Goodland Taiwan had sold 7 machines to a local buyer via a related party in Hongkong thus avoiding taxes on sales profits. The transaction had been audited by the Taiwanese tax administration and an assessment issued. Goodland brought the case to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all specific to the income tax law and may not be consistent with the judgment of related parties under the business tax law. In addition, in this case, the U.S. and local companies are at least covered by the fact that the income tax of the business is not in compliance with the requirements of Article 3 and Article 4(2) of the regular transfer pricing audit. The method of recognizing the income of a controlled foreign enterprise is based on the premise that there is a difference between domestic and foreign income tax liabilities, and is not related to the determination of related parties under business tax law. It is difficult to argue that the original decision did not apply these provisions and that the application of the law was incorrect or that the reasons for the decision were inadequate.As to the statement in the appeal that “the factual findings of the original judgment are contrary to the law of civil contracts”, the reasoning of the appeal is that “the original judgment is contrary to the law of civil contracts”.It is not clear what the specific breach of the law is, as the argument is brief and vague and lacks a complete legal reasoning.3. In conclusion, the original decision is clear and detailed and there is nothing that can be said to be unlawful. The grounds of appeal, as set forth in the original judgment, are only general allegations of the application of the law, but not specific allegations of “inapplicability of the law”, “improper application of the law”, or “the circumstances listed in Article 243, Paragraph 2 of the Administrative Procedure Law”. In accordance with the preceding provisions and explanations, the appeal should be considered unlawful.” Click here for English Translation ...

This case concerned a tax scheme where taxable income was eliminated using factoring and management fees to shift profits. The Tax Court held that the scheme was in essence an attempt to eliminate the taxes. Factoring and management fees were not deductible expenses but rather disguised distributions of corporate profits and generally currently taxable to the individual shareholders as constructive dividends or as income improperly assigned to the corporations. In the TC Memo interesting views on the arm’s length nature of factoring and management fees is elaborated upon. TC memo 2018-131 ...

A Norwegian company, A, first acquired shares in Company C from a unrelated party D for tNKR 625. Company A then transferred the acquired shares in C to a subsidiary E, a shell company established by C for the purpose of the transaction. Company A then sold the shares in subsidiary E to the unrelated party D, from which it had originally bought the shares in C, for tNKR 3830, a price almost six times higher than the acquisition price, in a tax free transfer. Based on these facts, the Norwegian tax administration adjusted the price of the intra-group transfer shares in C from A to E. The Norwegian tax tribunal decided that the valuation af the shares in the intra-group transfer could be based on a linear appreciation in the share value. Click here for translation ...

The Court of Appeal upheld decisions of the High Court confirming the Commissioner of Inland Revenue’s disallowance of a $1,116,000 management fee for income tax purposes. The Court of Appeal dismissed Honk Land Trustees Limited’s (“HLT”) appeal on the following alternative grounds: (1) there was no satisfactory evidence to show that management services were in fact provided; (2) there was no sufficient nexus shown; and (3) in the event the management fees were deductible, they were nevertheless part of a void tax avoidance arrangement. Additionally, the Court of Appeal agreed that the Commissioner was entitled to impose abusive tax position shortfall penalties ...

Tax avoidance scheme. Use of total return swap over shares in subsidiary to create a deemed creditor relationship. Value of shares depressed by novating liability for large loans to subsidiary. The scheme used by Ladbroke UK involved a total return swap and a novation of loans to extract reserves. Used to achieve a “synthetic transfer” of the JBB business to LB&G. In essence, this involved extracting the surplus which had accumulated in LGI and transferring it to LB&G prior to an actual sale of the JBB business to LB&G. The normal way to extract such reserves would be by a dividend payment. The Court ruled, that it is sufficient for the application of paragraph 13 (UK GAAR) that the relevant person has an unallowable purpose. Where the unallowable purpose is to secure a tax advantage for another person, HMRC do not have to show that the other person has in fact obtained a tax advantage, if the other person has been prevented from obtaining a tax advantage by the operation of paragraph 13. It would be impossible to construe paragraph 13 in that way where the relevant person intended to obtain a tax advantage for 40 itself, and there is nothing in the wording to indicate a different result where it intends to obtain a tax advantage for another ...

