect market trends There are jurisdictions with significant profits but little substantial activity There are jurisdictions with significant profits but low levels of tax accrued There are jurisdictions with significant activities but low levels of profit (or losses) A group has activities in jurisdictions which pose a BEPS risk A group has mobile activities located in jurisdictions where the group pays a lower rate or level of tax There have been changes in a group’s structure, including the location of assets Intellectual property (IP) is separated from related activities within a group A group has marketing entities located in jurisdictions outside its key markets A group has procurement entities located in jurisdictions outside its key manufacturing locations Income tax paid is consistently lower than income tax accrued A group includes dual resident entities A group includes entities with no tax residence A group discloses stateless revenues Information in a group’s CbC Report does not correspond with information previously provided by a constituent entity According to the OECD, combiantions of thise 19 indicators can provide a general overview of the main tax risks of a MNE Group ...

The African Tax Administration Forum (ATAF) and the German Federal Ministry for Economic Cooperation and Development (BMZ), through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, have developed this toolkit for African tax authorities seeking to assess transfer pricing risk in the mining industry. The purpose is to strengthen authorities’ capacity to determine whether they should audit particular high-risk “related party transactions.” The toolkit employs a specific risk review approach, which focuses on particular transfer pricing issues that present a high risk to revenue (as distinct from a comprehensive risk review, which tax authorities use when they cannot detect where transfer  pricing issues are likely to arise). A loss of even 1 percent of the value of these transactions is likely to be significant for developing country revenues. These issues are also very prevalent: many African tax authorities report corporate services, including procurement and management, as common causes of tax loss. The four issues of focus are: 1. Marketing arrangements. A related company, for example a marketing hub, buys mineral products from the mine. The key issue is whether the mineral products are transferred to a fully fledged related party marketer that takes ownership of the product, performs value-adding functions and assumes entrepreneurial risk, or, more commonly, a hub that merely provides a support function. 2. Intercompany debt. A subsidiary receives debt from a parent or an affiliate company, often a corporate treasury located in a low-tax jurisdiction, to finance geological exploration or mine development. Debt generates interest payments, which are tax deductible. Most African countries currently limit the maximum amount of debt on which deductible interest payments are available, by way of a debt-to-equity ratio. However, the cost of related party debt (i.e., the interest rate) is difficult for tax authorities to price, leaving the tax base vulnerable to excessive interest deductions. 3. Procurement services. A company purchases mining goods and services on behalf of its subsidiary; the price charged to the subsidiary will include the direct cost, plus a “mark-up.” Usually in such cases the cost base should be the cost of providing the service, not the value of the goods. 4. Management services. The subsidiary pays a fee to a related party in return for a range of administrative, technical and advisory services ...

For example, a business restructuring may involve the setting up by an MNE group of a central procurement operation that replaces the procurement activities of several associated enterprises. Similar to the guidance at paragraph 1.160 the MNE group has taken affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts and potential savings in administrative costs. In accordance with the guidance in Chapter I, the benefits due to deliberate concerted group action should be allocated to the associated enterprises whose contributions create the synergies. However, in a business restructuring, the central procurement company may also contractually assume risk associated with buying, holding, and on-selling goods. As stated in the previous section, an analysis of risk under the framework provided in Section D. 1.2.1 of Chapter I will determine the economic significance of the risk and which party or parties assume that risk. Although the central procurement operation is entitled to profit potential arising from its assumption of the risk associated with buying, holding, and on-selling goods, it is not entitled to retain profits arising from the group purchasing power because it does not contribute to the creation of synergies (see paragraph 1.168) ...

Business restructurings may often involve the centralisation of intangibles, risks, or functions with the profit potential attached to them. They may typically consist of: Conversion of full-fledged distributors (that is, enterprises with a relatively higher level of functions and risks) into limited-risk distributors, marketers, sales agents, or commissionnaires (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Conversion of full-fledged manufacturers (that is, enterprises with a relatively higher level of functions and risks) into contract manufacturers or toll manufacturers (that is, enterprises with a relatively lower level of functions and risks) for a foreign associated enterprise that may operate as a principal, Transfers of intangibles or rights in intangibles to a central entity (e.g. a so-called “IP company”) within the group, The concentration of functions in a regional or central entity, with a corresponding reduction in scope or scale of functions carried out locally; examples may include procurement, sales support, supply chain logistics ...

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ...

