Tag: Swiss trading hub

Ukrain vs PJSP Gals-K, July 2021, Supreme Administrative Court, Case No 620/1767/19

Ukrainian company “PJSP Gals-K” had been involved in various controlled transactions – complex technological drilling services; sale of crude oil; transfer of fixed assets etc. The tax authority found, that prices had not been determined in accordance with the arm’s length principle and issued a tax assessment. Gals-K disagreed and filed a complaint. The Administrative Court dismissed the tax assessment and this decision was later upheld by the Administrative Court of Appeal. Judgement of the Supreme Administrative Court The Supreme Court set aside the decisions of the Court of Appeal and remanded the case to the court of first instance for a new hearing. The court considered that breaches of procedural and substantive law by both the Court of Appeal and the Court of First Instance have been committed, and the case should therefore be referred to the Court of First Instance for a new hearing. Excerpts “Thus, in order to properly resolve the dispute in this part, the courts must determine, on the basis of the relevant and admissible evidence, whether the oil sales by the plaintiff to the non-resident GFF AG (Swiss Confederation) are controlled transactions within the meaning of paragraph 39. 2.1 of Article 39.2 of Article 39 of the Code of Ukraine. In this case, when establishing the validity of the position on the extension of the provisions of Article 39 of the CP of Ukraine to other legal relationships, the courts should also assess the validity of the opinion of the State Traffic Department regarding the improper valuation by the caller of a controlled operation when using the method of “comparative uncontrolled price”. For example, in the SO No. 35/4, the price that was set at the auction (auction certificate No. A185-186 of 23 January 2014 for the sale of oil on the domestic market) was reversed as the price of the export of oil from GFF AG to Orlen Lietuva.” “According to the appellant’s position, the transfer of the tangible fixed assets by the managing directorate of SD No 35/4 in the name of all the parties to the contract to one of the parties (PJSC “Ukrnafta”) in the person of its structural division (NGVU “Chernihivnaftogaz”) cannot be considered a sale, since the goods were actually transferred to the entire legal entity of PJSC “Ukrnafta”. In connection with the above-mentioned circumstances, during the cassation examination of the case, the plaintiff also pointed to the absence of legislative grounds for considering such a transaction as controlled, and the mention of the latter in the Report on Controlled Transactions constitutes a mistake made by the relevant administrative department. In accordance with this position, the courts of the previous instances have found that the use of the “resale price” method was unjustified. The College of Judges considers that, in resolving the dispute between the parties in this part, the courts of the previous instances did not fully appreciate the parties’ arguments on the dispute, which resulted in an incorrect assessment of the circumstances of the case. It should be noted that the sub-clauses of clause 14.1.139 of Article 14.1 and clause 153.14.5 of Article 153.14 of the Ukrainian Civil Code provide that for the purposes of the disclosure the obligations of the parties to the joint venture under the Joint Venture Agreement are specific civil law contracts. At the same time, the accounting treatment of transactions involving the transfer/sale of tangible goods has been subject to respect and legal scrutiny by the courts. In order to properly resolve the dispute in this part, the following should have been addressed: who and for what money the goods were delivered; to whom (PJSC “Ukrznafta” as a separate legal entity or PJSC “Ukrznafta” as a member of the Agreement No. 35/4) and on what legal basis the goods were exchanged/sold; how the relevant transaction was recorded in the accounting records and whether such recording corresponds to the primary documents that were created in connection with the transfer/sale of the goods.” “The Collegium of Judges notes that, in addition to the above-mentioned deficiencies in the absence of primary documents and accounting documents, which were created for the results of the business transactions, the documentation from the transfer pricing, which was provided to the audit, is also absent (volume 1, page 30). The above makes it impossible to establish officially the conditions of the case as to the method used by the caller, the arguments of the latter in the absence of the conditions for the inclusion of the joint operation in the controlled order with the self-inclusion of the operations of PJSC “Ukrnafta” in the Report for 2014 with the inclusion of the methods 303 “costs plus” and 305 “revenue allocation”, whereas in the letter No 1855/10 dated 22 March 2017 the caller informed the State Tax Administration about the use of only the 303 “cost plus” method.” Click here for English translation Click here for other translation 620-1767-19 ORG ...

