FAST (PTY) LTD is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts) which is used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, FAST requires some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (FAST Zug). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). FAST (PTY) LTD and FAST Zug are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2009-2011 by an amount of R114 157 077. According to the revenue service the prices paid for the PGMs had not been at arm’s length. The revenue service set aside the CUP method and instead applied the TNMM method using ROTC as the Profit Level Indicator. The assessment was based on a detailed analysis of the total cost base incurred by FAST (PTY) LTD in acquiring the PGMs and other raw materials, including the manufacturing and distribution costs of the catalysts. The role played by FAST (PTY) LTD in purchasing and manufacturing the catalysts, the assets and the risks involved, which risks FAST had accounted for in its financial statement was also taken into account. FAST (PTY) LTD filed a complaint in which it held that the South African arm’s length provision in section 31(2) of the ITA only permitted tax authorities to adjust the consideration in respect of the transactions between it and the Swiss Entity to reflect an arm’s length price for the purchase and supply of PGMs. It also stated that even if it had been found that it had not paid an arm’s length price for the PGMs, which it denies, the tax authorities was only entitled to adjust the price/consideration paid for the PGMs as between applicant and the Swiss Entity, not the consideration between applicant and third parties. In this regard, the tax authorities’ adjustment of profits pursuant to its application of the TNMM was not a legitimate exercise of transfer pricing power authorized by section 31(2). As a consequence, the additional assessment is legally impermissible. The issue which FAST seeks separated therefore, is whether the conduct of tax authorities fell within the powers set out in section 31(2). FAST (PTY) LTD appeal was dismissed by the Tax Court. The judge referred to three recent international transfer pricing court cases (The Coca Cola Company (TCCC) and Subsidiaries v The Commissioner of Internal Revenue US, Canda v AgraCity Ltd and Denmark v ECCO A/S) and stated that these cases illustrated that regardless of what method has been used to determine the arm’s length consideration, ultimately, adjustments are made to profits of the taxpayer to ensure that tax is levied on the correct amount of taxable income. An appeal was then filed by FAST with the Court of Appeal. However both parties to the case filed complaints over admendments to the statements and subnition of evidence by the other party. Judgement of the Court This judgement concerns statements of the parties in regards of evidence before the Court of Appeal. The first question before the court is: has the Commissioner, by amending his rule 31 statement, novated the whole of the factual or legal basis that underlies his assessment? The court answered no to this question. “The Commissioner, as pointed out, has not abandoned the basis of his assessment. It remains his primary case. The amendment does not detract from this. The Commissioner is not “replacing an old obligation with a new one”,1 he is not novating. He is not changing the facts of the tested transaction. He is simply introducing a different comparator – companies that “specifically document” the use of precious metals in the manufacturing process – to test the transaction. In so doing, the Commissioner may be introducing new “facts” in that he is scrutinising the profits of companies that did not feature in his initial assessment, but that is not the same as changing the facts of the tested transaction. The facts of the tested transaction are the facts upon which he based his conclusion regarding its arms-length nature. He is not changing the facts as to how much FAST paid for the purchase of the XYZs from FAST Zug, or about how much profit FAST made. Those are fixed, both in his assessment and in his amended – as well as in his unamended – rule 31 statement. The amended rule 31 statement does not alter the assessment. [18] Furthermore, for the prohibition set out in sub-rule 31(3) to be applicable there must be “a novation of the whole factual or legal basis of the assessment”. Here he is not “novating the whole” of the facts of his assessment. [19] In these circumstances, the application to amend the rule 31 statement should be allowed.” The second question is: was the amendments made by FAST to its rule 32 statement prohibited? The court also answered no to this question. “A taxpayer is not faced with an absolute bar to raising a new ground. The taxpayer is only barred from raising a ground that is completely novel, one that was not at all raised in the objection filed in terms of rule 7. It is difficult to articulate the legal principle more precisely. The principle can only be clarified on the facts of each case. Such facts would be the only way of testing if the ground of appeal differs so radically from the ground of objection that it would fall foul of the prohibition. Some differences are minor and would therefore be allowed in terms of sub-rules 10(4) and 33(2), thus avoiding the prohibition contained in sub-rules 10(3) and 32(3) ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. An appeal was filed with the Administrative Court by Eli Lilly, but the Court dismissed the appeal and decided in favour of the tax authorities. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The appeal of Eli Lilly was again dismissed and the decision of the administrative court – and the assessment of additional VAT upheld. “The complainant’s objections were not capable of overturning the conclusion that the supply of marketing services and the supply of the distribution (sale) of medicines were provided to different entities and that, in the eyes of the average customer, they were not one indivisible supply.” Click here for English Translation Click here for other translation ...

R.B. NV had entered into a loan agreement with a group company in Switzerland. The interest rate on the loan had been determined by applying the method used by the credit agency, Standard & Poor’s. Moreover, it had been concluded that R.B. NV was a “moderately strategic entity”, and a one-notch correction was applied to the “stand-alone credit rating”. Following an audit, the tax administration concluded that the company had not applied the S&P method consistently and that the company’s credit rating should have been the same as that of the group as the company was a “core entity” in the group. On that basis, the interest rate were reduced. Judgement of the Court The court ruled predominantly in favour of the tax authorities. The court found several unjustified deviations in the way R.B. NV had applied the S&P method and on that basis several adjustments were made by the court. According to the court, R.B. NV was not a “core entity” in the group whose credit rating should be the same as that of the group (as held by the tax authorities), but rather a “highly strategic entity” whose credit rating should be one notch lower than that of the group. Click here for English Translation Click here for other translation ...

In 2001 “POEM B.V.” was incorporated in the Netherlands under Dutch law by its shareholder X, and has since then been registered in the Dutch trade register. In 2010 its administrative seat was moved to Malta where it was also registered as an ‘Oversea Company’. X was from the Netherlands but moved to Switzerland in 2010. In “POEM B.V.”‘s Maltese tax return for the year 2013, the entire income was registered as ‘Untaxed Account’ and no tax was paid in Malta. “POEM B.V.” distributed dividend to X in FY 2011-2014. Following an audit the Dutch tax authorities issued an assessment where corporate income tax and withholding tax over the dividend had been calculated. The assessment was based on Article 4 (4) of the Dutch-Maltese DTA under which “POEM B.V.” was deemed to be a resident of the Netherlands. Not satisfied with the assessment “POEM B.V.” filed an appeal arguing that it was a resident of Malta (or alternatively Switzerland) and that the Netherlands therefore has no taxing right over the profits or the dividends. Judgement of the Court The Court decided in favour of the tax authorities and upheld the assessment of taxable income in the Netherlands. Excerpts: “5.38. In view of the aforementioned facts and circumstances, taken together and weighed up, the Court sees no evidence to suggest that, in the years in question, core decisions were prepared in substance in Malta and that substantive discussions took place there, let alone to rule that the core decisions were taken there. The interested party has thus failed to rebut the presumption of proof. This leads to the conclusion that the actual management of interested party was exercised from the Netherlands. Interested party was therefore resident in the Netherlands for the purposes of the Netherlands-Malta Convention in the years in question. For that case, it is not in dispute between the parties – rightly so – that the treaty does not impede the Dutch right of taxation and that the tax assessments in question were rightly imposed to that extent.” “5.40. Pursuant to Article 4(1) of the Netherlands-Switzerland Convention 2010, the interested party was a resident of the Netherlands if, under the laws of the Netherlands, she was subject to tax there by reason of her residence, stay, place of management or any other similar circumstance. The second sentence of that provision makes it clear that a person who is subject to tax only in respect of income from sources in the Netherlands is not deemed to be a resident of the Netherlands. For the application of this residence provision, the Court has previously held that in order to be a resident of one of the countries, a person must be fully subject to the tax in that country (‘full tax liability’) (see Court of Appeal of The Hague 24 June 2020, ECLI:NL:GHDHA:2020:1044, r.o. 5.63-5.65). 5.41. By virtue of the residence fiction in Article 2(4) of the Vpb Act, the interested party was a resident of the Netherlands within the meaning of Article 4(1) of the Netherlands-Switzerland Treaty 2010. Having held above in 5.38 that the interested party was a resident of the Netherlands for the purposes of the Netherlands-Malta Convention, the full subjection of the interested party in the Netherlands under Article 4(1) of the Netherlands-Switzerland 2010 Convention is not limited by the application of that Convention.” “5.47. In the opinion of the Court of Appeal, in the face of the substantiated challenge by the Inspector, the interested party, which argued that it is actually managed in a country other than the country in which the formal management sits, has the burden of demonstrating facts and circumstances that justify the conclusion that its actual management is in Switzerland. The mere circumstance that its sole shareholder and co-director resides in Switzerland is insufficient for that purpose – also in view of his varying places of residence (cf. HR 2 July 2021, ECLI:NL:HR:2021:1044, BNB 2021/156). Since the interested party did not put forward anything else to substantiate its claim, the conclusion is that the interested party is a resident of the Netherlands for the purposes of the Netherlands-Switzerland Convention 2010. For that case, it is not in dispute between the parties – rightly so – that the treaty does not impede the Dutch right of taxation and that the tax assessments in question were also rightly imposed to that extent.” Click here for English translation Click here for other translation ...

