The Revenue raised an additional assessment on gain received from the transfer of technical know-how by Keysight Technologies to Agilent Technologies International for the amount of RM821,615,000.00 being income under section 4(f) of the Income Tax Act 1967 (ITA 1967) together with the penalty under section 113(2) ITA 1967. The Revenue contended that subsection 91(3) of the ITA 1967 provided that the Revenue may issue an assessment after the expiration of the time period of 5 years on grounds of fraud or willful default or negligence. The findings of negligence on the part of Keysight Technologies include failure to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by Keysight Technologies to Agilent Technologies International was an outright sale and failure to furnish the document and information as requested by the Revenue in the audit letter on the valuation of the marketing and manufacturing intangibles. The Revenue found that there was no proof of outright sale of the technical know-how as the Intellectual Property (IP) Agreement and Manufacturing Services (MS) Agreement showed no evidence that the legal rights had been transferred to ATIS since the agreements merely stated of the transfer of beneficial rights. Further, facts have shown that the technical know-how was still used by Keysight Technologies in a similar manner prior to and post the IP Agreement and MS Agreement. Instead, the gain of RM821,615,000.00 million was proven to represent the future income that would have been received by Keysight Technologies for the years 2008-2015 should Keysight Technologies continue to carry out its function as a full-fledged manufacturing company of which the function had subsequently changed to being a contract manufacturing company due to the group’s global restructuring exercise. As such, the gain was taxed as other income under section 4(f) ITA 1967. Keysight Technologies argued that the Revenue was time-barred under section 91(1) ITA 1967 from issuing the Notice of Additional Assessment for YA 2008. Keysight Technologies also argued that the sale of marketing and manufacturing intangibles by Keysight Technologies to Agilent Technologies International was capital in nature and therefore should not subject to tax under section 4(f) ITA 1967. The “badges of trade test” would be applicable in determining whether the income was revenue or capital in nature. Judgment The Court of Appeal overturned the SCIT and the High Court dicisions and allowed Keysight Technologies’ appeal. The Court of Appeal affirmed the application of the “badges of trade” test as argued by Keysight Technologies in determining whether the income was capital or revenue in nature and the test was not confined to disposal of land. The “Badges of Trade test” considers several factors; Subject matter of the transaction, Period of ownership, Frequency of transactions, Alteration of property to render it more saleable, Methods employed in disposing of property, Circumstances responsible for sale. The Court of Appeal held that Keysight Technologies was not in the business of buy and sell of IP and the IP was not its stock in trade. No special effort had been made by Keysight Technologies to attract purchasers. The transfer of technical know-how was due to global restructuring of the group of the company. The Court of Appeal further held that there had been an actual sale by way of agreement. The title to technical know-how was not registrable due to protection of confidential information. The outright sale test thus was not a proper test and the valuation report as requested by the Revenue was irrelevant. There was no failure on the part of Keysight Technologies to adduce valuation report as it was not requested during audit. Thus, there was no negligence and hence the additional assessment was time-barred. Keysight Technologies’ appeal was allowed with cost of RM20,000 to be paid by the Revenue to Keysight Technologies. Click here for translation ...

Following a tax audit the tax authority conducted a on-site inspection of PJSC Odesa Port Plant on the completeness of tax calculation in respect of controlled transactions on the export of mineral fertilisers to non-resident companies Ameropa AG (Switzerland), “Koch Fertilizer Trading SARL (Switzerland), Nitora Commodities (Malta) Ltd (Malta), Nitora Commodities AG (Switzerland), Trammo AG (Switzerland), Trammo DMCC (United Arab Emirates), NF Trading AG (Switzerland) for FY 2013 and 2014, as well as business transactions on import of natural gas in gaseous form from a non-resident company Ostchem Holding Limited (Republic of Cyprus) for FY 2013. Based on the results of the inspection, an assessment of additional taxable income was issued. The assessment was based on the following considerations of the tax authority: – it is impossible to use the “net profit” method to confirm the compliance of prices in PJSC Odesa Port Plant’s controlled transactions for the export of mineral fertilisers in 2013 and 2014, since the “comparable uncontrolled price” method should have been used to determine the price in the said controlled transactions. The position of the tax authority is based on the fact that the application of the “net profit” method for determining the price does not allow to objectively determine the relevance of the price of the controlled transaction due to the lack of consideration of the impact of global trends in the nitrogen fertiliser market; information on derivative data available in officially recognised sources of information may be considered sufficient to determine the market price range (range of exchange prices) and calculate the level of arm’s length prices; in the presence of a market price range (range of exchange prices), – PJSC Odesa Port Plant’s transactions with Ostchem Holding Limited for the purchase of natural gas are controlled and PJSC Odesa Port Plant used the method of comparable uncontrolled price in determining the price in controlled transactions for the import of natural gas. However, PJSC Odesa Port Plant is a related party of PJSC Sumykhimprom, therefore, comparing the price in the controlled transaction with the prices in transactions that are also recognised as controlled. – it is not possible to use the “comparable uncontrolled price” method and it is appropriate to use the “net profit” method for natural gas import transactions, since no official source of information contains information on comparable uncontrolled transactions; it is not possible to adjust for the price of natural gas transportation from the European hub to the territory of Ukraine to ensure the proper level of comparability of the price in controlled transactions, and therefore the tax authority to find comparable transactions to apply the “net profit” method. It was found that the contract holder, Ostchem Holding Limited, did not perform any functions that could have influenced the increase in the sale price of natural gas. In the course of the audit, the Amadeus database was used to select independent companies that are comparable to Ostchem Holding Limited in terms of activities within the controlled natural gas import transaction. The sample included, in the tax authority’s opinion, independent companies with comparable activities and a similar functional profile to Ostchem Holding Limited. As a result of the search for comparable companies, 3 companies were selected, which, in the tax authority’s opinion, are fully comparable to Ostchem Holding Limited with key financial indicators for 2013. Based on the results of the analysis of the financial indicators of the comparable companies and the calculation of the range of profitability indicators, the tax authority found that the minimum value of the net profitability range for the comparable year 2013 was 0.04%, and the maximum value of the net profitability range was 1.51%. Thus, the net profitability of the controlled transaction with Ostchem Holding Limited exceeds the maximum value of the market range of net profitability of comparable companies by 30.34%. PJSC Odesa Port Plant disagreed with the tax assessment and filed an appeal. The district court upheld the appeal and dismissed the tax assessment. Subsequently, the Court of Appeal upheld the decision of the District Court and ruled in favour of PJSC Odesa Port Plant. The tax authority then appealed to the Supreme Court, which sent the case back to the Court of Appeal, which in the new trail upheld the tax authority’s assessment. This decision was then appealed to the Supreme Court – again – because, according to PJSC Odesa Port Plant, the Court of Appeal did not follow the instructions and conclusions of the Supreme Court in the course of the new procedure. Judgement of the Court The Supreme Court found that the violations of procedural and substantive law had been committed by the courts of first instance and appeal, and the failure to take into account the relevant correct conclusions of the Supreme Court, give grounds for sending the case for a new trial. In the new trail, it is necessary to take into account the above, to comprehensively and fully clarify all the factual circumstances of the case, verifying them with appropriate and admissible evidence, and to make a reasoned and lawful court decision with appropriate legal justification in terms of accepting or rejecting the arguments of the parties to the case. Excerpt in English “Subparagraphs 39.2.2.8 – 39.2.2.9 of paragraph 39.2.2 of Article 39.2.2 of the TC of Ukraine stipulate that, when determining the comparability of commercial and/or financial terms of comparable transactions with the terms of the controlled transaction, the characteristics of the markets for goods (works, services) where such transactions are conducted are analysed. At the same time, differences in the characteristics of such markets should not significantly affect the commercial and/or financial terms of the transactions conducted there, or such differences should be taken into account when making the appropriate adjustment. In determining the comparability of the characteristics of markets for goods (works, services), the following factors are taken into account: geographical location of markets and their volumes; the presence of competition in the markets, the relative competitiveness of sellers and buyers in the market; the ...

“Cosmetics sp. z o.o.” is a Polish distributor of cosmetics. It purchases the goods from a related foreign company. The contract concluded between “Cosmetics sp. z o.o.” and the foreign company contained a provision according to which 3% of the price of the goods purchased was to be paid (in the form of royalties) for the right to use the trademarks for the promotion, advertising and sale of the products. However, the invoices issued by the foreign company for the sale of the goods in question did not show the amount paid for the right to use the trademarks as a separate item. The invoices simply stated the price of the goods purchased. “Cosmetics sp. z o.o. requested an “individual interpretation” from the tax authorities as to whether the royalty payments included in the price of the goods were subject to withholding tax in Poland. According to Cosmetics sp. z o.o., the answer should be no, as the “royalty” element was an ancillary part of the main transaction – the purchase of the goods. The tax authority disagreed. According to the authorities, the payment of royalties for the right to use trademarks was not an ancillary element of the main transaction and its importance was not insignificant. Under the CIT Act and the relevant double tax treaty (DTT), the payment of royalties would be subject to withholding tax. Dismissing an appeal filed by Cosmetics sp. z o.o., the Administrative Court held that there were two separate transactions – one for the acquisition of goods and one for the acquisition of the right to use the trademark. Therefore, the tax authority’s interpretation was correct. Judgement of the Supreme Administrative Court. The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of “Cosmetics sp. z o.o.”. According to the court, it was clear from the agreement that the fee consisted of two transactions, one of which was a licence fee (royalty). Therefore, the claim that the tax authority was trying to separate this payment from the payment for the goods was not justified. Excerpt “The issue in dispute in the case is the taxation withholding tax on the amount paid by the Appellant to a foreign entity on account of the right to use trademarks, included in the agreement on the purchase of goods from that entity. Instead, the resolution of the above problem depends on whether the fee for the use of trademarks remains an ancillary element of the main consideration – the purchase of goods – and should then share the tax fate of that consideration, or whether it constitutes a separate element of the contract, which is subject to a separate method of taxation. The author of the cassation appeal argued that the elements comprising the subject matter of the contract and making up the price paid should be qualified together, as a single consideration. In the opinion of the Company’s attorney, a transaction transferring the right to use trademarks should not be treated as generating a licence fee, since the right is related only to the possibility of further resale of goods, and thus “the scope of the licence granted to the Applicant was significantly limited”. In support of the above argumentation, the attorney referred to the opinion of a representative of international tax doctrine, Professor Michelle Markham. Referring to the excerpt from the publication quoted on p. 6 of the cassation complaint concerning the issue analysed in the case, the panel finds that it is not relevant to the case at hand. Firstly, it is clear from the full context of the quoted sentence that these are considerations on the basis of US tax law regulations. Secondly, the quoted passage refers specifically to such contracts, the subject of which are at least two services (including one intangible service) covered by a single price, where it could be unreasonable to try to separate them for tax purposes. However, we do not face such a situation in the case, as the Company’s agreement with the Establishment clearly separates the remuneration for the right to use trademarks in the amount of 3% of the value of the purchased goods – even if the above amount is not specified on the invoices. Above all, however, the Supreme Administrative Court draws attention to the introduction in the agreement of a provision concerning the granting of a paid licence for the use of trademarks within the scope presented in the application, which is of fundamental importance in the case under consideration. Pursuant to Article 155 of the Act of 30 June 2000. – Industrial Property Law (Journal of Laws of 2019, item 2309; hereinafter: ‘p.w.p.’), the right of protection for a trademark suffers a significant limitation as a result of the exhaustion of the right to market the goods. “Pursuant to Article 155(1) p.w.p., the right of protection for a trademark does not extend to acts concerning goods with the trademark, consisting in particular in offering them for sale or further marketing of goods bearing the trademark, if the goods have been placed on the market in the territory of Poland by the authorised entity or with its consent. (…) By the act of placing the marked goods on the market, by the rightsholder or a third party acting with his consent, the rightsholder’s competence to use the trade mark in such a manner as to further distribute the goods is deemed to be exhausted. Therefore, the purchaser – as the owner of the goods – may continue to resell the goods and, in doing so, to advertise using the holder’s mark. Exhaustion, however, covers only one exclusive competence of the right holder, which is the right to put the marked goods on the market, and concerns only normal distribution processes of the marked goods, understood as a whole, which do not threaten the loss of connection with the goods.” (U. Promińska, Industrial Property Law, 5th edition, LexisNexis 2011, p. 340). Transferring the above considerations to the grounds ...