Australia vs Glencore, May 2021, High Court, Case No [2021] HCATrans 098

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax authorities found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. The tax assessment was brought to court by Glencore. The Federal Court of Australia found in favor of Glencore. The ruling of the Federal Court was appealed by the Australian tax authorities. On 6 November 2020, a Full Federal Court in a 3-0 ruling dismissed the appeal of the tax authorities. The tax authorities then submitted a application for special leave to the High Court. This application was dismissed by the Court in a judgement issued 20. May 2021. Click here for translation Australia vs Glencore 2021 ...

Canada vs Cameco Corp., February 2021, Supreme Court, Case No 39368.

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. The Canadian Revenue Agency found that transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting. Hence, a tax assessment was issued for FY 2003, 2005, and 2006. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal in 2020 dismissed the appeal and also ruled in favor of Cameco A application for leave to appeal from the judgment of the Federal Court of Appeal was then brought to the Canadian Supreme Court by the tax authorities. The application for leave to appeal was dismissed by the Supreme Court. 39368_Cameco_Judgment_on_Leave-Jugement_sur_demande ...

Ukrain vs PJSC “Azot”, January 2021, Supreme Administrative Court, Case No 826/17841/17

Azot is a producer of mineral fertilizers and one of the largest industrial groups in Ukraine. Following an audit the tax authorities concluded that Azot’s export of mineral fertilizers to a related party in Switzerland, NF Trading AG, had been priced significantly below the arm’s length price, and moreover that Azot’s import of natural gas from Russia via a related party in Cyprus, Ostchem Holding Limited, had been priced significantly above the arm’s length price. On that basis, an assessment of additional corporate income tax in the amount of 43 million UAH and a decrease in the negative value by 195 million UAH was issued. In a decision from 2019 the Administrative Court ruled in favor of the tax authorities. This decision was then appealed by Azot to the Supreme Administrative Court. The Supreme Administrative Court dismissed the appeal and decided in favor of the tax authorities. Click here for translation Єдиний державний реєÑÑ‚Ñ€ Ñудових рішень ...

Australia vs Glencore, November 2020, Full Federal Court of Australia, Case No FCAFC 187

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the February 2007 Agreement were within an arm’s length range and accordingly the taxpayer has discharged the onus of proof on it.” “In view of my conclusions, the objection decisions should be set aside and the amended assessments for the 2007, 2008 and 2009 income years set aside.“ The ruling of the Federal Court was appealed by the Australian tax authorities. On 6 November 2020, a Full Federal Court in a 3-0 ruling dismissed the appeal. Australia vs Glencore November 2020 ...

Canada vs Cameco Corp., June 2020, Federal Court of Appeal, Case No 2020 FCA 112.

