A Czech real estate company, AHI Oscar, had deducted the cost of intra-group services received from a related foreign service company. The price of the services had been calculated at a flat rate of 75% of the wages of the employees providing the support services, plus overhead costs. The tax authority found that the overhead costs included in the calculation did not correspond to the actual costs and excluded these costs from the calculation. According to the tax authority, it was irrelevant to consider the arm’s length principle under Section 23(7) of the ITA. AHI Oscar appealed to the Municipal Court, which upheld the tax authority’s assessment. AHI Oscar then appealed to the Supreme Administrative Court. Judgement of the Court. The Supreme Administrative Court overturned the decision of the Municipal Court. It was undisputed that AHI Oscar had actually incurred the declared costs and received the services from the related foreign service company. According to the court, the tax authority’s position on the taxpayer’s obligation to prove the actual basis of calculation is not supported by Section 24(1) of the ITA. However, this does not mean that the service charge should automatically be a fully deductible expense. Given the facts, it was therefore necessary to apply the transfer pricing rules under section 23(7) of the ITA, which the tax administrator did not do. As the case concerned 2012 and the 10-year general limitation period for tax assessment had expired, there would be no further assessment of the arm’s length amount from a transfer pricing perspective. Click here for English Translation Click here for other translation ...

Empresa Minera Los Quenuales S.A. had used the transactional net margin method to determine the arm’s length price for its controlled transactions consisting of sales of zinc concentrates to a related party, Glencore International AG, domiciled in Switzerland. The tax authorities disagreed with the choice of method and instead applied a CUP method, on the basis of which an assessment of additional taxable income was issued. Not satisfied with the assessment, Empresa Minera Los Quenuales S.A. appealed to the Tax Court. The Tax Court ruled mostly in favour of Empresa Minera Los Quenuales S.A. According to the Tax Court, the tax authorities had not taken into account various comparability factors in determining the arm’s length price of the zinc concentrate under the chosen method – such as weight, percentage of humidity, loss, ore grade, recovery factor, etc. The tax authorities then appealed. Judgment The Supreme Court overturned the Tax Court’s decision and decided in favour of the tax authorities. According to the Supreme Court, the tax authorities had analysed the relevant components of the zinc concentrate price and not only a single component consisting of the “international zinc quotation”, as the Tax Court erroneously stated. The Tax Court had also failed to analyse Article 32-A of the Income Tax Law, which states that in export transactions with a known quotation on the international market, or with prices that are fixed by reference to the quotations of the specified markets, the market value shall be determined on the basis of such quotations. Although the Tax Court assessed the evidence in the case, it did not rule on the merits of the case by determining the appropriate method for calculating market value under the transfer pricing rules. For these reasons, the judgment of the Tax Court was declared null and void. Click here for English Translation Click here for other translation ...

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.” ...

On 1 February 2010, E.K. and its subsidiary, E. S.A, concluded an agreement on the transfer of E.K.’s trade marks to E. S.A. Following the transfer (on the same day), E.K. concluded with E. S.A. an agreement to grant a licence for the use of the marks in return for payment to the licensor (E. S.A.) of a monthly remuneration. In 2011, E.K. recognised as a deductible expense the royalties paid to E. S.A. According to the tax authorities this resulted in E.K. understating its corporate income tax liability for 2011. According to the tax authorities, E. S.A. did not participate in any way in the creation of revenue, with the result that the profits generated by E.K. were ‘passed on’ in the form of royalties to a related company – E. S.A. The remuneration payable to the legal owner of the trademarks did not take into account the very limited functions performed by that entity in creating the value of the trademarks. The only function performed by E. S.A. in 2011 was to manage the legal protection of the trade marks, for which it would be entitled to a limited remuneration appropriate to its function. After receiving the resulting assessment of additional taxable income, a complaint was then filed by E.K. with the Director of the Tax Chamber which was later dismissed. An appeal was then filed by E.K. with the Administrative Court. Judgement of the Administrative Court. The Administrative Court set aside the Decision of the Tax Chamber and referred the case back to the Tax Chamber. Excerpts “… In the Court’s view, the faulty application of Article 11(1) and (4) of the u.p.d.o.p. affected the manner in which the applicant’s income was estimated and the estimation method adopted by the authorities, based on the erroneous assumption that the transaction analysed by the authorities consisted in the provision of trade mark administration services on behalf of the economic owner of those trade marks. In making that assumption, the authorities applied the net transaction margin method in order to determine the market level of the remuneration payable to the company for its trade mark administration functions. Meanwhile, the applicant provided the tax authority with the data that formed the basis for the calculation of the royalties, as well as the licence agreement. In view of the repetitive nature of such transactions on the market, the applicant used the comparable uncontrolled price method as the correct approach. The Court notes that the estimation of income by the methods indicated in Article 11(2) of the u.p.d.o.p. (comparable uncontrolled price method, reasonable margin method, selling price method) should be considered first, and only when it is not possible to apply these methods, the methods indicated in Article 11(3) of that Act (net transaction margin method, profit sharing method) will be applied. Furthermore, the applicant reasonably pointed out that in the comparability analysis the authorities should have taken into account the fact that intangible assets of significant value (trademarks) were involved in the examined transaction, being the only significant asset analysed by the parties to the examined transaction. As a result, the authorities incorrectly conducted the comparability analysis of the transaction involving the licence for the use of trademarks granted to the applicant by the limited partnership, which prejudges the validity of the allegation of a breach of Article 11(1)-(3) of the u.p.d.o.p. in conjunction with § 3, § 7, § 8, § 10 and § 11 of the MF Regulation. In the opinion of the Court, the basis for the decision in this case was not the provision of Article 11c(4) of the u.p.d.o.p. in the 2019 wording, hence the allegation of violation of this provision contained in the complaint does not merit consideration. In the opinion of the Court, the evidence gathered in the case allowed it to be resolved and, in this respect, the authorities did not fail to comply with Article 122 in conjunction with Article 187 § 1 of the Tax Ordinance. On the other hand, the allegation of a breach of Article 191 of the Tax Ordinance, consisting in the authorities’ faulty assessment of the market nature of the examined legal transactions, is justified. In the context of this allegation, however, it should be stipulated that the reclassification of a legal action by the authorities is not so much the result of a defective assessment of the evidence gathered, but results from the interpretation and manner of application of substantive law provisions adopted by the authorities (Article 11(1) and (4) of the u.p.d.o.p.). As aptly pointed out in the case law, in such a situation the state of facts was not so much established, but adopted by the tax authority. This is because the tax authority determines the factual state not on the basis of established circumstances, but reconstructs it, taking as a directional guideline the taxpayer’s intention to achieve the intended fiscal goal (unauthorised tax benefit). Thus, the state of facts adopted by the tax authorities does not so much result from the evidence gathered in the case, but from the assumption that if the taxpayer was guided only by economic and economic rationale and not by the intention to achieve an unauthorised tax benefit, it is precisely in the way the tax authority wants him to arrange his relations (judgment of the NSA of 8 May 2019, II FSK 2711/18). On the other hand, the consequence of the violation of substantive law is the legitimacy of the allegations of violation of Articles 120 and 121 § 1 of the Tax Ordinance by the authorities. On the other hand, due to the voluminous nature of the complaint, the Court referred to the allegations contained therein and their justification to the extent necessary to conduct a review of the appealed decisions (judgment of the Supreme Administrative Court of 26 May 2017, I FSK 1660/15). When re-examining the case, the authority will take into account the legal assessment presented above as to the interpretation and application, in the ...

