SARL SRN Métal’s business is trading in industrial metal and steel products. Following an audit of the company for FY 2011 to 2012 and assessment was issued related to VAT, Transfer Pricing and Withholding Tax. In regards to transfer pricing, the administration considered that (1) the sales of goods made by SRN Métal to B-Lux Steel, established in Luxembourg, were invoiced at a lower price than that charged to the company’s other customers and (2) that commissions paid to Costa Rica – a privileged tax regime – were not deductible as SRN Metal did not provided proof that the expenses corresponded to real operations and that they are not abnormal or exaggerated. The company requested the administrative court of Strasbourg to discharge the assessments. This request was rejected by the court in a judgement issued 29 October 2019. This decision of the administrative court was appealed by the company to the Supreme Administrative Court Judgement of the Supreme Administrative Court The Appeal of SRN Métal was rejected by the Court. Excerpts related to sales of goods to B-Lux “In order to establish a transfer of profits resulting from a reduction in the selling price of goods sold to B-Lux Steel, the department examined twenty sales transactions carried out by the applicant company with French customers at arm’s length from it. The administration also examined, within the framework of administrative assistance to the Luxembourg authorities, fifteen resale transactions by B-Lux Steel of products acquired from SRN Métal. This examination revealed that the margin charged by SARL SRN Métal for sales to B-Lux Steel was significantly lower than that charged to its other customers, without this difference being explained by the conditions of sale, the nature of the products sold or the situation of the customers. By merely alleging, without further clarification, that the results of the administrative assistance would have shown that it charged a higher margin for transactions carried out in Luxembourg, SRN Métal does not usefully challenge the evidence gathered by the department establishing the existence of a transfer of profits to Luxembourg by reducing the selling price of its goods. “It is true that SRN Métal intends to justify the lower prices charged to B-Lux Steel by its commercial interest in winning market share from Luxembourg customers and by the need to make sales to French customers limited by a credit insurance ceiling, through B-Lux Steel. However, it did not provide any evidence to support these allegations. Consequently, the administration was right to subject the profits thus transferred to Luxembourg to corporation tax. “ Excerpts related to commissions paid to Casa Vi.De.Sa.Ro in Costa Rica “The administration reintegrated into the applicant company’s taxable profits for 2011 and 2012 the sums it paid as commission to a company established in Costa Rica. It is not disputed that the company Casa Vi.De.Sa.Ro was not subject in Costa Rica to taxation on the profits it made abroad on account of the commission in question. Consequently, it is for the applicant company to prove that those commissions corresponded to real transactions and that they are not abnormal or exaggerated.” “In order to justify the reality of the business transactions which Casa Vi.De.Sa.Ro carried out on its behalf, the appellant company reiterates its argument that those commissions were intended to enable it to obtain the clientele of Arcelor Mittal Dunkerque. However, the applicant company, which does not even have a contract signed with the disputed company, does not provide any basis for its allegations. Although the applicant company maintains that it deducted exactly the same commissions in respect of other years and that the department admitted them on the occasion of another audit of the accounts, such a circumstance is not in itself sufficient to establish the reality of the services at issue during the period audited. Consequently, the administration was right to reinstate these commissions in its taxable profits.” Click here for English translation Click here for other translation ...

Atlas Copco Tanzania Ltd. is part of Atlas Copco Group, a conglomerate of multinational companies headquartered in Sweden. The group produces and sell compressors, vacuum solutions, generators, pumps, power tools etc. Apart from supplying generators in Tanzania on its own, Atlas Tanzania sold generators as an agent of its sister companies which had no presence in the country. For the latter type of sales, known as “indent sales”, Atlas Tanzania earned a commission. Being oblivious that the commission income attracted Value Added Tax (“VAT”), Atlas Tanzania did not file any VAT returns on indent sales until its external auditors, KPMG, informed it of the requirement. By then, Atlas Tanzania had posted in its sales ledgers commission income amounting to TZS. 134,413,682,281.00 for FY 2007 and 2008. Atlas Tanzania then accounted for VAT on the commission for the years 2007 and 2008 amounting to TZS. 5,692,574,000.00, which was paid through the VAT returns filed in 2009. This amount was much smaller than the sum of TZS. 13,413,682,281.00 originally booked in the sales ledgers for the two Fiscal Years. This was due to the fact, that Atlas Tanzania had reduced the amount on the ground that there was an overstatement of the commission by TZS.7,721,108,281.00, which was then corrected through an accounting reversal based on ordinary accounting practices. The tax authorities did not agree with the alleged overstatement and issued a notice of additional assessment for the sum of TZS. 2,118,115,834.00 representing the outstanding VAT plus interest. On appeal, the assessment issued by the tax authorities was upheld by the Appeals board and Tax Tribunal. Atlas Copco Tanzania Ltd. then appealed the decision to the Court of Appeal. Judgement of Court of Appeal The Court dismissed the appeal of Atlas Tanzania. “We would thus conclude that the present appeal presents no question of law but matters of fact that do not merit the attention of the Court in terms of section 25 (2) of the TRAA.” Click here for translation ...

