“S.” sp. z o.o. had filed a requested a written interpretation (binding ruling) with the tax authorities. The company had asked the following question: when calculating the income ratio to which the tax rate referred to in Article 24d(1) of the A.P.C. may be applied, can the transfer pricing regulations be applied accordingly (mutatis mutandis) by applying the profit split method – residual analysis (the method listed in § 13(3)(2) of the Ordinance). The request was dismissed by the tax authorities, stating that it could not assess the position presented in the application, as this would go beyond the framework of the individual interpretation proceedings defined by the legislator. An appeal was filed by “S” sp. z o.o. with the regional court and the court ruled in favour of the company. An appeal was then filed by the tax authorities with the the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Court dismissed the appeal of the tax authorities and upheld the decision of the regional court. According to the Supreme Administrative Court, “S.” sp. z o.o. had a right to obtain reliable information as to how – in the actual state of affairs/future event pertaining to it – the tax authority interprets the tax regulations applicable to it, which may affect the correctness of its settlement, and in the case of determining the tax base. Excerpt “According to the Supreme Administrative Court, both the actual state of affairs/future event described by the applicant in its application and the question contained in the application were in fact a question about the validity of the subsumption of the actual state of affairs/future event presented in the application under the relevant provisions of tax law. Moreover, the applicant’s request did not concern the interpretation of provisions other than those of tax law. The court of first instance correctly assessed that the analysis of the application and the applicant’s position indicates that its primary objective is to obtain an answer to the question whether, in the factual state/future event presented in the application, the income ratio to which the tax rate referred to in Article 24d(1) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws of 2020, item 1406, as amended); hereinafter: the “p.d.o.p.” may be – when calculating the income ratio to which the tax rate referred to in Article 24d(1) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws of 2020, item 1406, as amended); hereinafter: the “p.d.o.p.” – applied accordingly (mutatis mutandis) the transfer pricing regulations by applying the profit split method – split analysis, according to the method listed in § 13(3)(2) of the Regulation of the Minister of Finance of 21 December 2018 on transfer pricing for corporate income tax (Journal of Laws of 2018, item 259 as amended); hereinafter: ‘the Regulation’. Since the company, in presenting its own legal assessment of the above-mentioned factual state/future event, stated that the provisions of Article 24d(3)-(8) of the u.p.d.o.p.. do not explicitly specify the method by which income from intellectual property referred to in Article 30ca para. 2(3) of the u.p.d.o.p.. (should be: Article 24d(2)(8) of the u.p.d.o.p.. – note of the court), according to it, the most appropriate method is the residual profit split method, in which the separation of income streams (from development and design activities) would take place in two stages appropriate for this method. However, this company’s own legal assessment of the presented facts/future event should have been subject to the assessment of the interpreting authority, since both the provisions of the p.d.o.p, as well as the aforementioned implementing regulation issued pursuant to Article 11j(1)(1)(2) of the u.p.d.o.p.. constitute provisions of tax law, within the meaning of Article 3(2) of the A.p.l. This provision stipulates that whenever provisions of the tax law are referred to in the Act – it is understood as the provisions of tax acts, provisions of agreements on avoidance of double taxation ratified by the Republic of Poland and other international agreements on tax issues ratified by the Republic of Poland, as well as provisions of executive acts issued on the basis of tax acts. Undoubtedly, therefore, the company requested an individual interpretation of the provisions of tax law, i.e. the provision of Article 24d(2)(8) of the VAT Act and the provisions of the implementing act to the VAT Act, i.e. the aforementioned regulation. Moreover, what is important in the case, the applicant, when describing the facts/future event, directly classified its activity as research and development activity, and its aim was to confirm whether it is possible to adopt, mutatis mutandis, for the calculation of the income ratio to which the tax rate referred to in Article 24d(1) of the A.P.C. may be applied. – transfer pricing regulations by applying the profit split method – split analysis, according to the method listed in § 13(3)(2) of the aforementioned regulation.” Click here for English translation Click here for other translation ...

The arm’s length amount charged in a controlled transfer of tangible property must be determined under one of the six methods listed in this paragraph (a). Each of the methods must be applied in accordance with all of the provisions of § 1.482-1, including the best method rule of § 1.482-1(c), the comparability analysis of § 1.482-1(d), and the arm’s length range of § 1.482-1(e). The methods are – (1) The comparable uncontrolled price method, described in paragraph (b) of this section; (2) The resale price method, described in paragraph (c) of this section; (3) The cost plus method, described in paragraph (d) of this section; (4) The comparable profits method, described in § 1.482-5; (5) The profit split method, described in § 1.482-6; and (6) Unspecified methods, described in paragraph (e) of this section ...

The principles set out in this section similarly apply in situations where a member of an MNE group provides manufacturing services that may lead to process or product improvements on behalf of an associated enterprise that will assume legal ownership of such process or product improvements. Examples 14 to 17 in the Annex I to Chapter VI illustrate in greater detail the application of this Section B in the context of research and development arrangements ...

While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments. In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized. Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued. Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court. Judgement of the Court The court ruled in favor of the tax authorities. The trademark  transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning. The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income. Click here for English translation Click here for other translation ...