“Fertilizer B.V.” is part of a Norwegian group that produces, sells and distributes fertiliser (products). “Fertilizer B.V.” is the parent company of a several subsidiaries, including the intermediate holding company [C] BV and the production company [D] BV. The case before the Dutch Supreme Court involves two points of dispute: (i) is a factually highly effective hedge sufficient for mandatory connected valuation of USD receivables and payables? (ii) is the transfer prices according to the supply and distribution agreements between [D] and a Swiss group company (AG) at arm’s length? (i) Factual hedge of receivables and payables “Fertilizer B.V.” had receivables, forward foreign exchange contracts and liabilities in USD at the end of 2012 and 2013. It values those receivables and payables at acquisition price or lower value in use. It recognised currency gains as soon as they were realised and currency losses as soon as a receivable was valued lower or a debt higher. The court has measured dollar debts and forward contracts coherently, but not dollar debts against dollar receivables from a Brazilian subsidiary arising from corporate financing. The Court of Appeal does not consider a highly effective currency hedge (actual correlation) in itself sufficient for coherent valuation; in its view, this also requires a business policy connection between opposite currency positions, such as an intent of hedging or a business relationship between receivable and debt. The Secretary of State believes that the reality principle means that in the case of an actual 100% correlation, debts and receivables in the same currency should be measured coherently. With all the disputed receivables and payables being denominated in USD, the currency hedge is very effective, so they should be measured coherently. A-G Wattel believes that the reality of a highly effective currency hedge is that no foreign exchange risk is incurred as long as and to the extent that the hedge exists and that, therefore, the reality principle to that extent compels coherent valuation, irrespective of whether the entrepreneur intended hedging and irrespective of the existence or non-existence of prudential link between receivable and debt in the same currency. This, in his view, is in line with the case law on coherent valuation he has reproduced. He considers the cassation appeal of the State Secretary in both cases well-founded. (ii) Transfer pricing [D] produces fertiliser products and sells them to affiliated sales organisations. Transfer prices are based on the Transfer Pricing Master File (TP Master File) that says fully fledged producers like [D] are rewarded according to the comparable uncontrolled price (CUP). In 2008, it was decided to invest €400m by [D] in a plant, which was commissioned in early September 2011, enabling [D] to produce 39% more urea and fertiliser products (the surplus) than before. On 14 September 2011, following the commissioning of the new plant, [D] and AG entered into a Supply Agreement and a Distribution Agreement. AG is “related” to the interested party and to [D] within the meaning of Section 8 Vpb. Those agreements provide that AG buys the surplus for cost plus 5%, for five years, with tacit renewal. On that basis, [D] invoices 39% of its production at cost plus 5% to AG every month and remits the rest of its profit on the surplus to AG. According to the Inspector, this results in a monthly improper profit shift from [D] in the Netherlands to AG in Switzerland. The court did not find it plausible that a fully fledged profitable producer like [D] would cede its existing and proven excess profit capacity – which was only improved by the new plant – on a large part of its production to a third party in the market. The party making that claim will have to provide a business explanation for the fact that the agreements leave only 5% margin to the group’s proven much more profitable ‘best performing’ entrepreneur which continued to perform all the functions it was performing before, except (on paper) 39% production risk control, and for the fact that [D]’s substantial residual profit was henceforth transferred by it on a monthly basis to an affiliated acquirer of 39% production risk, with no significance to [D]’s original 61% production and no significance to the core functions required for [D]’s 39% surplus production. According to A-G Wattel, the Court of Appeal thus did not divide the burden of proof unreasonably or contrary to due process. Those who make remarkable contentions contrary to their own previous and 61% still held positions and contrary to their own TP Master File will have to provide an explanation. ‘The Court’s judgment implies, in the absence of sufficient explanation by the interested party, substantially (i) that a company that is unmistakably the most complex entity cannot be changed into a routine margin producer by mere contracting for an arbitrary percentage (39%) of its capacity while at the same time remaining fully fledged entrepreneur for the identical 61% remaining production and for the 39% surplus also effectively keeping everything as it was, and (ii) that neither can a Swiss group company which is not introduced to [D]’s production (processes), logistics, distribution and administration, and which is thus unmistakably the least complex entity, be turned into the true entrepreneur that [D] is by a mere contract for the same arbitrary percentage (39%) and also remains for that 39%, the less so as that contract is incompatible with the group’s TP Master File. Since, according to the Court, an unaffiliated entrepreneur would never agree to such a contract and, therefore, such contracts, according to it, are not concluded between unaffiliated parties, arm’s-length terms are difficult to conceive: no arm’s-length terms can be conceived for a non-existent transaction, so the situation without the said agreements must be assumed. A-G Wattel considers these judgments correct insofar as they are legal, factual and not incomprehensible. He therefore does not find incomprehensible the Court of Appeal’s conclusion that, for tax purposes, the situation without the two agreements should be assumed, which are not thereby disregarded, but ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. At the same time, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income and later similar assessments were issued for the following years. An appeal was filed with the District Court by Eli Lilly which was dismissed by the Court. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of Eli Lilly – annulled the judgement of the District Court and set aside the assessment of the tax authorities. “The Supreme Administrative Court found no reason to depart from the conclusions of the judgment in Case No 3 Afs 54/2020, even on the basis of the defendant’s additional arguments. Indeed, the applicant can be fully accepted that it is at odds with the reasoning of the Supreme Administrative Court and puts forward arguments on issues which are rather irrelevant to the assessment of the case. First of all, the defendant does not dispute in any relevant way that the disputed supplies were provided to two different entities (the distribution of medicines to the complainant’s customers and the provision of marketing services to Eli Lilly Export), and that the ‘average customer’ cannot perceive those supplies as a single supply. This conclusion does not in any way undermine the defendant’s reiteration of the complainant’s assertion at the income tax audit that, for the purposes of assessing the correctness of the transfer pricing set between the complainant and Eli Lilly Export in terms of section 23(7) of the Income Tax Act, the marketing service should be regarded as an integral part of the distribution of the medicines and cannot be viewed in isolation when assessing profitability. In terms of transfer pricing, the economic interdependence of the two activities was assessed, which was essential only to determine whether the profitability of each activity should be compared separately with entities carrying out only the relevant activity. However, the aggregate assessment of these activities in terms of Section 23(7) of the Income Tax Act, which involves offsetting profits and losses from different types of business activities and comparing profitability with entities performing a similar role (i.e. performing both marketing and distribution), does not necessarily mean that there is a single transaction for VAT purposes. This issue is assessed separately in accordance with the aspects of the VAT Act and the VAT Directive respectively. [32] Nor can the defendant’s other arguments, which it repeats in support of the conclusion that the provision of marketing services constitutes a supply incidental to the domestic sale of medicines, be accepted. It does not follow from the judgment in Case 3 Afs 54/202073 that the concept of ‘third party consideration’ cannot exist. The Supreme Administrative Court has not denied that the total value of the consideration received from the final customer for the purposes of determining the tax base may, in general, also include payments from third parties (see, for example, paragraphs 62 et seq. of the judgment referred to above). However, in the context of the present case, in the case of the distribution of pharmaceuticals, the Court held that the consideration for marketing services could not be regarded as part of the value of the consideration, since those services were not provided to ‘customers’ who were merely recipients of marketing information. The consideration for those services was not then spent on behalf of or for the benefit of the customers. As regards the defendant’s reference to the judgment of the CJEU in Firma Z, the conclusions expressed there concern a different factual situation and legal issue. The substantive issue was the offsetting of a reduction in the taxable amount of one supply against the taxable amount of another supply, which is excluded under the common VAT system. However, as noted above, in the present case the complainant does not supply any other supply to its customers at the same time as the pharmaceuticals. Therefore, if the conclusion of the tax administration were accepted, it would have received a higher amount of VAT than the amount paid for the supply which was the only supply received by the customer from the complainant (the pharmaceuticals). The complainant’s final, potential or immediate customers cannot be the recipients of a marketing service at all (see above). [33] Nor can the defendant’s view that the method of pricing the marketing services shows an ‘unquestionable link’ between the marketing services and the sale of medicines be accepted. In that connection, the defendant points out that the pricing of marketing services is not based solely on the costs of marketing, but also on the costs of distributing the goods (medicines). It therefore concludes that it is a payment by a third party (Eli Lilly Export) on top of the price of the medicines which the complainant sells at regulated prices. This argument of the defendant cannot stand. As a general rule, it is a matter for the parties to negotiate the price or the method of calculating it. Furthermore, ...

