FAST (PTY) LTD is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts) which is used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, FAST requires some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (FAST Zug). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). FAST (PTY) LTD and FAST Zug are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2009-2011 by an amount of R114 157 077. According to the revenue service the prices paid for the PGMs had not been at arm’s length. The revenue service set aside the CUP method and instead applied the TNMM method using ROTC as the Profit Level Indicator. The assessment was based on a detailed analysis of the total cost base incurred by FAST (PTY) LTD in acquiring the PGMs and other raw materials, including the manufacturing and distribution costs of the catalysts. The role played by FAST (PTY) LTD in purchasing and manufacturing the catalysts, the assets and the risks involved, which risks FAST had accounted for in its financial statement was also taken into account. FAST (PTY) LTD filed a complaint in which it held that the South African arm’s length provision in section 31(2) of the ITA only permitted tax authorities to adjust the consideration in respect of the transactions between it and the Swiss Entity to reflect an arm’s length price for the purchase and supply of PGMs. It also stated that even if it had been found that it had not paid an arm’s length price for the PGMs, which it denies, the tax authorities was only entitled to adjust the price/consideration paid for the PGMs as between applicant and the Swiss Entity, not the consideration between applicant and third parties. In this regard, the tax authorities’ adjustment of profits pursuant to its application of the TNMM was not a legitimate exercise of transfer pricing power authorized by section 31(2). As a consequence, the additional assessment is legally impermissible. The issue which FAST seeks separated therefore, is whether the conduct of tax authorities fell within the powers set out in section 31(2). FAST (PTY) LTD appeal was dismissed by the Tax Court. The judge referred to three recent international transfer pricing court cases (The Coca Cola Company (TCCC) and Subsidiaries v The Commissioner of Internal Revenue US, Canda v AgraCity Ltd and Denmark v ECCO A/S) and stated that these cases illustrated that regardless of what method has been used to determine the arm’s length consideration, ultimately, adjustments are made to profits of the taxpayer to ensure that tax is levied on the correct amount of taxable income. An appeal was then filed by FAST with the Court of Appeal. However both parties to the case filed complaints over admendments to the statements and subnition of evidence by the other party. Judgement of the Court This judgement concerns statements of the parties in regards of evidence before the Court of Appeal. The first question before the court is: has the Commissioner, by amending his rule 31 statement, novated the whole of the factual or legal basis that underlies his assessment? The court answered no to this question. “The Commissioner, as pointed out, has not abandoned the basis of his assessment. It remains his primary case. The amendment does not detract from this. The Commissioner is not “replacing an old obligation with a new one”,1 he is not novating. He is not changing the facts of the tested transaction. He is simply introducing a different comparator – companies that “specifically document” the use of precious metals in the manufacturing process – to test the transaction. In so doing, the Commissioner may be introducing new “facts” in that he is scrutinising the profits of companies that did not feature in his initial assessment, but that is not the same as changing the facts of the tested transaction. The facts of the tested transaction are the facts upon which he based his conclusion regarding its arms-length nature. He is not changing the facts as to how much FAST paid for the purchase of the XYZs from FAST Zug, or about how much profit FAST made. Those are fixed, both in his assessment and in his amended – as well as in his unamended – rule 31 statement. The amended rule 31 statement does not alter the assessment. [18] Furthermore, for the prohibition set out in sub-rule 31(3) to be applicable there must be “a novation of the whole factual or legal basis of the assessment”. Here he is not “novating the whole” of the facts of his assessment. [19] In these circumstances, the application to amend the rule 31 statement should be allowed.” The second question is: was the amendments made by FAST to its rule 32 statement prohibited? The court also answered no to this question. “A taxpayer is not faced with an absolute bar to raising a new ground. The taxpayer is only barred from raising a ground that is completely novel, one that was not at all raised in the objection filed in terms of rule 7. It is difficult to articulate the legal principle more precisely. The principle can only be clarified on the facts of each case. Such facts would be the only way of testing if the ground of appeal differs so radically from the ground of objection that it would fall foul of the prohibition. Some differences are minor and would therefore be allowed in terms of sub-rules 10(4) and 33(2), thus avoiding the prohibition contained in sub-rules 10(3) and 32(3) ...

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 ...

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”). Both the payment of royalties and the purchase fee are further regulated in the group’s transfer pricing document. Following an audit, the Customs Directorate added the payment of concept fee to the price of the acquired products for customs purposes. Decision of the Court The Court of Appeal ruled that the Customs Directorate’s decision on determining the customs value for the import of clothing and gift items was invalid. There was no basis for including a paid “concept fee” in the customs value. The condition of payment of concept fee had no connection to the sellers of the goods, but sprang from the buyer’s own internal organization. Click here for translation ...

The Australian Taxation Office has issued new guidance for multinational groups using offshore marketing- and procurment hubs for tax avoidance purposes. The guidance adresses tax schemes where MNEs uses offshore hubs to shift profits and thereby avoid Australian taxes. Offshore hub arrangements are catagorised by the ATO as white, green, blue, yellow, amber, or red – based on the risk assesment for tax purposes of the transfer pricing setup. The new guidance is a result of recent Australian investigations and hearings into tax avoidance schemes used by Multinational Groups. Tax avoidance in Australia Australian Senate Hearings into Tax Avoidance The overall framework for Australian risk assessment for tax purposes of MNE’s offshore marketing- and procurement hubs is shown below: ...