The Irish tax authorities considered that the cost of employee share options (stock-based compensation) should have been included in the cost basis when determining the remuneration of “Service Ltd” for services provided to its US parent company and issued an assessment of additional taxable income for FY2015 – FY2018. Service Ltd lodged an appeal with the Tax Appeals Commission. Decision The Tax Appeals Commission ruled in favour of “Service Ltd” and overturned the tax authorities’ assessment. Excerpts “271.The Commissioner notes that the nature of the comparability analysis performed for purposes of applying the TNMM necessitates comparing “like with like”. Paragraph 1.6 of the OECD Guidelines refers to the comparability analysis as “an analysis of the controlled and uncontrolled transactions”. The Commissioner notes paragraph 1.36 of the OECD Guidelines provides that: “…in making these comparisons, material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length transactions.” 272.Paragraph 3.2 of the OECD Guidelines provides that that: “[a]s part of the process of selecting the most appropriate transfer pricing method (see paragraph 2.2) and applying it, the comparability analysis always aims at finding the most reliable comparables”. 273.Paragraph 3.4 of the OECD Guidelines describes the typical process that can be followed when performing a comparability analysis. It states that: “This process is considered an accepted good practice but it is not a compulsory one, and any other search process leading to the identification of reliable comparables may be acceptable as reliability of the outcome is more important than process (i.e. going through the process does not provide any guarantee that the outcome will be arm’s length, and not going through the process does not imply that the outcome will not be arm’s length).” 274.The Commissioner observes that step 8 in the process is the “Determination of and making comparability adjustments where appropriate”, with the OECD Guidelines setting out guidance around such adjustments in paragraphs 3.47-3.54. 275.The Commissioner notes the Respondent’s correspondence to the Appellant dated 30 September 2021, which under a heading “Consideration of Comparability Adjustment”, it states that: “The OECD guidance indicates that comparability adjustments may only be made if appropriate to the results of the comparables identified and does not refer to adjustments to the financial results of the tested party. As a result, it is not appropriate to adjust the financial results of [the Appellant] in its statutory financial statements for the purposes of comparing with the NCP results of the comparables which are obtained from their statutory financial statements.” 276.The Commissioner observes that the Appellant in subsequent correspondence asserts that an adjustment to the financial results of the Appellant as the tested party to exclude the SBAs expense from its cost base is reasonable and enhances the reliability of the comparability analysis. The Respondent in its correspondence dated 30 September 2021, refers to paragraphs 3.47, 3.50 and 3.51 of the OECD Guidelines.” (…) “349. Having carefully considered all of the evidence, inter alia the viva voce evidence of the witnesses, the expert evidence, the case law and legal submissions advanced by Senior Counsel for both parties, in addition to the written submissions of the parties including, both parties’ statement of case and outline of arguments, the Commissioner has taken her decision on the basis of clear and convincing evidence and submissions in this appeal. In summary and having regard to the issues in this appeal, the Commissioner is satisfied that the answer to the issues as set out above in this determination, under the heading “the issues”, is as follows: (i) Was the Appellant correct to exclude in the calculation of its costs of providing the intercompany services, the expenses identified in the statutory financial statements of the Appellant in respect of the SBAs granted by the parent company to employees of the Appellant – Yes; (ii) If the Appellant was incorrect to exclude in the calculation of its costs of providing the intercompany services, the expenses identified in the statutory financial statements of the Appellant in respect of the SBAs granted by the parent company to employees of the Appellant, what, if any, adjustment is required – Not relevant, having regard to (i); (iii) The interpretation of section 835C and 835D TCA 1997 – An adjustment to profit rather than consideration is required; (iv) With respect to FY15, whether the Respondent was precluded from raising an amended assessment having regard to sections 959AA and 959AC TCA 1997 – Yes. 350. As set out, the Commissioner is satisfied that the Appellant has shown on balance that it was correct to exclude in the calculation of its costs of providing the intercompany services, the expenses identified in the statutory financial statements of the Appellant in respect of the SBAs granted by the parent company to employees of the Appellant. Hence, the appeal is allowed.” ...