This appeal and cross-appeal arise as a result of the response provided by the Tax Court of Canada to a question submitted under Rule 58 of the Tax Court of Canada Rules (General Procedure), SOR/90-688a. The question was: Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act (“ITA”) to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under section 12 of the Tax Court of Canada Act and section 171 of the ITA? This question arose in the context of the appeal commenced by Dow Chemical Canada ULC (Dow) in relation to the reassessment of its 2006 taxation year. The Tax Court (2020 TCC 139) provided the following answer to this question: The Court has determined that where the Minister has decided, pursuant to subsection 247(10) of the Income Tax Act (Canada) [the ITA], to deny a taxpayer’s request for a downward transfer pricing adjustment, that decision is not outside the exclusive original jurisdiction granted to the Court under section 12 of the Tax Court of Canada Act and section 171 of the ITA provided that the assessment resulting from that decision has been properly appealed to the Court… The Crown, in its appeal to this Court, is asking that the question as posed by the parties be answered in the affirmative. In its cross-appeal, Dow is seeking an amended response. In Dow’s view, the decision of the Minister of National Revenue (the Minister) under subsection 247(10) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the ITA) is within the exclusive jurisdiction of the Tax Court of Canada, regardless of whether an assessment has been issued. The Revenue Agency, in its appeal to the Federal Court of Appeal, is asking that the question as posed by the parties be answered in the affirmative – that the decision is outside the jurisdiction of the tax court. In its cross-appeal, Dow is seeking an amended response – that such a decision is within the exclusive jurisdiction of the Tax Court of Canada, regardless of whether an assessment has been issued. Judgement of the Federal Court of Appeal The Federal Court ruled in favour of the Revenue Agency and dismissed the cross appeal of Dow Chemicals. The court found  that the Tax Court could not reverse the revenue agency’s (Ministers) opinion that a requested downward adjustment is inappropriate. The jurisdiction accorded to the Tax Court is only to vacate or vary an assessment or refer it back to the Minister, whereas an opinion is not an assessment. The jurisdiction to judicially review an opinion was with the Federal Court ...

Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group. Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions. The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability analysis (aimed at identifying the net remuneration margin obtained by independent third parties in similar transactions), identifying only three comparables.. The tax authorities replied that the analysis carried out using the Transactional Net Margin income method, had revealed an average Return On Sales (R.O.S.) equal to 13.35 %, with the consequent ascertainment of the company’s higher profitability and the recovery for taxation of intra-group costs exceeding the normal value. The Provincial Tax Commission decided in favor of Burkert Contromatic Italiana s.p.a., noting that the choice of companies made by the tax authorities was completely different from that made by the company. In particular, they pointed out that the benchmark analysis carried out by the taxpayer, and attached to the appeal, had the objective of identifying independent companies operating in the national territory engaged in activities comparable to that of the taxpayer itself, i.e. commercial companies that purchased products from third-party suppliers and resold them on the national market to third-party customers; this comparison had indicated an average profitability of 4.85% compared to that ascertained by the Office of 10.26%. It also excluded that the Office had provided clear and irrefutable evidence of the methodology applied in the assessment. An appeal was lodged by the tax authorities, which complained of failure to state reasons or insufficient reasons on decisive facts and infringement of Article 110, paragraph 7, since the grounds of the judgment did not show the reasons in law justifying the acceptance of the appeal. The Regional Tax Commission rejected the appeal of the tax authorities. It held that there was no “omitted and/or grossly inadequate motivation on decisive and controversial facts” on the part of the judges at first instance and even less a violation of the provisions of Article 110, paragraph 7, of the TUIR. The tax authorities  then filed an appeal with the Supreme Court. In the appeal the tax authorities stated that it is a clear case of motivation by reference, since the regional tax court confines itself to using vague and general formulas, stating that the judgment of the provincial tax court is “clear” and “well-founded”, without giving any reason to understand why the objections raised by the tax authorities to the judgment at first instance were unfounded and why the reasoning provided by the judge at first instance was shared. Judgement of the Supreme Court The Supreme Court decided in favor of the tax authorities. It set aside the judgment under appeal and referred the case back to the court of first instance, with a different composition. Excerpts “Referring to the judgment appealed against, the C.T.R. [Commissione tributaria regionale] limited itself to stating that the first judges, ruling on the benchmark analysis, “for the purpose of identifying the companies comparable to the appellant and the relevant interquartile range of market value”, carried out by the Office on the basis of a comparison with three companies, had concluded that the Administration had not offered irrefutable evidence of the methodology applied in the assessment. It did not, however, adequately explain either the reasons why it intended to adhere to the decision of the Provincial Tax Commission and, therefore, the reasons why the method used by the Office could not be considered reliable, or why the method used by the taxpayer company should be preferred, and it failed to examine the specific observations made by the Tax Office, which had clearly and exhaustively set out the methodology actually applied and the results of the audit. In so doing, it failed to explain whether the assessment made by the tax authorities deviated from the criteria that must guide the analysis of intra-group transactions aimed at ascertaining whether the taxpayer company complied with the arm’s length price by comparing it with similar transactions carried out by independent third party companies. The taxpayer’s defence is therefore not adequately argued and the overall reading of the judgment, which also includes the factual premise and the arguments put forward by the parties at the various stages of the proceedings, does not bear witness to an independent assessment by the appeal court because it does not allow for an understanding of the assessment made with regard to the transfer pricing analysis carried out by the Office.” Click here for English translation Click here for other translation ...