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. In 1993, the United States and Russian governments executed an agreement that provided the means by which Russia could sell uranium formerly used in its nuclear arsenal. The net result of this agreement was that a certain quantity of uranium would be offered for sale in the market. Cameco initially attempted to secure this source of uranium on its own but later took the lead in negotiating an agreement for the purchase of this uranium by a consortium of companies. When the final agreement was signed in 1999, Cameco designated its Luxembourg subsidiary, Cameco Europe S.A. (CESA), to be the signatory to this agreement. The agreement related to the purchase of the Russian uranium was executed in 1999 among CESA, Compagnie Générale des Matières Nucléaires (COGEMA) (a French state-owned uranium producer), Nukem, Inc. (a privately owned United States trader in uranium), Nukem Nuklear GMBH and AO “Techsnabexport†(Tenex) (a Russian state-owned company). This agreement, which is also referred to as the HEU Feed Agreement, initially provided for the granting of options to purchase the uranium that Tenex would make available for sale. In the years following 1999, there were a number of amendments to this agreement. In particular, the fourth amendment in 2001, in part, obligated the western consortium (CESA, COGEMA and Nukem) to purchase a certain amount of uranium (paragraph 82 of the reasons). On September 9, 1999, CESA entered into an agreement with Urenco Limited (Urenco) (a uranium enricher) and three of its subsidiaries to purchase uranium that Urenco would be receiving from Tenex. Also in 1999, Cameco formed a subsidiary in Switzerland. This company, in 2001, changed its name to Cameco Europe AG (SA, Ltd) (CEL). In 2002, CESA transferred its business (which was described in the transfer agreement as “trading with raw materials, particularly uranium in various formsâ€) to CEL under the Asset Purchase and Transfer of Liabilities Agreement dated as of October 1, 2002, but executed on October 30, 2002. Therefore, CESA transferred to CEL the rights that CESA had to purchase uranium from Tenex and Urenco. CEL also purchased Cameco’s expected uranium production and its uranium inventory. It would appear that this arrangement did not include any uranium that was sold by Cameco to any customers in Canada (paragraph 40 of the Crown’s memorandum). At certain times, Cameco also purchased uranium from CEL. The profits in issue in this appeal arose as a result of the sale of uranium by CEL that it purchased from three different sources: Tenex, Urenco, and Cameco. When the arrangements with Tenex and Urenco were put in place in 1999, the price of uranium was low. In subsequent years, the price of uranium increased substantially. As a result, the profits realized by CEL from buying and selling uranium were substantial. The Canadian Revenue Agency found that the transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting.  According to the Canadian Revenue Agency, Cameco would not have entered into any of the transactions that it did with CESA and CEL with any arm’s length person, cf. paragraph 247(2) of the Act. All of the profit earned by CEL should therefore be reallocated to Cameco Corp. Hence, a tax assessment was issued for FY 2003, 2005, and 2006 where $43,468,281, $196,887,068, and $243,075,364 was added to the taxable income of Cameco Canada. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was then appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal dismissed the appeal and also ruled in favor of Cameco. “In this appeal, the Crown does not challenge any of the factual findings made by the Tax Court Judge. Rather, the Crown adopts a broader view of paragraphs 247(2)(b) and (d) of the Act and submits that Cameco would not have entered into any of the transactions that it did with CESA and CEL with any arm’s length person. As a result, according to the Crown, all of the profit earned by CEL should be reallocated to Cameco. The Crown, in its memorandum, also indicated that it was raising an alternative argument related to the interpretation of paragraph 247(2)(a) of the Act. … However, subparagraph 247(2)(b)(i) of the Act does not refer to whether the particular taxpayer would not have entered into the particular transaction with the non-resident if that taxpayer had been dealing with the non-resident at arm’s length or what other options may have been available to that particular taxpayer. Rather, this subparagraph raises the issue of whether the transaction or series of transactions would have been entered into between persons dealing with each other at arm’s length (an objective test based on hypothetical persons) — not whether the particular taxpayer would have entered into the transaction or series of transactions in issue with an arm’s length party (a subjective test). A test based on what a hypothetical person (or persons) would have done is not foreign to the law as the standard of care in a negligence case is a “hypothetical ‘reasonable person’†(Queen v. Cognos Inc., [1993] 1 S.C.R. 87, at page 121, 1993 CanLII 146). … The Crown’s position with respect to this hypothetical transaction is also contradicted by its position in this case. Essentially, in this case, Cameco became aware of an opportunity to purchase Russian sourced uranium from Tenex and Urenco and chose to complete those arrangements through a foreign subsidiary rather than purchasing this uranium itself and selling it to third-party customers in other countries. This was a foreign-based business opportunity to ...

Australia vs BHP Biliton Limited, March 2020, HIGH COURT OF AUSTRALIA, Case No [2020] HCA 5

BHP Billiton Ltd, an Australian resident taxpayer, is part of a dual-listed company arrangement (“the DLC Arrangement”) with BHP Billiton Plc (“Plc”). BHP Billiton Marketing AG is a Swiss trading hub in the group which, during the relevant years, was a controlled foreign company (CFC) of BHP Billiton Ltd because BHP Billiton Ltd indirectly held 58 per cent of the shares in the Swiss trading hub. BHP Billiton Plc indirectly held the remaning 42 per cent. The Swiss trading hub purchased commodities from both BHP Billiton Ltd’s Australian subsidiaries and BHP Billiton Plc’s Australian entities and derived income from sale of these commodities into the export market. There was no dispute that BHP Billiton Marketing AG’s income from the sale of commodities purchased from BHP Billiton Ltd’s Australian subsidiaries was “tainted sales income” to be included in the assessable income of BHP Billiton Ltd under Australian CFC provisions. The question was whether sale of commodities purchased from BHP Billiton Plc’s Australian entities (“the disputed income”) should also be included in the taxable income of BHP Billiton Ltd under Australian CFC provisions. Whether of not that income should also be included in the taxable income of BHP Billiton Ltd’s depends on whether BHP Billiton Plc’s Australian entities were to be considered “associates” of the Swiss Trading hub. The Australian Tax Office found, that the BHP Billiton Plc’s Australian entities were “associates” of the Swiss Trading hub and included income from those sales of commodities under Australian taxation according to Australian CFC provisions. BHP Billiton Ltd disagreed and filed a complaint over the decision to the Australian Tax Tribunal The Tax Tribunal found in favor of BHP Billiton Ltd. The Australian Tax Office disagreed with this decision an filed an appeal to the Federal Court. The Federal Court issued a split decision in 2019, where the appeal was allowed. BHP Biliton Ltd then appealed this decision to the High Court of Australia. The High Court of Australia dismissed the appeal of BHP Billiton and found in favor of the Australian Tax Office. Australia-vs-BHP-Billiton-Ltd-March-2020 ...

