Varian Medical Systems Iberica S.L. is the Spanish subsidiary of the multinational company Varian Medical Systems and carries out two types of activities – distribution and after-sales services. The products sold was purchased from related entities: Varian Medical Systems Inc., Varian Medical Systems UK Ltd., Varian Medical Systems International AG and Varian Medical Systems HAAN GmbH. The remuneration of Varian Medical Systems Iberica S.L. had been determined by application of the net margin method for all transactions and resulted in a operating margin of 2.86% in 2005 and 2.75% in 2006. In 2010 an audit were performed by the tax authorities for FY 2005 and 2006, which resulted in an adjustment. The tax authorities accepted the net margin method, but made various corrections in its application. The adjustments made by the tax authorities resulted in a operating margin of 6.45% in the two years under review, The tax administration argued that the margins determined by Varian Medical Systems Iberica S.L. could not be accepted due to various technical discrepancies in the application of the method. Instead they determined that a operating margin of 6.45% would have been obtained in an arm’s length situation. The target margin of 6.45% resulted in a decrease in the cost of purchases of goods from related manufacturing entities by 725,108 euros in 2005 (1 October 2005 to 30 September 2006) and by 1,008,065 euros in 2006 (1 October 2006 to 30 September 2007). Varian Medical Systems Iberica S.L. filed an appeal before the Regional Administrative Court of Madrid, which was dismissed. An appeal was then filed to the Central Administrative Court, which was also rejected. Judgement of the Nacional Court The Court decided in favor of Varian Medical Systems Iberica S.L. and set aside the tax assessment. Excerpts: “Indeed, as stated in paragraph 1.48 of the 1995 OECD Guidelines (and in similar terms in paragraph 3.60 of the 2010 version of the OECD Guidelines), “if the relevant terms of the controlled transactions (e.g. price or margin) are within the arm’s length range, no adjustment should be made”. In the light of the foregoing, the Board agrees with the application in so far as it states, at p. 15, that “[a]ccording to the Court of First Instance’s findings, the Court of First Instance has held that “in accordance with the OECD Guidelines, given that the operating margin of the distribution function declared by VMS (2.86% in 2005-2006 and 2.75% in 2006-2007), is within the arm’s length range (either the taxpayer’s interquartile range, which ranges from 1.06% to 5.25%, or that of the Inspectorate, which ranges from 1.55% to 6.45%), no adjustment is necessary”. “The arm’s length price declared by the appellant company, as stated above, was within the arm’s length range determined by the tax authorities, ergo, no adjustment was appropriate.” “In conclusion, for the reasons set out above, the technical basis used by the tax authorities to regularise the taxpayer’s situation, as regards the points at issue here, is not in accordance with the law.” Click here for English translation Click here for other translation ...

Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment. Click here for English translation Click here for other translation ...

A Oy had operated as the marketing and sales company of an international group in Finland. With the exception of 2008, the company’s operations had been unprofitable in 2003-2011, while at the same time the Group’s operations had been profitable overall. A Oy had purchased the products from the contract manufacturers belonging to the group. The method used in the Group’s transfer pricing documentation for product purchases had been characterized as a modified cost-plus / profit margin method (TNMM). The tested parties were contract manufacturers belonging to the group, for whom four comparable independent companies had been found in a search of the Amadeus database. According to the documentation, the EBITDA target margin for the Group’s contract manufacturers was set at two percent. When submitting A Oy’s tax return for 2010, the tax Office had considered, on the basis of the OECD’s 2010 Transfer Pricing Guidelines (paragraphs 1.70 – 1.72), that in independent business transactions the sales company would have received a  compensating adjustment or other equivalent credit as an adjustment. In addition, the tax office had considered that the analysis of the manufacturing companies had not made it possible to assess A Oy’s situation with sufficient reliability in relation to the long-term losses of A Oy’s operations. For this reason, the tax office had used A Oy as a test party when it had determined the company’s arm’s length profit level. Based on its report, the tax office had made an increase in the amount of taxable income reported by the company for the tax year 2010 and 2007-2009. The Supreme Administrative Court held that the loss of the group company did not in itself indicate that the company were to receive a service fee or other consideration from other group companies who could be considered to have benefited from the activities of the loss-making sales company. When determining the market conditionality of a loss-making group company’s transfer prices using the cost-plus or transaction margin method, the OECD transfer pricing guidelines require that a company for which reliable data can be found for the most closely comparable transactions be tested. Taking into account the activities performed by A Oy on the one hand and the contract manufacturers belonging to the A group on the other hand, the risks borne by them and their assets, A Oy should not have been chosen as the tested party. The contract manufacturers belonging to the group should have been selected as the companies to be tested, as had been done in the transfer price documentation of the A group. It had not been alleged in the case that A Oy’s transfer pricing had not been carried out in accordance with the transfer pricing documentation prepared by the Group or that the independent companies referred to in the Group’s transfer pricing documentation were not comparable. Therefore, and because A Oy had presented business reasons for its losses, the Supreme Administrative Court annulled the tax adjustments. Click here for translation ...