Tiger Flex was a fully fledged footwear manufacturer that was later restructured as a contract manufacturer for the Gucci Group. It had acquired goodwill which was written off for tax purposes, resulting in zero taxable income. The tax authorities disallowed the depreciation deduction. It found that the acquired goodwill had benefited the group as a whole and not just Tiger Flex. Tiger Flex filed an appeal with the Regional Tax Commission. The Regional Tax Commission decided in favour of Tiger Flex. The tax authorities then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission in a different composition. Excerpt “It is not disputed that the Tiger and Bartoli factories were profitable assets, endowed with productive and earning capacity. What is disputed, however, is the recorded purchase value which, legally spread over the decade, anaesthetises any contributory capacity, resulting in repeatedly loss-making activities. Hence the various censures on the quantitative, qualitative and inherent deductibility of such costs.” (…) “In the present case, an asset in surplus and capable of producing income was transformed into a loss-making asset with the entry of a depreciation value capable of absorbing its profits; whence the repeated conduct of the loss-making activity legitimised the Office to recover taxation, disallowing a cost that it considered to be to the advantage of the group and not inherent (solely) to Tiger Flex, recalculating it in its amount, with reversal of the burden of proof to the taxpayer who was unable to give a different answer, re-proposing the payment value entered in the balance sheet. On the other hand, the board of appeal imposed the burden of proof of inherence and consistency on the Office, whereas it had long been held that the breach of the precept set forth in Article 2697 of the Civil Code It has long been held that a violation of the precept set forth in Article 2697 of the Italian Civil Code occurs when the judge has attributed the burden of proof to a party other than the one that was burdened by the application of said provision, whereas, where, following an incongruous assessment of the preliminary findings, he erroneously held that the party burdened had discharged such burden, since in this case there is an erroneous assessment of the outcome of the evidence, it can be reviewed in the court of legitimacy only for the defect referred to in Article. 360, no. 5, c.p.c. (Court of Cassation no. 17313 of 2020). And finally, with regard to the assessment of income taxes, the burden of proof of the assumptions of the deductible costs and charges competing in the determination of the business income, including their pertinence and their direct allocation to revenue-producing activities, both under the provisions of Presidential Decree No. 597 of 1973 and Presidential Decree No. 598 of 1973, and Presidential Decree No. 917 of 1986, lies with the taxpayer. Moreover, since the tax authorities’ powers of assessment include the assessment of the appropriateness of the costs and revenues shown in the financial statements and returns, with the denial of the deductibility of a part of a cost that is disproportionate to the revenues or to the object of the business, the burden of proof of the inherent nature of the costs, incumbent on the taxpayer, also relates to the appropriateness of the same (see Court of Cassation V, no. 4554/2010, followed, e plurimis, by no. 10269/2017). The judgment under examination did not comply with this principle, which, finally, in its last paragraph, performs a sort of “resistance test”, i.e. that even if the burden of proof is placed on the taxpayer, it remains undisputed that after a number of years commensurate with the economic effort made, the balance sheet profit was achieved. This is not the profile of the decision, since the Office disputes precisely that for many years there was repeated loss-making conduct, Tiger Flex having taken on burdens not (exclusively) its own, but for the benefit of the entire Gucci group, so that – if ritually distributed – they would have enabled correct profitable conduct, with the consequent discharge of tax burdens.” Click here for English Translation Click here for other translation ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) An appeal was then filed with the CAA of Paris, where in April 2022 the Court dismissed the appeal and upheld the decision of the court of first instance. Finally an appeal was filed with the Conseil d’État. Judgement of the Conseil d’État The Conseil d’État dismissed the appeal of ST Dupont and upheld the decision of the Court of Appeal. Excerpt “ 15. It is clear from the documents in the file submitted to the lower courts that, in order to assess whether the prices at which ST Dupont sold its finished products to its distribution subsidiary ST Dupont Marketing constituted a transfer of profits abroad, it compared them to the prices at which the same products were sold to the independent South Korean company SJ Duko Co and to a network of duty-free sellers in South-East Asia. It considered that this comparison revealed the existence of an advantage granted by ST Dupont to its subsidiary, which it reintegrated into the parent company’s profits. However, in its response to the taxpayer’s comments, this adjustment was reduced by a “reduction” in the arm’s length prices used by the tax authorities, which consisted of aligning the margin on transactions with duty free shops with the margin on sales to SJ Duko, and then, in accordance with the opinion issued by the departmental commission for direct taxes and turnover taxes, by a further reduction of 50% of the amounts reintegrated into the company’s results. 16. In the first place, the company criticised the method used by the tax authorities on the grounds that ST Dupont Marketing and the Korean company SJ Duko Co were not comparable, since the former operated as a wholesaler and retailer while the latter only operated as a wholesaler. In rejecting this criticism on the grounds, firstly, that SJ Duko’s wholesale activity had been supplemented by that of exclusive sales agent and retailer and, secondly, that the applicant had not provided any evidence making it possible to assess the nature and cost of the differences in functions between ST Dupont Marketing and SJ Duko Co, taking into account in particular the assets used and the risks borne, and consequently to assess the existence, if any, of differences such that they would render the comparison irrelevant if they could not be appropriately corrected, the Court did not err in law. Although the company also argued that the differences in the functions performed by ST Dupont and the duty free shops prevented the duty free shops from being considered comparable, this criticism is new in the appeal and is therefore inoperative. 17. Secondly, in order to dismiss the criticism of the administration’s method based on the failure to take account of the difference in the geographical markets in which ST Dupont Marketing and SJ Duko Co operated, respectively, the Court was able, without committing an error of law, by disregarding the rules governing the allocation of the burden of proof or distorting the documents in the file submitted to it, to rely on the fact that ST Dupont’s transfer pricing documentation itself specified that retail prices were set uniformly by continental zone. 18. Thirdly, the Court noted, in a sovereign assessment not vitiated by distortion, on the one hand, that it did not follow either from the tables attached to the rectification proposal, or from the method of determining the selling prices of finished products to the various Asian subsidiaries, that the prices charged by ST Dupont to its customers depended on the quantities sold and, secondly, that the document produced by ST Dupont showing an overall statistical correlation between volume sold and unit price, which did not guarantee that the products compared were homogeneous, did not make it possible to establish this either. In relying on these factors to dismiss the company’s criticism based on the difference in the volume of transactions with ST Dupont Marketing and SJ Duko Co respectively, the Court did not err in law. 19. Fourthly, although the company criticises the grounds of the judgment in which the Court rejected its argument that the alignment of the mark-up applied to sales to duty-free shops with that applied to sales to SJ Duko Co meant that only one term of comparison was used, it is clear from other statements in the judgment, not criticised by the appeal, that the court also based itself on the fact that the tax authorities had, as an alternative, in their response to the taxpayer’s observations, applied a 27% reduction to the prices granted to duty-free shops in order to take account of the fact that these were ...

V. sp. z o.o. was part of the E group, in which the parent company was E. S.A.. V.’s principal activity was wholesale of tobacco products. The authority issued an assessment based on finding of irregularities consisting in the company’s overstatement, in its VAT purchase registers and tax returns for the periods indicated, of the net purchase value and input VAT resulting from invoices issued to it by: 1) L. sp. z o.o. and I. sp. z o.o. for marketing services for e-cigarettes, 2) E. S. sp. z o.o. for data processing services, 3) E. S. sp. z o.o. concerning re-invoicing of purchases incurred by E. S. sp. z o.o.. The tax authorities did not find that V. sp. z o.o. was entitled to reduce output tax by the input tax shown on the disputed invoices issued to it by: L. sp. z o.o. and I. sp. z o.o., relating to marketing services, and E. sp. z o.o., relating to data processing services and a re-invoicing of part of the purchases incurred by that entity. An appeal was filed by V. sp. z o.o. with the Administrative Court. Judgement of the Administrative Court. The Court dismissed the appeal of V. sp. z o.o.. Excerpts “The evidence gathered confirms that the services documented by the disputed invoices were not performed for the benefit of the company V., and are not related to its taxable activities within the meaning of Article 86(1) of the VAT Act. As demonstrated by the authorities, in the period from 15 July 2016 to 19 August 2016, when the marketing activities resulting from the invoices issued by L. sp. z o.o., consisting in the testing and sale of, inter alia, Iiquids, were carried out, the V. Company did not have commercial goods that could be offered for sale or distributed in the form of samples. The company made its first purchase in September 2016 and its first sale in October of that year. The activities carried out by I. sp. z o.o. and L. sp. z o.o. (according to the KRS, carrying on the business of selling tobacco products) did not concern the goods traded by V. as well as the company itself, which was not made visible in the materials submitted. Thus, the scope of the applicant’s business activity resulted from the role envisaged for it within the E. Capital Group. , which was the supply of commercial goods to the companies – E. and L. , in the quantities indicated by these entities. No other customers were sought. The increase in sales of the company V. in the following years, i.e. 2017-2018, referred to by the party – was the result of increased sales to the above-mentioned companies, which was established on the basis of data submitted by the taxpayer, supplemented by information resulting from JPK files and VAT-7 declarations submitted by V. (table no. […] of the decision of the authority of first instance – […]). As the authorities inferred, the applicant did not sell and was not intended to sell commercial goods (liquids) to customers other than E. and L. . Contrary to the party’s assertion, the marketing services resulting from the invoices issued by E. and L. , were not justified by the acquisition of new markets for V. sp. z o.o. as the company functioned as an internal distributor of goods, to the abovementioned entities. Its transactions during the period under review consisted of the purchase of flavoured oils and their sale to E. and L. , while the contested purchases were related to the sale of the entire range of tobacco products (including traditional cigarettes, tobacco) to various distributors and retail customers, as V. admitted in its objections to the protocol of examination of the tax books and in its appeal. Such transactions were not and were not to be carried out by the taxpayer. Therefore, the authorities correctly concluded that the marketing services documented by the invoices issued by the above-mentioned entities were not provided to the applicant and did not relate to its taxable activities within the meaning of Article 86(1) of the VAT Act. Company V. was not the actual recipient of the services in question. The Court assesses as correct the findings of the authorities concerning the invoices documenting the purchase by V. sp. z o.o. of data processing services from E. sp. z o.o., which were issued in connection with the contract concluded by these entities on 20 June 2016. […] The valuation of these services was based on the costs incurred by E. in the period from January 2016, plus a 5% margin. An analysis of the provisions of the contract in question for the provision of data processing services, does not confirm that the subject of the services provided to the applicant were activities such as: searching for suppliers and buyers of goods, assistance in establishing and maintaining business contacts, preparing goods for sale, promoting goods on the market. The contract provided for the support of E. sp. z o.o. for the company V. – in the area of financial and administrative management, i.e. supervision of the area of financial issues; reporting of business results, support of decision-making processes; management of financial resources; supervision of internal control procedures and risk management; introduction of accounting documents as required by the computer system; printing of accounting documents, preparation and maintenance of accounts related to payments; preparation of reports: fiscal, statistical, financial and other administrative activities as required by the principal; – handling personnel and occupational safety documentation, i.e. setting up and maintaining personal files of employees; carrying out recruitment processes; settling all obligations towards the Social Insurance Institution (ZUS), tax offices and others required by law; cooperation with labour offices in the area of refunding salaries of juvenile employees; drawing up necessary certificates, reports, statements, payrolls, holiday plans, referrals for medical examinations, etc.; sending payroll transfers; archiving personal documentation of dismissed employees; others not mentioned above, but related to personnel and occupational safety services. The ...

LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media. Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base. The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly. Decision of the Regional Court The Regional Court ruled in favour of the tax authorities on the pricing issue. Excerpts “37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions, and if that difference is not satisfactorily substantiated, the taxpayer’s tax base is adjusted by the difference found. The concept of connected persons is defined in paragraph (b)(5) of the same provision as meaning that, for the purposes of this Act, connected persons are otherwise connected persons who have formed a legal relationship principally for the purpose of reducing the tax base or reducing a tax loss. 38. The applicant argued that a finding that the price obtained differs from the normal price is not sufficient to conclude that there are connected persons, otherwise the question of otherwise connected persons would be superfluous. At the same time, the applicant’s knowledge of that unreasonable increase must be established. He also argued that there was no profit on the part of the applicant, since he had actually spent the sums on advertising and the savings in the form of a reduced tax base were much smaller in relation to the costs incurred. 39. The Regional Court did not find any merit in this objection in its previous judgment. It has reached the same conclusion now. It did not consider it necessary to await the decision of the Extended Chamber in Case No 2 Afs 132/2020-56 of 22 December 2021 on the question whether ‘the finding of a significantly increased price of the subject-matter of the contract compared to the normal price without a satisfactory explanation of the difference is a sufficient condition for concluding that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss, or whether other facts in the conduct of the taxpayer indicating the unusual nature of the commercial transaction must be proved by the administration’. The reason for this is that the tax authorities based their conclusion that the parties were connected not only on the finding of an exorbitant price but also on other circumstances which suggest that the transaction was unusual. In its previous judgment, the Regional Court did not deal with them in detail, as it relied on the view, held by case law at the time, that the finding of an exorbitant price without a satisfactory reason was sufficient for the conclusion of connected persons within the meaning of Section 23(7)(b)(5) of the Income Tax Act (e.g. Supreme Administrative Court judgments of 13 June 2013, no. 7 Afs 47/2013-30, 28 January 2021, no. 3 Afs 393/2019-43 or 20 August 2021, no. 2 Afs 313/2019-43). The Court therefore found the applicant’s objection with regard to them irrelevant. In view of the question submitted to the Extended Chamber, its irrelevance is no longer apparent and the Regional Court will comment on them below, but there is no reason to wait for the decision of the Extended Chamber; even if it were to prevail that the definition of connected persons includes, in addition to the exorbitant price, the presence of such facts in the conduct of the tax entity as to indicate the unusual nature of the transaction, that could not have a favourable effect on the applicant’s procedural success in the case now under consideration. 40. In the case at hand, the tax authority raised doubts about the claimed costs, finding that the total costs incurred by the applicant’s suppliers PRESSTEX and PAMBROKE for advertising and promotional services for the year 2013 for the applicant amounted to CZK 56 104, while the applicant booked costs of CZK 6 000 000, representing 107 times the price paid by the suppliers PRESSTEX and PAMBROKE. The tax administrator’s doubts were also raised by other “non-standard circumstances” mentioned in the Tax Audit Report on pages 23-25, which are: – a change in the contractual terms, as the documents on the performance of the subject matter of the contract were delivered to the applicant after the end of the contractual relationship – discrepancies between the contract and the invoice and between the photographic documentation and the invoice (different size of the banner, failure to indicate advertising in the Golf Arena Ostrava, invoicing for advertising services even for months when no matches were played) – the applicant’s failure to comply with the payment terms – failure to verify the effectiveness of advertising costs – non-standardisation of the applicant’s suppliers PRESSTEX and PAMBROKE (non-contactability of PRESSTEX, virtual headquarters, cash withdrawals of large sums, company without a statutory body) – the failure to verify the price quotation, since the applicant accepted the price proposed by PRESSTEX without further investigation of the more advantageous quotation, even though the applicant could have recognised the overestimation of the price because it has long been active in the sports and business environment. 41. On the basis of the foregoing, the tax administration found that there was a relationship between the applicant and PRESSTEX and PAMBROKE corresponding to Article 23(7)(b)(5) of the Income Tax Act, and the defendant agreed with its assessment (see paragraph 90 of the contested decision). 42. The ...

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed these amendments. A complaint filed by DFH with the regional court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court rejected DFH’s appeal and upheld the decision of the tax authorities. Excerpts “[34] On the basis of the foregoing, the Supreme Court of Justice, like the Regional Court, considers that the complainant’s tax loss for 2006, as a relevant fact in terms of the reopening of proceedings, was incurred, assessed and could be deducted from the tax base pursuant to Section 34(1) of the ITA only on 8 July 2013, when it was decided upon or determined by the aforementioned additional payment assessment for 2006. Therefore, the Supreme Administrative Court fully agrees with the Regional Court’s conclusion that it was only on that date that the corporate income tax loss for the tax year 2006, which the applicant claims to apply for the tax years 2010 and 2011 pursuant to Article 34(1) of the ITA, was determined (increased). The assessment of the tax loss for the year 2006 in 2013 cannot, therefore, be regarded as a new fact from the point of view of the reopening of the proceedings, which came to light after the assessment proceedings for the tax years 2010 and 2011 had been concluded and which already existed at the time of the tax administrator’s decision in those original assessment proceedings. Therefore, the condition for the authorisation of the reopening of proceedings under Section 117(1)(a) of the Tax Code, consisting in the existence of a new fact already existing at the time of the decision, which has newly come to light and was not known to the taxpayer or the tax administrator at the time of the decision, despite its existence, was not met in the case under consideration. Therefore, the complainant cannot claim, by way of a retrial, a reduction of the corporate income tax base for 2010 and 2011 by the tax loss assessed for 2006 in 2013. [35] The fact mentioned by the complainant that the tax loss for 2006 stems from the adjustment of transfer prices in the context of the tax audit for the years 2005-2007 does not change the above conclusion that the condition for the reopening of proceedings has not been met, since in the present case the decisive factor in terms of the reopening of proceedings for the tax years 2010 and 2011, which were closed by final payment assessments (assessment of the novelty of the facts), is when the tax loss for 2006 was assessed, not when the fact giving rise to the tax loss occurred. In the present case, it was the tax loss that could be deducted from the tax base in certain circumstances, not the overvalued transfer prices in 2006, that was the fact that could affect the amount of the complainant’s tax liability. [36] Given that the complainant became aware of the transfer price adjustment giving rise to the tax loss on 19 July 2013, it can be accepted that, without fault on the part of the complainant or the tax authorities, the tax loss for 2006 could not have been claimed earlier. However, the complainant’s knowledge of the transfer price adjustment does not alter the fact that the assessment of the tax loss for 2006 in 2013 cannot be regarded as a new fact for the purposes of the reopening of the proceedings, which came to light after the end of the assessment proceedings for the tax years 2010 and 2011. [37] As regards the complainant’s reference to the judgment of the Municipal Court in Prague of 19 August 2020, no. 10 A 30/2020 63, and the proceedings on the complainant’s cassation complaint against that judgment (terminated against the complainant by the judgment of the Supreme Administrative Court of 11 November 2022, no. 4 Afs 287/2020 49), the Supreme Administrative Court states that the case in question does not affect the assessment of the present case, which, in brief, concerns whether the assessment of the tax loss for 2006 on 8 July 2013 constitutes a new fact in terms of fulfilling the conditions for the renewal of the corporate income tax assessment proceedings for 2010 and 2011. [38] The arguments raised by the complainant in relation to the fact that it did not take the opportunity to challenge the tax authorities’ decisions of 13 September 2013, nos. 819339/13 and 819349/13, by which the tax authorities discontinued proceedings in respect of the supplementary tax returns for 2010 and 2011 submitted on 27 June 2013, in which the complainant claimed the tax loss for 2006 in instalments, are not relevant to the fulfilment of the conditions for the authorisation of the reopening of proceedings. The Supreme Administrative Court therefore did not consider it further. If the complainant argued that he had fulfilled the condition expressed in Section 117(2) of the Tax Code, i.e. that it was not possible to file additional tax returns for the years 2010 and 2011 due to the reasons for the reopening of the proceedings, this also does not change the above conclusion that in the case under consideration the condition for the authorisation of the reopening of the proceedings pursuant to Section 117(2) of the Tax Code was not fulfilled. (1)(a) of the Tax Code, consisting in the existence of a fact already existing at the time of the decision, which had newly come to light and which, despite its existence, was not known to the taxpayer or the tax administrator at the time of the decision. The complainant’s reference to the judgment of the Regional Court in Brno No 29 Af ...