ABC Ltd is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts). Catalysts are used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, applicant requires, inter alia, some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (“the Swiss Entity”). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). ABC Ltd and the Swiss Entity are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2011 by an amount of R114 157 077. According to the revenue service the prices paid for the PGMs had not been at arm’s length. The assessment set aside the CUP method and instead applied the TNMM method using ROTC as the Profit Level Indicator. The assessment was based on a detailed analysis of the total cost base incurred by ABC Ltd in acquiring the PGMs and other raw materials, including the manufacturing and distribution costs of the catalysts. The role played by ABC Ltd in purchasing and manufacturing the catalysts, the assets and the risks involved, which risks applicant had accounted for in its financial statement was also taken into account. ABC Ltd held that the South African arm’s length provision in section 31(2) of the ITA only permitted tax authorities to adjust the consideration in respect of the transactions between it and the Swiss Entity to reflect an arm’s length price for the purchase and supply of PGMs; in the event the ‘jurisdictional facts’ called for by section 31 were established as a matter of fact. It also stated that even if it had been found that it had not paid an arm’s length price for the PGMs, which it denies, the tax authorities was only entitled to adjust the price/consideration paid for the PGMs as between applicant and the Swiss Entity, not the consideration between applicant and third parties. In this regard, the tax authorities’ adjustment of ABC Ltd’s profits pursuant to its application of the TNMM was not a legitimate exercise of transfer pricing power authorized by section 31(2). As a consequence, ABC Ltd argues, the additional assessment is legally impermissible. The issue which ABC seeks separated therefore, is whether the conduct of tax authorities fell within the powers set out in section 31(2). Decision of the Tax Court ABC Ltd’s application for separation was dismissed by the Tax Court. “Applicant [ABC Ltd] refers to the process of establishment of the arm’s length nature of a transaction between connected persons as jurisdictional facts. Plain from its own advocation of the CUP method is that it accepts that there are various methods that can be employed in establishing the arm’s length nature of a transaction. The appropriateness of a method to test the arm’s length nature of a transaction however, is determined by the circumstances of a case. See in this regard PN 7 and the TPGs. It cannot merely be artificially assumed as applicant argued during the hearing of this matter. In this regard, and for the purpose of advancing the separation application, applicant submitted that the court may accept (artificially so) that the price it paid for the PGMs to the Swiss Entity was not an arm’s length price, even though this is denied. But this cannot be done and applicant knows this. For example, in furtherance of its preferred CUP method, applicant went further and stated that there would have been no need for adjustment had respondent [COMMISSIONER FOR SOUTH AFRICAN REVENUE SERVICE] adopted the CUP method. From the preceding statement, it must be accepted that applicant is aware that the establishment as a fact whether a consideration is or is not at arm’s length precedes the question of adjustment, regardless of what method is employed. The establishment of the arm’s length nature of a transaction is the first step in transfer pricing matters and it involves a factual inquiry which culminates in a decision being made as to which of the methods endorsed by PN 7 is to be employed. Applicant is also wrong in its submission that the question of respondent’s powers – in terms of section 31(2) – can be determined without reference to the merits or to the question of whether the PGM transactions were or were not at arm’s length. As respondent puts it, the question of adjustment does not even arise prior to determining the arm’s length nature of a transaction. The inquiry into the arm’s length nature of a transaction is an overriding principle in transfer pricing matters and cannot be receded to the back. I agree. Respondent at one point likened applicant’s approach with the separation application to determining quantum in a damages claim prior to determining the question of liability. I agree. On the conspectus of evidence before this court, ordering a separation will not achieve any practical benefit. On the contrary, it would result in piecemeal litigation, increase costs, and delay finalisation of the matter. At first, one may be allured by the points raised by applicant. However, on close interrogation there is neither a cogent point worthy of testing nor will the objects set out in Blair Atholl be served with the separation.” Click here for translation ...

A Swiss company, Ashland Industries Europe GmbH, had not declared a presence in Spain for VAT purposes and did not charge VAT for local sales. However, the Swiss company used the resources of its Spanish subsidiary when performing these local sales of goods in Spain. On that basis, the Spanish tax authorities found that the company had a permanent establishment for in Spain for VAT purposes and issued an assessment. An appeal was filed by Ashland Industries, but the appeal was dismissed by the courts. The Spanish Supreme Court concluded that: “First. To determine whether a permanent establishment can be deemed to exist in the Spanish territory of application of VAT where the only transactions carried out subject to that tax are supplies of goods other than supplies of gas, electricity, heat or refrigeration. Second. If the answer to the previous question is in the affirmative, what conditions are necessary to establish that a Spanish subsidiary constitutes a permanent establishment in the Spanish territory of application of value added tax? The answer to the first question, in accordance with our reasoning, must be that, on an interpretation of Articles 69(3) and 82(2) of Law 37/1992, Articles 44 and 45 of Directive 2006/112 and Article 11(1) of the implementing regulation (EU) of 15 March 2011, a permanent establishment may be deemed to exist in the Spanish territory in which VAT is applicable where the only transactions carried out subject to that tax are supplies of goods other than gas, electricity, heat or refrigeration. The answer to the second question, in accordance with our reasoning, must be that the conditions necessary for holding that a Spanish subsidiary constitutes a permanent establishment in the Spanish territory where value added tax is applied are those which derive from the case-law of the Court of Justice of the European Communities and which have been set out in the case-law of that Chamber, judgment of 23 March 2018 (RCA 68/2017). It follows from the case-law that, in order to be able to speak of a permanent establishment for VAT purposes, the following conditions must be met: (a) The existence of a fixed place of business which determines the link with the territory of application of the tax A physical link with the place of business is therefore required and it must have a sufficient degree of permanence (judgments of 4 July 1985, Berkholz, 168/84, EU:C:1985:299, paragraphs 18 and 19; and of 28 June 2007, Planzer Luxembourg, C-73/06, EU:C:2007:397 , paragraph 54). (b) An adequate structure in terms of human and technical resources (Berkholz, paragraphs 18 and 19, and Planzer Luxembourg, paragraph 54; also, judgment of 16 October 2014, Welmory, C-605/12 , EU:C:2014:2298, paragraph 58). Therefore, Articles 84(2) LIVA and 31(2) LFIVA, by requiring the permanent establishment to intervene in the supply of goods or services, consider that such an intervention takes place when the establishment arranges its material and human factors of production or one of them for the purpose of carrying out the transaction subject to VAT. It is not essential to have their own structures, and agencies or representatives authorised to contract in the name or on behalf of the taxable person may be considered permanent establishments [ see Article 69(3)(2)(a) Vat]. It must also have a sufficient degree of permanence and a structure suitable, from the point of view of its human and technical resources, to enable it to carry out autonomously the transactions in question (Case C-190/95 AROLease [1997] ECR I-0000). I-4383, paragraph 16, and Case C-390/96 Lease Plan [1998] ECR I-2553, paragraph 24). (c) With a few exceptions, it does not have to be a subsidiary, since it has legal personality. In such situations, it is the subsidiary which becomes liable for VAT, and not the parent company, which, in order to be regarded as such, must not act through subsidiaries but through permanent establishments in the territory where the tax is applied (see Article 87(2) LFIVA and Article 31(2) LFIVA). However, by way of exception, a subsidiary may be regarded as a permanent establishment where it is wholly controlled by the parent company on which it is wholly dependent and where it operates as a mere subsidiary. In such situations, the underlying economic reality must prevail over legal independence (judgments of 20 February 1997, DFDS, C-260/95, EU:C:1997:77 , paragraph 29; and 25 October 2012, Daimler Widex, C-318/11 and C-319/11, EU:C:2012:666, paragraphs 48 and 49).” Click here for English Translation Click here for other translation ...

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal lids for jars etc. The Polish tax authorities had issued an tax assessment for FY 2009 – 2012 based on a TNMM benchmark study where financial results of comparable independent manufactures operating in the packaging industry showed that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities The Court of first instance held in favor of the tax authorities. The case was then brought before the Administrative Court of Appeal. In the Court’s view, the authorities did not subject the case to thorough verification in accordance with the legal standards on which the decision was based – including, in particular, the analysis of comparable transactions (CUP’s). In the Court’s opinion, the authorities have illegally equated the fact of the loss achieved by the applicant with the data resulting from the general financial ratios for the entire activity of the applicant in 2013. The economic rationality of the transaction should be assessed, in the opinion of the Court, through the prism of the benefit that a specific entity may obtain from the transaction and not in relation to general financial ratios of the compared entities covering the entirety of their activity for a given year. For as long as the tax authority does not prove that the difference in price conditions was only for the purpose of tax avoidance and did not result from economic conditions, the abovementioned Article 11 cannot be applied (cf. glossary to the judgment of the Supreme Court of 22 April 1999, Case No III RN 184/98, OSP 2000, No 5, p. 264). Click here for translation ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. Judgement of the Court The Court dismissed the appeal of Eli Lilly CR s.r.o. and decided in favour of the tax authorities. According to the court marketing services constituted partial supply that was part of the distribution activities and should have been considered, from the VAT perspective, a secondary activity used for the purpose of obtaining benefit from the main activity. Therefore, Eli Lilly CR s.r.o should have been paying VAT on income from the marketing services. “a customer purchasing medicinal products from the claimant is the recipient of a single indivisible supply (distribution and marketing),” “the aim of such marketing is certainly to increase the customer awareness of medicines distributed by the claimant, and, as a result to increase the marketability of these medicines” For Eli Lilly Export S.A., marketing was a secondary benefit. Eli Lilly CR s.r.o. was the owner of the products when the marketing services were provided. Eli Lilly Export S.A. was not the manufacturer of the products and did not hold the distribution license for the Czech market. Therefore, Eli Lilly Export S.A. could not be the recipient of the marketing services provided by Eli Lilly CR s.r.o. Hence, the payment received by Eli Lilly CR s.r.o. for marketing services was in fact “a payment received from a third person”. An appeal to the Supreme Administrative Court was filed on 14 February 2020 by Eli Lilly CR. Click here for English Translation Click here for other translation ...