Russia vs PJSC Uralkali, November 2019, Supreme Court Review Panel, Case No. Ð40-29025/2017

PJSC Uralkali, produced and sold fertilizers (“potassium chlorideâ€) through a related Swiss trader. Uralkali had informed the authorities about the controlled transaction and submitted the required TP documentation. To substantiate the pricing of the transaction they had applied the transactional net margin method (TNMM) with the Swiss trader as the tested party. The Russian tax authorities disapproved of the choice of method and the way the method had been applied. They conducted an analysis, using the CUP method, and determined the the prices used in the controlled transaction deviated from price quotations of an independent pricing agency (Argus). Hence a tax assessment was issued. PJSC Uralkali disapproved of the assessment and brought the case to court. The court of first instance supported Uralkali’s position, and argued that the tax authority should have applied the same TP method as the Taxpayer. Failure of the tax authority to apply the same TP method or to provide sufficient evidence to justify use of another method was considered sufficient to invalidate the tax assessment. The Court of Appeal overruled the decision of the lower court. They concluded that the TNMM method had been applied in violation of paragraph 1 of Article 105.12 of the Russian Tax Code, and further that the method had been applied for the purpose of obtaining an unjustified tax benefits. They found that the CUP method was more appropriate for the case, taking into account the actual circumstances and conditions of the controlled transaction. They ruled in favor of the tax authorities and returned the case for new consideration in the court of first instance. The review panal of the Russian Supreme Court found no grounds (violation of the norms of substantive and procedural law) for bringing the decision before the Supreme Court. Click here for translation A40-29025-2017_20191125_Opredelenie ...

Australia vs Glencore, September 2019, Federal Court of Australia, Case No FCA 1432

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referrable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the copper concentrate it supplied to GIAG under the February 2007 Agreement were within an arm’s length range and accordingly the taxpayer has discharged the onus of proof on it.” “In view of my conclusions, the objection decisions should be set aside and the amended assessments for the 2007, 2008 and 2009 income years set aside.“ On October 7 2019 it was announced that the Australian Tax Office will appeal the ruling of the Federal Court. 2019FCA1432 ...

Russia vs PJSC Uralkali, April 2019, Court of Appeal, Case No. Ð40-29025/2017

PJSC Uralkali, produced and sold fertilizers (“potassium chlorideâ€) through a related Swiss trader. Uralkali had informed the authorities about the controlled transaction and submitted the required TP documentation. To substantiate the pricing of the transaction they had applied the transactional net margin method (TNMM) with the Swiss trader as the tested party. The Russian tax authorities disapproved of the choice of method and the way the method had been applied. They conducted an analysis, using the CUP method, and determined the the prices used in the controlled transaction deviated from price quotations of an independent pricing agency (Argus). Hence a tax assessment was issued. PJSC Uralkali disapproved of the assessment and brought the case to court. The court of first instance supported Uralkali’s position, and argued that the tax authority should have applied the same TP method as the Taxpayer. Failure of the tax authority to apply the same TP method or to provide sufficient evidence to justify use of another method was considered sufficient to invalidate the tax assessment. The Court of Appeal overruled the decision of the lower court. They concluded that the TNMM method had been applied in violation of paragraph 1 of Article 105.12 of the Russian Tax Code, and that the method had been applied for the purpose of obtaining an unjustified tax benefits. They found that the CUP method was more appropriate for the case, taking into account the actual circumstances and conditions of the controlled transaction. They ruled in favor of the tax authorities and returned the case for new consideration in the court of first instance. Click here for translation A40-29025-2017_20190423_Postanovlenie_apelljacionnoj_instancii ...