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed the amendments. A complaint filed by DFH with the district court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Court rejected DFH’s arguments that the tax loss must be allowed under the Czech-German income tax treaty. DFH could not reduce its tax liabilities in the Czech Republic in 2010 and 2011 with the 2006 tax loss resulting from the German transfer pricing adjustment. The Court noted that the usual purpose of double taxation treaties is to regulate the place where income is taxed, but the actual rules for taxation or the deduction of expenses remain reserved to national law. In this case, the Double Taxation Convention could not be applied because there was no international aspect of taxation and the deduction of tax losses was a matter for national legislation. Excerpts “[38] In the present case, the complainant first invoked a motion for protection against the tax authority’s failure to act in relation to the activation of conciliation proceedings on 28 October 2019 in respect of the resolution of the case by way of an agreement under Article 25 of the Double Taxation Treaty. The Appellate Financial Directorate postponed this complaint on the grounds that the alleged inaction of the tax administrator (the Tax Office for the Pilsen Region) had been eliminated, as the tax administrator had submitted the case to the defendant 2) for resolution of the case by agreement under the said treaty. Subsequently, on 15 December 2019, the complainant submitted a request for removal of the inaction pursuant to Article 38 of the Tax Code, to which defendant 2 responded on 28 January 2020 by stating that it did not find the request for resolution of the case by agreement under the Arbitration Convention justified, since the tax administrator had issued additional payment assessments for the years 2005 and 2006, thereby accepting the adjustments made by the German tax administration and thus eliminating double taxation. The defendant also stated in its reply that the activation of the double taxation convention was not an option even for the tax years 2010 and 2011, since there would have been taxation in breach of that convention. On 7 February 2020, defendant 1 responded to this complaint by stating that it did not consider it justified, since the conciliation procedure under Article 25 of the Double Taxation Treaty and the measures under Section 39q(a) and (b) of the Income Tax Act did not constitute tax administration procedures and therefore could not be invoked as a defence against inaction; at the same time, defendant 1 also referred in this reply to the opinion of defendant 2.) [39] It is clear that defendant 2), which potentially had the competence to conduct conciliation proceedings under Article 25 of the Double Taxation Treaty (in conjunction with Article 9 thereof), acted in accordance with the above-quoted conclusions expressed in judgment No 5 Afs 468/2019-65 and informed the complainant of the reasons why conciliation proceedings could not be initiated. The reasons for its action (failure to adopt a measure pursuant to Section 39q of the Income Tax Act) were also communicated to the complainant by defendant 1). Those reasons were subsequently reviewed by the Municipal Court in the judgment under appeal in that it considered the possibility of submitting the matter to conciliation under the double taxation treaty or of adopting a measure under section 39q of the Income Tax Act. In so doing, it concluded that the issue raised by the applicant, for which it seeks an order requiring the defendant to adopt the measures repeatedly referred to, is not resolved by a double taxation treaty but is purely domestic in nature. For that reason, he did not consider that there was any merit in either the requirement to submit the matter by way of an agreement under a double taxation treaty or in the requirement to take measures in relation to a foreign country by defendant 1) under the Income Tax Act. …. “[41] The appeal is not well-founded for the reasons set out above and the Supreme Administrative Court therefore dismissed it pursuant to the second sentence of Article 110(1) of the Code of Civil Procedure.” Click here for English Translation Click here for other translation ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) Still not satisfied with the result, an appeal was filed by ST Dupont with the CAA of Paris. Judgement of the CAA The Court of appeal dismissed the appeal of ST Dupont and upheld the decision of the court of first instance. Excerpt “It follows from the above that the administration provides proof of the existence and amount of an advantage granted to ST Dupont Marketing that it was entitled to reintegrate into ST Dupont’s results, pursuant to the provisions of Article 57 of the General Tax Code, before drawing the consequences on the amount of the deficits declared by this company in terms of corporation tax, on the liability of the sums thus distributed to the withholding tax and on the integration in the base of the minimum contribution of professional tax and the contribution on the added value of companies. 29. It follows from all the foregoing that ST Dupont is not entitled to maintain that it was wrongly that, by the contested judgment, the Paris Administrative Court rejected the remainder of its claim. Its claims for the annulment of Article 4 of that judgment, for the discharge of the taxes remaining in dispute and for the restoration of its declared carry-over deficit in its entirety must therefore be rejected.” Click here for English translation Click here for other translation ...

The work on Action 14 of the BEPS Action Plan directly addresses the obstacle that domestic law time limits may present to effective mutual agreement procedures. Element 3.3 of the Action 14 minimum standard includes a recommendation that countries should include the second sentence of paragraph 2 of Article 25 in their tax treaties to ensure that domestic law time limits (1) do not prevent the implementation of competent authority mutual agreements and (2) do not thereby frustrate the objective of resolving cases of taxation not in accordance with the Convention ...

Where a bilateral treaty does not override domestic time limits for the purposes of the mutual agreement procedure, tax administrations should be ready to initiate discussions quickly upon the taxpayer’s request, well before the expiration of any time limits that would preclude the making of an adjustment. Furthermore, OECD member countries are encouraged to adopt domestic law that would allow the suspension of time limits on determining tax liability until the discussions have been concluded ...

Paragraph 2 of Article 25 of the OECD Model Tax Convention addresses the time limit issue by requiring that any agreement reached by the competent authorities pursuant to the mutual agreement procedure shall be implemented notwithstanding the time limits in the domestic law of the Contracting States. Paragraph 29 of the Commentary on Article 25 recognises that the last sentence of Article 25(2) unequivocally states the obligation to implement such agreements (and notes that impediments to implementation that exist at the time a tax treaty is entered into should generally be built into the terms of the agreement itself). Time limits therefore do not impede the making of corresponding adjustments where a bilateral treaty includes this provision. Some countries, however, may be unwilling or unable to override their domestic time limits in this way and have entered explicit reservations on this point. OECD member countries therefore are encouraged as far as possible to extend domestic time limits for purposes of making corresponding adjustments when mutual agreement procedures have been invoked ...

Time limits for finalising a taxpayer’s tax liability are necessary to provide certainty for taxpayers and tax administrations. In a transfer pricing case a country may under its domestic law be legally unable to make a corresponding adjustment if the time has expired for finalising the tax liability of the relevant associated enterprise. Thus, the existence of such time limits and the fact that they vary from country to country should be considered in order to minimise double taxation ...

Relief under paragraph 2 of Article 9 may be unavailable if the time limit provided by treaty or domestic law for making corresponding adjustments has expired. Paragraph 2 of Article 9 does not specify whether there should be a time limit after which corresponding adjustments should not be made. Some countries prefer an open-ended approach so that double taxation may be mitigated. Other countries consider the open-ended approach to be unreasonable for administrative purposes. Thus, relief may depend on whether the applicable treaty overrides domestic time limitations, establishes other time limits, or links the implementation of relief to the time limits prescribed by domestic law ...

