At issue was the existence of a basis for taking into account the deductibility of the costs of services, the costs related to the repurchase and destruction of products and the tax deductibility of royalty expenses charged between related parties. Judgment of the Court The Administrative Court concluded that “Buy/Sell Distributor” had failed to prove that the disputed services charged to it were actually supplied and necessary for it. As regards the costs relating to the redemption and destruction of the products, it held that “Buy/Sell Distributor” was not obliged to bear those costs in view of the functions it performed within the multinational company’s system and the risks it bore. The Court also held that there was no basis for treating the royalty payment as a tax deductible expense. Click here for English translation Click here for other translation ...

The tax authority found that the taxpayer had not provided credible documentation or evidence from which it could be indisputably established that the services were actually provided between related parties and, therefore, did not include the costs of those services as a tax deductible expense under Article 16 ZDDPO-2. Judgment of the Court The Administrative Court agreed with the reasons given by the tax authority of first instance for its decision, namely in the treatment of the costs of services charged between related parties. Excerpt in English “The Court considers that the contested decision is correct and in accordance with the law relied on. The Court also agrees with the grounds on which the decision is based by the tax authority at first instance and with the grounds on which the appeal is rejected by the defendant. The pleas in law and defences are identical in substance to those raised in the appeal, and the Court therefore refers to and does not repeat the grounds of the contested decision and the decision on appeal (Article 71 Causes of Justice). Pursuant to Article 11(3) of the ITA-1, unless otherwise provided by that law, the income and expenditure recognised for the purpose of determining profits shall be the income and expenditure recognised in the profit and loss account or in the annual report corresponding to the profit and loss account and showing the income, expenditure and result, on the basis of the law and in accordance with the accounting standards established by that law. For the purpose of determining profit, the expenditure necessary to obtain the revenue taxed under this Law shall be recognised. However, expenses which, in the light of the facts and circumstances, are not a direct condition for carrying on an activity and do not result from the carrying on of an activity are not such expenses (Art. 20 ZDDPO-1). Costs of services are recognised on the basis of documents proving that they are normally related to the economic benefits arising (SRS 14.10). In determining the taxable person’s expenditure, transfer prices with related parties for assets, including intangible assets, and services are taken into account, in accordance with Article 12(2) of the ITA-1, but not more than to the extent that the expenditure is determined by reference to comparable market prices. Under Article 20(1) of the Regulations, a related party service is deemed to have been provided if the unrelated party would have been willing to purchase the service from another unrelated party or if the unrelated party would have been willing to provide the service itself. The arm’s length principle is defined in Article 9 of the OECD Model Tax Convention on Income and Wealth, which is the basis for the bilateral tax treaties concluded. It is also the basis for the OECD Guidelines, from which the domestic transfer pricing regime is derived. The tax authorities are therefore also justified in assessing the tax deductibility of expenditure in the light of its consistency with the OECD Guidelines. In the light of the above, two questions arise in the analysis of transfer pricing for intra-group services. The first is whether the intra-group services were actually provided, and the second is what price for such intra-group services would be consistent for tax purposes with the arm’s length principle (point 7.7 of the OECD Guidelines). The tax authority’s request for documentation demonstrating that the services charged for were actually rendered to the applicant, and the nature and extent of those services, is justified by the provisions of the ITA-1 and the SRS and ITA-2. There is no dispute in the case that the applicant did not submit the requested documentation in the tax proceedings. It has only substantiated the amount of the cost mark-up charged, but has not demonstrated the volume and nature of the services allegedly provided to it by the group companies. The alleged compliance of the costs charged with the arm’s length principle is for that reason not demonstrated. The tax authority further substantiates the finding of inconsistency of the transfer prices by the fact that the applicant had no influence on the price of the services provided by the group, that the allocation key established for each type of service is inappropriate and that there is duplication of services. The applicant claims otherwise, that there is no duplication of services, but does not prove that fact in the absence of any evidence of services provided by related companies. The allegations concerning the services allegedly provided to the applicant by the individual companies in the group and the calculation of the average monthly costs, which are repeated by the applicant in its application, do not, for the reasons given by the appellate authority, also do not, in the Court’s view, prove that the services were actually provided. In the light of the above, since the pleas in law are unfounded and the Court of First Instance has not found any irregularities of which the Office is aware, the Court of First Instance dismisses the action as unfounded on the basis of Article 63(1) of the Causes of Action Act.” Click here for English translation Click here for other translation ...