A / S Norske Shell runs petroleum activities on the Norwegian continental shelf. By the judgment of the Court of Appeal in 2019, it had been decided that there was a basis for a discretionary tax assessment pursuant to section 13-1 of the Tax Act, based on the fact that costs for research and development in Norway should have been distributed among the other group members. According to section 13-1 third paragraph of the Norwegian Tax Act the Norwegian the arms length provisions must take into account OECD’s Transfer pricing guidelines. And according to the Court of Appeal the Petroleum Tax Appeals Board had correctly concluded – based on the fact – that this was a cost contribution arrangement. Hence the income determination then had to be in accordance with what follows from the OECD guidelines for such arrangements (TPG Chapter VIII). The question before the Supreme Court was whether this additional income assessment should also include the part of the costs charged to A/S Norske Shell’s license partners in recovery projects on the Norwegian continental shelf. The Supreme Court concluded that the tax assessment should not include R&D costs charged to A/S Norske Shell’s license partners on the Norwegian continental shelf. Click here for translation ...

The principal activity of Shell Services Asia Sdn Bhd in Malaysia is to provide services to related companies within the Shell Group. For FY 2011 – 2016 the company was part of a contractual arrangement for the sharing of services and resources within the Shell Group as provided in a Cost Contribution Arrangement. The tax authorities conducted a transfer pricing audit, and based on the findings, issued a tax assessment, where the Cost Contribution Arrangement had instead been characterised as an intra-group services arrangement. As a result the taxable income was adjusted upwards by imposing a markup on the total costs of the services provided for fiscal years 2012, 2014, 2015 and 2016. Consequently, the company had to pay the additional taxes in the amount of: RM 3,474,978.44; RM 2,559,754.38; RM 7,096,984.69; RM 2,537,458.50; RM 15,669,176.01. The company did not agree with the proposal and an appeal for leave was filed with the High Court related to statutory powers/legal jurisdiction of the authorities. Courts decision The appeal was dismissed. The judgement by the High Court only relates to proceedings and no views is expressed regarding the tax assessment. Excerpt “this judgement concerns solely DGIR’s decision on s 140A ITA which do not fall within the 3 Catagories. There may be decisions of DGIR under the ITA which fall within any one or more of the 3 Catagories and in such cases, leave of court should therefore be granted pursuant to O 53 r 3(1) RC for a judicial review of those decisions.” ...

In FY 2005 Shell Timur Sdn Bhd in Malaysia had sold its economic rights in trademarks to a group company, Shell Brands International AG. The sum (RM257,200,000.00) had not been included in the taxable income, but had – according to Shell – been treated as a capital receipt which is not taxable. The tax authorities conducted a transfer pricing audit beginning in June 2015 and which was finalized in 2018. Following the audit an assessment was issued where the gain had been added to the taxable income of Shell Timur Sdn Bhd. According to the tax authorities they were allowed to issue the assessment after the statutory 5-year time-bar in cases of fraud, wilful default or negligence of a taxpayer. An application for leave was filed by Shell. Courts decision The Court dismissed the application. Excerpt “I am, by the doctrine of stare decisis, bound by these pronouncements of the Court of Appeal and Federal Court. Hence, it is crystal clear that in matters concerning the raising of assessments of tax under section 91(1) or 91(3) of the ITA, challenges by the tax payer are best left to be dealt by the SCIT, unless of course if there are any exceptional circumstances. (27) In this case, I do not find exceptional circumstance that would warrant leave to be granted for judicial review. Which would then make this application an abuse of process. Wherefore, the I dismissed the application for leave.” ...