Acer Computer Ibérica S.A. (ACI) is part of the multinational ACER group, which manufactures and distributes personal computers and other electronic devices. Acer Europe AG (AEAG), a group entity in Switzerland, centralises the procurement of the subsidiaries established in Europe, the Middle East and Africa, and acts as the regional management centre for that geographical area. ACI is responsible for the wholesale marketing of electronic equipment and material, as well as in the provision of technical service related to these products in Spain and Portugal. ACI is characterized as a limited risk distributor by the group. At issue was deductibility of payments resulting from factoring agreements undertaken ACI with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Based on an interpretation of the limited risk agreement signed between ACI and its principal AEAG, the tax authorities disregarded the allocation of the risk – and hence allocation of the relevant costs – to ACI. The tax authorities considered that the financial costs arising from the relocation of cancelled orders, those arising from differences in the criteria for calculating collection and payment deadlines and those arising from delays in shipments are due to the application of incorrect criteria for the accounting and invoicing of certain transactions. It also considers that the assumption of those costs by ACI is in contradiction with its classification as a low-risk distributor and does not comply with the distribution of functions and risks between ACI and AEAG, which results from the distribution contract and the transfer pricing report. An assessment for FY 2006 – 2008 where the costs were added back to the taxable income of Acer Computer Ibérica S.A. was issued. Judgement of the Federal Court The court dismissed the appeal of Acer and upheld the tax assessment in which deductions for the costs in question had been disallowed. Excerpts “The interpretation of the contract terms which we uphold follows the above mentioned OECD Guidelines: In arm’s length transactions, the contract terms generally define, expressly or implicitly, how responsibilities, risks and results are allocated between the parties.” “However, it is irrelevant, in view of the foregoing on the assumption of risk, that ACI’s financing costs are higher than those of comparable undertakings (as the tax authorities maintain), since the refusal of deductibility is based on the fact that the costs claimed to be deductible are not borne by the appellant in accordance with the terms of the contract.” Click here for English Translation Click here for other translation ...

In January 2013 the Swiss company Normet International Ltd acquired all the shares in the Norwegian company Dynamic Rock Support AS (now Normet Norway AS) for a price of NOK 78 million. In February 2013 all intangibles in Dynamic Rock Support AS was transfered to Normet International Ltd for a total sum of NOK 3.666.140. The Norwegian tax authorities issued an assessment where the arm’s length value of the intangibles was set at NOK 58.2 million. The Court of Appeal upheld the tax assessment issued by the tax authorities and rejected the appeal. Click here for translation ...

Following an investigation into Luxembourg’s tax treatment of McDonald’s under EU state aid regulations since 2015, the EU Commission concluded that the tax rulings granted by Luxembourg to McDonald’s in 2009 did not provide illegal state aid. According to the Commission, the law allowing McDonald’s to escape taxation on franchise income in Luxembourg – and the US – did not amount to an illegal selective advantage under EU law. The double non-taxation of McDonald’s franchise income was due to a mismatch between the laws of the United States and Luxembourg. See the 2015 announcement of formal opening of the investigations into McDonald’s tax agreements with Luxembourg from the EU Commission ...

ICL ESPAÑA, S.A., ICL Packaging Coatings, S.A., were members of the Tax Consolidation Group and obtained extraordinary profits in the financial years 2000, 2001 and 2002. (AKZO NOBEL is the successor of ICL ESPAÑA, as well as of the subsidiary ICL PACKAGING.) On 26 June 2002, ICL ESPAÑA, S.A. acquired from ICL Omicron BV (which was the sole shareholder of ICL ESPAÑA, S.A. and of Elotex AG and Claviag AG) 45.40% of the shares in the Swiss company, Elotex AG, and 100% of the shares in the Swiss company of Claviag AG. The acquisition was carried out by means of a sale and purchase transaction, the price of which was 164.90 million euros, of which ICL ESPAÑA, S.A. paid 134.90 million euros with financing granted by ICL Finance, PLC (a company of the multinational ICL group) and the rest, i.e. 30 million euros, with its own funds. On 19 September 2002, ICL Omicron BV contributed 54.6% of the shares of Elotex AG to ICL ESPAÑA, S.A., in a capital increase of ICL ESPAÑA, S.A. with a share premium, so that ICL ESPAÑA, S.A. became the holder of 100% of the share capital of Elotex AG. The loan of 134,922,000 € was obtained from the British entity, ICL FINANCE PLC, also belonging to the worldwide ICL group, to finance the acquisition of the shares of ELOTEX AG. To pay off the loan, the entity subsequently obtained a new loan of €75,000,000. The financial burden derived from this loan was considered by ICL ESPAÑA as an accounting and tax expense in the years audited, in which for this concept it deducted the following amounts from its taxable base – and consequently from that of the Group: FY 2005 2,710,414.29, FY 2006 2,200,935.72, FY 2007 4,261,365.20 and FY 2008 4.489.437,48. During the FY under review, ICL ESPAÑA SA has considered as a deductible expense for corporate tax purposes, the interest corresponding to loans obtained by the entity from other companies of the group not resident in Spain. The financing has been used for the acquisition of shares in non-resident group companies, which were already part of the group prior to the change of ownership. The amounts obtained for the acquisition of shares was recorded in the groups cash pooling accounts, the entity stating that “it should be understood that the payments relating to the repayment of this loan have not been made in accordance with a specific payment schedule but rather that the principal of the operation has been reduced through the income made by Id ESPAÑA SA from the cash available at any given time”. Similarly, as regards the interest accrued on the debit position of ICL ESPAÑA SA, the entity stated that “the interest payments associated with them have not been made according to a specific schedule, but have been paid through the income recorded by ICL ESPAÑA SA in the aforementioned cash pooling account, in the manner of a credit policy contract, according to the cash available at any given time”. The Spanish tax authorities found the above transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions for tax purposes. This decision was appealed to the National Court. Judgement of the National Court The Court partially allowed the appeal. Excerpts “It follows from the above: 1.- The purchase and sale of securities financed with the loan granted by one of the group companies did not involve a restructuring of the group itself. The administration claims that the transfer of 100% ownership of the shares of both Swiss companies is in all respects formal. And it is true that no restructuring of the group can be seen as a consequence of the operation, nor is this alleged by the plaintiff. 2.- There are no relevant legal or economic effects apart from the tax savings in the operation followed, since, as we have pointed out, we are dealing with a merely formal operation, with no substantive effect on the structure and organisation of the Group. 3.- The taxation in the UK of the interest on the loan does not affect the correct application of Spanish tax legislation, since, if there is no right to deduct the interest generated by the loan, this is not altered by the fact that such interest has been taxed in another country. It is clear that the Spanish authorities cannot make a bilateral adjustment in respect of the amounts paid in the United Kingdom for the taxation of the interest received. For this purpose, provision is made for the mutual agreement procedure under Article 24 of the Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion in relation to taxes on income and on capital and its Protocol, done at London on 14 March 2013 (and in the same terms the previous Instrument of Ratification by Spain of the Convention between Spain and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Taxes on Income and on Capital, done at London on 21 October 1975, Article 26 ).” “For these reasons, we share the appellant’s approach and we understand that the non-compliance with the reinvestment takes place in the financial year 2004 (as the start of the calculation of the three-year period is determined by the deed of sale dated 29 June 2001), and that therefore the regularisation on this point should be annulled because it corresponds to a financial year not covered by the inspection.” “Therefore, and in the absence of the appropriate rectification, this tax expense would be double-counted, firstly because it was considered as a tax expense in 1992 and 1999, and secondly because it was included in seventh parts – in 2003 and in the six subsequent years – only for an amount lower than the amount due, taking into account the proven ...