SA Tropicana Europe Hermes is a French permanent establishment of SA Tropicana Europe, located in Belgium. The French PE carried out the business of bottling fruit juice-based drinks. In 2009, a new distribution contract was concluded with the Swiss company FLTCE, which was accompanied by a restructuring of its business. Before 1 July 2009, Tropicana was engaged in the manufacture of fresh fruit juices in cardboard packs and purchased fresh fruit juices which it pasteurised. As of 1 July 2009, its activity was reduced to that of a contract manufacturer on behalf of FLTCE, which became the owner of the technology and intellectual property rights as well as the stocks. The re-organisation led to a significant reduction in the company’s turnover and profits. Tropicana Europe was subject to two audits, at the end of which the tax authorities notified it of tax reassessments in respect of corporate income tax, withholding tax and business value added contribution (CVAE) for the years 2010 to 2013, together with penalties. It also notified the company of tax adjustments, together with penalties, in respect of the additional contribution to corporation tax for the years 2012 and 2013. According to the tax authorities Tropicana Europe’s new contract was not at arm’s length and constituted an abnormal act of management. Tropicana filed an appeal with the Administrative Court, where the assessment issued by the tax authorities was later set aside. An appeal was then filed by the tax authorities with the Court of Appeal. At issue was whether FLTCE was located in a privileged tax regime and whether there was a link of dependence between Tropicana and FLTCE and thus the basis of the tax assessment. Judgement of the Court of Appeal The court dismissed the appeal of the tax authorities and upheld the decision of the administrative court. Excerpts “As regards the existence of a privileged tax regime : 6. Before the first judges, Tropicana Europe disputed that FLTCE was established in a country with a privileged tax regime within the meaning of the second paragraph of Article 238 A of the General Tax Code. The first judges considered that by simply relying on the overall corporate tax rate of 13% in the canton of Bern, in the Swiss Confederation, where FLTCE’s head office is located, and the significant difference between this rate and the corporate tax rate of 33.33% in France, the tax authorities did not establish that FLTCE was established in a country with a privileged tax regime, the tax authorities did not establish that the amount of income tax to which FLTCE is subject is less than half the amount of income tax for which it would have been liable under the conditions of ordinary law in France, if it had been domiciled or established there, and, consequently, that FLTCE would be subject to a preferential tax regime pursuant to the aforementioned provisions of Article 238 A of the French General Tax Code. As this ground of the judgment is not contested on appeal by the Minister, the latter must be considered as renouncing to rely on the establishment of FLTCE in a country whose tax regime is privileged pursuant to the provisions of Article 238 A of the General Tax Code. Consequently, the Minister bears the burden of proof of the existence of a link of dependence between Tropicana Europe and FLTCE.” “As regards the existence of a link of dependence : 7. In order to discharge Tropicana Europe from the taxes it was contesting, the first judges noted that, in order to establish a relationship of dependence between this company and FLTCE, the tax authorities based themselves on the fact that these two companies belonged to the same multinational group, PepsiCo, and deduced that, by relying solely on this factor, the authorities, who bear the burden of proof, did not establish any relationship of dependence between the two companies within the meaning of Article 57 of the General Tax Code. 8. In order to prove the existence of a relationship of dependence between Tropicana Europe and FLTCE, the Minister noted that SA Tropicana Europe Hermes is a permanent establishment of SA Tropicana Europe, located in Belgium, which is 99.99% owned by Seven’Up Nederland BV, which in turn is wholly owned by Pepsico Inc. FLTCE, located in Switzerland in the canton of Bern, is wholly owned by Frito Lay Compagny Gmbh, also located in Switzerland in the same canton. This company has been controlled since 14 December 2011 by PepsiCo Limited located in Gibraltar. While the Minister deduces from all these facts that SA Tropicana Europe and FLTCE are sister companies under the control of the PepsiCo group, he does not provide evidence of legal dependence between SA Tropicana Europe and FLTCE, which are not linked by a capital link between them. Consequently, it is up to the Minister to provide proof of the existence of a de facto dependency link between these two companies. However, the Minister did not provide any other element or indication that would make it possible to detect a de facto dependence between these two companies other than the fact that they belong to the same group. The fact that the two companies belong to the same group does not, in the present case, constitute sufficient proof or evidence of de facto dependence between SA Tropicana Europe and FLTCE in the absence of any other element put forward by the Minister. Consequently, the Minister is not entitled to maintain that, contrary to the assessment made by the first judges, the conditions for the application of Article 57 of the General Tax Code were met in order to base the taxes for which the Administrative Court of Amiens granted discharge.” “As regards the request for substitution of legal basis : … 12. However, this reorganisation was not limited to a simple “change in the invoicing circuit” as the Minister maintains, but led to a significant change in operating conditions since, before 1 July 2009, Tropicana Europe was engaged ...

On 16 June 2022 McDonald’s France entered into an settlement agreement according to which it will pay €1.245 billion in back taxes and fines to the French tax authorities. The settlement agreement resulted from investigations carried out by the French tax authorities in regards to abnormally high royalties transferred from McDonald’s France to McDonald’s Luxembourg following an intra group restructuring in 2009. McDonald’s France doubled its royalty payments from 5% to 10% of restaurant turnover, and instead of paying these royalties to McDonald’s HQ in the United States, going forward they paid them to a Swiss PE of a group company in Luxembourg, which was not taxable of the amounts. During the investigations it was discovered that McDonald’s royalty fees could vary substantially from one McDonald’s branch to the next without any justification other than tax savings for the group. This conclusion was further supported by statements of the managers of the various subsidiaries as well as documentation seized which showed that the 100% increase in the royalty rate was mainly explained by a higher profitability of McDonald’s in France and a corresponding increase in taxes due. The investigations led the French tax authorities to question the overall economic substance of the IP company in Luxembourg and the contractual arrangements setup by the McDonald’s group. After being presented with the findings of the investigations and charged with tax fraud etc. McDonald’s was offered a public interest settlement agreement (CJIP) under Article 41-1-2 of the French Code of Criminal Procedure. The final settlement agreement between McDonald’s and the French authorities was announced in a press release from the Financial Public Prosecutor (English translation below). On 16 June 2022, the President of the Paris Judicial Court validated the judicial public interest agreement (CJIP) concluded on 31 May 2022 by the Financial Public Prosecutor (PRF) and the companies MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L pursuant to Article 41-1-2 of the Criminal Procedure Code. under Article 41-1-2 of the Code of Criminal Procedure. Under the terms of the CJIP, MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L, undertake to pay the French Treasury a public interest fine totalling 508,482,964 euros. Several French companies of the MC DONALD’S group have also signed a global settlement with the tax authorities, putting an end to the administrative litigation. The sum of the duties and penalties due under the overall settlement and the public interest fine provided for under the CJIP amounts to a total of EUR 1,245,624,269. Subject to the payment of the public interest fine, the validation of the CJIP extinguishes the public prosecution against the signatory companies. This agreement follows a preliminary investigation initiated by the PNF on 4 January 2016 after the filing of a complaint by the works council of MC DONALD’S OUEST PARISIEN. Opened in particular on the charge of tax fraud, the investigation had been entrusted to the Central Office for Combating Corruption and Financial and Fiscal Offences (OCLCIFF). This is the 10ᵉ CJIP signed by the national financial prosecutor’s office. The Financial Public Prosecutor Jean-François Bohnert Validated Settlement Agreement of 16 June 2022 English translation of the Validated Settelment Agreement Preliminary Settlement Agreement of 31 May 2022 with statement of facts and resulting taxes and fines English translation of the Preliminary Settlement Agreement of 31 May 2022 ...

Keysight Technologies Malaysia Sdn Bhd (KTM) was incorporated in 1998 and active as a full-fledged manufacturer of various microwave devices and test instruments in which capacity it had also developed valuable intangibles. In 2008, KTM was converted into a contract manufacturer under an agreement with Agilent Technologies International s.a.r.l. and at the same time KLM purportedly transferred its intangibles to Agilent Technologies. KTM received an amount of RM 821 million which it reported as non-taxable gains form sale of intangibles in its tax return. Following an audit the tax authorities issued a notice of assessment for FY 2008 where the sum of RM 821 million had been considered revenue in nature and thus taxable under Section 4(f) of the ITA. This resulted in a claim of RM 311 million together with a 45% penalty. According to the tax authorities the transfer of technical knowhow was not actually a sale as KTM was still using the technical knowhow in its manufacturing activities. The proceeds were related to the conversion of KLM from a full-fledged manufacturer to a contract manufacturer, which had resulted in a reduction in taxable profits. “The gain on the transfer of technical knowhow was for the payment on the loss of income since it was related to the change of the Appellant’s function from a full-fledged manufacturer to a contract manufacturer which resulted in a reduction of profit margin of the Appellant after the change of the function.” KTM filed an appeal against the assessment in which it stated that proceeds from the sale of know-how were not revenue in nature and therefore not taxable under the ITA. KLM also appealed against the penalty imposed under Section 113(2) of the ITA. The appeal was dismissed by the Special Commissioners of Income Tax, and an appeal was then filed by KTM with the High Court. Judgement of the High Court The High Court Judge dismissed KTM’s appeal and upheld the decision of the Special Commissioners of Income Tax. According to the High Court KTM had “failed to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by KTM to Agilent Technologies International totalling of RM821,615,000.00 is an outright sale.”. There were no documents showing that the IP rights had been registered in the name of Agilent Technologies International s.a.r.l. Hence the proceeds was considered revenue in nature and taxable under Section 4(f) of the Income Tax Act 1967(“ITA”). Click here for translation ...

Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question. Skechers held that the losses did not derive from the costs of the intra-group purchases of the goods, but from the fixed start-up costs, not compensated by an adequate volume of sales, as an effect also of the competitive Italien market. The provincial and later the regional Tax Commission rejected the taxpayer’s appeal. The judge of appeal held that Skechers had not proved that the losses stemmed from the fixed start-up costs, which – moreover – were found only in relation to the Italien company and not in relation to the distribution companies located in other European countries; it then held that it was Skechers’ burden to prove the arm’s length nature of the costs. Skechers then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision and remanded the case to the Regional Tax Commission in a different composition. Excerpts “6. The following principle of law should therefore be stated: “on the subject of the determination of business income, the transfer pricing rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 22 December 1986. 917 of 22 December 1986 imposes on the tax authorities the burden of proving the existence of transactions between related companies at a price other than the market price, using in this regard the transfer pricing methods described in the OECD Guidelines as soft law rules; once that burden of proof has been discharged, the taxpayer bears the burden of proving that those transactions took place for market values to be considered normal, having regard to the same stage of marketing, time and place where the goods and services were acquired or rendered, having regard – in particular – to the market context in which the taxpayer was operating”. 7. The judgment under appeal, in so far as it burdened the taxpayer company with the proof of the existence and inherent nature of the fixed operating costs, did not comply with the aforesaid principles, both in so far as the burden of proof lies with the Office, and in so far as the burden of proof must relate to the appropriateness of the transfer prices of the purchases of goods, in the market conditions in which the taxpayer company was required to operate, according to one of the criteria indicated in the OECD Guidelines. Nor can the burden of proof be discharged by alleging the mere uneconomicity of management (even if ascribed to the incidence of the aforesaid purchases), since the judge of the merits must verify the use of one of the methods indicated in the aforesaid Guidelines. The merit judge’s assessment must then be carried out in relation to the context in which the taxpayer company was operating at the time of the assessment, during which there had been a high incidence on the typical management of fixed operating costs, due to the start-up phase, which would have required the realisation of higher sales volumes in order to reach the break-even point. 8. The appeal must therefore be upheld and the contested judgment set aside, with reference back to the court a quo, in a different composition, also for the settlement of the costs of the proceedings.” Click here for English translation Click here for other translation ...

The question at issue was whether a Crop tax adviser had acted in accordance with the requirements of a reasonably competent and reasonably acting adviser when advising on the so-called royalty routing and its implementation. Judgement of the Court of Appeal “Crop is liable for the damages arising from the shortcoming. For the assessment of that damage, the case must be referred to the Statement of Damages, as the District Court has already decided. To answer the question of whether the likelihood of damage resulting from the shortcomings is plausible, a comparison must be made between the current situation and the situation in which business rates would have been applied. For the hypothetical situation, the rates to be recommended by the expert should be used. For the current situation, the Tax Authorities have agreed to adjusted pricing. The question whether and to what extent [the respondents] et al. can be blamed for insufficiently limiting their loss in the negotiations with the tax authority, as argued by Crop, should be adjudicated in the proceedings for the determination of damages, because it has not been made plausible beforehand that Crop’s obligation to pay compensation should lapse in full because this is required by the requirements of fairness under the given circumstances” Click here for English Translation Click here for other translation ...