In order to avoid double taxation, “Fashion Distributor A/S” had requested the Danish Tax Authorities, in parallel to the review of a transfer pricing assessment, to conduct a mutual agreement procedure under Article 6 of the EC Arbitration Convention 1990. The Danish Tax Authorities rejected the request on the grounds that it did not contain the minimum information required by paragraph 5(a) of the Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (EU Code of Conduct 2006). Judgement of the High Court The Court held that the reference in Article 7(1) of the EC Arbitration Convention to Article 6(1) had to be understood as referring only to the ‘timely presented case’ and did not imply that case was also ‘submitted’ within the meaning of Article 7(1). Furthermore, the Court found that the company’s complaint of double taxation undoubtedly appeared justified, and that the tax authorities rejection of the case was therefore unjustified. On that basis it was decided that the Danish Tax Authorities should initiate and pursue the mutual agreement procedure on the basis of the company’s request. Click here for English translation Click here for other translation ...

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 ...

This case deals with arm’s length pricing of various inter-company loans which had been granted – free of interest – by Cypriot company Ltd. to an affiliate group company. Following an audit of Cypriot company Ltd, an upwards adjustment of the taxable income was issued. The adjustment was based on a comparison of the terms of the controlled transaction and the terms prevailing in transactions between independent parties. The lack of interest on the funds provided (deposit of a remittance minus acceptance of a remittance) was not considered in accordance with the arm’s length principle. Cypriot company Ltd disagreed with the assessment and filed an appeal with the tax court. Judgement of the Tax Court The Tax Court dismissed the appeal of Cypriot company Ltd. in regards of the arm’s length pricing of the loans. Excerpt “It is evident from the above that the bond loan taken is related to the outstanding balance of the debt as at 31/12/2014 and is not an investment option. As the contracting companies are related entities, the above transaction falls within the scope of the verification of the arm’s length principle. As in the previous cases above, the independent party for the comparison of the terms of the transaction is understood to be domestic financial institutions. Therefore, the independent market interest rate for the calculation of interest is the interest rate of bank loans in euro for the interest rate category to non-financial companies “To non-financial companies – Long-term loans of regular maturity – Loans over EUR 1 million”, according to the methodology defined by the Bank of Greece. For the month of purchase of the bonds (December 2015), the applicable average market interest rate is approximately 4.86%, higher than the one specified in the contract (2%). It can therefore be seen that in the present case the principle of equal distance is not respected, since interest crediting the lender with a lower interest rate than the one applicable between independent parties is calculated. The accounting of interest on the funds granted at a lower rate of interest constitutes a derogation from the arm’s length principle. Therefore, the audit was right to calculate imputed credit interest in order to restore the arm’s length principle and in accordance with the provisions of Article 50 of the Law. 4174/2013. The applicant claims that it was not informed as to how to calculate the interest for the 2018 tax year in the note of findings, however, the reasoning and the numerical verifications are identical to the corresponding accounting differences of the previous years for which it received detailed information and therefore the allegations made as to the violation of the right to be heard in this matter lack any substantial basis. Since the applicant company also claims that the contested acts, which are unfavourable attributive acts, were adopted by the Tax Administration after the expiry of the exclusive period of one month from the submission of the observations and in breach of the provisions of Article 28 of Law No. 4174/2013 in conjunction with the provisions of Article 10 par. 5 of Law no. 2690/1999. However, this claim is rejected as unfounded as the right to control and issue tax acts is regulated exclusively by Article 36 of Law No. 4174/2013 and as it is clear from the evidence in the file, the stamp duty and income tax differences in question were charged by the issuance and notification of the contested acts within the prescribed limitation period (except for the contested stamp duty act for the tax year 2014, which was referred to above). Because the findings of the audit, as recorded in the 08/12/2020 partial audit reports of the income tax and stamp duty assessment of the C.E.M.E.P. auditor, on which the contested acts are based, are considered to be valid, acceptable and fully reasoned.” Click here for English translation Click here for other translation ...

An employee (tax manager) of Amdocs Inc did not cooperate with the Canada Revenue Agency during several audits of the company and did not inform his superior about the audits. The audits resulted in tax reassessments for FY 2012 – 2014. The reassessment concerning FY 2012 resulted in income tax payable by $3,353,906, but by the time the employee informed his superior of the reassessment in 2019, Amdocs was time barred from objecting by virtue of the limitation periods. With respect to the assessments for FY 2013 and 2014 the limitation period for objections had not yet elapsed. Amdocs Inc filed an appeal with the court in regards of the denied access to object on the assessment for FY 2012. Judgement of the Federal Court The court dismissed the appeal of Amdocs and decided in favor of the tax authorities. Excerpts “…I find the Minister’s decision is reasonable. The Minister’s decision is internally coherent and justified in relation to the relevant facts and law, and the Applicant has not identified any flaws in the Minister’s decision that are sufficiently central or significant. I therefore dismiss this application for judicial review.” ...

PJSC Vimpelcom-Communications submitted to the tax authority a revised notice of controlled transactions for 2017, under which contract numbers for 68 transactions were adjusted, including an agreement with a foreign counterparty Veon Wholensale Services B.V. (Netherlands) for the provision of agency-services (the “Controlled Transactions”), and information was also provided on another transaction with another foreign counterparty. Based on the revised notification, the Russian Tax Authorities issued a decision on 29 December 2020 to conduct an audit with respect to pricing of the Company’s Controlled Transactions for 2017. The Company held that the tax authority’s decision as unlawful. The Company insisted that the Russian Tax Authorities had missed the two-year deadline for issuing a decision on the appointment of an audit, and therefore lost its right to conduct a price audit in respect of the 2017-transactions in question. Judgement of the Arbitration Court The court dismissed the complaint and decided in favor of the tax authorities. The court concluded that the time limit for ordering tax control measures was suspended for 2 months and 25 days, and accordingly, the time limit for ordering an audit in respect of the Company’s Controlled Transactions was extended from 24.10.2020 to 31.12.2020. Click here for English translation ...

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. In December 2020 the High Court decided in favour of HMRC. GE Capital then filed an appeal with the Court of Appeal. Judgement of the Court of Appeal The Court of Appeal overturned the judgement of the High Court and ruled in favour of GE Capital ...

DIGITEX INFORMATICA S.L. had entered into a substantial service contract with an unrelated party in Latin America, Telefonica, according to which the DIGITEX group would provide certain services for Telefonica. The contract originally entered by DIGITEX INFORMATICA S.L. was later transferred to DIGITEX’s Latin American subsidiaries. But after the transfer, cost and amortizations related to the contract were still paid – and deducted for tax purposes – by DIGITEX in Spain. The tax authorities found that costs (amortizations, interest payments etc.) related to the Telefonica contract – after the contract had been transferred to the subsidiaries – should have been reinvoiced to the subsidiaries, and an assessment was issued to DIGITEX for FY 2010 and 2011 where these deductions had been disallowed. DIGITEX on its side argued that by not re-invoicing the costs to the subsidiaries the income received from the subsidiaries increased. According to the intercompany contract, DIGITEX would invoice related entities 1% of the turnover of its own customers for branding and 2% of the turnover of its own or referred customers for know-how. However, no invoicing could be made if the operating income of the subsidiaries did not exceed 2.5% of turnover, excluding the result obtained from operations carried out with local clients. Judgement of the Court The Audiencia Nacional dismissed the appeal of DIGITEX and decided in favour of the tax authorities. Excerpt “1.- The income derived from the local contracts for customer analysis and migration services corresponds to the appellant Group entities and designated as PSACs, i.e. to the same affiliates. Therefore, the taxpayer should have re-invoiced the costs of the project to these subsidiaries, according to the revenue generated in each of them. And this by application of the principle of correlation between income and expenditure set out in RD 1514/2007. The plaintiff should not be surprised by this consideration insofar as this was done, at least partially, in the financial year 2010, in which it already re-invoiced EUR 339 978.55. Consequently, it cannot be said that the defendant administration went against its own actions when it took the view that the plaintiff in 2009 should have recorded in its accounts an intangible asset of EUR 50 million, in view of what happened later, in 2010, when the contracts with the subsidiaries were concluded and the PSACs became PSACs. Therefore, it was the plaintiff itself that went against its own actions, acting differently between 2010 and 2011 when it came to allocating the costs derived from the intangible amortisation and the financial expenses of the loan contracted. 2.- Even if we were to admit that the services provided by the plaintiff have added value by incorporating both a trademark licence and know-how, this does not mean that such re-invoicing does not have to be carried out, when, as has been said, in 2009 DIGITEX INFORMATICA S.L was acting as PSAC under the mediation contract, but as a result of the new contracts entered into with the Latin American subsidiaries in 2010, this position as PSAC was assumed by the said subsidiaries present in the seven Latin American countries. As regards the method of determining the profit, it is appropriate to refer to the operating margin expressly contained in the contracts concluded by the plaintiff with the subsidiaries and not to the general margin determined by the plaintiff in accordance with folio 32 et seq. of the application (according to the final result of the profit and loss account), despite the reports provided by the appellant. And so it is that the latter cannot contradict itself by going against its own acts to the point of altering the literal nature of the contracts, even if it indicates that the will of the parties in the other to the contrary, in accordance with the provisions of Article 1281 of the CC.” Click here for English Translation Click here for other translation ...