In 2007, IKEA reorganised its property portfolio in Norway so that the properties were demerged from the Norwegian parent company and placed in new, separate companies. The shares in these companies were placed in a newly established property company, and the shares in this company were in turn sold to the original parent company, which then became an indirect owner of the same properties. The last acquisition was funded through an inter-company loan. Based on the non-statutory anti-avoidance rule in Norwegian Tax Law, the Supreme Court concluded that the parent company could not be allowed to deduct the interest on the inter-company loan, as the main purpose of the reorganisation was considered to be to save tax. The anti-avoidance rule in section 13-1 of the Tax Act did not apply in this circumstance. Click here for translation ...

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

The Orica case involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income (Free dip). The arrangements essentially involve the “round robin” movement of funds where an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997). Similar arrangements may display some or all of the following features: the entity claiming the Australian tax deductions is related to the overseas party providing the loan or other financial benefit the overseas party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country use of hybrid entities or instruments such that: i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity’s owners in the overseas jurisdiction the financing costs payable to the overseas party is not income taxable in Australia under Australia’s controlled foreign company (CFC) provisions the non-assessable foreign sourced income distributed to the Australian entity increases its ‘conduit foreign income’ balance so it can distribute unfranked dividends funded from its Australian profits to its foreign shareholders free of dividend withholding tax there is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries the arrangement produces a commercial outcome or achieves an overall advantage to the global group because of the Australian tax benefits ...

The Australien Chevron case was about a $US 2.5 billion intercompany loan between Chevron Australia and its US subsidiary, Chevron Texaco, and whether the interest paid on the loan by Chevron Australia exceeded the arm’s length price. Chevron Australia had set up a company in the US, Chevron Texaco Funding Corporation, which borrowed money in US dollars at an interest rate of 1.2% and then made an Australian dollar loan at 8.9% to the Australian parent company. This 8,9% interest increased Chevron Australia’s costs, and reduced taxable profits. These interest payments, which was not taxed in the US, came back to Australia in the form of tax free dividends. The US company was just a shell created for the sole purpose of raising funds in the commercial paper market and then lending those funds to the Australian company. Chevron argued that the 8,9% interest rate was taking into account the risk of raising loans written in US dollars and then turning that into an Australian dollar loan. The Court ruled in favor of the tax administration and the case has since been appealed by Chevron. The ruling was based on the following arguments: The interest rate applied to the intra-group financial transaction was high because there was no security and no financial or operational covenants. Under similar conditions, an independent entity would have been required to provide security  and subject to financial or operational covenants Hence, at arm’s length the applicable interest rate would have been (much) lower ...

Following the Tax Courts decision in 2013 (2013 TCC 404), Judge Boyle J. in an order from September 2014 recused himself from completing the McKesson Canada proceeding in the Tax Court. This extended to the consideration and disposition of the costs submissions of the parties, as well as to confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry. Postscript An appeal was filed by McKesson with the Federal Court, but the appeal was later withdrawn and a settlement agreed with the tax authorities. In May 2015 McKesson filed a 10-K with the following information regarding the settlement “…Income tax expense included net discrete tax benefits of $33 million in 2015, net discrete tax expenses of $94 million in 2014 and net discrete tax benefits of $29 million in 2013. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. We have received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of 2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003 through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter and do not expect it to have a material impact to income tax expense.” Further information on the settlement was found in McKesson’s 10-Q filing from July 2015 “…We received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we filed a Notice of Appeal to the Federal Court of Appeal. During the first quarter of 2016, we reached an agreement to settle the transfer pricing matter for years 2003 through 2010 and recorded a discrete income tax benefit of $12 million for a previously unrecognized tax benefit.” ...