SAS Microchip Technology Rousset (former SAS Atmel Rousset) is a French subsidiary of the American Atmel group, which designs, manufactures, develops and sells a wide range of semiconductor integrated circuits. It was subject to an audit covering the FY 2010 and 2011 and as a result of this audit, the tax authorities imposed additional corporate income tax and an additional assessments for VAT. The administration also subjected SAS Atmel Rousset to withholding tax due to income deemed to be distributed to one of the Atmel group companies. The authorities invoked the provisions of Article 57 of the General Tax Code as the new legal basis for the additional corporate tax contributions and the social contribution on corporate tax, resulting from the reintegration of the capital loss arising from the sale of SAS Fabco shares and the assumption of responsibility for SAS Fabco’s social plan, instead of the provisions of Article 38(1) and Article 39(1) of the same code. The tax administration, which relies on the guidelines recommended in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Public Administrations, argued that the transfer of the production activity, materialised by the sale of the Rousset plant, is part of a global strategy. The parent company of the group will benefit from the gains made through the outsourcing of the production activity, and moreover initiated and conducted the negotiations, as demonstrated by the letter of intent to purchase dated 12 May 2009 from LFoundry GmbH, addressed to the group’s parent company. Similarly, the administration notes that the “Stock Purchase Agreement” and “Wafer Purchase Agreement” relating respectively to the transfer of shares in SAS Fabco, and to the terms of purchase of semiconductors sold by this same company, were signed by Mr A…, Atmel Corporation’s Director of Operations. It follows from all of these elements that the tax authorities must be considered as providing evidence of a practice falling within the scope of Article 57 of the General Tax Code, which establishes a presumption of indirect profit transfer. SAS Microchip Technology Rousset applied to the Marseille administrative court for a discharge of duties and penalties for the taxes to which it was thus subject for the years 2010 and 2011, and in a judgment of 21 June 2019, the administrative court decided in favor of SAS Microchip Technology Rousset and set aside the assessment. The Authorities filed an appeal to the Court of Appeal. Judgement of the Court of Appeal The court dismissed the appeal of the authorities and upheld the decision of the administrative court in favor of SAS Microchip Technology Rousset. Excerpts “…although the administration argues that this operation was entirely led by the group’s parent company’s operations manager, this circumstance, particularly because of the international scope of the project, is not such as to demonstrate that the interests of SAS Microchip Technology Rousset were not taken into account and that the transaction in question was concluded to the exclusive benefit of the American company. It follows from the above that the court was right to consider that the sum in dispute could not be considered as an indirect transfer of profits to the American company Atmel Corporation within the meaning of Article 57 of the General Tax Code. As a result, the tax authorities were not justified in increasing the profit subject to corporate income tax for the financial year ending in 2010 by EUR 72,062,567. “…Furthermore, it is also clear from the information provided by the respondent company that the cost of the additional costs generated by the Manufacturing Services Agreement was much lower than the costs that SAS Microchip Technology Rousset would have had to bear in the event of the restructuring of the Rousset manufacturing unit or its closure. It is clear from the documents in the file that the Flichy firm estimated that the redundancy costs alone would have amounted to EUR 176 800 000, while the community of the Pays d’Aix estimated at EUR 60 million the amount of business tax that would have had to be paid in the event of cessation of the activity. Finally, the fact that the director of operations of the parent company Atmel Corporation took the decisions relating to the transfer of the manufacturing activity of SAS Microchip Technology Rousset is not sufficient to establish that, by accepting the terms of the Manufacturing Services Agreement and by bearing the resulting additional costs, the respondent company did not act in the interest of the company. Consequently, the latter provided proof that the costs in dispute, which it had borne, had been justified by obtaining favourable considerations for its own operations and did not constitute an indirect transfer of profits. The administration was therefore not justified, as the administrative court ruled, in reintegrating the corresponding sum into the taxable profits of SAS Microchip Technology Rousset for the financial year ending in 2011.” Unless it establishes the existence of an abnormal act of management, the tax administration does not have to interfere in the management of companies. Under the combined provisions of Articles 38 and 209 of the General Tax Code, the profit subject to corporation tax is that which derives from operations of any kind carried out by the company, with the exception of those which, because of their purpose or their methods, are alien to normal commercial management. The assumption by an enterprise of costs for which it has no direct consideration or which are not directly incumbent on it is only normal commercial management if it appears that, in granting such advantages, the enterprise has acted in its own interest. It follows from the reasons set out in points 10 and 12, recalling the interest of SAS Microchip Technology Rousset in bearing the additional costs linked to the invoicing conditions provided for in the “Manufacturing Services Agreement” and “Wafer Purchase Agreement” relating to the purchase of wafers from LFoundry, that the administration does not establish an abnormal management act. Click here for English translation Click here for other translation ...

Swiss banking group, UBS, had set up a system aimed at facilitating tax evasion and money laundering of wealthy French taxpayers. Judgement of the Court of Appeal By judgment of the Paris Court of Appeal dated 13 December 2021, the Swiss parent, UBS AG, was found guilty of banking and financial canvassing and of facilitating tax evasion and money laundering. The Court Sentenced UBS AG to a fine of €3,750,000.00 and confiscation of €1,000,000,000.00. Furthermore UBS AG was ordered to pay €800,000,000.00 for damages to the French State. UBS FRANCE SA, the French subsidiary, was found guilty of complicity in banking and financial canvassing and sentenced to a fine of €1,875,000.00. Click here for English translation ...

The US tax authorities had increased Whirlpool US’s taxable because income allocated to Whirlpool Luxembourg for selling appliances was considered taxable foreign base company sales income FBCSI/CFC income to the parent company in the U.S. under “the manufacturing branch rule” under US tax code Section 951(a). The income from sales of appliances had been allocated to Whirlpool Luxembourg  through a manufacturing and distribution arrangement under which it was the nominal manufacturer of household appliances made in Mexico, that were then sold to Whirlpool US and to Whirlpool Mexico. According to the arrangement the income allocated to Luxembourg was not taxable in Mexico nor in Luxembourg. Whirlpool challenged IRS’s assessment and brought the case to the US Tax Court. In May 2020 the Tax Court ruled in favor of the IRS. “If Whirlpool Luxembourg had conducted its manufacturing operations in Mexico through a separate entity, its sales income would plainly have been FCBSI [foreign base company sales income] under section 954(d)(1),”. The income should therefore be treated as FBCSI under the tax code, writing that “Section 954(d)(2) prevents petitioners from avoiding this result by arranging to conduct those operations through a branch.” Whirlpool brought this decision to US court of appeal. Judgement of the Court of Appeal The Court of Appeal upheld the decision of the tax court and found that under the text of the statute alone, the sales income was FBCSI that must be included in the taxpayer’s subpart F income. Excerpt: “The question presented is whether Lux’s income from its sales of appliances to Whirlpool-US and Whirlpool-Mexico in 2009 is FBCSI under §954(d)(2). That provision provides in full: Certain branch income. For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation. As the Tax Court aptly observed, § 954(d)(2) consists of a single (nearly interminable) sentence that specifies two conditions and then two consequences that follow if those conditions are met. The first condition is that the CFC was “carrying on” activities “through a branch or similar establishment” outside its country of incorporation. The second condition is that the branch arrangement had “substantially the same effect as if such branch were a wholly owned subsidiary corporation [of the CFC] deriving such income[.]” If those conditions are met, then two consequences follow as to “the income attributable to” the branch’s activities: first, that income “shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation”; and second, the income attributable to the branch’s activities “shall constitute foreign base company sales income of the controlled foreign corporation.” 26 U.S.C. § 954(d)(2).” … “From these premises, § 954(d)(2) expressly prescribes the consequences that follow: first, that the sales income “attributable to” the “carrying on” of activities through Lux’s Mexican branch “shall be treated as income derived by a wholly owned subsidiary” of Lux; and second, that the income attributable to the branch’s activities “shall constitute foreign base company sales income of” Lux. That second consequence directly answers the question presented in this appeal. We acknowledge that § 954(d)(2) states that, if the provision’s two conditions are met, then “under regulations prescribed by the Secretary” the provision’s two consequences “shall” follow. And Whirlpool makes various arguments as to those regulations, seeking a result different from the one mandated by the statute itself. But the agency’s regulations can only implement the statute’s commands, not vary from them. (The Tax Court read the “under regulations” text the same way. See Op. at 38 (“The Secretary was authorized to issue regulations implementing these results.”)). And the relevant command here—that Lux’s sales income “shall constitute foreign base company sales income of” Lux—could hardly be clearer.” Click here for translation ...

A new huge leak of financial records revealed by ICIJ, once again shows widespread use of offshore accounts, shell companies and trusts to hide wealth and/or avoid taxes. The new leak is known as the Pandora Papers and follows other recent leaks – lux leak, panama papers, paradise papers. The International Consortium of Investigative Journalists obtained 11.9 million confidential documents from 14 separate legal and financial services firms, which the group said offered “a sweeping look at an industry that helps the world’s ultrawealthy, powerful government officials and other elites conceal trillions of dollars from tax authorities, prosecutors and others.” “The key players in the system include elite institutions – multinational banks, law firms and accounting practices – headquartered in the U.S. and Europe.” The Consortium said the 2.94 terabytes of financial and legal data shows the “offshore money machine operates in every corner of the planet, including the world’s largest democracies,” and involves some of the world’s most well-known banks and legal firms. “The Pandora Papers provide more than twice as much information about the ownership of offshore companies. In all, the new leak of documents reveals the real owners of more than 29,000 offshore companies. The owners come from more than 200 countries and territories, with the largest contingents from Russia, the U.K., Argentina and China.” “Pandora Papers” leaks: Statement by Bob Hamilton, Chair of the Forum on Tax Administration and Chris Jordan, Chair of the FTA’s Joint International Task Force on Shared Intelligence and Collaboration On October 14, a statement was issued by the OECD The Forum on Tax Administration and its Joint International Task Force on Shared Intelligence and Collaboration (JITSIC) are already working collaboratively in response to the recent “Pandora Papers” leaks. This follows the model successfully adopted for the Panama and Paradise Papers leaks. 14/10/2021 – The International Consortium of Investigative Journalists (ICIJ) has recently released information relating to its review of data leaks referred to as the Pandora Papers. As a result of the strong partnerships established through its JITSIC Network, the OECD Forum on Tax Administration (FTA) is well positioned to enable a collaborative approach to identifying and addressing aggressive tax avoidance and tax evasion involving multiple jurisdictions once the data becomes available. The FTA is dedicated to tax transparency and tax co-operation through the delivery of its collaborative work programme, and its members have access to a range of tools and platforms to help tackle offshore tax evasion and avoidance, including: The FTA’s JITSIC network, which provides an effective and well-established platform to its 42 members to cooperate directly on individual cases, as well as sharing their experience, resources and expertise. This direct and immediate collaboration proved to be very effective following the Panama and Paradise Papers leaks. JITSIC, like tax administrations more generally, operates under strict rules designed to protect the confidentiality of information and the confidence of taxpayers. As a consequence much of the work of JITSIC is not always visible to the public. The OECD standard on the exchange of information on request, which provides a powerful framework for tax administrations to receive detailed information on taxpayers’ offshore affairs from 163 jurisdictions. The OECD Common Reporting Standard (CRS) under which there is automatic reporting of information between more than 100 jurisdictions on the offshore financial accounts of non-residents, to their jurisdiction of residence. Information on these financial accounts, as well as the requirements envisaged by the transparency and exchange of information on request standard, ensure greater transparency of ownership of companies, trusts, and other similar structures, the importance of which has been illustrated in the Pandora Papers. As has been the case with previous leaks, JITSIC members will continue to work together to pool resources, share information and rapidly develop a more accurate picture of potential wrong doing in order to facilitate further investigations. While the information contained in such leaks can be of value in investigations, the inclusion of information about an individual or entity in a data leak does not automatically mean that there has been non-compliance ...

A new huge leak of financial records revealed by ICIJ, once again shows widespread use of offshore accounts, shell companies and trusts to hide wealth and/or avoid taxes. The new leak is known as the Pandora Papers and follows other recent leaks – lux leak, panama papers, paradise papers. The International Consortium of Investigative Journalists obtained 11.9 million confidential documents from 14 separate legal and financial services firms, which the group said offered “a sweeping look at an industry that helps the world’s ultrawealthy, powerful government officials and other elites conceal trillions of dollars from tax authorities, prosecutors and others.” “The key players in the system include elite institutions – multinational banks, law firms and accounting practices – headquartered in the U.S. and Europe.” The Consortium said the 2.94 terabytes of financial and legal data shows the “offshore money machine operates in every corner of the planet, including the world’s largest democracies,” and involves some of the world’s most well-known banks and legal firms. “The Pandora Papers provide more than twice as much information about the ownership of offshore companies. In all, the new leak of documents reveals the real owners of more than 29,000 offshore companies. The owners come from more than 200 countries and territories, with the largest contingents from Russia, the U.K., Argentina and China.” ...

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 ...

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

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”). Both the payment of royalties and the purchase fee are further regulated in the group’s transfer pricing document. Following an audit, the Customs Directorate added the payment of concept fee to the price of the acquired products for customs purposes. Decision of the Court The Court of Appeal ruled that the Customs Directorate’s decision on determining the customs value for the import of clothing and gift items was invalid. There was no basis for including a paid “concept fee” in the customs value. The condition of payment of concept fee had no connection to the sellers of the goods, but sprang from the buyer’s own internal organization. Click here for translation ...