In this case, the French tax authorities questioned the method implemented by GE Healthcare Clinical Systems to determine the purchase price of the equipment it was purchasing from other General Electric subsidiaries in the United States, Germany and Finland for distribution in France. The method used by the GE Group for determining the transfer prices was to apply a margin of 5% to all direct and indirect production costs borne by the foreign group suppliers. For the years 2007, 2008 and 2009 the tax authorities applied a TNM-method based on a study of twenty-six comparable companies. The operating results of GE Healthcare France was then determined by multiplying the median value of the ratio “operating result/turnover” from the benchmark study to the turnover in GE Healthcare Clinical Systems. The additional profit was declared and qualified as constituting an indirect transfer of profits to the related party suppliers in the General Electric Group. The GE Group disagreed and brought the case to Court. First, the Tribunal dismissed the application by judgment of 18 May 2015, as did the Versailles Administrative Court of Appeal in a judgment of 9 February 2017. Finally, the Conseil d’Etat rejected the appellant’s appeal on the ground that the administration had established the existence of a benefit constituting a transfer of profits. When the tax authorities note that the prices charged to a company established in France by a foreign related company are higher than those charged to independent parties, without this difference being explained by the different circumstances, it is entitled to reinstate in the results of the French company an amount equal to the advantage. The Conseil d’Etat also confirmed that a benchmark study could include companies whose turnover was not identical to that of the taxpayer. Click here for translation ...

During the period from 1 January 2003 to 31 December 2005 all the products marketed by GE Healthcare Clinical Systems (France), a company wholly owned by the American company GE Medical Systems Information Technologies and the exclusive distributor in France of medical equipment produced by the General Electric group, were supplied to it by its German subsidiary, GE Medical Systems Information Technologies (MSIT) GmbH, of which it held 100% of the capital. Transfer prices were determined based on the cost plus method. Following an audit of the accounts of GE Healthcare Clinical Systems, the tax authorities dismissing the cost plus method and instead set up a sample of eight companies considered comparable to GE Healthcare Clinical Systems. The difference between the operating loss declared by this company and its arm’s length operating results, calculated on the basis of the median of the net operating margin of the eight companies deemed to be comparable, constituted an indirect transfer of profits granted without consideration by GE Healthcare Clinical Systems to its supplier, GE MSIT GmbH, within the meaning of Article 57 of the general tax code. This transfer of profits constituted income distributed to a company established in Germany, within the meaning of the provisions of Article 111c of the General Tax Code, the administration subjected GE Healthcare Clinical Systems to the withholding tax provided for in Article 119a(2) of this code, in respect of the 2004 and 2005 financial years, at the rate provided for by the French-German tax treaty GE Medical Systems, which took over the rights and obligations of GE Healthcare Clinical Systems following the merger of that company, is appealing against the judgment of 3 January 2013 by which the Montreuil Administrative Court dismissed the latter’s application for discharge of the withholding tax and the corresponding penalties to which it was subject in respect of the financial years ended in 2004 and 2005, which were levied on 30 April 2009; Judgement of the Court of Appeal The Court of Appeal upheld the assessment of the tax authorities and dismissed the appeal of GE Medical Systems Excerpts “22. Considering that the administration, which did not limit itself to noting the loss-making results, with the exception of the year 2000, of GE Healthcare Clinical Systems during the financial years 1998 to 2005, which are not attributable to salary and structural costs as the applicant company maintains, failing to provide any proof of its allegations, and to pointing out that these losses represented 60% of the turnover for the year 2005, thus provides proof of the relevance of the method derived from the study of net transactional margins; that in these circumstances, given the size of the difference between the operating losses declared by GE Healthcare Clinical Systems and the company’s arm’s length operating results resulting from the application of the transactional net margin method, which amounted to EUR 3,675,112 for 2004 and EUR 5,025,107 for 2005, it must be regarded as establishing that the company’s operating losses were in line with the net margin method, it must be regarded as establishing that in the financial years 2004 and 2005 GE Healthcare Clinical Systems, by paying GE MSIT GmbH purchase prices that were excessive in relation to an arm’s length situation, transferred to it profits in the amount of the difference recorded, respectively, in respect of each financial year, within the meaning and for the application of Article 57 of the General Tax Code ; – As regards the justification of the advantages granted : 23. Considering that neither GE Healthcare Clinical Systems nor GE MEDICAL SYSTEMS establishes or even alleges that the advantages granted by GE Healthcare Clinical Systems to its German subsidiary were justified by the obtaining of counterparties favourable to the activity of GE Healthcare Clinical Systems or to its operating results; 24. Considering that it follows that the tax authorities were right to consider that GE Healthcare Clinical Systems indirectly transferred to its German subsidiary profits amounting to EUR 3,675,112 for the 2004 financial year and EUR 5,125,107 for the 2005 financial year;” Click here for English translation. Click here for translation ...