Several mining companies are beeing audited by the Canadian Revenue Agency for aggressive tax planning and tax evasion schemes. Among the high-profile companies that have filed pleadings with the Canadian Tax Court are Cameco, Silver Wheaton, Burlington Resources, Conoco Funding Company and Suncor Energy. The CRA says, the companies inappropriately ran international transactions through subsidiary companies in low-tax foreign jurisdictions. In the Cameco case the Revenue Agency has audited years 2003 to 2015 and challenged Cameco Canada’s arrangements with a Swiss subsidiary. Cameco sells uranium to its marketing subsidiary in Switzerland, which re-sells it to buyers, incurring less tax than the company would through its Canadian office. The CRA position is that Cameco Canada was in fact carrying the uranium business – not Swiss Cameco subsidiary. The total tax bill for the 13 years: $2.1-billion, plus interest and penalties. Three tax years are currently being tried in the tax court, where a final decision is expected in late 2018 or early 2019 ...

In January 2003, a Swedish company, Nobel Biocare Holding AB, entered into three loan agreements with its Swiss parent company. The loans had 15, 25 and 30 maturity respectively, with terms of amortization and with a variable interest rate corresponding to Stibor plus an interest rate margin of 1.75 percent points for one of the loans and 1.5 percent points for the other two loans. The same day the parent company transfered the loans to a sister company domiciled in the Netherlands Antilles. In June 2008 new loan agreements was signed. The new agreements lacked maturity and amortization and interest rates were stated in accordance with the Group’s monthly fixed interest rates. Amortization continued to take place in accordance with the provisions of the 2003 agreement, and the only actual change in relation to those agreements consisted in raising the interest rates by 2.5 percent points. These loans were transferred to a Swiss sister company. The Swedish Tax administration denied tax deductions corresponding to the difference between the interest rates in 2003 and 2008 respectively, with the support of the so-called correction rule (arm’s length rule) in Chapter 14 Section 19 of the Income Tax Act (1999: 1229). The question before the HFD Court was whether the correction rule could be applied when a contract with a certain condition was replaced by an agreement with a worse conditions – Were an audit according to the correction rule limited to referring only to the interest rate terms of the 2008 agreement or were there any reason to take into account the existence and content of the agreements that had previously been concluded between the parties? The Court stated that a prerequisite for applying the correction rule is that the company’s earnings have been lowered as a result of terms being agreed which differ from what would have been agreed between independent parties. It is thus the effect of the earnings that must be assessed and not how a single income or expense item has been affected. According to the Court, it was not only the new interest rate in the 2008 agreement that should be used as the basis for the audit, but all af the terms agreed by the parties. Of particular importance was the fact that the company accepted an increased interest rate without compensation, even though the 2003 agreement did not contain any such obligation for the company. The Court considered that an independent party had not acted in that way. The Court concluded that the correction rule could be applied when a contract with a certain condition was replaced by an agreement with a worse conditions. Such an interpretation of the correction rule was considered compatible with the OECD Guidelines. Click here for translation ...

In the case of Société Lifestand vivre debout, the Court considered that there was economic control in a situation where the rent for Swiss premises used by a Swiss entity was paid by a French company. The functions related to the activity of the Swiss company were actually performed by the French company. The French manager managed the Swiss company. Consequently, the transactions conducted between these two entities needed to comply with transfer pricing rules. Click here for other translation ...

The European Commission has formally opened an investigation into Luxembourg’s tax treatment of McDonald’s. Tax ruling granted by Luxembourg may have granted McDonald’s an advantageous tax treatment in breach of EU State aid rules On the basis of two tax rulings given by the Luxembourg authorities in 2009, McDonald’s Europe Franchising has paid no corporate tax in Luxembourg since then despite recording large profits (more than €250 million in 2013). These profits are derived from royalties paid by franchisees operating restaurants in Europe and Russia for the right to use the McDonald’s brand and associated services. The company’s head office in Luxembourg is designated as responsible for the company’s strategic decision-making, but the company also has two branches, a Swiss branch, which has a limited activity related to the franchising rights, and a US branch, which does not have any real activities. The royalties received by the company are transferred internally to the US branch of the company. The Commission requested information on the tax rulings in summer 2014 following press allegations of advantageous tax treatment of McDonald’s in Luxembourg. Subsequently, trade unions presented additional information to the Commission. The Commission’s assessment thus far has shown that in particular due to the second tax ruling granted to the company McDonald’s Europe Franchising has virtually not paid any corporate tax in Luxembourg nor in the US on its profits since 2009. In particular, this was made possible because: A first tax ruling given by the Luxembourg authorities in March 2009 confirmed that McDonald’s Europe Franchising was not due to pay corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the US. This was justified by reference to the Luxembourg-US Double Taxation Treaty. Under the ruling, McDonald’s was required to submit proof every year that the royalties transferred to the US via Switzerland were declared and subject to taxation in the US and Switzerland. However, contrary to the assumption of the Luxembourg tax authorities when they granted the first ruling, the profits were not to be subjected to tax in the US. While under the proposed reading of Luxembourg law, McDonald’s Europe Franchising had a taxable presence in the US, it did not have any taxable presence in the US under US law. Therefore McDonald’s could not provide any proof that the profits were subject to tax in the US, as required by the first ruling (see further details below). McDonald’s clarified this in a submission requesting a second ruling, insisting that Luxembourg should nevertheless exempt the profits not taxed in the US from taxation in Luxembourg. The Luxembourg authorities then issued a second tax ruling in September 2009 according to which McDonald’s no longer required to prove that the income was subject to taxation in the US. This ruling confirmed that the income of McDonald’s Europe Franchising was not subject to tax in Luxembourg even if it was confirmed not to be subject to tax in the US either. With the second ruling, Luxembourg authorities accepted to exempt almost all of McDonald’s Europe Franchising’s income from taxation in Luxembourg. In their discussions with the Luxembourg authorities, McDonald’s argued that the US branch of McDonald’s Europe Franchising constituted a “permanent establishment” under Luxembourg law, because it had sufficient activities to constitute a real US presence. Simultaneously, McDonald’s argued that its US-based branch was not a “permanent establishment” under US law because, from the perspective of the US tax authorities, its US branch did not undertake sufficient business or trade in the US. As a result, the Luxembourg authorities recognised the McDonald’s Europe Franchising’s US branch as the place where most of their profits should be taxed, whilst US tax authorities didnotrecognise it. The Luxembourg authorities therefore exempted the profits from taxation in Luxembourg, despite knowing that they in fact were not subject to tax in the US ...