This decision is about the jurisdiction of the Tax Court of Canada, or perhaps more accurately about the scope of an appeal of an assessment. It arises in the context of an appeal by Dow Chemical Canada ULC of a reassessment of its 2006 taxation year. The reassessment increased Dow Chemical’s income under the transfer pricing provisions in section 247 of the Income Tax Act. In reassessing Dow Chemical for its 2006 and 2007 taxation years, the tax authorities had increased Dow Chemical’s income in respect of certain transactions with non-residents to which Dow Chemical is related. The authorities initially indicated that the transfer pricing provisions also would result in a downward adjustment to Dow Chemical’s income in those taxation years in respect of another transaction. However, the most recent reassessment of Dow Chemical’s 2006 taxation year did not reflect the downward adjustment, although the reassessment of its 2007 taxation year did. Dow Chemical has appealed the 2006 reassessment. The problem was the tax authorities decision to deny Dow Chemical the benefit of the downward adjustment. While the amount of the adjustment is not in dispute, the authorities, determined that it is not appropriate in the circumstances to give effect to the adjustment. The dispute concerns whether that determination was proper. The issue faced by Dow Chemical was where to bring the remaining issue in dispute. The Tax Court has the jurisdiction to consider an appeal of an assessment. The Federal Court has jurisdiction to judicially review a decision of the Minister, but only if the matter is not otherwise appealable. The uncertainty concerning the proper forum for the dispute led the parties to submit a question of law to the Tax Court under section 58 of the Tax Court of Canada Rules (General Procedure). “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?” The Tax Court’s decision “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.” ...

Software A/S was a fully fledged Danish distributor of software an related services up until 2010 where the company was converted into a commissionaire dealing on behalf of a newly established sales and marketing hub in Switzerland. Following an audit, the Danish tax authorities issued a assessment where additional taxable income from the transfer of intangibles to Switzerland in 2010 had been determined by application of the DCF valuation model. As no transfer pricing documentation had been prepared on the transfer, the assessment was issued on a discretionary basis. Software A/S filed a complaint to the Danish Tax Court. The Tax Court found that the tax authorities did not have the authority to make a discretionary assessment. It was emphasized that the company in its transfer pricing documentation had described the relevant circumstances for the restructuring. Furthermore, the company had analyzed functions and risks and prepared comparability analyzes for transactions before and after the restructuring. However, the Tax Court found that the authorities had proved that during the restructuring, valuable intangible assets had been transferred, which were to be priced in accordance with Danish arm’s length provisions. For this purpose, the Tax Court applied the valuation model prepared by the tax authorities, but where the expected useful life of the assets was limited to only 10 years – and not indefinite as determined by the authorities – resulting in a lower value. Click here for other translation ...

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. The assessment was set aside by the National Court in a decision issued in November 2018. The Supreme court were to clarify the conformity with the law of the judgement of the Audiencia Nacional, following in the wake of the order of admission which, in a similar manner to that proposed in appeal no. 5448/2018, ruled in favour of the taxpayer on 3 February last, asks the following questions. a) to clarify the objective and temporal limits of the so-called dynamic interpretation of the DTAs signed by the Kingdom of Spain on the basis of the OECD Model Convention – as in this case the Spanish-Swiss DTA – when, despite the fact that the concept of beneficial owner is not provided for in article 12 of the DTA, this figure is applied in accordance with the Commentaries to the OECD Model Convention (drawn up at a date subsequent to the initial formalisation of the Convention), despite the fact that the beneficial owner was not introduced in Article 12 (relating to royalties) in subsequent amendments to the DTA, but was introduced in other provisions (Articles 10 and 11) for other concepts such as dividends or interest. b) Whether dynamic interpretation, if possible, allows the applicator of the rule, including the Court in proceedings, to correct the actual meaning or literal tenor of the rules agreed in the Convention, which occupies a preferential place in our system of sources (Article 96 EC), in order to avoid treaty overriding or unilateral modification. c) Clarify whether the Commentaries to the OECD Model Convention (here drawn up at a date subsequent to the signing of the Convention) constitute a source of law in their own right (Articles 117 EC and 1. 6 of the Civil Code), as they are not, as we have stated – STS of 19 October 2016, pronounced in appeal no. 2558/2015-, as they are not strictly speaking legal rules that are binding on the Courts of Justice and which, therefore, can be the basis for a ground for cassation in their hypothetical infringement and whether, consequently, the Courts can rely on their indications or opinions to stop applying a double taxation Convention and directly apply the national law, which results in a qualitatively higher taxation. These questions coincide substantially, with slight variations in formulation, with those examined in appeal no. 5448/2018, which gave rise to the favourable judgment -for the taxpayer- of 3 February 2020. This leads us to specify the neuralgic points of the problem raised here, as far as they coincide, for the decision of the appeal in cassation and the formation of jurisprudential doctrine in this matter: a) what is the dynamic interpretation of the Conventions and whether it is an expression that can find equivalents in our legal tradition; b) whether the OECD model agreements or their commentaries, by their origin and nature, are legal rules that the courts of justice must take into account when interpreting the rules agreed in the Conventions, in accordance with the provisions of Articles 94 and 96 of our EC; c) whether such commentaries, guidelines or interpretative models can take precedence over the hermeneutical rules, either those agreed between the signatory states or in other conventions and treaties, or those of their respective domestic legal systems, and by virtue of what source of legitimacy; d) whether this dynamic interpretation can be used to interpret an article of the Convention on the basis of the content of other subsequent rules of the same Convention, in any event not in force at the time of application of the withholdings required here; and e) whether Spain can unilaterally interpret, on the basis of this rule, the concept of royalties, as well as that of beneficial owner, in order to deny that it is present in the paying company. Judgement of the Supreme Court The court held in favour of Colgate and set aside the decision of the tax authorities. Excerpts “The provisions of paragraph 1 shall not apply if the beneficial owner of the interest, who is a resident of a Contracting State, carries on a business in the other Contracting State from which the interest arises through a fixed establishment situated in that other State and the debt-claim giving rise to the interest is effectively connected with that fixed establishment. In such a case the provisions of Article 7 shall apply”. As already indicated, it should be stressed that the wording of Article 12 (royalties) did not include any reference to the concept of beneficial owner (despite having had the opportunity at the time of the amendment of the Convention). Moreover, to date, the concept of “beneficial owner” has not been introduced in Article 12 either, despite the fact that there has been a second amendment of the Spain-Switzerland DTA through the Protocol made in Madrid on 27 July 2011 (BOE of 11 June 2013) – “Protocol of 2011”. That is to say, without prejudice to the incorporation of the concept of “beneficial owner” in the 1977 and 1995 Model Conventions and the subsequent amendments made to the conventional text that came to reflect this and other modifications introduced in the Model Convention, the fact is that the literal wording of the sections that interest us here in Article 12 of the Spain-Switzerland DTA maintains, to date, its original wording. That is to say, the States have agreed to modify and adapt the CDI to the new standards set out in the Model, but only in those provisions expressly agreed by both States and among which the provision relating to royalties was not included […]”. “By their very nature, the above considerations lead us to the need to annul and set aside the lower court judgment, on the ...

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle). In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to the relevant provocations that H1 A/S has not lifted the burden of proof that the payments of royalties to the group-affiliated company G1 SA, constitutes a deductible operating expense, cf. section 6 (a) of the State Tax Act. 4.5 and par. 4.6, the national court finds that the company’s royalty payment cannot otherwise be regarded as a deductible operating expense.” Adecco appealed the decision to the Supreme Court. The Supreme Court overturned the decision of the High Court and ruled in favor of Adecco. The Supreme Court held that the royalty payments had the nature of deductible operating costs. The Supreme Court also found that Adecco A/S’s transfer pricing documentation for the income years in question was not insufficient to such an extent that it could be considered equal to lack of documentation. The company’s income could therefore not be determined on a discretionary basis by the tax authorities. Finally, the Supreme Court did not consider that a royalty rate of 2% was not at arm’s length, or that Adecco A/S’s marketing in Denmark of the Adecco brand provided a basis for deducting in the royalty payment a compensation for a marketing of the global brand. Click here for translation ...

The US tax authorities had increased Whirlpool US’s taxable because income allocated to Whirlpool Luxembourg for selling appliances was considered taxable foreign base company sales income/CFC income to the parent company in the U.S. under “the manufacturing branch rule” under US tax code Section 951(a). The income from sales of appliances had been allocated to Whirlpool Luxembourg  through a manufacturing and distribution arrangement under which it was the nominal manufacturer of household appliances made in Mexico, that were then sold to Whirlpool US and to Whirlpool Mexico. According to the arrangement the income allocated to Luxembourg was not taxable in Mexico nor in Luxembourg. Whirlpool challenged IRS’s assessment and brought the case to the US Tax Court. The tax court ruled in favor of the IRS. “If Whirlpool Luxembourg had conducted its manufacturing operations in Mexico through a separate entity, its sales income would plainly have been FCBSI [foreign base company sales income] under section 954(d)(1),”. The income should therefore be treated as FBCSI under the tax code, writing that “Section 954(d)(2) prevents petitioners from avoiding this result by arranging to conduct those operations through a branch.” ...

A Dutch company, Zinc Smelter B.V., transferred part of it’s business to a Swiss group company in 2010. In dispute was whether the payment for the transferred activities had been set at arm’s length, and whether the cost-plus remuneration applied to the Dutch company after the business restructuring constituted an arm’s length remuneration for the remaining activities in the company. The case had previously been presented before the lower court where a decision had been issued in October 2017. After hearings in the Court of Appeal, Zinc Smelter B.V. and the Dutch tax authorities reached a settlement which was laid down in the decision. According to the agreement the profit split method was the correct method for determining the arm’s length remuneration of the Dutch company after the restructuring. Click here for translation ...

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 ...

Two Swiss investors had established a structure for the management of a private equity fund in the form of a Swiss “Investment Advisor” AG and a Jersey “Investment Mananger” Ltd. They each held 50% of the shares in the Swiss AG and 50% of the shares in the Jersey Ltd. Swiss AG and Jersey Ltd then entered an investment advisory agreement whereby the Swiss AG carried out all advisory activities on behalf of Jersey Ltd and Jersey Ltd assumed all the risk of the investments. Both investors were employed by Swiss AG and Jersey Ltd had no employees execpt two directors who each received a yearly payment of CFH 15,000. According to the investment advisory agreement Jersey Ltd would remunerate the Swiss AG with 66% of the gross fee income. The Swiss AG would carry out all relevant functions related to investment advisory and recommend to Jersey Ltd acquisition targets which the latter would then evaluate and subsequently decides on and assume the risk of. For provision of the advisory functions two-thirds of the total fees (of 2.25% on Assets under Management) would go to the Swiss AG, and the remaining one-third would go to the Jersey Ltd. The Swiss AG had prepared a benchmarking analysis confirming that independent private equity fund of funds (Dachfonds) earned management fees of between 0.75% and 1% on Assets under Management, which was in line with the 0.75% attributed to the Jersey Ltd. The Swiss Tax Authorities regarded the two Swiss investors employed by the Swiss AG as the only two entrepreneurs in the structure that could have possibly taken any significant decisions. On that basis the tax authorities claimed that the 66/34 profit sharing was artificial and inconsistent with the substance of the arrangements. They argued that the Jersey Ltd should only be remunerated with a cost plus 10%. This assessment was brought to the first instance of the tax appelant court and then to the administrative court. Both courts ruled that the set-up was artificial and not in line with OECD standards, after applying a substance-over-form approach. Click here for translation ...

Nestlé del Uruguay S.A. had deducted royalty payments to its parent company located in Switzerland for the right to use certain local brands such as Águila, El Chaná, Vascolet, Bracafé and Copacabana. Royalties were calculated as 5% of sales, with the exception of payments for the Águila brand products, where royalties were calculated as 2% of sales. The tax administration (DGI) found that the royalty payments had not been at arm’s length. In defense of this position, it was argued that these local brands had been developed by Nestlé Uruguay itself, and then transferred to Nestlé Switzerland in 1999 for a sum of USD 1. Nestle Uruguay disagreed and argued that the tax administration was applying transfer pricing rules retroactively to a transaction concluded in 1999, when such rules did not yet exist. Judgement of the Court The Court considered that the Nestlé Uruguay should not pay 5% in royalties for the right to use trademarks it had developed itself. “…the Court shares the report of the tax inspectors of the International Taxation Department of the DGI insofar as they state: “It is… questionable… that Nestlé del Uruguay S.A. pays royalties for the use of trademarks developed and operated by the company itself… Nestlé Uruguay developed, maintained and operated the local brands… in Uruguay, contributing to generate the value of these brands…”. “This conclusion… does not imply the retroactive application of the transfer pricing rules to previously operated brand assignments, but rather the application of such rules only for the period… where there was relevant activity by the plaintiff with respect to the exploitation of the local brands”. Instead royalties for use of all the local brands – not only on the Águila brand – should be calculated as 2% of sales. Click here for English translation Click here for other translation ...

For the purpose of determining whether a Swiss Corporation had effektivly been managed from the Netherlands or had a permanent establishment in the Netherlands, the Dutch tax authorities send a request for information. The Swiss Corp was not willing to answere the request and argued that the request was disproportionate and that the concepts of “documents concerning decision-making with regard to important decisions” and “e-mail files” was and did not fit into the powers that an inspector has under Article 47 of the AWR. The court ruled in favor of the tax authorities. The court did not find the tax authorities’ request for information disproportionate. Article 47 of the Awr requires the provision of factual information and information that may be relevant to taxation with respect to the taxpayer (cf. Supreme Court October 20, 2017, ECLI: NL: HR: 2017: 2654). In the opinion of the court, the defendant remained within those limits with his request to claimant to provide access to the entire, original administration in the broadest sense (see 1.6). In addition, a broad range of starting points with regard to the subjective tax liability of the plaintiff also justifies a broad question in this case. The court passed the claim that requesting access to “documents concerning decision-making on important decisions” and “e-mail files” was open to multiple interpretations. However, in the view of the court, the mere circumstance that a request for information left some room for interpretation did not mean that it was not in accordance with the powers that the inspector has pursuant to Article 47 of the AWR. Click here for other translation ...