A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgement of the High Court The High Court set aside in part and upheld in part the decision of the Tribunal. The court set aside the decision of the Tribunal in regards of qualifying the service payments as royalty. The court found that the strategic and incentive fee received by Hyatt International was not a consideration for the use of or the right to use any process or for information of commercial or scientific experience. Instead, these fees were in consideration of the services as set out in SOSA. The fact that the extensive services rendered by Hyatt in terms of the agreement also included access to written knowledge, processes, and commercial information in furtherance of the services could not lead to the conclusion that the fee was royalty as defined under Article 12 of the DTAA. The court upheld the findings of the Tribunal that Hyatt had a permanent establishment in India. According to the court “It is apparent from the plain reading of the SOSA that the Assessee exercised control in respect of all activities at the Hotel, inter alia, by framing the policies to be followed by the Hotel in respect of each and every activity, and by further exercising apposite control to ensure that the said policies are duly implemented. The assessee’s affiliate (Hyatt India) was placed in control of the hotel’s day-to-day operations in terms of the HOSA. This further ensured that the policies and the diktats by the Assessee in regard to the operations of the Hotel were duly implemented without recourse to the Owner. As noted above, the assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied. There is also little doubt that the Assessee had carried out its business activities through the Hotel premises. Admittedly, the Assessee also performed an oversight function in respect of the Hotel. This function was also carried out, at least partially if not entirely, at the Hotel premises.” The Court also confirmed the direction of the Tribunal asking Hyatt to submit the working regarding apportionment of revenue, losses etc. on a financial year basis so that profit attributable to the PE can be determined judicially. According to the High Court profits attributable to a PE are required to be determined considering the permanent establishment as an independent taxable entity, and prima facie taxpayers would be liable to pay tax in India due to profits earned by the permanent establishment notwithstanding the losses suffered in the other jurisdictions. This matter was to be decided later by a larger bench of the Court ...

(i) Facts. The year 1 facts are the same as in Example 3. In year 2, FP and USSub enter into a separate services agreement that obligates FP to perform incremental marketing activities, not specified in the year 1 license, by advertising AA trademarked athletic gear in selected international sporting events, such as the Olympics and the soccer World Cup. FP’s corporate advertising department develops and coordinates these special promotions. The separate services agreement obligates USSub to pay an amount to FP for the benefit to USSub that may reasonably be anticipated as the result of FP’s incremental activities. The separate services agreement is not a qualified cost sharing arrangement under § 1.482-7T. FP begins to perform the incremental activities in year 2 pursuant to the separate services agreement. (ii) Whether an allocation is warranted with respect to the incremental marketing activities performed by FP under the separate services agreement would be evaluated under § 1.482-9. Under the circumstances, it is reasonable to anticipate that FP’s activities would increase the value of USSub’s license as well as the value of FP’s trademark. Accordingly, the incremental activities by FP may constitute in part a controlled services transaction for which USSub must compensate FP. The analysis of whether an allocation is warranted would include a comparison of the compensation provided for the services with the results obtained under a method pursuant to § 1.482-9, selected and applied in accordance with the best method rule of § 1.482-1(c). (iii) Whether an allocation is appropriate with respect to the royalty under the license agreement would be evaluated under §§ 1.482-1 through 1.482-3, this section, and §§ 1.482-5 and 1.482-6. The comparability analysis would include consideration of all relevant factors, such as the term and geographical exclusivity of USSub’s license, the nature of the intangible property subject to the license, and the marketing activities required to be undertaken by both FP and USSub pursuant to the license. This comparability analysis would take into account that the compensation for the incremental activities performed by FP was provided for in the separate services agreement, rather than embedded in the royalty paid for use of the AA trademark. For illustrations of application of the best method rule, see § 1.482-8, Example 10, Example 11, and Example 12 ...

(i) Facts. The year 1 facts are the same as in Example 3. In year 2, FP and USSub enter into a separate services agreement that obligates USSub to perform certain incremental marketing activities to promote AA trademark athletic gear in the United States, above and beyond the activities specified in the license agreement executed in year 1. In year 2, USSub begins to perform these incremental activities, pursuant to the separate services agreement with FP. (ii) Whether an allocation is warranted with respect to USSub’s incremental marketing activities covered by the separate services agreement would be evaluated under §§ 1.482-1 and 1.482-9, including a comparison of the compensation provided for the services with the results obtained under a method pursuant to § 1.482-9, selected and applied in accordance with the best method rule of § 1.482-1(c). (iii) Whether an allocation is warranted with respect to the royalty under the license agreement is determined under § 1.482-1, and this section through § 1.482-6. The comparability analysis would include consideration of all relevant factors, such as the term and geographical exclusivity of the license, the nature of the intangible property subject to the license, and the nature of the marketing activities required to be undertaken pursuant to the license. The comparability analysis would take into account that the compensation for the incremental activities by USSub is provided for in the separate services agreement, rather than embedded in the royalty paid for use of the AA trademark. For illustrations of application of the best method rule, see § 1.482-8 Examples 10, 11, and 12 ...