Ukrain vs PJSC “Azot”, March 2019, Administrative Court of Appeal, Case No 826/17841/17

Azot is a producer of mineral fertilizers and one of the largest industrial groups in Ukraine. Following an audit the tax authorities concluded that Azot’s export of mineral fertilizers to a related party in Switzerland, NF Trading AG, had been priced significantly below the arm’s length price, and moreover that Azot’s import of natural gas from Russia via a related party in Cyprus, Ostchem Holding Limited, had been priced significantly above the arm’s length price. On that basis, an assessment of additional corporate income tax in the amount of 43 million UAH and a decrease in the negative value by 195 million UAH was issued. The Court ruled in favor of the tax authorities. Click here for translation UK v Az 2019 ...

Canada vs Cameco Corp., October 2018, Tax Court of Canada, Case No 2018 TCC 195

Canadian mining company, Cameco Corp., sells uranium to a wholly owned trading hub, Cameco Europe Ltd., registred in low tax jurisdiction, Switzerland, which then re-sells the uranium to independent buyers. The parties had entered into a series of controlled transactions related to this activity and as a result the Swiss trading hub, Cameco Europe Ltd., was highly profitable. Following an audit, the Canadian tax authorities issued a transfer pricing tax assessment covering years 2003, 2005, 2006, and later tax assessments for subsequent tax years, adding up to a total of approximately US 1.5 bn in taxes, interest and penalties. The tax authorities first position was that the controlled purchase and sale agreements should be disregarded as a sham as all important functions and decisions were in fact made by Cameco Corp. in Canada. As a second and third position the tax authorities held that the Canadian transfer pricing rules applied to either recharacterise or reprice the transactions. The Tax Court concluded that the transactions were not a sham and had been priced in accordance with the arm’s length principle. The tax authorities have now decided to appeal the decision with the Federal Court of Appeal. See also Canada vs Cameco Corp, Aug 2017, Federal Court, Case No T-856-15 and Cameco’s settelment with the IRS Canada-vs-Cameco-Corp-Oct-2018tcc195 ...

Spain vs COLGATE PALMOLIVE HOLDING SCPA, February 2018, High Court, Case No 568/2014