In a case where there is a chain of distribution of goods through an intermediate company, it may be relevant for tax administrations to look not only at the resale price of goods that have been purchased from the intermediate company but also at the price that such company pays to its own supplier and the functions that the intermediate company undertakes. There could well be practical difficulties in obtaining this information and the true function of the intermediate company may be difficult to determine. If it cannot be demonstrated that the intermediate company either assumes an economically significant risk or performs an economic function in the chain that has increased the value of the goods, then any element in the price that is claimed to be attributable to the activities of the intermediate company would reasonably be attributed elsewhere in the MNE group, because independent enterprises would not normally have allowed such a company to share in the profits of the transaction ...

Under these circumstances, Country B would be entitled to make a transfer pricing adjustment reducing the expenses of the Country B manufacturing affiliate by USD 2 500. The transfer pricing adjustment is appropriate because the pricing arrangements misallocate the benefit of the group synergy associated with volume purchasing of the widgets. The adjustment is appropriate notwithstanding the fact that the Country B manufacturing affiliate acting alone could not purchase widgets for a price less than the USD 50 000 it paid. The deliberate concerted group action in arranging the purchase discount provides a basis for the allocation of part of the discount to the Country B manufacturing affiliate notwithstanding the fact that there is no explicit transaction between the Country B and Country C manufacturing affiliates ...

The purchasing employee at the shared services centre then places orders for the required widgets and requests that the supplier invoice the Country B manufacturing affiliate for 5 000 widgets at a total price of USD 50 000 and invoice the Country C manufacturing affiliate for 5 000 widgets at a total price of USD 45 000. The supplier complies with this request as it will result in the supplier being paid the agreed price of USD 95 000 for the total of the 10 000 widgets supplied ...

The independent supplier sells widgets for USD 10 apiece and follows a policy of providing a 5% price discount for bulk purchases of widgets in excess of 7 500 units. A purchasing employee in the Country D shared services centre approaches the independent supplier and confirms that if the Country B and Country C manufacturing affiliates simultaneously purchase 5 000 widgets each, a total group purchase of 10 000 widgets, the purchase discount will be available with respect to all of the group purchases. The independent supplier confirms that it will sell an aggregate of 10 000 widgets to the MNE group at a total price of USD 95 000, a discount of 5% from the price at which either of the two manufacturing affiliates could purchase independently from the supplier ...

Assume a multinational group based in Country A, has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30% and Country C has a tax rate of 10%. The group also maintains a shared services centre in Country D. Assume that the manufacturing subsidiaries in Country B and Country C each have need of 5 000 widgets produced by an independent supplier as an input to their manufacturing processes. Assume further that the Country D shared services company is consistently compensated for its aggregate activities by other group members, including the Country B and Country C manufacturing affiliates, on a cost plus basis, which, for purposes of this example, is assumed to be arm’s length compensation for the level and nature of services it provides ...

Assume facts similar to those in Example 3, except that instead of actually purchasing and reselling the widgets, Company A negotiates the discount on behalf of the group and group members subsequently purchase the widgets directly from the independent supplier. Under these circumstances, assume that the comparability analysis suggests that Company A would be entitled to a service fee of USD 5 per widget for the coordinating services that it performed on behalf of other group members. (The lower assumed service fee in Example 4 as compared to Example 3 may reflect a lower level of risk in the service provider following from the fact that it does not take title to the widgets or hold any inventory.) Group members purchasing widgets would retain the benefit of the group purchasing discount attributable to their individual purchases after payment of the service fee ...

Assume that Company A is assigned the role of central purchasing manager on behalf of the entire group. It purchases from independent suppliers and resells to associated enterprises. Company A, based solely on the negotiating leverage provided by the purchasing power of the entire group is able to negotiate with a supplier to reduce the price of widgets from USD 200 to USD 110. Under these circumstances, the arm’s length price for the resale of widgets by Company A to other members of the group would not be at or near USD 200. Instead, the arm’s length price would remunerate Company A for its services of coordinating purchasing activity. If the comparability and functional analysis suggests in this case that in comparable uncontrolled transactions involving a comparable volume of purchases, comparable coordination services resulted in a service fee based on Company A’s costs incurred plus a mark-up equating to a total service fee of USD 6 per widget, then the intercompany price for the resale of the widgets by Company A would be approximately USD 116. Under these circumstances, each member of the group would derive benefits attributable to the group purchasing power of approximately USD 84 per widget. In addition, Company A would earn USD 6 per widget purchased by members of the group for its service functions ...