In the French Nestlé water case, the following arguments were made by the company: The administration, which bears the burden of proof under the provisions of Article 57 of the General Tax Code, of paragraphs 38, 39 and 42 of the Instruction 13 l-7-98 of 23 July 199 8 and case law, does not establish the presumption of indirect transfer of profits abroad that would constitute the payment of a fee to the Swiss companies A … SA, company products A … SA and Nestec SA. The mere fact that the association of the mark A … with the mark Aquarel also benefits company A … SA, owner of the mark A …, does not allow to prove the absence of profit and thus of consideration for NWE. The latter company also benefited from the combination of the two brands. Advertising alone are not enough to characterize an indirect transfer of profits abroad; in any case, the administration does not provide any quantified data and in particular no comparable study to assess the amount of the benefit that A … SA derives from the “co-branding” operation. In any event, and assuming that the Court considers that the administration has provided a presumption of proof of indirect transfer of profits abroad, it justifies that NWE benefited from an effective and sufficient counterpart in payment of the royalty to the company A … SA because the global economy of the royalty agreement perfectly respects the interests of the company NWE. The fee mainly pays for the use of the A brand, which has a value in the global agri-food market, of which bottled water is a sub-category; the European Commission notes in its decision of 22 July 1992 (Case No IV / M.190 -A …- Perrier) that the European bottled water market is extremely competitive. Only well-known brands can reasonably expect to survive in the medium to long term and, especially in France, it is important to associate bottled water with notions of health and healthy living during actions. Advertising; Although the A mark was not directly associated with the bottled water market at the time, it is recognized in the food industry as a quality brand, embodying health and lifestyle values, at a reasonable price and should, by associating it with the Aquarel brand, facilitate NWE’s access to the market. The Danone group also chose to join the Taillefine brand when it launched a new brand of water on the market. In this regard, the interview of the Chief Executive Officer of Perrier-Vittel, now A … Waters, carried out in 2001 on Group A’s strategy …, is taken out of context and can not be accepted by the Court. The fee also remunerates the costs of technical assistance and know-how under Article 26 of the contract, which is provided by A … Waters Management and Technology. Finally, the fee also remunerates the risks taken by the owner of the brand A … by associating the name A … with bottled water. The court ruled in favor of Nestlé. Click here for translation ...

In the Nestlé Finance case, a cash pool/treasury activity was transferred to a related Swiss entity. The function had been purely administrative, carried out exclusively for the benefit of parties related to the French company. The French company did not receive any compensation for the transfer of the cash pooling activity. First the Administrative Court concluded that the transfer of an internal administrative function to a foreign entity – even if the function only involved other affiliated companies ‘captive clientele’ – required the payment of arm’s-length compensation. This decision was then appealed and later revoked by a decision of the Administrative Court of Appeals. Click here for translation . . . Click here for translation ...

“Paper Trading B.V.” was active in the business of buying and selling paper. The paper was purchased (mostly) in Finland, and sold in the Netherlands, Belgium, France, and Germany. The purchasing and selling activities were carried out by the director of Paper Trading B.V. “Mr. O” who was also the owner of all shares in the company. In 1994, Mr. O set up a company in Switzerland “Paper Trader A.G”. The appointed director of “Paper Trader A.G” was a certified tax advisor, accountant, and trustee, who also acted as director of various other companies registered at the same address. The Swiss director took care of administration, correspondence, invoicing and corporate tax compliance. A couple of years later, part of the purchasing and selling of the paper was now carried out through “Paper Trader A.G”. However, Mr. O proved to be highly involved in activities on behalf of “Paper Trader A.G”, and the purchase and sale of its paper. Mr. O was not employed by “Paper Trader A.G”, nor did he receive any instructions from the company. From witness statements quoted by the Court in the context of a criminal investigation, it followed that Mr. O de facto ran “Paper Trader A.G” like Paper Trading B.V. Mr. O decided on a case-by-case basis whether a specific transaction was carried out by either one of the companies. Moreover, both companies had the same suppliers of paper, paper products, logistics providers and buyers. The only difference was the method of invoicing and payment. The tax authorities issued additional corporate income tax assessments for fiscal years 1996, 1997 and 1998. For fiscal year 1999, the tax authorities issued a corporate income tax assessment that deviated from the corporate income tax return filed by Paper Trading B.V. These decisions were appealed at the Court of Appeal in Amsterdam (the Court). Ruling The Court considered it plausible that the attribution of profit was not based on commercial consideration, but motivated by the interest of the Mr O. The aim was to siphon a (large) part of the revenue achieved from trading activities from the tax base in the Netherlands. The Court of Appeal ruled that the income generated by Paper Trader A.G had to be accounted for at the level of the Paper Trading B.V. For administrative services, Paper Trader A.G was entitled to a cost plus remuneration of 15%. Certain expenses could not be included in the cost basis, such as factoring and insurance fees. Judgement of the Supreme Court The Supreme Court confirmed the ruling. Click here for English translation Click here for other translation ...

In the case of Vansthal France the tax authorities had disallowed a transfer pricing policy under which a 20%-40% mark-up was added to payments to a Swiss entity because in its capacity as a billing centre the Swiss entity assumed no risk. Judgement of the Court The Court ruled in favour of the tax authorities. Excerpt “Considering, on the other hand, that it results from the investigation that the MAD company re-invoiced the goods to the VANSTHAL FRANCE company after having increased the prices by 39% for the kitchen articles and 20% for the porcelain articles and collected the corresponding payments; that, since MAD did not perform any services for the applicant company, the department considered that the latter had performed an abnormal act of management by agreeing to pay for its purchases at an unreasonably high price with full knowledge of the facts and that the payment of the excess price resulted in a transfer of profits abroad to the Nyder group, on which the applicant is dependent; Considering that if the applicant company maintains that the over-invoicing was justified by the services rendered by the company VANSTHAL INTERNATIONAL in the field of management and accounting, it was up to the latter to invoice these ‘services’ and not to the company MAD whose link with the company Z… INTERNATIONAL is solely financial; that the production of the MAD company’s operating account by the applicant company, in the absence of any official Swiss supporting document, does not have any evidential force to enable the value of the services that the MAD company allegedly rendered to the applicant to be assessed; that since the concept of ‘goodwill’ is an element used to calculate the value of the securities representing the share capital of limited companies, the relationship between the acquisition of shares in the company Nyder B. V. and the mark-ups on the price of goods charged by MAD is not established; that, consequently, the applicant company does not justify the existence of a consideration for the mark-ups on the prices invoiced by the Swiss company MAD; Considering that it follows from all the above that SARL Z… FRANCE is not entitled to maintain that it was wrongly that, by the contested judgment, the administrative court of Lille rejected its request; Article 1: The request of SARL Z.. FRANCE is rejected.” Click here for English translation Click here for other translation ...