PJSC Uralkali, produced and sold fertilizers (“potassium chloride”) 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 ...

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions had been concluded between independent parties. SKAT does not consider it in accordance with section 2 of the Tax Assessment Act that during the period 2006 to 2009, H1 A/S had to pay royalty to G1 SA for the right to use trademark, “know-how intangibles” and “ international network intangibles ”. An independent third party, in accordance with OECD Guidelines 6.14, would not have agreed on payment of royalties in a situation where there is a clear discrepancy between the payment and the value of licensee’s business. During the period 2006 to 2009, H1 A/S did not make a profit from the use of the licensed intangible assets. Furthermore, an independent third party would not have accepted an increase in the royalty rate in 2006, where the circumstances and market conditions in Denmark meant that higher profits could not be generated. H1 A/S has also incurred considerable sales and marketing costs at its own expense and risk. Sales and marketing costs may be considered extraordinary because the costs are considered to be disproportionate to expected future earnings. This assessment takes into account the licensing agreement, which states in Article 8.2 that the termination period is only 3 months, and Article 8.6, which states that H1 A/S will not receive compensation for goodwill built up during the contract period if the contract is terminated. H1 A/S has built and maintained the brand as well as built up “brand value” on the Danish market. The company has contributed to value of intangible assets that they do not own. In SKAT’s opinion, an independent third party would not incur such expenses without some form of compensation or reduction in the royalty payment, cf. OECD Guidelines 6.36 – 6.38. If H1 A/S was not associated with the trademark owners, H1 A/S would, in SKAT’s opinion, have considered other alternatives such as terminating, renegotiating or entering into more profitable licensing agreements, cf. OECD Guidelines 1.34-1.35. A renegotiation is precisely a possibility in this situation, as Article 8.2 of the license agreement states that the agreement for both parties can be terminated at three months’ notice. The control of the group has resulted in H1 A/S maintaining unfavorable agreements, not negotiating better terms and not seeking better alternatives. In addition, SKAT finds that the continuing losses realized by the company are also due to the Group’s interest in being represented on the Danish market. In order for the Group to service the global customers that are essential to the Group’s strategy, it is important to be represented in Denmark in order to be able to offer contracts in all the countries where the customer has branches. Such a safeguard of the Group’s interest would require an independent third party to be paid, and the company must therefore also be remunerated accordingly, especially when the proportion of global customers in Denmark is significantly lower than in the other Nordic countries.“ Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in section 2 of the Tax Assessment Act (- the arm’s length principle) . In particular, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions pursuant to section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. According to section 6 (a) of the State Tax Act expenses incurred during the year to acquire, secure and maintain income are deductible for tax purposes. There must be a direct and immediate link between the expenditure incurred and the acquisition of income. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments. The High Court ruled in favor of the Danish tax authorities and concluded as follows: “Despite the fact that, as mentioned above, there is evidence to suggest that H1 A/S’s payment of royalties for the use of the H1 A/S trademark is a deductible operating expense, the national court finds, in particular, that H1 A/S operates in a national Danish market, where price is by far the most important competitive parameter, that the company has for a very long period largely only deficit, that it is an agreement on payment to the company’s ultimate parent company – which must be assumed to have its own purpose of being represented on the Danish market – and that royalty payments must be regarded as a standard condition determined by G1 SA independent of the market in which the Danish company is working, as well as the information on the marketing costs incurred in the Danish company and in the Swiss company compared with the failure to respond to ...

There is an obligation to withhold tax on dividends paid to a holding company resident in an EU Member State, if the beneficial owner is resident abroad. Although the Parent-Subsidiary Directive 90/435 does not contain a beneficial owner clause, the exemption clause contained in Article 14.1.h) of the TRLIRNR is perfectly in line with EU law. It cannot be rejected as an incorrect transposition nor can it be considered to infringe the Community principles of freedom of movement or establishment. All this in accordance with the CJEU Judgment of 26 February 2019. The judgment of the CJEU in Cases C-116/16 and C-117/16 is analysed. In contrast to the judgment cited by the claimant: CJEU Judgment of 7 September 2017 Case C-6/16. SP vs Palmolive SAN_1128_2018 ENG NW”>Click here for English Translation Click here for other translation ...

According to the Tax Authorities, the content of Christian Fishbacher S.p.A’s contract with the Swiss parent of the Group, granting limited right of use of the trademark, did not justify a royalty of 3.5%, to which an additional 1.6% was added as a contribution to the investments for the promotion and development of the brand. The appellate judge held that exceeding the values taken as “normal” by the circular 32 of 09/22/1980 not it were justified in the light of the concrete elements of the case is that correctly the Office had re-determined the value of the services within 2%, following the aforementioned Circular, which incorporated the indications of the report drawn up by the OECD in 1979. The circular identifies three levels for assessing the normal value of royalties: the first, not suspected, up to 2%; the second from 2% to 5%, determined on the basis of technical data firm and to the content of the contract , in particular reference usefulness of the licensee; the third over 5% for exceptional cases, justified by the high technological level of the reference economic sector . The decision of the CTR does not appear to conflict with the art. 110, paragraph 7, Tuir . (nor with the Articles 39 and 40 Presidential Decree no.600/73), as the appellate judge held that subsist a series of elements which jointly considered competed to to form a painting circumstantial suitable to ascertain the ascertainment of the Office pursuant to Article 110 , paragraph 7 ; moreover it has assumed the percentages indicated in the circular n.32/1980 as objective parameter for the determination of the “normal value”, in the absence of evidence contrary or different provided by the tax payer. The solution adopted is in line with the principle, regarding the assessment of income taxes, according to which the burden of proof of the assumptions of the deductible costs and charges, competing to determine the business income, including their inherence and their direct attribution to revenue-generating activities lies with the tax payer (see Cass. 02/25/2010, n. 4554; Cass. 30/07/2002, n. 11240). Click here for English translation Click here for other translation ...

PJSC Uralkali, produced and sold fertilizers (“potassium chloride”) 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 ...

“Drinks Distributor S.A.” was involved in purchase, sale and distribution of alcoholic beverages in Mexico. “Drinks Distributor s.a” had entered into a non-exclusive trademark license agreement with a related party for the sale of its product. Following a restructuring process, the related party moved to Switzerland. Following an audit the Mexican tax administration, determined that deductions for marketing and advertising costs related to brands and trademarks used under the licensing agreement, were not “strictly indispensable” and therefore not deductible, cf. requirement established by the Income Tax Law in Mexico. Drinks Distributor S.A on its side held that the marketing and advertising costs were strictly indispensable and that the tax deductions should be accepted. The dispute ended up in the Federal Court of Administrative Justice. Judgement: The Court determined what should be understood as “strictly indispensable“. To establish this concept the purposes of the specific company and the specific costs must first be determined – in particular that the costs are directly related to the activity of the enterprise the costs are necessary to achieve the aims of its activity or the development of this activity; in the absence of the costs, the commercial activity of the taxpayer will be hindered. “ADVERTISING AND PUBLICITY EXPENSES. THE DEDUCTION IS INAPPROPRIATE, AS THEY ARE NOT STRICTLY INDISPENSABLE FOR THE COMPANY SELLING PRODUCTS UNDER TRADEMARKS WHOSE USE AND EXPLOITATION WERE GRANTED TO IT BY MEANS OF A NON-EXCLUSIVE LICENSE AGREEMENT. Article 31, section I of the Income Tax Law provides that the deductions must comply with various requirements, including that they are strictly indispensable for the purposes of the taxpayer’s activity; the latter being understood to mean that said expenses are directly related to the activity of the company, that they are necessary to achieve the purposes of its activity or the development thereof and that if they do not occur they could affect its activities or hinder its normal operation or development. Therefore, in order to determine whether such expenditure satisfies that requirement, account must be taken of the aims of the undertaking and the specific expenditure itself. Therefore, if a company has as its object the sale of a certain product, and to this end has entered into a non-exclusive license agreement for the use and exploitation of intangibles, which grants it the use and exploitation of a brand name to sell this product; The latter is prevented from deducting advertising and publicity expenses, since, as it does not own the trademark it uses to sell its product, the aforementioned expenses – understood as the acts through which something is made known in order to attract followers or buyers through the means used to disseminate or spread the news of things or facts – are not strictly indispensable for the development of its activity, as they increase the value of the trademark for the benefit of a third party; That is to say, the owner of the trade mark, since they are not aimed at the article, but at positioning the trade mark on the market, in order to give it notoriety, fame and recognition among the consumer public.” Click here for English Translation Click here for other translation ...

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 ...

The European Commission found that Luxembourg did not grant illegal State aid to McDonald’s as a consequence of the exemption of income attributed to a US branch. “Based on this analysis, the Commission concludes that in this specific case, it is not established that the Luxembourg tax authorities misapplied the Luxembourg – US double taxation treaty. Therefore, on the basis of the doubts raised in the Opening Decision and taking into account its definition of the reference system, the Commission cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty.” McDonald’s Corporation is a Delaware public limited company with its principal office located in Oak Brook, Illinois, USA. It operates and franchises McDonald’s restaurants, which serve food and beverages. Of the 37,241 restaurants in over 100 countries approximately 34,108 are franchised and 3,133 are operated by the company. McDonald’s Corporation is therefore primarily a franchisor, with over 80% of McDonald’s restaurants owned and operated by independent franchisees. In 2017, McDonald’s Corporation had around 400 subsidiaries and 235,000 employees and recorded total revenues of USD 22.8 billion, of which USD 12.7 billion was from company-operated sales and USD 10.1 billion from franchised revenues. A Luxembourg group company made a buy-in payment to enter a cost sharing arrangement with a US related company, and thereby acquired beneficial ownership of certain existing and future franchise rights. These rights were allocated to the US branch of the Luxembourg company. The royalty fees due by franchisees would first be paid to a Swiss branch of the Luxembourg company, which provided services associated with the franchise rights. The royalty fees would then be transferred to the US branch, deduction being made of a service fee to the benefit of the Swiss branch consisting of cost coverage, plus a profit mark-up. Although royalty fees was booked in the US no tax was levied. This was due to the fact that the activities carried out in the US did not constitute a trade or business. The income allocated to the US branch was also not taxed in Luxembourg. According to the US-LUX tax treaty the residence State was prevented from taxing as (1) the US activity would constitute a permanent establishment under the Luxembourg interpretation of the treaty and (2) the existence of such a permanent establishment would oblige Luxembourg to apply the article on the elimination of double taxation. In a tax ruling Luxembourg found that the income would be exempt although not taxed in the US. The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax rulings granted State aid to McDonald’s Europe within the meaning of Article 107(1) of the Treaty and expressed its doubts as to the compatibility of the contested tax measures with the internal market. In particular, the Commission expressed doubts that the revised tax ruling misapplied Article 25(2) of the Luxembourg – US double taxation treaty and thereby granted a selective advantage to McDonald’s Europe. Following the investigation, the Commission concluded that Luxembourg did not give a selective advantage to McDonald’s by exempting the income allocated to the US branch. The conclusions of the European Commission on the issue of state aid does not relate to the arm’s length nature of the transfer pricing setup used by McDonald’s in relation to the European marked ...

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A. (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. Judgement of the National Court The court held in favour of Colgate and set aside the decision of the tax authorities. SP vs Palmolive SAN_1128_2018 ENG NW”>Click here for English Translation Click here for other translation ...