If important group synergies exist and can be attributed to deliberate concerted group actions, the benefits of such synergies should generally be shared by members of the group in proportion to their contribution to the creation of the synergy. For example, where members of the group take deliberate concerted actions to consolidate purchasing activities to take advantage of economies of scale resulting from high volume purchasing, the benefits of those large scale purchasing synergies, if any exist after an appropriate reward to the party co-ordinating the purchasing activities, should typically be shared by the members of the group in proportion to their purchase volumes ...

For example, if a group takes affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts, and that group company resells the items it purchases to other group members, a deliberate concerted group action occurs to take advantage of group purchasing power. Similarly, if a central purchasing manager at the parent company or regional management centre performs a service by negotiating a group wide discount with a supplier on the condition of achieving minimum group wide purchasing levels, and group members then purchase from that supplier and obtain the discount, deliberate concerted group action has occurred notwithstanding the absence of specific purchase and sale transactions among group members. Where a supplier unilaterally offers one member of a group a favourable price in the hope of attracting business from other group members, however, no deliberate concerted group action would have occurred ...

The Practical Compliance Guideline (Guideline) sets out the Australian Taxation Office’s (ATO’s) compliance approach to transfer pricing issues related to the location and relocation of certain business activities and operating risks into a centralised operating model. The type of activities commonly centralised include marketing, sales and distribution functions although centralised operating models are not necessarily limited to these functions. For the purposes of this Guideline, these centralised operating models are referred to as ‘hubs’. The ATO understands that the overall structure of hubs, the transactions that flow in and out and the diversity and sophistication of a hub’s dealings contribute to increased complexity and higher costs for tax compliance. The Guideline is designed to help manage the compliance risk and therefore the compliance costs associated with your hub. The framework set out in the Guideline can be used to: (a) assess the compliance risk of the transfer pricing outcomes of hubs in accordance with the ATO’s risk framework (b) understand the compliance approach that the ATO will likely adopt having regard to the risk profile of hubs (c) mitigate the transfer pricing risk in relation to hubs , and (d) understand the type of analysis and evidence the ATO would require when testing the outcomes of hubs. the ATO’s  engagement will be tailored having regard to the specific hub’s risk rating. If a hub is assessed as being in the low risk zone it can be expected that the ATO will not generally apply compliance resources to test and assess the transfer pricing outcomes. If a hub falls outside the low risk zone, It can be expected that the ATO will monitor, test and/or verify the transfer pricing outcomes. Hubs with a high risk rating will be reviewed as a matter of priority. There is no presumption that because a hub is outside the low risk zone that the transfer pricing outcomes are incorrect, rather it means that the ATO considers a risk and therefore the ATO may conduct further compliance activity to test the outcomes of the hub. The transfer pricing methods used in the risk framework in the Guideline are for risk assessment purposes only. Consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 (OECD guidelines), when pricing an arrangements the transfer pricing methodology (or combination of methodologies) that is most appropriate and reliable for your circumstances should be used. The Guideline is structured as follows: (a) Part A sets out the general indicators and principles of the hub risk framework. These principles are relevant to all types of offshore hubs and apply to both outbound and inbound goods and commodity flows (b) Part B provides guidance to assist you when preparing your transfer pricing analysis if you are outside the green zone, and (c) Schedules attached to this Guideline set out specific indicators relevant to particular types of hubs ...

Gap International Sourcing was engaged in sourcing products from India to other group companies. The activity comprised of assistance in identification of vendors, provision of assistance to vendors in procurement of apparel, inspection and quality control and coordination with vendors to ensure delivery of goods to group companies. The necessary technical and intellectual basis for provision of these services were provided by the group companies. The Indian company used TNMM to benchmark the service fee at full cost plus 15%. The tax administration disregarded the functional profile and characterisation of Gap International Sourcing by assuming that the functional profile was substantially higher than those of limited risk support service providers. The tax administration found that a cost plus form of remuneration did not take into account substantial intangible assets owned by the taxpayer. Intangibles were identified to be human asset intangibles, supply chain intangibles and location savings. Based on above, the tax administration set the arm’s length remuneration at a commission of 5% on the value of the products sourced. The Tribunal held, that for determining the arm’s length price of international transaction, it is importent to take the characterisation of the taxpayer and the relatet party into consideration through a functional analysis. The Tribunal observed the following specifically for Gap International Sourcing: • No significant business risks were assumed. • No capacity to assume business risks. • No human resource intangibles were developed. • No supply chain intangibles were developed. • Location savings could not be attributed to the taxpayer. The Tribunal held that the arm’s-length cost plus mark-up for the taxpayer should be 32% (- as opposed to the cost plus 830% and 660% for the two years under consideration, derived by resorting to a commission based model of 5%). The Tribunal also stated that the arm’s length principle as determined by either the taxpayer or Revenue cannot lead to manifestly absurd or abnormal financial results ...