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided – in accordance with the 2020 judgment of the Federal Administrative Court – in favor of the tax authorities and the appeal of C. SA and A was dismissed. Click here for English translation Click here for other translation ...

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. The High Court ruled that HMRC could pursue the claim against GE in July 2020. Judgement of the High Court The High Court ruled in favour of the tax authorities ...

In this case, A. S.A. had granted interest free loans to an affiliate company – Poiana Ciucas S.A. The tax authorities issued an assessment of non-realised income from loans granted. The tax authorities established that the average interest rates charged for comparable loans granted by credit institutions in Romania ranged from 5.45% to 19.39%. The court of first instance decided in favor of the tax authorities. An appeal against this decision was lodged by S S.A. According to S S.A. “The legal act concluded between the two companies should have been regarded as a contribution to the share capital of Poiana Ciucaș S.A. However, even if it were considered that a genuine loan contract (with 0% interest) had been concluded, it cannot be held that the company lacked the capacity to conclude such an act, since, even if the purpose of any company is to make a profit, the interdependence of economic operations requires a distinction to be made between the immediate purpose and the intermediate purpose of a commercial activity, both of which are the cause of any legal act. Since company A. S.A. is the majority shareholder in Poiana Ciucaș S.A., the grant of a sum of money to the latter, at a time when it was unable to secure financing, is intended to safeguard the economic activity and, implicitly, to obtain subsequent benefits for the company.” “The essential legal issue in this case is that for the period prior to 14 May 2010 (when the tax legislation changed) there was no legal basis for reconsidering the records of the Romanian related persons. Art. 11 para. (1) sentence 1 of the Tax Code cannot be considered as applicable in this case, as it refers to the right of the tax authority to disregard a fictitious/unrealistic transaction, which is not the case of the operation analysed during the tax inspection, which took place between companies A. and Poiana Ciucaș. Thus, the second sentence of Art. 11 para. (1) of the Tax Code, relating to the reclassification of the form of a transaction, becomes fully applicable to the factual situation at issue, as the tax authority considered the transaction between the two companies to be a genuine loan and not a contribution to the share capital.” Judgement of Supreme Court The Court set aside the appealed judgment, and refer the case back to the court of first instance. Excerpts “Consequently, the High Court finds that the objection of limitation of the authority’s right to determine tax liabilities for 2008 is well founded, since the decision of the court of first instance rejecting that objection was handed down with the incorrect application of the relevant provisions of substantive law, a ground for annulment provided for in Article 488(2) of the EC Treaty. (At the same time, from an analysis of the documents in the case-file, it is not possible to determine the amount of the sums withheld from the applicant company by the contested acts, representing corporation tax for 2008, interest and late payment penalties relating to that tax liability for the year in question, so that the Court of Appeal cannot determine with certainty the amount of those sums.” “As regards the appellant’s criticisms concerning the contract between it and Poiana Ciucaș S.A., the judgment under appeal reflects the correct interpretation and application of the provisions of Articles 11 and 19(1)(b) of the Civil Service Code. (5) of Law No 571/2003 on the Fiscal Code, as in force at the relevant time, the provisions of Article 1266 of the Civil Code, Article 1 of Law No 31/1990 and point 1.65 of the OECD Transfer Pricing Guidelines. Thus, in analysing the applicant’s claims concerning the classification of the contract concluded between A. S.A. and Poiana Ciucaș S.A. as representing a contribution to the share capital, the Court of First Instance correctly held that those claims were unfounded, having regard to the provisions of Articles 1266 and 1267 of the Civil Code and the content of the contractual clauses contained in the contract in question. From an interpretation of the extrinsic and intrinsic elements of the contract, it cannot be held that the legal act between the contracting parties which occurred approximately eight years after the conclusion of the contract and the making available of the initial funds constitutes an element indicating that those funds represent a contribution to the share capital and that that was the original and real intention of the parties. In accordance with the view expressed by the judge hearing the case, it is held that the obligation to repay the sum granted by way of a loan was extinguished between the contracting parties by a new expression of will which took place between 2015 and 2016 and which cannot have retroactive effect from the date of conclusion of the contract (1 January 2007). That conclusion of the Court of First Instance, with which the Court of First Instance agrees, is not the result of a strictly grammatical analysis of the contractual clauses stipulated by the two parties, but is based on an analysis of the legal act which subsequently arose between the parties, taking into account the entire factual context in which it was concluded, in relation to the clauses of the loan agreement, the content of which was examined in a relevant manner by the court, holding that those clauses cannot be interpreted in the sense asserted by the applicant as regards the nature of the contract. A further argument in support of the above conclusion also derives from the manner in which the contractual terms were performed, the subsequent conduct of the lender, which did not receive any repayment of the sum paid and did not charge any interest, being relevant in that regard. The Court of First Instance examined the lender’s conduct both in the light of the defining features of the loan agreement and in the light of the terms of the contract at issue, finding that that conduct fully complied with the ...

In February 2019, Colegio de Abogados de La Libertad (CALL) in Peru filed an appeal before the Constitutional Court claiming that tax debts of at least 9 billion soles (USD 2,5 billions) owed by 158 large companies could not be collected by the tax authorities (SUNAT) due to the statute of limitation in Legislative Decree 1421. By four votes against and one vote for, the Constitutional Court rejected the claim. Language/Year202220172010200919951979 English French German Spanish Chinese Turkish Czech Italien Hungarian Ukranian Slovenian Serbian Click here for English Translation ...

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided in favor of the tax authorities. “The above elements relied on by the appellants in no way provide proof that the appellant carried out the said transactions on behalf of the other companies in the [G]B group. Moreover, they do not in themselves allow the conclusion that the appellant acted through the other companies in its group, as the appellants maintain. Insofar as, as has been seen (see recital 5.1 above), the contract for the sale of *** was concluded and the relevant invoices issued in the name of the appellant, which is moreover designated as the seller in the sales contract (see heading and point 9. 2(a) of that contract), and that the other companies in the group are never mentioned in the context of the transactions at issue, it is much more appropriate to hold that they were carried out, admittedly for the benefit of the appellant, but through the appellant acting in its name and on its behalf. Therefore, by renouncing the resulting proceeds to the appellant, the appellant did indeed make concealed distributions of profits, i.e. appreciable cash benefits subject to withholding tax” “In these circumstances and insofar as the proceeds from the sale of *** were paid directly by [C. SA.] O. to the companies [H Ltd and J Ltd.] Y. and X.     – which must undoubtedly be regarded as persons closely related to the appellant within the meaning of the case-law (cf. recital 3.2.1 above) -, without any equivalent consideration in favour of the appellant, and that part of those proceeds was reallocated to the supply of *** (cf. d above), the lower authority was right to find that there was a taxable supply of money (see recitals 3.2.1 and 3.2.2 above) and to calculate this on the basis of an estimate of the profit resulting from the purchase and resale of *** (see decision under point 4.3, pp. 10 et seq.)” “In the absence of any document attesting to an assignment to the appellant of the claims arising from the purchase contract with [L] M. and the supply agreements of November 2004 with [M] O.     In addition, there is no reason to consider that the allocation of the profit resulting from the purchase and resale of *** to the companies of the group based abroad constitutes the remuneration granted to the latter for the takeover of the two contracts (purchase and sale), nor is there any justification for deducting the value of those contracts from the amount retained by the lower authority. The appellant’s submissions to this effect (see the memorandum of 12 May 2015, pp. 22 et seq. [under para. 6]) must therefore be rejected. Accordingly, the court of appeal refrains from carrying out the expert assessment requested by the appellant in order to estimate that value (see the memorandum of 12 May 2015, p. 25 [under section V]; see also section 2.2.1 above).” “… it should be noted that, in view of the foregoing and the size of the amounts waived by the appellant, the taxable cash benefit was easily recognisable as such by all the participants. Consequently, and insofar as the appellant did not declare or pay the relevant withholding tax spontaneously, the probable existence of tax evasion must be accepted, without it being necessary to determine whether or not it was committed intentionally (see recitals 4.1 and 4.2 above). Accordingly, there can be no criticism of the lower authority’s application of the provisions of the DPA and, since a contribution was wrongly not collected, of Article 12 paras. 1 and 2 of that Act in particular.” “The contested decision must therefore also be confirmed in this respect. Finally, as the case file is complete, the facts sufficiently established and the court is convinced, the court may also dispense with further investigative measures (see section 2.2.1 above). It is therefore also appropriate to reject the appellant’s subsidiary claim that he should be required, by all legal means, to provide ...