A GmbH (“Sport Data GmbH”) was founded in 2006 as a wholly-owned subsidiary of A Holding AG, which had been founded shortly before and had its registered office in Switzerland. A AG, Switzerland was also founded as a sister company of A GmbH. A AG is A GmbH´s only customer. The business of A GmbH is the development and support of software for A AG, the maintenance of hardware, the training of employees and the forwarding of information. A AG, Switzerland sells the information provided by A GmbH. For these services A GmbH receives a remuneration from A AG determined as actual costs plus a profit surcharge of 5 %. The tax authorities noted that A AG did not initially have any active business activities. Against this background, the tax office had doubts about the arm’s length nature of the transfer prices. The tax authorities concluded, there were also no “simple services” by A GmbH for which, according to international accounting principles (services of a routine nature), procedures with profit mark-ups in the range of 5% to 15% could be considered. A high quality service should not be compensated by a 5% mark-up, especially if the service is performed using self-created intangible assets. In such cases, the profit split method should instead be applied. An assessment of estimated additional profits was issued. Judgement of the Court The court decided that the remuneration should be based on the cost plus method, but that the margin should be changed from 5 % to 10 % due to the advanced functions performed by A GmbH. Excerpts: “The contacts with the international sports organisers such as the IFA and the customers (companies) are again (only) with A AG, Switzerland. This picture also shows the overall profit situation of the group of companies in comparison: In the first year in dispute, the 5% mark-up applied by the Bf. amounted to 276,214.58 euros, while the share of the company’s profit applied by the tax office (in the context of the BVE) was “only” 195,120 euros. In the following year, the ratio changed in such a way that the surcharge of the complainant amounted to approximately 150,000 euros, while the part assessed by the tax office amounted to approximately 270,000 euros, and in the third year, with the same accounting of the complainant, even approximately 840,000 euros, and in the following years much more. While the performance of the complainant thus remained relatively constant (in the first year longer periods were affected due to a different business year), A AG, Switzerland was able to increase its business results enormously through efficient marketing on the basis of the good functioning of the EDP and/or the training of the employees working worldwide. Even if the business idea and the IT implementation of the same originated with the complainant, the economic success of the group of companies is not least due to the marketing activities of A AG, Switzerland, under the motto “even the best product must first find a buyer”. In this situation, the appropriateness can only be checked using the standard cost+ method.” “As far as a profit mark-up of 5% is charged for this routine activity, a higher profit mark-up must be applied for the services of the complainant in comparison. Determining the amount of the appropriate mark-up within the range of 5 – 15% is naturally associated with uncertainties. One indication in the case of a complaint can be the mark-up rates for IT programming of between 4.78% and 13.95% determined in the transfer pricing study by PwC. Another indication is the assessment of the complainant herself, who had to concede at the hearing that the 5% mark-up may be too low. In a detailed discussion, she was unable to offer any substantive arguments against a 10% mark-up rate. Considering that the defendant’s activities after the development and sale of the software “A Live System”, which is not in dispute here, consist of very different services, a mixed mark-up rate of 10% seems appropriate:” Click here for English translation Click here for other translation ...

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 ...

A Russian company, Togliattiazot, supplied ammonia to the external market through a Swiss trading hub, Nitrochem Distribution AG. The tax authority found that the selling price of the ammonia to Nitrochem Distribution AG had not been determined by Togliattiazot in accordance with the arm’s length principle but had been to low. Hence, a transfer pricing assessment was issued where the CUP method was applied. At first, the company argued that Togliattiazot and Nitrochem Distribution AG were not even affiliates. Later, the company argued that transfer prices had been determined in accordance with the TNM-method. The court ruled in favor of the Russian tax authority. Based on information gathered by the tax authorities – SPARK-Interfax and Orbis Bureau Van Djik bases, Switzerland’s trade register, Internet sites, and e-mail correspondence etc – the tax authorities were able to prove in court, the presence of actual control between Togliattiazot and Nitrochem. The TNMM method applied by Togliattiazot was rejected by the court because “the method applied by the taxpayer, based on the conditions of the controlled transaction, did not allow determining the comparability with the conditions of comparable transactions between non-related parties”. Click here for other translation ...

ZERAIM IBERICA SA, a Spanish subsidiary in the Swiss Syngenta Group (that produces seeds and agrochemicals), had first been issued a tax assessment relating to fiscal years 2006 and 2007 and later another assessment for FY 2008 and 2009 related to the arm’s length price of seeds acquired from Zeraim Gedera (Israel) and thus the profitability of the distribution activities in Spain. The company held that new evidence – an advance pricing agreement (APA) between France and Switzerland – demonstrated that the comparability analysis carried out by the Spanish tax authorities suffered from significant deficiencies and resulted in at totally irrational result, intending to allocate a net operating result or net margin of 32.79% in fiscal year 2008 and 30.81% in 2009 to ZERAIM IBERICA SA when the profitability of distribution companies in the sector had average net margins of 1.59%. The tax authorities on there side argued that the best method for pricing the transactions was the Resale Price Method and further argued that the companies in the benchmark study provided by the taxpayer were not comparable. The authorities also pointed to the fact that ZERAIM IBERICA SA prior to entering the distribution agreement had a gross margin of around 40%, and now after entering the agreement would have a net margin of only 1.5%. The Court held in favor of the tax authorities due to (1) lack of explanation to the shift in profitability of ZERAIM IBERICA SA before and after entering the distribution agreement and (2) lack in comparability between the companies selected for the benchmark study and the Spanish distributor and (3) the transactional net margin method presented by the taxpayer in accordance with Spanish regulations is subordinated to the direct methods (resale price minus etc.). Click here for English translation Click here for other translation ...

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company of the group and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. In 2015 the Administrative Court of Appeal ruled in favor of Reca Quimica due to formal grounds. However, the assessment was allowed to be issued again in accordance with the guidelines set out in the ruling. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the Judgement of the Administrative Court of Appeal, except for allowed claims in respect of the award of damages and interest, which was annulled. The Courts considered that the the authorities had made an error in motivating the adjustment on a presumed basis determination, without complying with the legal requirements established for this type of tax determination. Furthermore, they said that if transfer prices had been determined, the authorities should have applied the adjustment according to one of the methods established by the OECD on a certain basis, and not on a presumed basis. The judicial decision commits, in our opinion, a mistake. The five OECD methods are to determine whether or not there is transfer pricing. These methodologies are designed to examine whether prices between related parties are adjusted or not, to transactions in comparable circumstances between independent parties. But once it has been determined that there are transfer prices, what is appropriate is precisely to adjust them to prices under competitive conditions. The new price must then be set by the authorities, so that it is the basis for determining the corresponding tax obligations.” Excerpts “…this Chamber endorses the Court’s decision, insofar as it ruled that this discrepancy did not allow the use of the presumed basis method. Likewise, it considered, “…this allegation is fallacious, since using a margin in sales to related companies abroad different from that used in sales to other companies is not a true accounting irregularity or defect”. This is due to the fact that the accounting of the plaintiff could not be qualified as omissive, irregular and contradictory, since the taxpayer did not fail to provide information on its transactions, but rather, based on its reality, reported a different, -minor- profit in the transactions carried out with its related companies abroad (regardless of their normality), then the Administration should have applied the method of certain basis, via transfer prices.” “Hence, there is no doubt that what the Administration should have done was to determine, -by using transfer prices- whether the price at which it sold to its related companies abroad was dissimilar to the market price, but never to use, as it did, the estimate based on a presumptive basis. For, as explained above, the plaintiff provided in her declaration information on the price at which she sold to her related companies abroad. According to the OECD (Organisation for Economic Co-operation and Development), there are five approved transfer pricing mechanisms, namely, first, the comparable free price method. Second, the resale price method. Third, the cost plus method. Fourth, the net transaction margin method; and fifth, the profit split method. With regard to this point, Executive Decree no. 37898-H of 5 June 1998 is currently in force in the legal system. 37898-H of 5 June 2013, and at the time of the facts that are of interest in the sub-lite, Interpretative Guideline no. 20-03 was in force, -with support in regulations 8 and 12 of the TC-. The legality of that Guideline was ratified by the Constitutional Chamber since its decision no. 2012-04940 of 15 hours 37 minutes on 18 April 2013. Consequently, the Court rightly stated: “…-based on what was indicated by the Chamber and taking into account the erga omnes binding effect of the constitutional jurisprudence (article 13 of Law 7135)- there is no contradiction between the transfer pricing methodology and the application of the economic reality principle of paragraphs 8 and 12 of the CNPT, nor is there any impediment to resort to the former even in the absence of an express legal rule that incorporates it into the Costa Rican legal system”. Thus, in this case, contrary to what was argued by the Administration, none of the assumptions established in canon 124 of the TC were met, so as to empower it to apply the presumptive basis methodology (article 125 ibid); on the contrary, according to the information provided by the plaintiff in its tax return, what was relevant was the application of the transfer pricing methodology, through any of its five mechanisms, so as to arrive at the correct determination of the tax liability. By not doing so, it is clear, as the judges ruled, that the Administration acted illegally, given that it should have applied the certain base method, which, since it was dealing with a transfer pricing case, should have been examined in accordance with the technical regulations of the OECD, which was feasible in accordance with the legal system in force at that time. Therefore, the complaint should be rejected.” Click here for English translation Click here for other translation ...

A Dutch parent company was providing support services to its foreign subsidiary on a cost-plus basis and received a compensation fee following a business restructuring where headquarter and strategic functions was transferred from the Dutch parent company to Switzerland. The Dutch tax authorities took the view that the compensation paid was insufficient, and that the Dutch parent company was still performing strategic functions for the group. The Court ruled that the taxpayer had fulfilled its legal obligations by preparing thorough transfer pricing documentation and that the burden of proof was on the Dutch tax authorities. The Court ruled that the tax authorities did not provide sufficient arguments to support the adjustment. The original assessment of € 188.342.906 was reduced to a calculated taxable profit of € 42,641,089 and a taxable amount of € 32,067,270. Click here for translation ...

A Dutch company was engaged in smelting of zinc. The business was then restructured, for which the company received a small compensation payment. Dutch tax authorities disagreed with both the amount of compensation payment and the arm’s-length remuneration of the post restructuring manufacturing activities. Until 2003 the Dutch Company was a fully fledged business. The company owned the assets and controlled the risks relating to the activities. In the years after 2003, the company was involved in several business restructurings: Activities other than the actual production activities were gradually transferred to other group companies, among others the global marketing and services team (GMS), took over purchasing, sales and deployment of personnel. After becoming part of another group in 2007, the company entered a consultancy agreement with another group company under witch strategic and business development, marketing, sales, finance, legal support, IT, staffing and environmental services was now provided on a cost plus 7.5% basis. Under ‘Project X’, a Belgian company was established in April 2009, which concluded both a business transfer agreement and a cooperation agreement with related smelting companies (including the taxpayer). Under the business transfer agreement, the Belgian company purchased the working capital, including raw materials, products and debtors from the smelting companies. Under the cooperation agreement, which had a term of two years, the Belgian company provided the smelting companies with raw materials. The smelting companies would then process the materials and transfer the final products back to the Belgian company. The Belgian company’s remuneration was based on a cost plus 7.5% mark-up and a 3.5% return on equity. Under ‘Project Y’, the group moved its headquarters to a Swiss company. In the new structure, the Swiss company managed the production planning, purchasing, logistics and sales. The former agreement was terminated, for which the Duch company received a compensation payment of about €28 illion. A manufacturing services agreement was concluded between the Swiss company and the Dutch company under which the smelting companies were compensated based on cost plus 10%. In 2010 the Dutch company reported a taxable amount of €32 million. The Dutch tax authorities increased this amount to €187 million, arguing that at arm’s length the compensation payment should have been €185 million instead of €28 million. The tax authorities argued that: The taxpayer unfairly assumed an expected loss of income for the period of only one year, the remaining term of the cooperation agreement; The compensation payment calculated by the taxpayer was lower than past actual annual profits. The tax authorities provided that the calculation should also consider the foregoing of profits and costs relating to activities such as purchasing and selling. The taxpayer incorrectly assumed that the activities of the GMS were not conducted for the account and risk of the taxpayer; The taxpayer made a calculation error of €50 million and the cash flows in a real sense had been discounted against a nominal discount factor; and The tax authorities referred to the uniqueness of activities conducted by the taxpayer based on the costliness of the factory with huge investments and complexity of the process. The tax authorities also argued that the key functions of the taxpayer had not actually changed after moving the headquarters to Switzerland, and that this should be considered in calculating the compensation payment following the transfer. The company argued that: Under Project X activities relating to purchasing, sales and logistics had already been gradually transferred to other group entities before 2010. In determining the compensation payment, it was therefore not necessary to consider the profit potential of these activities that were no longer being performed by the taxpayer. During the negotiation of the compensation payment, consideration was given to its bargaining position and possibilities to request compensation for a period of time longer than the remaining one year of the cooperation agreement. According to the taxpayer, however, it appeared that compensation, due to poor prospects, was not on the agenda. Although large investments were made in the smelting plant, the taxpayer suggested that these investments mainly related to an adjustment of the production process in line with the environmental standards at the time. The smelting plant of the taxpayer was otherwise not distinctive compared with other smelting plants so as to justify a higher compensation payment. As a result of the business restructuring, the functional profile of the taxpayer changed. The taxpayer regarded itself as a toll manufacturer to be remunerated based on a cost-based approach. However, the tax authorities suggested that a profit split method should be applied considering the strongly interrelated activities of the taxpayer and the Swiss headquarters and the ownership of unique intangibles by both sides. In the Court’s view, the Dutch company was a toll manufacturer in 2010, and therefore the net cost plus method was an acceptable method to determine an arm’s-length remuneration of the current and future activities. The Court  also found that the company had complied with the Dutch documentation requirements and had adequately substantiated the use of tcost plus method. The Court therefor ruled that the tax authorities did not meet the burden of proof and the income adjustment was thus annulled. (The decision has been appealed by the tax authorities) Click here for English translation Click here for other translation ...

Canadian mining company, Cameco Corp, has settled a tax dispute and will pay the IRS $122,000 for income years 2009-2012. Cameco’s dispute with tax authorities relates to its offshore marketing structure and transfer pricing. 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. Cameco says it has a marketing subsidiary in Switzerland because most customers are located outside Canada ...

