16. The facts in this example are the same as in Example 3, except that the marketing activities performed by Company B are more limited and do not significantly enhance the goodwill or reputation associated with the trademark. Company B has a mechanism whereby customer feedback on the products it sells is relayed to Company A, but this is a relatively simple process, and does not constitute a unique and valuable contribution. In sum, its distribution activities are not a particular source of competitive advantage in its industry. In particular, the potential success of the new line of products is largely dependent on its technical specifications, its design, and the price at which the products are sold to final customers. 17. The functional analysis concludes that Company A assumes the risks associated with the design, development and manufacturing of the product and Company B assumes the risks relating to marketing and distribution. 18. Marketing and distribution risks assumed by Company B may impact on the ultimate profitability of Company A. However, the functional analysis determines that the risks assumed by Company B are not economically significant for the business operations and that Company B does not make any unique and valuable contributions in relation to the controlled transaction. 19. Under these circumstances, the transactional profit split method may not be the most appropriate method as it is likely that the arm’s length compensation for the contribution of Company B can be reliably benchmarked by reference to comparable uncontrolled transactions and the application of a one-sided transfer pricing method or methods ...

The Italian tax authorities had issued an assessment against a local distribution company of a multinational group, where the transfer pricing analysis conducted by the taxpayer had been disregarded. The tax authorities, carried out a new benchmark analysis based on the transactional net margin method (“TNMM”) and adjusted the company’s profitability to the median. Judgement of the Court The Court decided in favour of BI S.r.l. and cancelled the assessment. The Court stated that the profitability range calculated by the tax authorities goes, for the year 2013, from a minimum value of 1.40% to a maximum of 18.28%. The local distribution company had obtained a ROS/EBIT margin of 8.38%, and since the last percentage falls between the minimum and the maximum, the court set aside the assessment. In regards to the TP analysis performed by the tax authorities the Court stated: “The company had applied the CUP method, as it was considered the most direct and reliable method to apply the principle of free competition and, therefore, according to today’s appellant, this method had to be preferred to the application of any other method. The Office, on the other hand, considered the TNMM method more correct, thus arriving at ROS (return on sales) values that were totally different from those applied by the company for the three-year period 2010, 2011 and 2012. The office, by changing method, without any specific reason had settled on the percentage of the median. The office had taken refuge behind that percentage, without justifying in the notices of assessment why “The appellant’s objections on the issue of comparables are upheld, as the present company exercised, for the years in dispute, sales and routine functions, while the key role within the group was played by the company B.R.; the latter, as the “real entrepreneur” who was responsible for the fundamental decision-making fruitions, the definition of the various business strategies and, no less, the fruitions in the development and production area.” “B.I. was the sole distributor in Italy of a single supplier, to which it was linked by a shareholding relationship. The comparables compared by the Office did not adequately match the model of the company under examination, as the companies compared carried out production activities, operated in different sectors and distributed different products. This being the case, the office had identified competitors that were not comparable in terms of product sector, market and risk level. These obvious differences in distribution channels, type of goods or products sold or totally different local realities make the analysis carried out by the office unacceptable as a whole.” Click here for English translation Click here for other translation ...

In the Rocadis case the French taxpayer argued that a related Japanese company was not a routine distributor, but a co-entrepreneur. The court however considered that evidence for such as statement was not provided, and the transfer pricing adjustment was upheld by the court. Click here for translation ...