The tax authorities had issued a TP adjustment for FY 2013 later than 18 month after initiating an audit of “O.P.A.P. PROVISION OF SERVICES S.A.” “O.P.A.P. PROVISION OF SERVICES S.A.” disagreed with legal basis for the assessment and filed an appeal. Judgement of the Supreme Court The Supreme Court allowed the appeal of “O.P.A.P. PROVISION OF SERVICES S.A.” and dismissed the assessment issued by the tax authorities. Since, the tax authorities had not carried out and completed its own tax audit within 18 months, these cases were considered definitively closed and time-barred after the 18-month period has passed. In other words, for these cases, the limitation period of the State’s audit right is 18 months and not five years. According to the Supreme Court, a re-inspection could only be carried out after the 18-month period, but within the normal five-year limitation if serious offenses were found concerning money laundering from criminal activities or transactions with non-existent tax companies or issuing or receiving fake-fictitious tax data. Excerpts “Because Article 5 (paragraphs 2, 5 and 6) of the Tax Authority’s Administrative Order POL. 1159/2011 (as subsequently amended, as explained in paragraph 8) stipulates that the tax authority’s audits are carried out and completed within 18 months from the date of submission of the tax certificate to the database of the General Tax Administration, with the exception of the cases of prosecution of members of the Board of Directors, in accordance with the provisions on money laundering, the receipt or issue of false – fictitious data, transactions with non-existent tax companies and the proven detection of violations of Articles 39 and 39A of Law No. 2238/1994 (in these cases the audit could be carried out within the limitation period of the respective financial year). Consequently, Article 6 (paragraph 1(a)) of the same above-mentioned Decree provided that if within 18 months from the issuance of the unqualified tax compliance report no tax infringements are detected by the tax authority’s audits provided for in Article 5, the fiscal year in question is deemed to have expired and, in principle, no further audit is possible, except in the case of indications of the above-mentioned significant infringements referred to in paragraph 6 of Article 5 of the said Decree….” “an audit of the tax authority could be carried out (and should have been completed) by 31 March at the latest. 2015, (b) if such an audit was not carried out within 18 months of the submission of the above-mentioned certificate, the contested financial year was deemed to have lapsed, and there were no exceptional cases of an audit even after the lapse, within the limitation period, i.e. the detection of evidence or indications of infringements of Para. 6 of article 5 of the A.Y.O. POL. 1159/2011, (c) the provisions of article 65A of the law are not applicable in this case. 4174/2013, which does not impose a time limit (except for the limitation period) on the checks carried out, since, according to Article 72 par. 40(a) of the same law, as added by Article 50 para. 2 of Law No. 4223/2013 and in force (even) after its replacement by Article 56 par. 4 of Law No. 4410/2016, the provisions of Article 65A on the tax certificate are applicable for fiscal years from 1.1.2014, (d) the provision of a time limitation of the audits for the fiscal years up to 31.12.2013 by the provisions of Articles 5 (paragraphs 2 and 5) and 6 (paragraph 1, subparagraph a) of D.O. POL. 1159/2011 (which remained in force for these years even after article 65A), is not outside the legislative authority, as has been accepted in an opinion of the State Legal Council, which unlawfully refers to the contested decision of the Board, and (e) any non-application of the above-mentioned contested provisions of A.Y.O. POL. 1159/2011 in the present case would be contrary to the principles of legal certainty and legitimate expectations, as well as to article 9 (paras. 2 and 5) of Law No. 4174/2013. The above plea, as supplemented by the additional plea of 25.10.2019, must be upheld as well founded in law, in accordance with what has been held in paragraphs 14 and 15 above, and in substance, in view of the above factual allegations and the evidence submitted in support thereof by the applicant and not contested by the Administration. Accordingly, the appeal should be allowed, the examination of the other grounds of appeal being superfluous, and the decision 4580/4.9.2017 of the Head of the AADC’s D.E.D. should be annulled, dismissing the appeal filed by the applicant company on 7.4.2017 against the final act 1238156/346/6.3.2017 of corrective assessment of income tax for the financial year 2013 by the Head of the C.E.M.E.P., and the latter act. Any unduly paid tax (principal and/or additional) must be refunded to the applicant, with legal effect from the date of the lodging of the appeal (in which a request to that effect is made) or, in the event of subsequent payment, from the lodging of the appeal, and with interest at the rate applicable under Article 53 (paragraphs 2 and 4) of the Code of Fiscal Procedure. Finally, the interventions lodged must be upheld. Mr Ioannis Dimitrakopoulos, Judge Advocate General, dissented, arguing as follows: The above ground of appeal, as supplemented by the additional ground of appeal filed on 25.10.2019, which is based on the inapplicable provisions of paragraphs 2 and 5 of Article 5 and case (a) of paragraph 1 of Article 6 of D.O. POL. 1159/2011, must be rejected as unlawful, in accordance with the minority view expressed in paragraphs 14 and 15 above, in the light of which the Board of Appeal rightly rejected the abovementioned plea in the applicant’s appeal, irrespective of any specific grounds. Furthermore, on the basis of the same dissenting opinion, the interventions lodged must also be dismissed as unfounded.” Click here for English translation Click here for other translation ...

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.” ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation ...

During an audit for the FY 2010 “Doc Request SA” was requested to submit information and supporting documentation on expense accounts, acquisitions of goods and services, ISC commission accounts paid etc. after the ordinary one-year audit period established by Article 62º-A of the Tax Code had already expired. The taxpayer filed a complaint arguing that the exception to this one-year period provided for in paragraph 3 of Article 62º-A, referring to the audits carried out in regards of transfer pricing rules, was not applicable, given that the requested information and documentation did not related to transfer pricing. Decision of the Court The Court decided in favour of “Doc Request SA”. Excerpt “…the complainant was requested to submit information and supporting documentation on expense accounts, acquisitions of goods and services recorded in the Book, charges to the ISC commission accounts paid and unreported airline tickets flown, additions and deductions via affidavit, credits to expense accounts, charges to income accounts and bad debts…, in order to support their use in the company’s own operations and demonstrate that such expenses are proper and/or necessary to maintain the source generating taxable income (principle of causality), in accordance with article 37 of the Income Tax Law; among others; that is, the complainant has been asked for information and documentation that would not involve the application of the transfer pricing rules, taking into account that the Administration has not specified in that request whether the information and documentation requested is related to the application of the aforementioned rules. In this regard, in accordance with the aforementioned criterion, the exception regulated by numeral 3) of article 62º-A of the Tax Code is only applicable to the requirements requesting information and/or documentation related to the application of the transfer pricing rules, and not those referring to aspects that do not involve the application of said rules; Consequently, the Administration had a period of one year to request from the complainant information and/or documentation referring to aspects other than the application of the transfer pricing rules, and in this case, the notification of the requirement No. 0122170000434 was not made within the period established by law18. Consequently, considering that the information and/or documentation requested in Demand No. 0122170000434 is not related to the application of the transfer pricing rules, but to other aspects of the tax and period audited, and that said demand was notified to the complainant when the one-year term established by numeral 1 of article 62º-A of the Tax Code had already elapsed, the complaint filed should be declared well-founded, and the Administration should annul the aforementioned demand.” Click here for English Translation Click here for other translation ...