According to Colgate Palmolive, following a restructuring, the local group company in Spain was changed from being a “fully fledged distributor†responsible for all areas of the distribution process to being a “limited risk distributor” (it only performs certain functions). A newly established Swiss company, Colgate Palmolive Europe, instead became the principal entrepreneur in Europe. The changed TP setup had a significant impact on the earnings in the Spanish group company. Net margins was reduced from around 16% before the restructuring, to 3.5% after the restructuring. Following a thorough examination of the functions, assets and risks before and after application of the new setup, the Tax administration held that Colgate Palmolive Europe could not be qualified as the “principal entrepreneur” in Europe. The swiss company was in substance a service provider for which the remuneration should be determined based on the cost plus method. Judgement of the Court The High Court held in favour of the tax administration and dismissed the appeal of Colgate Palmolive. Excerpt “.…the conclusion, in our opinion, can only be that the Administration is right, since in reality – remember that certain functions were already being carried out by the French Headquarter – there is no significant change in the situation existing prior to the restructuring in the years in question. This being so, it is not surprising that the Agreement reasons that “the existence of transactions between related entities, the Spanish and Swiss entities, determines the application of the regime provided for in Article 16 of the Consolidated Text of the Corporate Income Tax Law (TRLIS) and in its implementing regulations, mainly Chapter V of Title I of the Corporate Income Tax Regulations (RIS), taking into account the change of regulation introduced by Law 36/2006 applicable, in the case of Colgate Palmolive, as from the financial year 2007”. Adding that “in relation to the existence of transactions between related companies, it is also necessary to take into account Article 9 of the Spanish-Swiss Double Taxation Agreement, inspired by the OECD Model Agreement, which provides that the profits of associated companies may be adjusted when the conditions present in their commercial or financial relations differ from those that would be agreed between independent entities. This article recognises the so-called arm’s length principle, the interpretation of which must take into account the OECD Doctrine, contained in the Commentary to Article 9 itself and its 1995 Transfer Pricing Guidelines, which have been significantly updated in 2010”. As reasoned in the Agreement, the Board shares the reasoning, “according to the exhaustive description contained in the verification file, the characterisation of CP Europe as a “principal trader” is inappropriate, it being more correct to consider that such an entity is in reality a service provider. It is therefore considered that the method chosen by the group to value the transactions is inappropriate and that the appropriate valuation method is the cost plus method. This method, in addition to being a traditional method (and therefore preferable under our internal regulations and the Guidelines), is, in accordance with the OECD Guidelines (paragraph 2.32 and 2.39 in the 2010 version), particularly appropriate for valuing the provision of services”. The fact is that ‘the valuation method applied by Colgate Palmolive is not appropriate, as it results in the residual profit of the group’s operations in Spain being concentrated in the CP Europe entity, which makes no sense if the economic activity of each entity (CP USA, CP Spain and CP Europe) in the overall business in our country is taken into account. The Guidelines themselves highlight in their chapter 7 dedicated to intra-group services (paragraph 7.31, before and after 2010) the cost plus method, together with the comparable free price, as the method to be used to value this type of services between related entities. The work of the Joint Transfer Pricing Forum of the European Union, which also assumes that this is the method most frequently used to value this type of transaction”. The Inspectorate adds, quite reasonably, that “until 2005, the group itself valued transactions between the French Headquarter, with the role of service provider, and the other entities of the group – including CP Spain – using the cost plus method”. The consequence of all the above is that, as stated on p. 73 of the report -reasoning endorsed by the Agreement- “in order to value the transactions between CP Europe and CP Spain, the transactional net margin method, taking CP Spain as the analysed party (Tesdet party), is inappropriate. Instead, it is considered that the most appropriate method for valuing the transactions is the cost plus method, which is based on attributing to the provider of those services – CP Europe – a gross margin on the costs it incurs which are attributable to the Spanish market [it should be recalled that following the analysis carried out it has been concluded that CP Europe cannot be considered as a principal trader, but rather as an entity which performs the functions of a service provider]’. This means that, in the years in question, it is not correct to attribute to CP EUROPE the residual profit derived from the group’s operations in Spain, but rather that this residual profit, deducting the remuneration of the owner of the intangible asset -CP USA- and of the service provider -CEP EUROPE-, should fall on CP SPAIN. The calculations are set out in pp. 74 to 81 of the report, as well as in pp. 59 to 62 of the Agreement. The Board, particularly in the absence of any arguments to the contrary, considers them to be correct. For all the foregoing reasons, the plea is dismissed.” Click here for English Translation Click here for other translation SP vs Palmolive SAN_1128_2018 ...

September 2017: Transfer Pricing Risk Assessment in the Mining Industry

The African Tax Administration Forum (ATAF) and the German Federal Ministry for Economic Cooperation and Development (BMZ), through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, have developed this toolkit for African tax authorities seeking to assess transfer pricing risk in the mining industry. The purpose is to strengthen authorities’ capacity to determine whether they should audit particular high-risk “related party transactions.†The toolkit employs a specific risk review approach, which focuses on particular transfer pricing issues that present a high risk to revenue (as distinct from a comprehensive risk review, which tax authorities use when they cannot detect where transfer  pricing issues are likely to arise). A loss of even 1 percent of the value of these transactions is likely to be significant for developing country revenues. These issues are also very prevalent: many African tax authorities report corporate services, including procurement and management, as common causes of tax loss. The four issues of focus are: 1. Marketing arrangements. A related company, for example a marketing hub, buys mineral products from the mine. The key issue is whether the mineral products are transferred to a fully fledged related party marketer that takes ownership of the product, performs value-adding functions and assumes entrepreneurial risk, or, more commonly, a hub that merely provides a support function. 2. Intercompany debt. A subsidiary receives debt from a parent or an affiliate company, often a corporate treasury located in a low-tax jurisdiction, to finance geological exploration or mine development. Debt generates interest payments, which are tax deductible. Most African countries currently limit the maximum amount of debt on which deductible interest payments are available, by way of a debt-to-equity ratio. However, the cost of related party debt (i.e., the interest rate) is difficult for tax authorities to price, leaving the tax base vulnerable to excessive interest deductions. 3. Procurement services. A company purchases mining goods and services on behalf of its subsidiary; the price charged to the subsidiary will include the direct cost, plus a “mark-up.†Usually in such cases the cost base should be the cost of providing the service, not the value of the goods. 4. Management services. The subsidiary pays a fee to a related party in return for a range of administrative, technical and advisory services. 2017_GIZ_Transfer_Pricing_Risk_Tool_EN ...