See the documents from the US Senate hearings on offshore profit shifting and abusive tax schemes Offshore Profit Shifting and the U.S. Tax Code – Part 1 (Microsoft & Hewlett-Packard) and Part 2 (Apple Inc.), Carl Levin’s opening statements ...

McKesson is a multinational group engaged in the wholesale distribution of pharmaceuticals. Its Canadian subsidiary, McKesson Canada, entered into a factoring agreement in 2002 with its ultimate parent, McKesson International Holdings III Sarl in Luxembourg. Under the terms of the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for approximately C$460 million and committed to purchase all eligible receivables as they arise for the next five years. The receivables were priced at a discount of 2.206% to face value. The funds to purchase the accounts receivable were borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent company in Luxembourg. At the time the factoring agreement was entered into, McKesson Canada had sales of $3 billion and profits of $40 million, credit facilities with major financial institutions in the hundreds of millions of dollars, a large credit department that collected receivables within 30 days (on average) and a bad debt experience of only 0.043%. There was no indication of any imminent or future change in the composition, nature or quality of McKesson Canada’s accounts receivable or customers. Following an audit, the tax authorities applied a discount rate of 1.013%, resulting in a transfer pricing adjustment for the year in question of USD 26.6 million. In addition, a notice of additional withholding tax was issued on the resulting “hidden” distribution of profits to McKesson International Holdings III Sarl. McKesson Canada was not satisfied with the assessment and filed an appeal with the Tax Court. Judgement of the Tax Court The Tax Court dismissed McKesson Canada’s appeal and ruled in favour of the tax authorities. The Court found that an “other method” than that set out in the OECD Guidelines was the most appropriate method to use, resulting in a highly technical economic analysis of the appropriate pricing of risk. The Court noted that the OECD Guidelines were not only written by persons who are not legislators, but are in fact the tax collecting authorities of the world. The statutory provisions of the Act govern and do not prescribe the tests or approaches set out in the Guidelines. According to the Court, the transaction at issue was a tax avoidance scheme rather than a structured finance product ...

This case is about the importance of proving that the transaction has a real economic purpose, and that it does not artificially seek to achieve tax benefits. The courts also consider the spirit of the law, for example, the purpose of the tax exemptions relating to parent-subsidiary distributions is to involve the parent company in the business of the subsidiary. Click here for translation ...

On 13 June 2013, a Statement was released by New Zealand’s Inland Revenue Service on the interpretation of Tax Avoidance provisions. This statement outlines the Commissioner’s view of the law on tax avoidance in New Zealand and sets out the approach the Commissioner will take to application of the general anti-avoidance provision, based on the three-stage test for assessing whether an arrangement is tax avoidance as provided by the Supreme Court Judgment in the Ben Nevis case. In Ben Nevis case the Supreme Court indicated it intended to settle the approach regarding the relationship between s BG 1 and the rest of the Income Tax Act. This has been acknowledged in all relevant judicial decisions released since Ben Nevis. Accordingly, the Commissioner considers that the statement is based upon and reflects the view of the court in Ben Nevis ...

In 2003 Alesco NZ bought two other companies in New Zealand. Its Australian owner, Alesco Corporation, funded the acquisitions by advancing the purchase amount of $78 million. In consideration Alesco NZ issued a series of optional convertible notes (OCNs or notes). The notes were non-interest bearing for a fixed term and on maturity the holder was entitled to exercise an option to convert the notes into shares. Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes in accordance with relevant accounting standards and a determination issued by the Commissioner against its liability to taxation in New Zealand. In the High Court Heath the Commissioner’s treatment of the OCN funding structure as a tax avoidance arrangement under section BG 1 of the Income Tax Act of 1994 and the Income Tax Act of 2004 was upheld ...

In the Vodafone case, the Supreme Court of India found that tax planning within the law will be valid as long as it does not amount to a colourable device ...