Svenske Shell AB imported crude oil from its UK sister company SIPC over a five-year period. Imports included the purchase and shipping of crude oil to the port of Gothenburg i Sweden from different parts of the world. The price of the oil was based on a framework agreement entered into between the parties, while the freight was calculated based on templates with no direct connection to the actual individual transport. The tax authorities considered that the pricing in both parts was incorrect and therefore partially refused deduction of the costs of oil imports. The assessment (and the later judgement of the Supreme Administrative Court) was based on the wording of the former Swedish “arm’s length” provision dating back to 1965. Decision of Court The Court did not consider that a price deviation has been sufficiently established where the applied price of only a single transaction deviates from the market price. Applying such a narrow view on price comparisons in general lacks support in the preparatory work, nor can it be justified in the light of the purpose of the legislation, which is to prevent unauthorized transfers of profits abroad. Where the controlled parties have continuous business transactions with each other, it is more aligned with the purpose of the legislation to focus on the more long-term effects of the bases and methods of pricing applied during the period under review. This means that “overprices” and “underprices” that have occurred within the same tax year should normally be offset against each other. According to the Court, it is therefore often necessary to make an overall assessment of the Swedish and foreign company’s business transactions with each other. The Court also concluded that it is sometimes possible to deviate from the principle of separate tax year’s when applying the arm’s length provisions. A pricing system that in a longer perspective is fully acceptable from an arm’s point of view can lead to overcharging in one year and undercharging in another year. It can also lead to costs in the form of premiums for a number of years leading to higher incomes or losses at a later stage. For a period of three years, Swedish Shell had applied one and the same business strategy with regard to its oil purchases. The strategy was considered justified for business reasons, which meant that the results during two of the tax years were taken into account in the assessment of the results in the third year. The price method used in the case was the market price method (CUP). This method was chosen as no material had been presented that could form the basis for using any of the other methods. The price test and choice of method had to be made in the light of the information available on the price conditions in the crude oil and freight markets. The Court stated that a market comparison presupposed that the contractual conditions and the market situation could be established. The sale of crude oil from SIPC to Svenska Shell had taken place on CIF terms (cost, insurance and freight) in the sense that SIPC had been responsible for shipping and insurance of the oil sold. It could have been worthwhile, the Court held, to base the arm’s length test on a comparison between that total price and the CIF prices which occurred in similar transactions on the market between independent parties. However, there was no investigation of such CIF prices and in fact it was the case that SIPC’s and Svenska Shell’s contractual relations in significant parts had no direct equivalent on the market during the relevant time period. Even though the sale of crude oil had taken place on CIF terms, the contractual relationship between Svenska Shell and SIPC had contained separate agreements on the pricing of crude oil and shipping. As a result of these agreements, prices of oil were more similar to FOB (free on board) prices and the prices of freight could be linked to standards that directly or indirectly reflected market prices. A separate price comparison of oil and shipping was therefore possible. According to the Court, there were also other reasons for making such a separate assessment of the prices, since the fundamental problems that arose during the arm’s length examination in the two areas differed in significant respects. Swedish Shell claimed that SIPC had the function of an independent trader and therefore took out a certain trading margin on crude oil sales. The Swedish Tax Agency claimed that SIPC was only a group-wide service body and therefore not entitled to any profit margin at all. However, the Swedish Tax Agency accepted a certain remuneration for the services provided by SIPC. The Court found that SIPC had borne certain risks in its purchasing and sales activities and that these risks were such that a certain trading profit was justified. To assess the trading margin when pricing crude oil, different types of list prices were used as a comparison. Some of these list prices contained a certain trading margin that amounted to different levels. The Court found that it was not possible to determine any general levels for the size of the trading margin based on the material. An acceptable margin therefore had to be estimated in the individual case. The Court did not find it clear that the trading margin taken by SIPC on crude oil exceeded the level that would have been agreed between independent parties. When it came to the pricing of crude oil, different price types were used based on price quotations in different markets. The Court assessed the extent to which the different price types could be used for purpose of pricing the controlled transaction. One of the price types used was the US list prices. These were average prices that the US tax authorities produced as comparative prices for one year at a time. The list consisted of a large number of sales worldwide. The Court found that these list prices were based on a ...