By Javier Garcia-Bernardo, Jan Fichtner, Frank W. Takes, & Eelke M. Heemskerk Multinational corporations use highly complex structures of parents and subsidiaries to organize their operations and ownership. Offshore Financial Centers (OFCs) facilitate these structures through low taxation and lenient regulation, but are increasingly under scrutiny, for instance for enabling tax avoidance. Therefore, the identifcation of OFC jurisdictions has become a politicized and contested issue. We introduce a novel data-driven approach for identifying OFCs based on the global corporate ownership network, in which over 98 million firms (nodes) are connected through 71 million ownership relations. This granular firm-level network data uniquely allows identifying both sink-OFCs and conduit-OFCs. Sink-OFCs attract and retain foreign capital while conduit-OFCs are attractive intermediate destinations in the routing of international investments and enable the transfer of capital without taxation. We identify 24 sink-OFCs. In addition, a small set of countries – the Netherlands, the United Kingdom, Ireland, Singapore and Switzerland – canalize the majority of corporate offshore investment as conduit-OFCs. Each conduit jurisdiction is specialized in a geographical area and there is signifcant specialization based on industrial sectors. Against the idea of OFCs as exotic small islands that cannot be regulated, we show that many sink and conduit-OFCs are highly developed countries. Conduits-and-Sinks-in-the-Global-Corporate-Ownership-Network.pdf ...

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 ...

At issue was deductions of management fees paid by a Coca-Cola s.r.o. – a Slovakian subsidiary of the Coca-Cola group – to Coca Cola Management Services GmbH & Co. AG. in Switzerland. The assessment sas issued by the tax authorities based on the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administration, which according to the tax authorities was a generally accepted supplementary interpretative tool to Art. 9 of the Treaty on the avoidance of double taxation within the meaning of the Vienna Convention on contract law. Documents and information submitted in the course of a tax inspection showed that in addition to the fee for the provision of management services, Coca-Cola s.r.o. also paid for the provision of employment services and IT services. In total, payments for provision of services in 2005 was € 1,463,385.46. In regards to MTC article 9 and application of the OECD Transfer pricing guidelines in Slovakia the Supreme Court stated: “… the OECD TP Guidelines, unless duly published, shall not be regarded as binding source of law under Slovak legal order … it is not binding on the taxpayers or the tax authority … the same applies for the OECD Commentary that has not been published in the collection of laws and therefore shall be regarded as non-binding recommendation that can only be used for the interpretation of international treaties … ” Click here for translation ...

Oxfam’s list of Tax Havens, in order of significance are: (1) Bermuda (2) the Cayman Islands (3) the Netherlands (4) Switzerland (5) Singapore (6) Ireland (7) Luxembourg (8) Curaçao (9) Hong Kong (10) Cyprus (11) Bahamas (12) Jersey (13) Barbados, (14) Mauritius and (15) the British Virgin Islands. Most notably is The Netherlands placement as no. 3 on the list. Oxfam researchers compiled the list by assessing the extent to which countries employ the most damaging tax policies, such as zero corporate tax rates, the provision of unfair and unproductive tax incentives, and a lack of cooperation with international processes against tax avoidance (including measures to increase financial transparency). Many of the countries on the list have been implicated in tax scandals. For example Ireland hit the headlines over a tax deal with Apple that enabled the global tech giant to pay a 0.005 percent corporate tax rate in the country. And the British Virgin Islands is home to more than half of the 200,000 offshore companies set up by Mossack Fonseca – the law firm at the heart of the Panama Papers scandal. The United Kingdom does not feature on the list, but four territories that the United Kingdom is ultimately responsible for do appear: the Cayman Islands, Jersey, Bermuda and the British Virgin Islands ...

Reca Química is active in industrial production of paints and synthetic resins. Its parent company is H.B. Fuller which is based in the United States. According to the “Transfer Pricing Policy” set by the parent company and in place since 1992, a 10% margin on sales was applied to inventory transferred between affiliates. However, during the fiscal periods 2003 and 2004, the parent company changed the policy so that sales to related companies abroad were to be made with a profit margin of only 5%, while for local affiliates and independent parties, the margin would be 10%. The tax administration issued an assessment in which the margin of all the controlled transactions was set at 10% resulting in additional taxable income of ¢185,827,941.00. According to the tax administration the 5% margin was not even enough to cover the operating expenses for the transactions in question. Judgement of the Administrative Court The court ruled in favour of Reca Quimica due to formal grounds. However, the assessment was allowed to be issued again in accordance with the guidelines set out in the ruling. Excerpts “In the view of the Court of First Instance, we are therefore faced with conduct which, contrary to what the applicant’s representatives allege in arguing that the plea does not exist, is vitiated by a partially inadequate statement of reasons, but which does not give rise to the defects of absolute invalidity pointed out by the applicant’s representatives. “The Court considers that the plea does exist, since, as indicated above, the evidence adduced in the file, including the evidence admitted for the purpose of a better decision, which refers to the consolidated financial statements of the applicant company, provides the Court with the certainty that […] sold at prices below cost […], and that […] sold at prices below cost […]. …] sold at prices below the cost of sales to its related companies, in the fiscal periods two thousand three and two thousand four, incurring in a practice (sic) that derived in a self-determining action on the part of the plaintiff company in which it established as the amount of its tax obligation, an amount lower than the amount that would have corresponded in the case of applying the market value. This is the cause or reason for the contested conduct, and it is precisely the factual assumption that served as a background for the Administration to issue the contested acts. Thus, although it is wrong to state as part of the reasoning that the taxpayer’s accounts are irregular and contradictory, the fact is that it is also expressly stated, and implicitly found throughout the content of the various contested decisions, that the reason for the administration’s intervention, and its unofficial determination action, was precisely the fact that the taxpayer’s accounts were irregular and contradictory, and that the taxpayer’s accounts were irregular and contradictory, was precisely the fact that it was able to determine the existence of related operations that, by selling at prices below the cost of sales, caused damage to the Treasury by reducing the size of the tax obligation of the taxpayer, conduct that is due to tax planning, and for which the law offers a solution through sections 8 and 12 of the Tax Code, as we will see below.” “Consequently, it was not possible in this hypothesis to resort to the determination by the presumptive basis method, and the partial annulment claimed in this respect had to be upheld. Indeed, in the opinion of the undersigned, the ATGC should have proceeded by the method of certain basis, which, since we are in a transfer pricing scenario, implied carrying out the corresponding analysis based on the technical rules of the OECD, mentioned above, which was perfectly possible based on the theoretical and legal framework set out in Interpretative Guideline number 20-03, already in force at the time. Although in the complaint the plaintiff claims that the content and justification of the aforementioned Guideline is erroneous and even illegal, the fact is that it does not challenge it, so that there is no impediment in this respect, particularly in light of the related constitutional ruling.” “The legal situation of the plaintiff is restored to the date on which the first of the contested acts was issued, so that if it is legally appropriate, the Tax Administration may issue it again, in accordance with the guidelines set out in this ruling.” Click here for English translation Click here for other translation ...

The case involved a Dutch mutual insurance company, DutchCo, which paid surpluses from the insurance activity back to the participating members in the form of premium restitution. Prior to 2002, DutchCo reinsured the majority of its risks with external reinsurers via an external reinsurance broker. DutchCo kept a small part of the risks for its own account. In 2001, DutchCo established a subsidiary in Switzerland, Captive, to act as a captive reinsurance provider. DutchCo stated that the business rationale to establish Captive goes back to “9/11.” The resulting worldwide turmoil significantly impacted the reinsurance market. In an extremely nervous market, premiums increased and conditions were sharpened. From 2002 onward, all the reinsurance contracts of DutchCo were concluded with Captive (in exchange for payment of premiums), whereby Captive reinsured a vast majority of these risks with external reinsurers and kept a limited part of the risk for itself. As mentioned above, Captive did not employ any personnel, but made use of the services of M GmbH in the person of the owner/director of M GmbH (on average two days a week), an external Swiss reinsurance broker on whose office address Captive was located. In this respect, Captive was charged an amount of about €150,000 annually. The Dutch tax inspector argued that the reinsurance agreements with Captive were not concluded under the same conditions as with third parties. As a result, the tax inspector increased DutchCo’s taxable profit for the 2005-2008 years equal to the premiums paid to Captive by DutchCo after deducting the cost plus remuneration for Captive (i.e. the service fees paid to M GmbH with a mark-up of 10% in 2005 and 11% in the 2006-2008 years). In addition to the tax assessments, the tax inspector levied penalties equal to 50% of the income adjustment (i.e., taxes as a result of adjustments due to profit shifting to Captive). The Court stated that the conditions of the reinsurance agreements between DutchCo and Captive should be evaluated as if it would have been agreed between independent parties. In this respect, reference was made to the arm’s length principle as codified in Article 8b of the Dutch Corporate Income Tax Act 1969 (Article 8b). The Court considered it plausible that the level of the premiums paid by DutchCo to Captive and the policy of Captive regarding whether to reinsure the risks with third parties were determined by DutchCo itself. The Court also held that the tax inspector made it sufficiently plausible that the conditions of the agreement between DutchCo and Captive deviate from the conditions that would have been agreed between independent parties. Reference is made to the considerations of the expert. Next, the profits of DutchCo should be determined as if the deviating conditions would not have been agreed to (based on Article 8b of the Corporate Income Tax Act). Taking into account the limited activities and lack of policy determination by Captive, the Court argued that an annual return on equity (including the accumulated non-arm’s length premiums from the past) of 7.5% for Captive is reasonable in addition to a cost plus mark-up of 10% or 11% as set by the tax inspector. Hence, the Court lowered the adjustment to DutchCo’s taxable income as assessed by the tax inspector. The Court also adjusted the proposed penalties of the tax inspector to an annual penalty of €125,000 for the relevant years (about 25% of the additional corporate income tax). The Court believed that DutchCo intended to withdraw a considerable part of its profits from taxation in The Netherlands by setting up the structure with Captive and the excessive level of premiums paid to Captive. Click here for other translation ...

Nestlé de Costa Rica S.A. had been issued a tax assessment in which the taxable income for FY 2005 and 2006 was adjusted with an additional amount of ¢60,609,096.00 and ¢75,663,084.00. According to the tax authorities, the sales made by Nestlé to its related companies located in Chile, Switzerland and Puerto Rico had a profit margin different from those made to third parties. The margin on the unrelated transactions was 88% whereas the margins on comparable related party transactions was only 7%. The adjustments was determined based on internal CUPs. Judgement of the Court The Court dismissed the appeal of Nestlé. Excerpts “This Chamber agrees with the Tribunal, in the sense that the expert witness Luna Ramírez, during her testimony, does not manage to disprove the system applied by the Tax Administration, since she rejects the method used, however, she also states that it is difficult to resort to any other method. What is clear from this testimony is that in this process the plaintiff could not substantiate or justify the reason why it sold the same product at a lower price to its related companies.” “According to the study made by the Tax Administration, which again was not contested by the plaintiff, the average profit on the standard cost of the products sold to independent companies was 87.87%, while with the related companies it was 7.17% for the tax periods at issue here. The difference is so large that it is not possible to explain reliably the reason for this disparity.” “Therefore, this Chamber endorses the Court’s position of upholding the criterion issued by the Tax Administration and collecting the differences due to the total non-payment of the tax.” Click here for English translation Click here for other translation ...