The tax scheme in the Ben Nevis-case involved land owned by the subsidiary of a charitable foundation being licensed to a group of single purpose investor loss attributing qualifying companies (LAQC’s). The licensees were responsible for planting, maintaining and harvesting the forest through a forestry management company. The investors paid $1,350 per hectare for the establishment of the forest and $1,946 for an option to buy the land in 50 years for half its then market value. There were also other payments, including a $50 annual license fee. The land had been bought for around $580 per hectare. This meant that the the investors, if it wished to acquire the land after harvesting the forest, had to pay half its then value, even though they had already paid over three times the value at the inception of the scheme. In addition to the above payments, the investors agreed to pay a license premium of some $2 million per hectare, payable in 50 years time, by which time the trees would be harvested and sold. The investors purported to discharge its liability for the license premium immediately by the issuing of a promissory note redeemable in 50 years time. The premium had been calculated on the basis of the after tax amount that the mature forest was expected to yield. Finally the investors had agreed to pay an insurance premium of $1,307 per hectare and a further premium of $32,000 per hectare payable in 50 years time. The “insurance company” was a shell company established in a low tax jurisdiction by one of the promoters of the scheme. The insurance company did not in reality carry any risk due to arrangements with the land-owning subsidiary and the promissory notes from the group of investors. There was also a “letter of comfort” from the charitable foundation that it would make up any shortfall the insurance company was obliged to pay out. 90 per cent of the initial premiums received by the insurance company were paid to a company under the control of one of the promoters as commission and introduction fees tunneled back as loans to the promoters’ family trusts. Secure loans over the assets and undertakings secured the money payable under the promissory notes for the license premium and the insurance premium. The investors claimed an immediate tax deduction for the insurance premium and depreciated the deduction for the license premium over the 50 years of the license. The Inland Revenue disallowed these deductions by reference to the generel anti avoidance provision in New Zealand. Judgement of the Supreme Court The Supreme Court upheld the decisions of the lower courts and ruled in favor of the Inland revenue. The majority of the SC judges rejected the notion that the potential conflict between the general anti-avoidance rule and specific tax provisions requires identifying which of the provisions, in any situation, is overriding. Rather, the majority viewed the specific provisions and the general anti-avoidance provision as working “in tandem”. Each provides a context that assists in determining the meaning and, in particular, the scope of the other. The focus of each is different. The purpose of the general anti-avoidance provision is to address tax avoidance. Tax avoidance may be found in individual steps or in a combination of steps. The purpose of the specific provisions is more targeted and their meaning should be determined primarily by their ordinary meaning, as established through their text in the light of their specific purpose. The function of the anti-avoidance provision is “to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act.” The process of statutory construction should focus objectively on the features of the arrangements involved “without being distracted by intuitive subjective impressions of the morality of what taxation advisers have set up.” A three-stage test for assessing whether an arrangement is tax avoidance was applied by the Court. The first step in any case is for the taxpayer to satisfy the court that the use made of any specific provision comes within the scope of that provision. In this test it is the true legal character of the transaction rather than its label which will determine the tax treatment. Courts must construe the relevant documents as if they were resolving a dispute between the parties as to the meaning and effect of contractual arrangements. They must also respect the fact that frequently in commerce there are different means of producing the same economic outcome which have different taxation effects. The second stage of the test requires the court to look at the use of the specific provisions in light of arrangement as a whole. If a taxpayer has used specific provisions “and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement.” The economic and commercial effect of documents and transactions may be significant, as well as the duration of the arrangement and the nature and extent of the financial consequences that it will have for the taxpayer. A combination of those factors may be important. If the specific provisions of the Act are used in any artificial or contrived way that will be significant, as it cannot be “within Parliament’s purpose for specific provisions to be used in that manner.” The courts are not limited to purely legal considerations at this second stage of the analysis. They must consider the use of the specific provisions in light of commercial reality and the economic effect of that use. The “ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provisions in a manner that is consistent with Parliament’s purpose.” If the arrangement does make use of the specific provisions in a manner consistent with Parliament’s purpose, it will not be tax avoidance. The third stage is to consider whether tax avoidance ...

In this case the Court held that while a “colourable device” could result in the transaction being considered a sham, that did not mean that tax planning within the law will not be permitted ...