SARL Cosi Immobilier, is a wholly owned subsidiary of the Swiss company Compagnie de Services Immobiliers SA (Cosi SA). The group is engaged in sale of properties and real estate. Following a tax audit covering the FY 2011 and 2012, an assessment of additional corporate income tax was issued, together with penalties. According to the tax authorities service fees paid by SARL Cosi to its Swiss parent (50% of the the sales commission received) for online marketing of properties and real estates located in France had not been at arm’s length. The company requested the administrative court of Lyon to discharge the assessments, but this request was rejected by the court in a judgement issued 11 December 2018. This decision was then appealed by the company to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Appeal of Cosi Immobilier was rejected by the Court. Excerpts “In the present case, the company Cosi Immobilier concluded on 17 August 2010 a service agreement with the company Cosi SA in order, according to its preamble, to allow SARL Cosi Immobilier to promote in Switzerland its portfolio of properties located in France thanks to the development by Cosi SA of a quality internet platform, the use of qualified personnel and the provision of its network of prospects. Article 1 of this agreement stipulates that its purpose is to provide an IT platform for the purpose of putting the properties online, the promotion and marketing of the properties, as well as the acquisition and referral of clients. The exhaustive list of services that Cosi SA undertakes to provide, as set out in the appendix, includes IT, advertising, telephone, financial and banking, commercial, marketing and training services. As Cosi Immobilier acknowledges in its written submissions, the main purpose of the services thus provided for Cosi SA is to bring in new prospects in order to find buyers, consistent with the level of remuneration contractually provided for, corresponding, in accordance with the practices of the profession in the event of two agencies sharing the search mandate and the sales mandate, to 50% of the commission excluding tax received by the applicant company. However, this remuneration is due by the applicant company for each sale concluded before a notary, regardless of the origin of the purchaser.” “In order to qualify the remuneration paid on the occasion of certain transactions as an indirect transfer of profits, the administration first noted, without being contradicted on this point, that certain sales, listed exhaustively in appendices 1, 2 and 3 of the rectification proposal, gave rise to both the repayment to Cosi SA of 50% of the commission, and also to the payment to employees or partners of Cosi Immobilier of part of the commission contractually owed when the interested party provided both the sales mandate and the search mandate. The administration also noted that some sales had resulted in a sharing of the commission with third-party agencies. By merely producing a credit note from Cosi SA for commissions for 2012, which does not specify which sales it relates to, Cosi Immobilier does not usefully dispute that it received only zero or even negative remuneration on certain sales. It is not disputed either that other services contractually provided for by Cosi SA, such as telephone canvassing, were not carried out either. Finally, it is clear from the information transmitted by the Swiss tax authorities, which has not been contradicted either, that Cosi SA, which was dissolved in 2008, had only been in business for three months when Cosi Immobilier was created, and therefore could not have had a real network in Switzerland, that its turnover over the years in question consisted almost exclusively of commissions paid by its subsidiary, and that it only declared losses for these same years, that it does not have any premises in Switzerland, being domiciled at the accounting firm where its manager, who is also the manager of the subsidiary, works, that it only spent between 0.25 and 4% of its turnover on advertising and marketing during 2011 and 2012, and that its balance sheet does not show any computer equipment. The tax authorities have thus established the excessive nature of the remuneration accepted by Cosi Immobilier in relation to the reality of the services allegedly provided by Cosi SA, and consequently the reality of a practice falling within the provisions of Article 57 of the General Tax Code.” “The company Cosi Immobilier does not provide proof that the advantage thus granted is justified by favourable considerations for its own operations, merely relying on computer referencing tasks carried out on Cosi SA’s website, even supposing that they could not have been carried out by its own employees, whose agreement of 17 August 2010 provided for training in these tasks, a few e-mails between certain buyers and Cosi SA, or even mailing files, which in any case include a large number of messages from the independent service provider working with Cosi Immobilier, and not from employees of Cosi SA. The tax authorities also point out, without any useful contradiction, that the proportion of Cosi Immobilier’s clients established in Switzerland does not exceed 10%.” Click here for English translation Click here for other translation ...