“X Beverages S.A.” had entered into an agreement with the ABCDE Group for the use of concentrate and trademarks for the production and sale of beverages in Spain, but according to the agreement, “X Beverages S.A.” only paid for the concentrate. Following an audit for the financial years 2005-2007, the tax authorities issued an assessment which considered part of the payment to be royalties on which withholding tax should have been paid. Court’s Judgement The Court agreed that part of the payment could be qualified as royalties, but the assessment made by the tax authorities had been based on secret comparables – leaving the taxpayer defenceless – and on this basis the Court annulled the assessment. Excerpts “The taxpayer itself seems to recognize that the so-called “Contract of …” contains both a distribution contract and a trademark assignment contract when it says on page 127 of its statement of allegations “Indeed, this authorization of use is necessary to be able to carry out the activity of packaging and distribution that is the object of the contract, and it would not be possible for X to carry out its obligations under the contract if it did not have this authorization to use the trademark. If X did not have the right to use the trademark, it would not be able to package and label the product as required by its principal (Z), nor would it be able to distribute it under said trademark, in accordance with the terms of the contract.” And although the “authorization of use” of the trademark recognized by the taxpayer is qualified by the latter as an obligation and not as a right of the same, seeming to want to reach the conclusion that only if it were a right it would generate a royalty, in the opinion of this Court both aspects (obligation and right) are not mutually exclusive but complementary: X acquires the right to use the trademark and the obligation to use the same with respect to the products (the beverages) made by it with the “concentrates” acquired from the ABCD Group. And without the existence of limits and/or conditions. Limits and/or conditions which, on the other hand, are inherent to any assignment of rights contract, which is never absolute. In the present case, such limits would be that X may not use the trademark to identify other products not made with the “concentrates” purchased from the ABCD Group and that it may not identify the products made with such “concentrates” under another trademark. Both things are logical since the trademark owner remains the owner of the trademark (he only assigns its use in a certain temporal and territorial scope) and must protect its prestige by means of the indicated precautions (previously called limits and/or conditions). Por otro lado, y en contra de lo alegado (pág. 129 of the pleadings), the right to use the trademark is not something merely “instrumental” but something “substantial” to the contracts entered into between the parties in the sense that it is in the interest of the supplier to sell its concentrates and of X to market the products it manufactures with such concentrates under certain trademarks (ABCD or M8), of special diffusion and prestige in the market and whose use implies a volume of sales notably higher than that which it would obtain if it marketed the products under X ‘s own denomination without such diffusion and prestige in the market. The importance of the trademark is such (and more so the ones we are now dealing with) that it would be difficult to understand in the opinion of the Inspectorate a purely “instrumental” transfer of use of the same, and much less free of charge, as the claimant defends. This circumstance is supported by the Inspection in the Valuation Report, which grants to the assignment of the trademark, as an example, percentages of 61.17% of the price of the concentrate in the case of ABCD-1 and 46.18% in the case of ABCD-2.” “Thus, it is clear that the promotion of the ABCD trademark in Spain (not of the products themselves, which is what is made with the “concentrates” acquired by X) generates expenses for the holder of the trademark[2] ( ABCD Group and, specifically,ABCD C…), the inspection revealed that “it does not seem reasonable to think that the ABCD trademarks in Spain only generate expenses and no income” (….) “From a strictly economic perspective, the actions of the ABCD group, assuming such an amount of expenses to make the brand known to the consumer without this action generating any income for the brand in Spain, lacks all rationality”. This is an additional fact taken into account by the Inspectorate for the purpose of confirming the rationality of the fact that the assignment of use of the trademark is not free of charge but that the ABCD Group obtains income from it.” “In the case at hand, we cannot properly speak of “lack of evidence” but more properly of “lack of externalized evidence” since, even if such evidence exists (which this Court, in principle, has no doubt about), it cannot be incorporated into the file that is made available to the interested party, Therefore, the latter is defenseless when it comes to being able to oppose the suitability of the comparables used, so that, as stated in the previously transcribed SAN, we are faced with an “inadequate assessment method” in terms of generating defenselessness in the taxpayer. This Central Court has recently pronounced in the same sense as above in its RG of 05-09-2013 (RG 3780/11). Having said the above with respect to the “subjective motivation”, it should be noted that the objections raised by the taxpayer with respect to the “technical motivation” refer basically to the fact that the data used by the Inspection to assess are not in any case comparable with those of ABCD because ABCD is unique and neither by its product characteristics, nor by the characteristics of the product …. . In ...

In this case, the royalty payments of Accenture Norway was at issue. The Norwegian tax authorities held that the royalty payments to Accenture Global Services in Switzerland had been excessive. The Court disagreed and found in favor of Accenture. Click here for translation ...

In this case the Italien company, T. S.r.l. is entirely controlled by H. S.A., registered in Switzerland, and is part of the American multinational group T., being its only branch in Italy for the exclusive marketing of its software products (games for personal computers, play station, etc.). T. S.r.l. imports these products through T. Ltd (which is also part of the same multinational group and controlled by the same parent company), which is registered in the United Kingdom and is the sole supplier of the products that are marketed by the Italian branch. On 31st October 2004 (the last day of the financial year), T. S.r.l. posted an invoice that the British company T. Ltd had issued on that date for £ 947,456. This accounts document referred to “Price adjustment to product sold during FY 2003/2004”, and charges the Italian company with adjustment increases to previously applied prices relative to certain software products the company had purchased during the aforesaid financial year. The Inland Revenue challenged the operation claiming it was evasive, and addressed to reducing the taxable profit of the Italian company by the abusive use of transfer pricing. To back up these claims the Inland Revenue emphasised that: • the operation was carried out on the last day of the financial year; • it involved posting an invoice for the adjustment increases to previously applied prices by the English supplier company; • the prices differ from the average purchase price for the same products by T. S.r.l.. Supreme Court established that: “(…)the application of transfer pricing regulations does not fight the concealment of the price, which is a form of evasion, but the manoeuvres that affect an evident price, allowing the surreptitious transfer of profits from one country to another, which has a tangible effect on the applicable tax regime. Therefore, given these essential requirements it must be considered that this regulation constitutes – according to the more widespread interpretation in case law in this court – an anti-avoidance provision (…)”. The infringement of an anti-avoidance provision means that the burden of proof for recourse to this premise of fact, in principle is the responsibility of the Inland Revenue office that intends carrying out the controls. Therefore, the Supreme Court felt that: “(…) when determining company income, or rather, the problem of sharing the intra-group costs, the question of pertinence must be considered as well as the existence of the declared costs further to charging for a service or asset transfer to the subsidiary from the holding, or another company that is controlled by the same company (…). The burden for demonstrating the existence and pertinence of these negative income items, and, as in the case in question, it concerns costs derived from services or assets loaned or transferred by a foreign holding to an Italian subsidiary, each element that enables the inland revenue to verify the arm’s length value of the relative costs – further to the so-called principle of sphere of influence– can only be the responsibility of the taxpayer”. Transfer pricing legislation is included among the anti-avoidance dispositions, as it is addressed to fight the transfer of income from one country to another by “manipulating” the intra-group costs. Consequently, the burden of proof that there are the premises of fact of evasion lies, mainly, with the Inland Revenue, which should prove the grounds for the adjustment, or the deviation from the applied cost with respect to the arm’s length value. However, as the sharing of intra-group costs also involves the matter of whether the costs exist and are pertinent, the burden of proof of the costs to the company’s business lies with the taxpayer according to the Supreme Court. The Italien Supreme Court have drawn a distinction between cases regarding income and cases regarding expenses. In cases regarding income the burden of proof lies with the tax authorities. In cases regarding costs, the burden of proof lies with the taxpayer. Click here for English translation Click here for other translation ...

Prior to a business restructuring in 1999, the Spanish subsidiary, Roche Vitaminas S.A., was a full-fledged distributor, involved in manufacturing, importing, and selling the pharmaceutical products in the Spanish and Portuguese markets. In 1999 the Spanish subsidiary and the Swiss parent, Roche Vitamins Europe Ltd., entered into a manufacturing agreement and a distribution agreement. Under the manufacturing agreement, the Spanish subsidiary manufactured products  according to directions and using formulas, know-how, patents, and trademarks from the Swiss parent. These manufacturing activities were remunerated at cost plus 3.3 percent. Under the distribution (agency) agreement, the Spanish subsidiary would “represent, protect and promote” the products. These activities were remunerated at 2 percent of sales. The Spanish subsidiary was now characterized as a contract manufacturer and commission agent and the taxable profits in Spain were much lower than before the business restructuring. The Spanish tax authorities argued that the activities constituted a PE in Spain according to article 5 of DTT between Spain and Switzerland. Therefore, part of the profits should be allocated to the Spanish subsidiary in accordance with article 7 of the DTT. Supreme Court Judgement The Supreme Court held that the restructured Spanish entity created a PE of Roche Vitamins Europe Ltd. in Switzerland. The profits attributed to the PE included not only the manufacturing profits but also profits from the distribution activity performed on behalf of Roche Vitamins Europe Ltd. in Switzerland. Excerpts “The administration is therefore correct in stating that the applicant company operated in Spain by means of a permanent establishment…” “In short, what is laid down in these two paragraphs 1 and 2 of Article 7 of the Spanish-Swiss Convention (in summary form) is that: (a) If a taxpayer acts in a State, of which he is not a resident, through a permanent establishment, then the profits of that taxpayer may be taxed in that State, but only to the extent that such profits are attributable to the said re-establishment. (b) This means that only the profit that the non-resident would have made in that State if he had had a full presence (as a resident), through a separate and distinct company, will be taxable in that State; but, of course, only in respect of the activity carried out by that establishment. The Audiencia Nacional, contrary to this reading of Article 7, establishes that if a non-resident company has a permanent establishment, then it must be taxed in the State in which that establishment is located for all the activities carried out in the territory of that State, even if they are not carried out through the permanent establishment. Contrary to this, and by application of the only possible interpretation of Article 7(1) and (2) (already explained and in accordance with the criteria of the OECD Tax Committee, as we shall see below), a permanent establishment should only be taxed in the State in which it is located on the profit derived from the activity carried out through the permanent establishment.” “…the sales figure must include all sales made by the permanent establishment. We consider that it is established in the file, contrary to the appellant’s submissions, that those sales must include those made to Portuguese customers, since they were made as a result of the promotional and marketing activities of Roche Vitaminas SA and are therefore attributable to it. It is also common ground that the expenses referred to by the appellant have been taken into account, as is stated in the official document dated 12 July 2002. For the rest, we refer to what was established in the settlement agreement dated 23 April 2003, as well as to the full arguments contained in the judgment under appeal.” Click here for english translation Click here for other translation ...

In connection with a restructuring, Ferring Sweden (a Scandinavian pharmaceutical) had transferred intangible assets to a group company in Switzerland. Among the assets transferred was an exclusive worldwide license to manufacture and sell a drug and a number of ongoing R&D projects. The question in the case was whether the price agreed between the Group companies was consistent with the arm’s length principle. The Ferring’s position was that the price was consistent with the arm’s length principle, while the Swedish Tax Agency believed that an arm’s-length price was significantly higher. In support of its pricing, the company had submitted a valuation made by the audit company A, where the value of Ferring after the transfer (the residual company) was compared with the value of the company if it had continued to operate as a full-fledged company (the original company). These values ​​were determined through a present value calculation of the future cash flows in each unit. The difference in value was considered to correspond to the value of the intangible assets transferred. The Swedish Tax Agency had made its own assessment of a market-based remuneration for the license only to manufacture and sell the drug. In this valuation, the present value of the future cash flows was calculated according to what the sale of the drug could be expected to generate, ie the income that the Swedish company would lose after the transfer of the license. The value obtained exceeded the price that the Group companies had agreed on for all intangible assets. The Swedish Tax Agency had also made a calculation regarding the ongoing R&D projects. In this calculation, the present value of the estimated costs of R&D projects was compared with the present value of the future revenues that these projects could be expected to lead to. In support of the assessment, the Swedish Tax Agency also relied on a valuation made by the audit firm B, which was made on behalf of the Swedish Tax Agency. Like the audit firm A, the accounting firm B calculated the value of the transferred assets by comparing the value of the parent company with the value of the residual company. However, Audit Company B came to a significantly higher value in its valuation than Audit Company A did. The Court of Appeal considered that clearly overwhelming reasons indicated that the audit firm B’s valuation provided a reasonable arm’s length value. This conclusion was reinforced by the Swedish Tax Agency’s evaluation of the license to manufacture and sell the drug, by the Swedish Tax Agency’s calculation of R&D projects, and by an evaluation of the outcome of the respective auditing companies’ values ​​by using multiples. The Court of Appeal also took into account the size of the amounts that the Swedish company invested in R&D in the years prior to the transfer. The Court found that in the absence of proportionality and in the absence of explanations, the relationship between the value of intangible assets and the sums invested in developing them may give an indication that the price is not market-based. The Court of Appeal also held that the information contained in the case was insufficient to explain the seemingly unreasonable relationship between what had been invested in R&D up until the transfer and the price that was then determined at the transfer of assets, which included the R&D projects. All in all, the District Court considered that the Swedish Tax Agency had sufficiently proved that the market price of the assets transferred between the Group companies exceeded the agreed price, at least with the increase decided by the Swedish Tax Agency. According to the court, the Swedish Tax Agency had therefore had grounds for taxing Ferring in the manner that had taken place. Click here for translation ...

The Applicant is an Australian subsidiary of the Roche Group, the parent company of which is a resident of Switzerland. Roche is a major pharmaceutical corporation with integrated operations in many countries. It carries on research and development, manufacturing, marketing, selling and distribution of pharmaceuticals, vitamins, chemicals, diagnostic and other products. During the 1993 to 2003 income years (the relevant income years) the Applicant carried on business in Australia marketing, selling and distributing Roche products through three divisions: the Prescription Division (dealing in prescribed drugs), the Consumer Health Division (dealing in over the counter pharmaceuticals) and Diagnostic Products (dealing in diagnostic equipment and supplies) ...

The Bundesfinanzhof confirmed that losses incurred by a simpel distribution entity over a longer period of time trigger a rebuttable presumption in Germany that transfer prices have not been at arm’s length. A German company, Loss Distributor GmbH, imported goods from their Swiss sister company S-AG and had made continious losses over a period of time. The tax authorities found that the purchase prices paid to the S-AG had increased since 1989 and that the German company could not fully pass on the increased purchase price to its customers. Since at the same time the price of the Swiss franc had fallen since 1989, the purchase prices paid to the S-AG in the years of the dispute had been inflated and currency gains had been transferred to Switzerland in this way. A tax assessment was therefor issued. The German company appeal the assessment to the Bundesfinanzhof. The Federal Tax Court ruled in favor of the tax authorities. Click here for English translation Click here for other translation ...