Following an audit Broker A SRL was ordered to submit corrective statements on the corporate income tax for the tax years 2016 and 2017, and not to take over the tax loss from previous years, in the amount of RON 62,773,810 in 2016 and 2017. The tax authorities had found shortcomings in the comparability study drawn up by the company and replaced it with their own study. According to Broaker A SRL the transfer pricing adjustment was unlawful: the measure of reworking the comparability study has no legal basis and was not reasoned by the tax authorities; the findings of the tax inspection bodies are based on a serious error concerning the accounting recognition of A. BV’s income in its records; unlawfulness as regards the adjustment of income in respect of support services. ANAF has made serious errors of calculation by reference to its own reasoning in establishing the adjustments. unlawfulness of the tax decision in relation to the adjustment of expenditure on strategic management services. The findings of the tax inspection team lead directly and directly to double taxation at group level of this income, to which the following criticisms are made: the tax authorities erroneously adjusted income relating to strategic management services which were not the subject of the Support Services Contract between A. SRL and A. BV and which were not provided by the company; the imposition of the obligation to re-invoice A. BV for management services leads to double taxation at group level. Judgement of Supreme Court The Supreme Court found the appeal of Broker A SRL unfounded and upheld the assessment of the tax authorities. Click here for English translation Click here for other translation ...

Cadence Design System Srl received a sales commission of 29% under a written agreement dated 1999 with a related party in Ireland. However, in 2003 the commission rate was changed to only 20%. The change was communicated to Cadence Design System Srl by e-mail from the Irish company dated 6/08/2002. Following an audit, the tax authorities issued an assessment where the taxable income was calculated on the basis of the commission rate originally agreed by the parties. A complaint was filed by Cadence and in 2010 the regional tax court (CTR) issued a decision where the commission rate was set to 22.38% for FY 2003 based on a transfer pricing study provided in the case. Not satisfied with the decision an appeal was filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal and upheld the decision of the regional tax court. Excerpts “The ruling in question, in fact, inferred the existence of greater revenues from the clause in the (written) commission agreement between the sister companies, under which the consideration due to the taxpayer by the Irish company was set at 29% of the revenues. In compliance with the evidentiary mechanism of Article 39(1)(d), the CTR, therefore, by an assessment of merit that cannot be reviewed by the court of legitimacy, ruled out that the factual elements relied on by the appellant to demonstrate the reduction of the commission from the amount originally provided for, were capable of eliminating the probative effectiveness of the relevant contractual clause.” “The appellant complains that the CTR applied the erroneous regula iuris according to which, in the absence of contrary proof on the part of the taxpayer, the taxpayer’s claim, assisted by a presumption iuris tantum of foundation, should be upheld. It points out that the appellate court: “should have ascertained whether documentation existed, i.e. positive proof of the office’s claim and, in the absence of any proof of the Treasury’s assumption, should have allowed the taxpayer’s appeal.” (See p. 94 of the appeal). He submits that, in so doing, the appellate court failed to notice that the percentage provided for in the contract had then been modified by the parties, as attested by the e-mail of 6/08/2002, addressed by the Irish sister company to the Italian taxpayer, which indicated the new commission percentage of 20%. According to the defence, the CTR, by disregarding this element of knowledge, also infringed Article 11 of the Vienna Convention, which recognises that a contract of sale between intra-group companies, belonging to different States, does not need to be in writing, ad substantiam or ad probationem, and indeed is not subject to any formal requirement. “The CTR, on the contrary, presumed the existence of greater revenues on the basis of the negotiation clause referred to several times above, and, subsequently (with a judgement on the merits, unquestionable in the court of legitimacy), did not find that the taxpayer had provided evidence of the reduction of the percentage of 29%, denying, inter alia, that the e-mail from the Irish company, addressed to the appellant, communicating the reduction of the commission percentage from 29% to 20%, was capable of: “invalidate the very different conclusion of the written contract” (see page 5 of the contested judgment).” “In the present case, it is clear that the judgment of appeal is not criticised for a motivational defect concerning a historical fact that is controversial and decisive for the judgement, but rather, in an inadmissible manner, for the relevance that it attributed to certain concrete elements of the case (starting with the written contract that provided for a commission percentage of 29%), to the detriment of others, deemed irrelevant (for example: the e-mail of 6/08/2002), in order to recognise and affirm the validity of the tax assessment.” Click here for English translation Click here for other translation ...

A transfer pricing dispute between South African Revenue Service and Sishen Iron Ore, a subsidiary of Kumba Iron Ore, has now been resolved in a settlement of ZAR 2.5bn. The case concerned disallowance of sales commissions paid to offshore sales and marketing subsidiaries in Amsterdam, Luxembourg and Hong Kong. Since 2012, Kumba Iron Ore’s international marketing has been integrated with the larger Anglo American group’s Singapore-based marketing hub. The settlement follows a similar investigations into the transfer pricing activities of Evraz Highveld Steel, which resulted in a R685 million tax claim against the now-bankrupt company related to apparent tax evasion using an Austrian shell company between 2007 and 2009 ...

In Reynolds Tobacco, the 2%-3% commission received was considered arm’s-length, even though competitors received 8% for providing similar services. The services provided by the French company were sufficiently different, and this justified the lower commission rate charged. Excerpt from the Judgement “...by virtue of a contract concluded between the two companies on 14 December 1976, Reynolds Tobacco France covers, on behalf of its parent company, the administrative costs entailed by its representation in France in return for a commission of 2 to 3% of the amount of sales; that by maintaining that companies with a similar or comparable activity are remunerated by a commission of the order of 8% without establishing that this rate remunerates services of the same nature, the administration does not provide proof of the transfer of profits that it alleges; that neither the fact that Reynolds Tobacco France considered renegotiating the terms of its contract with the German company, nor the fact that it considered increasing its capital to prevent losses from reaching three-quarters of its capital, are such as to make it possible to consider this proof as having been provided…” Click here for English translation Click here for other translation ...