A Swiss company provided administration and other services to trusts. According to the company a related party in the Seychelles handled the daily business and received remuneration in accordance with an intra-group service agreement. Due to the service fees paid the Swiss company reported losses. Following an audit the tax administration issued an assessment where the fees paid to the related company in the Seychelles had been determined using the cost plus (5%) method. Judgement of the Supreme Court The court dismissed the appeal of A. SA and upheld the assessment of the tax authorities. The Court confirmed that the Seychelles company only performed routine functions without assumption of any significant risk. The cost plus 5% remuneration was therefore confirmed. Excerpts “4.6. According to the OECD Committee on Fiscal Affairs, by referring to the conditions that would prevail between independent enterprises for comparable transactions (i.e. for “comparable open market transactions”) in making the profit adjustment, the arm’s length principle takes the approach of treating the members of a multinational group as separate entities. In doing so, the focus is on the nature of the transactions between the members of the multinational group and whether the terms and conditions of those controlled transactions differ from those that would be obtained for comparable transactions in the open market. This analysis is referred to as “comparability analysis” (OECD Guidelines 2010, § 1.6). The OECD Committee on Fiscal Affairs clarifies that the application of the arm’s length principle is generally based on a comparison of the terms of a transaction between associated enterprises and those of a transaction between independent enterprises. For such a comparison to be meaningful, the economic characteristics of the situations considered must be sufficiently comparable (OECD Guidelines 2010, § 1.33). Five characteristics or “comparability factors” may be important in assessing comparability: the characteristics of the goods or services transferred, the functions performed by the parties (taking into account the assets deployed and the risks assumed), the contractual terms, the economic circumstances of the parties, and the industrial and business strategies pursued by the parties (OECD Guidelines 2010, § 1.36). In the context of a benchmarking exercise, the examination of these five factors is inherently twofold, as it involves analysing the factors that affect the taxpayer’s controlled transactions and those that affect comparable transactions in the open market (OECD Guidelines 2010, § 1.38). In the absence of comparable transactions, the arm’s length price is determined by other methods, such as the cost plus method. This method consists in particular in determining the costs incurred by the company providing the service, to which an appropriate margin is added so as to obtain an appropriate profit taking into account the functions performed and the market conditions (judgment 2C_11/2018 of 10 December 2018, para. 7.4). ” “The appellant does not dispute that, with the exception of the 2011 business year, which showed an accounting profit of CHF 155,319, it made losses during the years 2008 to 2012 and declared zero taxable profits, taking into account the losses carried forward, for all tax periods. It also did not dispute that the customers had no contact with the subsidiary, which had only one customer, the parent company, that the parent company bore all the marketing and canvassing costs, as well as the entire salary of the director, that the contracts were concluded solely between the parent company and the customer, that the people working for the subsidiary were less qualified than those working for the parent company, that the staff of the subsidiary performed purely executory tasks ordered by the parent company, and finally that the risks with regard to the customer were borne by the parent company. The asymmetry between the appellant’s successive losses and the totality of its tasks and expenses, while the subsidiary provided only low-value-added services, was a sufficient indication that the price of the services provided by the subsidiary was disproportionate (see OECD Principles 2010, § 1.70). In these circumstances, the previous court could rightly consider that the burden of proof was reversed and that it was up to the appellant to show that the cost of the services in question was commercially justified. The claim that the rules on the allocation of the burden of proof had been violated was rejected. 6.2. The appellant complains in vain that the previous instance confirmed the application of the cost-plus method instead of the comparable market transaction method. It fails to see that the latter method, as explained above (see recital 4.6), requires a twofold examination, since it involves analysing the five comparability factors, including the functions performed by the parties (taking into account the assets used and the risks assumed), which have an impact both on the taxpayer’s controlled transactions and on comparable transactions on the open market. In the present case, the previous instance rightly found that the respondent authority had analysed the relationship between the appellant and the subsidiary, the content of the service contract of 6 February 2009, the functions performed by the appellant, in particular marketing and prospecting, and the allocation of commercial risks, whereas the appellant, wrongly arguing that the comparability analysis had been wrongly defined, in particular with regard to the company’s cost structure (see The appellant, wrongly arguing that the comparability analysis was incorrectly defined, in particular with regard to the company’s cost structure (cf. appeal memorandum, p. 5), confined itself to providing extracts from pages found on the internet setting out the prices charged by its competitors. However, it appears, as the previous court rightly held, that these documents do not make it possible to ascertain that the transactions in question are indeed free market transactions comparable to those carried out between the appellant and its subsidiary as described by the respondent authority. The appellant, who bears the burden of proof (see recital 6.1 above), has therefore failed to demonstrate that the prices charged by its subsidiary were commercially justified, having regard to comparable transactions on the free market. It follows that the previous ...