A / S Norske Shell runs petroleum activities on the Norwegian continental shelf. By the judgment of the Court of Appeal in 2019, it had been decided that there was a basis for a discretionary tax assessment pursuant to section 13-1 of the Tax Act, based on the fact that costs for research and development in Norway should have been distributed among the other group members. According to section 13-1 third paragraph of the Norwegian Tax Act the Norwegian the arms length provisions must take into account OECD’s Transfer pricing guidelines. And according to the Court of Appeal the Petroleum Tax Appeals Board had correctly concluded – based on the fact – that this was a cost contribution arrangement. Hence the income determination then had to be in accordance with what follows from the OECD guidelines for such arrangements (TPG Chapter VIII). The question before the Supreme Court was whether this additional income assessment should also include the part of the costs charged to A/S Norske Shell’s license partners in recovery projects on the Norwegian continental shelf. The Supreme Court concluded that the tax assessment should not include R&D costs charged to A/S Norske Shell’s license partners on the Norwegian continental shelf. Click here for translation ...

A/S Norske Shell – an entity within the Dutch Shell group – had operations on the Norwegian continental shelf and conducted research and development (R&D) through a subsidiary. All R&D costs were deducted in Norway. The Norwegian tax authority applied the arms length principle and issued a tax assessment. It was assumed that the R&D expense was due to a joint interest with the other upstream companies in the Shell group. The Court of Appeal found that the R&D conducted in Norway also constituted an advantage for the foreign companies within the group for which an independent company would demand compensation. The resulting reduction in revenue provided the basis for determining the company’s income on a discretionary basis in accordance with section 13-1 of the Tax Act. The tax authorities determination of the amount of the income reduction had not based on an incorrect or incomplete fact, nor did the result appear arbitrary or unreasonable. The Court of Appeal concluded that the decision was valid and rejected the company’s appeal. The judgement has later been appealed to the Supreme Court, HR-2020-122-U. Click here for translation ...

SAP Labs France SAS provided IT-related services to its German parent company, SAP AG, and received a cost-plus 6 % remuneration. According to the R&D agreement all income taxes, including withholding tax, applied on the amount paid by the parent company pursuant to the agreement would be paid for by the French company. However, the French tax administration held that the French company should have included the CVAE tax in the cost base on which it was remunerated, and by not doing so SAP Laps France had indirectly transferred profit to SAP AG. A tax reassessments under the French arm’s length provisions was then issued. SAP disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal issued a decision in favor of the tax administration. “6. The contribution on the added value of companies is a burden on the company. Consequently, this tax could not be disregarded when determining the transfer price of the services provided by SAP Labs France SAS to SAP AG. Even though it is based on contractual stipulations, the failure to take this taxation into account to determine the transfer price makes it possible, by itself and independently of the level of the transfer price to which this deduction leads by applying the contractual calculation method, to presume the existence of a transfer of profits abroad, within the meaning of Article 57 of the General Tax Code. The administration was therefore not required to compare the situation of SAP Labs France SAS with that of companies in a situation of arm’s length competition. In the present case, this company did not provide any justification likely to establish that this absence of re-invoicing was sufficient consideration for it and that it would thus have had the character of a normal act of commercial management. Furthermore, the guidelines on the free choice of accounting classification of the contribution on the added value of companies contained in the press release of the Conseil national de la comptabilité (French National Accounting Council) dated 14 January 2010 have no influence on the application of the tax law, whereas in any event it results from the instruction that SAP Labs France SAS has entered this tax in account 635111, which is an account of current management expenses, without even drawing up an appendix that could justify its choice to classify this contribution as income tax, despite the indications in the same press release. 7. As a result of the above, the tax authorities were right to consider that, in accordance with Article 57 of the French General Tax Code, SAP Labs France SAS had transferred profits for 2012 in an amount corresponding to the amount of the company value added tax, which is undisputed to be €600,301, increased by the contractual margin of 6%. As a result, Labs France is not entitled to request the discharge of the disputed taxes. Consequently, its conclusions regarding the costs related to the dispute must also be rejected.” Click here for English translation Click here for other translation ...

A Swiss company manufactured and distributed pharmaceutical and chemical products. The Swiss company was held by a Dutch parent that held another company in France. R&D activities were delegated by the Dutch parent to its French subsidiary and compensated with cost plus 15%. On that basis the Swiss company had to pay a royalty to its Dutch parent of 2.5% of its turnover for using the IP developed. Following an audit the Swiss tax authorities concluded that the Dutch parent did not contribute to the development of IP. In 2006 and 2007, no employees were employed, and in 2010 and 2011 there were only three employees. Hence the royalty agreement was disregarded and an assessment issued where the royalty payments were denied. Instead the R&D agreement between the Dutch parent and the French subsidiary was regarded as having been concluded between the Swiss and French companies Judgement of the Supreme Court The Court agreed with the decision of the tax authorities. The Dutch parent was a mere shell company with no substance. Hence, the royalty agreement was disregarded and replaced with the cost plus agreement with the French subsidiary. The Court found that it must have been known to the taxpayer that a company without substance could not be entitled to profits of the R&D activities. On that basis an amount equal to 75% of the evaded tax had therefore rightly been imposed as a penalty. Click here for English translation Click here for other translation ...

In a decision the IRS determined that Xilinx should have allocated stock option costs for foreign subsidiary research and development employees as part of its Section 482-7 cost-sharing agreement calculation. The United States Tax Court overruled the IRS, finding that in an arm’s-length situation, unrelated parties would not allocate employee stock option costs in the way determined by the IRS. The Court of Appeals later in 2009 overruled the opinion of the tax court, and found in favor of the IRS ...