Russia vs Uralkaliy PAO, July 2017, Moscow Arbitration Court, Case No. A40-29025/17-75-227

A Russian company, Uralkaliy PAO, sold potassium chloride to a related trading company in Switzerland , Uralkali Trading SA. Following an audit, the Russian tax authority concluded that Uralkaliy PAO had set the prices at an artificially low level. A decision was therefore issued, ordering the taxpayer to pay an additional tax of 980 million roubles and a penalty of 3 million roubles. Uralkaly PAO had used the transactional net margin method (TNMM). The reasons given for not using the CUP method was that no publicly accessible sources of information on comparable transactions between independent parties existed. The range of return on sales for 2012 under the TNMM was 1.83% – 5.59%, while Uralkali Trading SA’s actual profit margin was 1.81%. The court supported the taxpayer’s choice of pricing method (TNMM), and since the Swiss trader’s actual profit margin did not exceed the upper limit of the range, it was concluded that the controlled transactions were priced at arm’s length.  The court rejected the tax authority’s position that Uralkali Trading SA had purchased products at an artificially low price from Uralkaliy PAO and resold them at a large mark-up. The court also identified significant flaws in the tax authority’s application of the CUP method. Had the Swiss trader, Uralkali Trading SA, used the prices sugested by the tax authorities it would not have been able to cover even “direct business costs†and thus been loss-making. The tax authority had wrongfully compared the taxpayer’s prices in transactions with Uralkali Trading SA with that same taxpayer’s prices after the addition of another trader’s margin. The data published by the Argus price reporting agency had been used without properly analysing the transactions on which the price quotations were based and without adjusting for significant differences in comparability factors – volumes, period , and payment terms. For these reasons, the tax authority’s decision was ruled invalid. Click here for translation A40-29025-2017_20170616_Reshenija_i_postanovlenija ...

Nederlands vs “Paper Trading B.V.”, October 2011, Supreme Court, Case No 11/00762, ECLI:NL:HR:2011:BT8777

“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 ECLI_NL_PHR_2011_BT8777 ...

US vs E.I. Du Pont de Nemours & Co, October 1979, US Courts of Claims, Case No 608 F.2d 445 (Ct. Cls. 1979)

Taxpayer Du Pont de Nemours, the American chemical concern, created early in 1959 a wholly-owned Swiss marketing and sales subsidiary for foreign sales — Du Pont International S.A. (known to the record and the parties as DISA). Most of the Du Pont chemical products marketed abroad were first sold by taxpayer to DISA, which then arranged for resale to the ultimate consumer through independent distributors. The profits on these Du Pont sales were divided for income tax purposes between plaintiff and DISA via the mechanism of the prices plaintiff charged DISA. For 1959 and 1960 the Commissioner of Internal Revenue, acting under section 482 of the Internal Revenue Code which gives him authority to reallocate profits among commonly controlled enterprises, found these divisions of profits economically unrealistic as giving DISA too great a share. Accordingly, he reallocated a substantial part of DISA’s income to taxpayer, thus increasing the latter’s taxes for 1959 and 1960 by considerable sums. The additional taxes were paid and this refund suit was brought in due course. Du Pont assails the Service’s reallocation, urging that the prices plaintiff charged DISA were valid under the Treasury regulations implementing section 482. The Court ruled in favor of the tax authorities with the following reasons: “In reviewing the Commissioner’s allocation of income under Section 482, we focus on the reasonableness of the result, not the details of the examining agent’s methodology …. The amount of reallocation would not be easy for us to calculate if we were called upon to do it ourselves, but Section 482 gives that power to the Commissioner and we are content that his amount… was within the zone of reasonableness. The language of the statue and the holdings of the courts recognize that the Service has broad discretion in reallocating income … A ‘broad brush’ approach to this inexact field seems necessary.” E. I. DU PONT DE NEMOURS CO. v. U ...