The Spanish Tax administration made an income adjustment of Citresa (a Spanish subsidiary of the Schweeps Group) Corporate Income Tax for FY 2003, 2004, 2005 and 2006, resulting in a tax liability of €38.6 millon. Citresa entered into a franchise agreement and a contract manufacturing agreement with Schweppes International Limited (a related party resident in the Netherlands). The transactions between the related parties were not found to be in accordance with the arm’s length principle. In the parent company, CITRESA, the taxable income declared for the years 2003 to 2005 was increased as a result of an adjustment of market prices relating to the supply of certain fruit and other components by Citresa to Schweppes International Limited. In the subsidiary, SCHWEPPES, S.A. (SSA), the taxable income declared for the years 2003 to 2006 was increased as a result of adjustment of market prices relating to the supply of concentrates and extracts by the entity Schweppes International Limited, resident in Holland, to SSA. The taxpayer had used the CUP method to verify the arm’s length nature of the transaction while the Spanish Tax administration – due to lack of comparable transactions – found it more appropriate to use the transactional net margin method (TNMM). Prior to 1 December 2006, the Spanish Corporate Income Tax Act (CIT) established three methods of pricing related transactions (the “Comparable Uncontrolled Price Method”, the “Cost Plus Method” and the “Resale Price Method”) and if none were applicable it established the application of the “Transactional Profit Split Method”. Thus, the “Transactional Net Margin Method” was not included at the time the market value of related transactions was established. However, as the Tax Treaty between Spain and the Netherlands was applicable, the Spanish Tax Authorities considered that the OECD Transfer Pricing Guidelines could be directly applicable. Consequently, as the “Transactional Net Margin Method” was envisaged in the above-mentioned Guidelines, the Spanish Tax Authorities understood that this method could be used as a valid pricing method. The case ended up in Court where Citresa argued that the assessment was in breach of EU rules on freedom of establishment and that the TNM method had been applied by the authorities without any legal basis in Spain for the years in question. Judgement of the Court In regards to the claimed violation of the principle of freedom of establishment cf. TFEU article 49, the Court stated: “….the mere purposes of argument, that there can be no doubt as to the conformity with European Union Law of the regime of related-party transactions in Spain, in the terms in which this infringement is proposed to us, which is what is strictly speaking being postulated in cassation for the first time, it being sufficient to support this assertion to record some elementary considerations, such as that the censure is projected indiscriminately on the whole of the law (that is to say, on the legal regime of related-party transactions), which is to say, on the legal regime of related-party transactions, on the legal regime of related-party transactions regulated by Article 16 of Law 43/1995, of 27 December 1995, on Corporate Income Tax, and then Article 16 of Royal Legislative Decree 4/2004, of 5 March 2004, which approves the revised text of the Law on Corporate Income Tax – TRLIS), while, at the same time and in open contradiction, it advocates the application of the precept to resolve the case, thus starting from its compliance with European Union Law.” In regards to application of the transactional net margin method, the Court stated: “…tax years cover the period from January 2003 to February 2006. Article 16.3 of Law 43/1995, in the wording applicable to the case, and the same provision of the TRLIS, in its original version, established the following: “In order to determine the normal market value, the tax authorities shall apply the following methods: Market price of the good or service in question or of others of similar characteristics, making, in this case, the necessary corrections to obtain equivalence, as well as to consider the particularities of the transaction. The following shall be applicable on a supplementary basis: The sale price of goods and services calculated by increasing the acquisition value or production cost of the goods and services by the margin normally obtained by the taxable person in comparable transactions entered into with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions entered into with independent persons or entities. Resale price of goods and services established by the purchaser, reduced by the margin normally obtained by the aforementioned purchaser in comparable transactions arranged with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions arranged with independent persons or entities, considering, where applicable, the costs incurred by the aforementioned purchaser in order to transform the aforementioned goods and services. Where none of the above methods are applicable, the price derived from the distribution of the joint result of the transaction in question shall be applied, taking into account the risks assumed, the assets involved and the functions performed by the related parties”. This hierarchical list exhausts the possible methods available to the administration for establishing the market value of the transactions to which it has been applied. It consists of four methods: one of them, which we can call direct or primary, that of the market price of the good or service in question (art. 16.3.a) LIS); two others that the law itself declares to be supplementary, that of the increase in acquisition value and that of the resale price (art. 16.3.b) of the legal text itself); and finally, as a residual or supplementary second degree method, that of the distribution of the joint result of the operation in question (art. 16.3.c) LIS). These obviously do not include the valuation method used by the tax inspectorate in this case, that of the net margin of all transactions, introduced ex novo by Law 36/2006, of 29 November, on measures for the ...

A tax assessments based on anti-avoidance doctrine “gjennomskjæring” were set aside. The case dealt with the benefits of a multi-currency cash pool arrangement. The court held that the decisive question was whether the allocation of the benefits was done at arm’s length. The court dismissed the argument that the benefits should accure to the parent company as only common control between the parties which should be disregarded. The other circumstances regarding the actual transaction should be recognized when pricing the transaction. In order to achieve an arm’s length price, the comparison must take into account all characteristics of the controlled transaction except the parties’ association with each other. While the case was before the Supreme Court, the Oil Tax Board made a new amendment decision, which also included a tax assessment for 2002. This amendment, which was based on the same anti-avoidance considerations, was on its own to the company’s advantage. Following the Supreme Court judgment, a new amended decision was made in 2009, which reversed the anti-avoidance decision for all three years. The Supreme Court concluded that in 2009 the tax authorities could also change the tax assessment for 2002, even though this tax assessment was not considered by the Supreme Court in 2008. The Court pointed out that the need for amendments pursuant to section 9-5 no. 2, litra a) of the Tax Assessment Act extends beyond the limits for the substantive legal force, cf, section 9-6 no. 5, litra e) of the Tax Assessment Act, and stated that if the tax authorities have solved a classification or allocation issue for a transaction in the same way for several income years, and there is a final and enforceable judgment for one of the years, the provision gives the tax authorities the right and obligation to also consider the tax assessments for the other years. In the specific case, the amendment for 2002 followed from the Supreme Court’s judgment for the two preceding income years, and the tax authorities then had the authority to consider the tax assessment for this year. Click here for translation ...

This case concerned the Danish company, Swiss Re, Copenhagen Holding ApS, which was wholly owned by the US company, ERC Life Reinsurance Corporation. In 1999 the group considered transferring the German subsidiary, ERC Frankona Reinsurance Holding GmbH, from the US parent company to the Danish company. The value of the German company was determined to be DKK 7.8 billion. The purchase price was to be settled by the Danish Company issuing shares with a market value of DKK 4.2 billion and debt with a market value of DKK 3.6 billion. On 27 May 1999, the parent company and the Danish company considered to structure the debt as a subordinated, zero-coupon note. Compensation for the loan would be structured as a built-in capital gain in order to defer recognition of the compensation for the period 1 July 1999 to 30 June 2000. The Danish company would be unable to use a deduction in income year 1999. A built-in capital gain should be recognized in 2000 where payment of the first instalment would be made. If the compensation were structured as interest payments, the compensation should be recognized on an accrual basis. On 17 June 1999, a bank provided the Danish Company with information about market terms for a zero-coupon loan. On 21 June 1999 the acquisition ofthe German company was approved with effect from 1 July 1999. On 14 September 1999. On 15 October 1999, the parties signed the loan agreement. The principal of the loan was fixed at DKK 4.9 billion corresponding to a market value of DKK 3.6 billion. The effective interest on the loan was 6.1 % per annum. The Capital loss associated with the first instalment on 30 June 2000 was DKK 222 million, which was claimed by the Danish company as a deduction in its tax return for 2000. The Supreme Court affirmed the opinion of the High Court that section 34(5) (Danish statutes of limitation for controlled transactions) covered all types of adjustments of controlled transactions. The income years 1999 and 2000 were thus not time barred. The Court further noted the following : “The Supreme Court notes that the provision in section 2(1) of the Tax Assessment Act under which prices and terms of controlled transactions must comply with the “arm’s length principle” for tax purposes, according to the legislative history covers all relations between the parties, e.g. provision of services, loan agreements, transfer of assets, transfer for use of intangibles etc. According to the provision the tax authorities are entitled to make adjustments of transactions between related parties where a transaction does not reflect what could have been obtained between unrelated parties. The authority to make an adjustment covers all economic elements and other terms of relevance for taxation purposes including, for example, due date, recognition of interest and capital losses and the legal qualification of the transaction. A loan agreement on zero-coupon terms concluded between related parties with retroactive effect may thus be adjusted by the tax authorities on the basis of section 2(1) of the Tax Assessment Act. The Supreme Court further concurs that there is no basis to conclude that a final and binding agreement between Swiss Re Copenhagen Holding ApS and the parent company on the terms of the loan had been concluded before the signing of the loan agreement on 15 October 1999. On this basis the Supreme Court upholds the decision.” The Supreme Court thus held that the loan agreement infringed on the arm’s length principle as laid down in section 2 of the Tax Assessment Act, and that the adjustment made by the tax authorities was warranted. Click here for translation ...