The 2013 Draft Handbook on Transfer Pricing Risk Assessment is a detailed, practical resource that countries can follow in developing their own risk assessment approaches. The handbook supplements useful materials already available with respect to transfer pricing risk assessment. The OECD Forum on Tax Administration published a report entitled “Dealing Effectively with the Challenges of Transfer Pricing” in January 2012. One chapter of that report also addresses transfer pricing risk assessment ...

X BV in the Netherlands was a wholesaler in garden related (gift) articles. Customers are located in the Netherlands and abroad (especially in Western Europe, the United States and Canada). Procurement of the products is mainly done in China. Delivery of the products is made directly by the producer to [X] BV or to its other clients. As compensation for procurement activities performed by the [X Limited] in Hong Kong, X group BV pays a 10% surcharge on the purchase price paid by [X Limited] to its Chinese suppliers. This surcharge is passed on in the cost price of the products. The tax administration held that the compensation [X Limited] receives for its procurement activities is (much) too high. The District Court disagreed and decided in favor of X Group BV. Click here for other translation ...

“Holding B.V.” is a holding company. The actual activity of the [X] group in the Netherlands – a wholesale trade in garden-related (gift) items – takes place in [X] B.V. The latter is included in a fiscal consolidation for corporate tax purposes with “Holding B.V.”. Customers of [X] B.V. are located in both the Netherlands and abroad (particularly in Western Europe, the United States and Canada). The products are purchased in China in particular and supplied direct by the producer to [X] B.V. or to its other customers. The procurement company – X Limited has an office and a showroom in Hong Kong, and employs a staff of five. The core activities of X Limited consist of quality control, logistics, product development, purchasing and sales. As remuneration for its activities, [X] B.V. pays a mark-up of 10% on the purchase price paid by X Limited to its Chinese suppliers. The tax authorities issued an assessment where the remuneration of the procurement company in Hong Kong was instead based on a cost plus method. Judgement of the Court The court rules that the transfer prices are not arm’s length. The ‘comparable uncontrolled price’ method advocated by the plaintiff is not accepted. The court followed the tax authorities in the cost-plus method, in which a cost surcharge of 10% was applied. The Court considers the following. The cup method as advocated by the plaintiff involves a comparison of the price charged for goods or services transferred in a group transaction with the price charged for goods and services transferred in a comparable free market transaction in comparable circumstances. The Court is of the opinion – as stated by the Respondent – that in view of the various functions which [X Limited] performs vis-à-vis the Claimant or third parties, there is no question in this case of a cup. A cup can therefore not serve as a basis for the transfer price so that another method should apply as a basis for determining the transfer prices. According to the defendant, the cost-plus method should be taken as a starting point. According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995-1999), the cost-plus method is based on costs incurred by the supplier of the goods or services in a group transaction for goods or services supplied to an associated purchaser. An appropriate cost-plus mark-up is then added to these costs in order to achieve an appropriate profit in view of the functions performed and the market conditions. The court is of the opinion that in view of the OECD Guidelines, the cost-plus method is a correct method for determining transfer prices in the present case. A cost-plus surcharge of 10% as defended by the defendant and further calculated in the statement of defence, has not been contested by the plaintiff and also does not appear unreasonable to the court. In view of all relevant facts and circumstances – considered together and in relation to each other – the Court is therefore of the opinion that the Defendant has made it plausible that the transfer price applied between the Claimant and [X Limited] is not based on business economics. In view of the fact that the cost supplement applied by the plaintiff is considerably higher than a transfer price that should be considered as arm’s length, the defendant has herewith also made it plausible that there is an intention to favour and awareness of this on the part of both parties. The arguments put forward by the claimant against this is of insufficient weight to conclude otherwise. Click here for English translation Click here for other translation ...