Proctor & Gamble is engaged in the business of manufacturing and marketing of consumer and industrial products. Proctor & Gamble operates through domestic (US) and foreign subsidiaries and affiliates. Proctor & Gamble owned all the stock of Procter & Gamble A.G. (AG), a Swiss corporation. AG was engaged in marketing Proctor & Gamble’s products, generally in countries in which Proctor & Gamble did not have a marketing subsidiary or affiliate. Proctor & Gamble and AG were parties to a License and Service Agreement, known as a package fee agreement, under which AG paid royalties to Proctor & Gamble for the nonexclusive use by AG and its subsidiaries of Proctor & Gamble’s patents, trademarks, tradenames, knowledge, research and assistance in manufacturing, general administration, finance, buying, marketing and distribution. The royalties payable to Proctor & Gamble were based primarily on the net sales of Proctor & Gamble’s products by AG and its subsidiaries. AG entered into agreements similar to package fee agreements with its subsidiaries. In 1967, Proctor & Gamble made preparations to organize a wholly-owned subsidiary in Spain to manufacture and sell its products in that country. Spanish laws in effect at that time closely regulated foreign investment in Spanish companies. The Spanish Law of Monetary Crimes of November 24, 1938, in effect through 1979, regulated payments from Spanish entities to residents of foreign countries. This law required governmental authorization prior to payment of pesetas to residents of foreign countries. Making such payments without governmental authorization constituted a crime. Decree 16/1959 provided that if investment of foreign capital in a Spanish company was deemed economically preferential to Spain, a Spanish company could transfer in pesetas “the benefits obtained by the foreign capital.” Proctor & Gamble requested authorization to organize Proctor & Gamble Espana S.A. (Espana) and to own, either directly or through a wholly-owned subsidiary, 100 percent of the capital stock of Espana. Proctor & Gamble stated that its 100 percent ownership of Espana would allow Espana immediate access to additional foreign investment, and that Proctor & Gamble was in the best position to bear the risk associated with the mass production of consumer products. Proctor & Gamble also indicated that 100 percent ownership would allow Proctor & Gamble to preserve the confidentiality of its technology. As part of its application, Proctor & Gamble estimated annual requirements for pesetas for the first five years of Espana’s existence. Among the items listed was an annual amount of 7,425,000 pesetas for royalty and technical assistance payments. Under Spanish regulations, prior authorization of the Spanish Council of Ministers was required in order for foreign ownership of the capital of a Spanish corporation to exceed fifty percent. The Spanish government approved Proctor & Gamble’s application for 100 percent ownership in Espana by a letter dated January 27, 1968. The letter expressly stated that Espana could not, however, pay any amounts for royalties or technical assistance. For reasons that are unclear in the record, it was determined that AG, rather than Proctor & Gamble, would hold 100 percent interest in Espana. From 1969 through 1979, Espana filed several applications with the Spanish government seeking to increase its capital from the amount originally approved. The first such application was approved in 1970. The letter granting the increase in capital again stated that Espana “will not pay any amount whatsoever in the concept of fees, patents, royalties and/or technical assistance to the investing firm or to any of its affiliates, unless with the approval of the Administration.” All future applications for capital increases that were approved contained the same prohibition. In 1973, the Spanish government issued Decree 2343/1973, which governed technology agreements between Spanish entities and foreign entities. In order to obtain permission to transfer currency abroad under a technology agreement, the agreement had to be recorded with the Spanish Ministry of Industry. Under the rules for recording technology agreements, when a foreign entity assigning the technology held more than 50 percent of the Spanish entity’s capital, a request for registration of a technology agreement was to be looked upon unfavorably. In cases where foreign investment in the Spanish entity was less than 50 percent, authorization for payment of royalties could be obtained. In 1976, the Spanish government issued Decree 3099/1976, which was designed to promote foreign investment. Foreign investment greater than 50 percent of capital in Spanish entities was generally permitted, but was conditioned upon the Spanish company making no payments to the foreign investor, its subsidiaries or its affiliates for the transfer of technology. Espana did not pay a package fee for royalties or technology to AG during the years at issue. Espana received permission on three occasions to pay Proctor & Gamble for specific engineering services contracts. The Spanish Foreign Investments Office clarified that payment for these contracts was not within the general prohibition against royalties and technical assistance payments. Espana never sought formal relief from the Spanish government from the prohibition against package fees. In 1985, consistent with its membership in the European Economic Community, in Decree 1042/1985 Spain liberalized its system of authorization of foreign investment. In light of these changes, Espana filed an application for removal of the prohibition against royalty payments. This application was approved, as was Espana’s application to pay package fees retroactive to July 1, 1987. Espana first paid a dividend to AG during the fiscal year ended June 30, 1987. The Commissioner determined that a royalty of two percent of Espana’s net sales should be allocated to AG as royalty payments under section 482 for 1978 and 1979 in order to reflect AG’s income. The Commissioner increased AG’s income by $1,232,653 in 1978 and by $1,795,005 in 1979 and issued Proctor & Gamble a notice of deficiency.1 Proctor & Gamble filed a petition in the Tax Court seeking review of the deficiencies. The Tax Court held that the Commissioner’s allocation of income was unwarranted and that there was no deficiency. The court concluded that allocation of income under section 482 was not proper in this case because Spanish ...

Proctor & Gamble is an US corporation engaged in the business of manufacturing and marketing of consumer and industrial products. Proctor & Gamble operates through domestic and foreign subsidiaries and affiliates. Proctor & Gamble owned all the stock of Procter & Gamble A.G. (AG), a Swiss corporation. AG was engaged in marketing Proctor & Gamble’s products, generally in countries in which Proctor & Gamble did not have a marketing subsidiary or affiliate. Proctor & Gamble and AG were parties to a License and Service Agreement, known as a package fee agreement, under which AG paid royalties to Proctor & Gamble for the nonexclusive use by AG and its subsidiaries of Proctor & Gamble’s patents, trademarks, tradenames, knowledge, research and assistance in manufacturing, general administration, finance, buying, marketing and distribution. The royalties payable to Proctor & Gamble were based primarily on the net sales of Proctor & Gamble’s products by AG and its subsidiaries. AG entered into agreements similar to package fee agreements with its subsidiaries. In 1967, Proctor & Gamble made preparations to organize a wholly-owned subsidiary in Spain to manufacture and sell its products in that country. Spanish laws in effect at that time closely regulated foreign investment in Spanish companies. The Spanish Law of Monetary Crimes of November 24, 1938, in effect through 1979, regulated payments from Spanish entities to residents of foreign countries. This law required governmental authorization prior to payment of pesetas to residents of foreign countries. Making such payments without governmental authorization constituted a crime. Decree 16/1959 provided that if investment of foreign capital in a Spanish company was deemed economically preferential to Spain, a Spanish company could transfer in pesetas “the benefits obtained by the foreign capital.” Proctor & Gamble requested authorization to organize Proctor & Gamble Espana S.A. (Espana) and to own, either directly or through a wholly-owned subsidiary, 100 percent of the capital stock of Espana. Proctor & Gamble stated that its 100 percent ownership of Espana would allow Espana immediate access to additional foreign investment, and that Proctor & Gamble was in the best position to bear the risk associated with the mass production of consumer products. Proctor & Gamble also indicated that 100 percent ownership would allow Proctor & Gamble to preserve the confidentiality of its technology. As part of its application, Proctor & Gamble estimated annual requirements for pesetas for the first five years of Espana’s existence. Among the items listed was an annual amount of 7,425,000 pesetas for royalty and technical assistance payments. Under Spanish regulations, prior authorization of the Spanish Council of Ministers was required in order for foreign ownership of the capital of a Spanish corporation to exceed fifty percent. The Spanish government approved Proctor & Gamble’s application for 100 percent ownership in Espana by a letter dated January 27, 1968. The letter expressly stated that Espana could not, however, pay any amounts for royalties or technical assistance. For reasons that are unclear in the record, it was determined that AG, rather than Proctor & Gamble, would hold 100 percent interest in Espana. From 1969 through 1979, Espana filed several applications with the Spanish government seeking to increase its capital from the amount originally approved. The first such application was approved in 1970. The letter granting the increase in capital again stated that Espana “will not pay any amount whatsoever in the concept of fees, patents, royalties and/or technical assistance to the investing firm or to any of its affiliates, unless with the approval of the Administration.” All future applications for capital increases that were approved contained the same prohibition. In 1973, the Spanish government issued Decree 2343/1973, which governed technology agreements between Spanish entities and foreign entities. In order to obtain permission to transfer currency abroad under a technology agreement, the agreement had to be recorded with the Spanish Ministry of Industry. Under the rules for recording technology agreements, when a foreign entity assigning the technology held more than 50 percent of the Spanish entity’s capital, a request for registration of a technology agreement was to be looked upon unfavorably. In cases where foreign investment in the Spanish entity was less than 50 percent, authorization for payment of royalties could be obtained. In 1976, the Spanish government issued Decree 3099/1976, which was designed to promote foreign investment. Foreign investment greater than 50 percent of capital in Spanish entities was generally permitted, but was conditioned upon the Spanish company making no payments to the foreign investor, its subsidiaries or its affiliates for the transfer of technology. Espana did not pay a package fee for royalties or technology to AG during the years at issue. Espana received permission on three occasions to pay Proctor & Gamble for specific engineering services contracts. The Spanish Foreign Investments Office clarified that payment for these contracts was not within the general prohibition against royalties and technical assistance payments. Espana never sought formal relief from the Spanish government from the prohibition against package fees. In 1985, consistent with its membership in the European Economic Community, in Decree 1042/1985 Spain liberalized its system of authorization of foreign investment. In light of these changes, Espana filed an application for removal of the prohibition against royalty payments. This application was approved, as was Espana’s application to pay package fees retroactive to July 1, 1987. Espana first paid a dividend to AG during the fiscal year ended June 30, 1987. The Commissioner determined that a royalty of two percent of Espana’s net sales should be allocated to AG as royalty payments under section 482 for 1978 and 1979 in order to reflect AG’s income. The Commissioner increased AG’s income by $1,232,653 in 1978 and by $1,795,005 in 1979 and issued Proctor & Gamble a notice of deficiency.1 Proctor & Gamble filed a petition in the Tax Court seeking review of the deficiencies. Decision of the Tax Court The Tax Court held that the Commissioner’s allocation of income was unwarranted and that there was no deficiency. The court concluded that allocation of income under section 482 was ...