In 2004, a Management Services Agreement was concluded between Telecom Bulgaria (BTC EAD) and BTC Holding Limited, UK (the Operator), whereby the Operator was entrusted with supporting the overall management activities of the company, including the development and implementation of a general company performance policy, organisational structure, annual budgets, Strategic Plan and Business Plan. According to the contract it is agreed that for the services received Telecom Bulgaria shall pay to the operator a remuneration in the amount of 2.25% of the gross revenues. Furthermore, according to the agreement a fee of 1.25% would be paid by Telecom Bulgaria for technology – the provision or licensing of proprietary software and systems, material intellectual property rights, specialized technical research and consulting services, hardware and equipment, trade names and any other proprietary information will be provided by the Operator only pursuant to separate agreements. A Technical and Consultancy Services Contract between Telecom Bulgaria and BTC UK Limited (the contractor) was entered into on 11 June 2004 for the provision of these services. For the audited year 2010 expenses in connection with the above-mentioned contracts were recorded by Bulgaria Telecom in the total amount of BGN 21 596 152, 53. The tax authorities, using the transaction net profit method (TNMM), determined a maximum and minimum arm’s length price for the services under the contracts and on that basis they concluded that the services rendered under the contracts had not been determined at arm’s length. The taxabel income of Telecom Bulgaria for 2010 was increased by an amount of BGN 14 634 733, 31. Judgement of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities. Excerpts “In case the conclusion of the tax authorities regarding the adjustment of the financial result of the contracting company is accepted, without the corresponding adjustment of the result of the contracting company, it would lead to double taxation with corporate tax of the same amounts, once for the contractor of the services and a second time for the contracting company, i.e. to incomparability of the conditions under which both parties to the transactions are taxed with corporate tax, which is inadmissible. In the present case, the corresponding amount by which the financial result is adjusted on the ground of tax avoidance is already included in the financial result of the other party to the transaction and the corresponding tax thus confirmed to be payable by the recipient of the payments under the contracts does not lead to the conclusion of tax avoidance. By taking a different approach, the revenue authorities infringed the principle of legal certainty and the principle of the protection of legitimate expectations. In this sense is also the established practice of the Supreme Administrative Court with decisions rendered in: administrative case No 1846/2011, administrative case No 5629/2011, administrative case No 14708/2011, administrative case No 2996/2016 and administrative case No 3318/2018. It is also necessary to take into account the decision No. 5275/23.04.2018 rendered in administrative case No. 3318/2018 of the First Division of the Supreme Administrative Court in an identical case between the same parties, for the same services, under the same contracts, but rendered for the previous tax period 2007-2009, inclusive. By the above-mentioned final decision of the Supreme Administrative Court, Revision Act No. R-29-1300410-091-001 of 05.06.2015 of the revenue authorities at the Regional Directorate of the National Revenue Agency of the Republic of Bulgaria and Romania (R-29-1300410-091-001) was annulled. Sofia, confirmed by Decision No. 1314/24.08.2015 of the Director of the Directorate “ODOP”, Sofia. Sofia, in the part whereby additional corporate tax liabilities of “BTC “EAD for the period 2007 – 2009 in the total amount of BGN 6 297 549,30 and interest in the amount of BGN 3 772 918,88 were established. The Trial Chamber of the Supreme Administrative Court held that none of the three expert reports had been able to identify and analyse transactions having identical or similar services to the services performed for the benefit of the audited company. In the light of the foregoing, none of the transactions examined appears to be comparable to the transactions at issue and, therefore, the finding in the audit certificate that the agreed remuneration for the services contracted by BTC EAD was in excess of the market prices for that type of services is unjustified. The appellant’s main objection, relating to the alleged absence of a hypothesis under Article 16(1)(a) of Directive 89/104/EEC, is accepted. 1 of the Administrative Procedure Code in this case and the evidence collected in this respect – the audit reports and audit acts drawn up for Nef Telecom Bulgaria Ltd. after the audits of the company – contractor, under the CCC for 2007, 2008 and 2009, in which the acts issued by the revenue authority established that the financial result for the said periods was compiled in accordance with the requirements of the CCPO and no adjustments were made to the revenues realized by Nef Telecom Bulgaria Ltd. from the fees for the services under the two contracts concluded with BTC EAD.” Click here for English Translation Click here for other translation ...