Eni Norge AS was a wholly owned subsidiary of Eni International B.V., a Dutch company. Both companies were part of the Eni Group, in which the Italian company Eni S.p.A was the HQ. Eni Norway had deducted costs related to the purchase of “technical services” from Eni S.p.A. Following an audit, the tax authorities reduced these deductions pursuant to section 13-1 of the Taxation Act (arm’s length provision). This meant that Eni Norway’s income was increased by NOK 32,673,457 in FY 2015 and NOK 16,752,728 in FY 2016. The tax assessment issued by the tax authorities was later confirmed by a decision of the Petroleum Tax Appeal Board. The Appeals Board considered that there were price deviations between the intra-group hourly rates for technical services and the external hourly rates. The price deviations could be due to errors in the cost base and/or a lack of arm’s length in the distribution of costs. There was thus a discretionary right pursuant to section 13-1, first paragraph, of the Tax Act. Eni Norge A/S applied to the District Court for a review of the decision refering to a previous judgement from the Norwegian Supreme Court HR-2020-1130-A (the Shell R&D judgement). Judgement of the District Court The court did not find that the decision of the Appeals Board was based on incorrect facts or application of the law and upheld the decision. Excerpts “The Supreme Court held that the correct approach was to base the assessment on what was actually the cost burden for Norske Shell. Costs covered by others should not be included (paragraph 57). The Court cannot see that this judgement provides guidance for our case, because it concerns a different fact. The Supreme Court assumed that it concerned a case with an agreed cost contribution scheme: 51-52: (51) In the legislative proposal in connection with the addition of section 13-1 fourth paragraph of the Tax Act in 2007, Proposition No. 62 (2006-2007), the Ministry reviewed the content of the OECD Transfer Pricing Guidelines. Section 5.9 of the proposal provides an account of the guidelines relating to cost contribution arrangements (CCA) – referred to in the guidelines as Cost Contribution Arrangements (CCA). The content of such arrangements is described as follows: “A CCA is a contractual framework for sharing the costs and risks associated with the development, production or acquisition of assets, services or rights. The participants seek to obtain an expected benefit through their contributions to the KBO. Under a KBO, each participant will have the right to utilise its interests in the KBO as the actual owner of these, and the participants will thus not be liable to pay royalties or other remuneration to any other party for the utilisation of their interests in the arrangement. The most common KBOs are arrangements for joint development of intangible assets, but KBOs are also established for other purposes.” In my view, it is in good accordance with the arm’s length principle that follows from Section 13-1 of the Tax Act and the OECD Guidelines, when the Complaints Board in its decision has assumed that the relationship between Norske Shell and the group companies involves a cost-sharing arrangement. In this case, there is no transfer of assets for a consideration to be determined on the basis of the commercial principles that would apply to an ordinary sale of goods, services or rights.” The situation in our case concerns a case that the Supreme Court has limited itself to, namely the purchase of services between mother and daughter, which must be considered a transfer of assets for consideration. An ordinary sale has taken place. The service agreement and the individual sales do not involve a cost contribution scheme. Nor did the agreement state that revenues were to be deducted in a cost sharing arrangement, as was the situation in the Shell R&D judgement. The fact that the accounting agreement contains provisions on cost allocation between the licence partners does not change the facts. It concerns the sale of services between two independent parties, Eni S.p.A and Eni Norge. In the assessment, the income shall be determined as if the community of interest had not existed, cf. section 13-1, third paragraph, of the Tax Act. The Court agrees with the reasoning of the majority of the Appeals Board: “In the assessment, the income shall be determined as if the community of interest had not existed, cf. section 13-1 third paragraph of the Tax Act. § Section 13-1, third paragraph. If independent parties would have viewed the transactions in context, it is natural to do so also in controlled transactions. An independent service provider in a similar arrangement would naturally demand payment for all the services provided, regardless of whether the service recipient is subsequently re-invoiced or reimbursed for the costs of some of the services by others. An independent service recipient in such an arrangement would also accept to pay for all the services, but no more than what similar services would cost in the open market. This must also apply to the services that Eni Norge can charge the licence partners under the accounting agreement.” Without it being of decisive importance for the Court’s assessment, the Plaintiff has not been as clear in the administrative proceedings that there is a pure passing on of the service costs to the licence partners as it was during the main hearing. The Court refers to this description by the majority of the Board of Appeal of the charge: (…) As the Court understands the Plaintiff’s response during the proceedings, it confirms that there is not full correspondence between the costs from the purchase of the service from Eni S.p.A and the onward charge. The Plaintiff has at best been very unclear on this point. This supports the Court’s assessment that the transactions must be assessed separately. As stated, this is not decisive for the Court’s conclusion. The Court has no need to problematise the principle that it can only rely on the facts presented by the ...

AES SUL Distribuidora Gaúcha de Energia S/A is active in footwear industry. It had paid for services to related foreign companies in South Africa, Argentina, Canada, China, South Korea, Spain, France, Holland, Italy, Japan, Norway, Portugal and Turkey. The tax authorities were of the opinion that withholding tax applied to these payments, which they considered royalty, and on that basis an assessment was issued. Not satisfied with this assessment AES filed an appeal, which was allowed by the court of first instance. An appeal was then filed by the tax authorities with the Superior Tribunal. Judgement of the Superior Tribunal de Justiça The court upheld the decision of the court of first instance and dismissed the appeal of the tax authorities. Excerpts “Therefore, the income from the rendering of services paid to residents or domiciled abroad, in the cases dealt with in the records, is not subject to the levy of withholding income tax. The refund of amounts proved to have been unduly paid, therefore, may be requested by the plaintiff, as she would have borne such burden, according to article 166 of the CTN.” “This Superior Court has a firm position according to which IRRF is not levied on remittances abroad arising from contracts for the provision of assistance and technical services, without transfer of technology, when there is a treaty to avoid double taxation, and the term “profit of the foreign company” must be interpreted as operating profit provided for in arts. 6, 11 and 12 of Decree-law 1.598/1977, understood as “the result of the activities, main or accessory, that constitute the object of the legal entity”, including income paid in exchange for services rendered, as demonstrated in the decisions summarized below” “1. The case laws of this Superior Court guide that the provisions of the International Tax Treaties prevail over the legal rules of Domestic Law, due to their specificity, subject to the supremacy of the Magna Carta. Intelligence of art. 98 of the CTN. Precedents: RESP 1.161.467/RS, Reporting Justice CASTRO MEIRA, DJe 1.6.2012; RESP 1.325.709/RJ, Reporting Justice NAPOLEÃO NUNES MAIA FILHO, DJe 20.5.2014. 2. The Brazil-Spain Treaty, object of Decree 76.975/76, provides that the profits of a company of a Contracting State are only taxable in this same State, unless the company performs its activity in the other State by means of a permanent establishment located therein. 3. The term profit of the foreign company must be interpreted not as actual profit, but as operating profit, as the result of the activities, main or accessory, that constitute the object of the legal entity, including, the income paid as consideration for services rendered.” “Article VII of the OECD Model Tax Agreement on Income and Capital used by most Western countries, including Brazil, pursuant to International Tax Treaties entered into with Belgium (Decree 72.542/73), Denmark (Decree 75.106/74) and the Principality of Luxembourg (Decree 85. 051/80), provides that the profits of a company of a contracting state are only taxable in that same state, unless the company carries on its activities in the other contracting state through a permanent establishment situated therein (branch, agency or subsidiary); moreover, the Vienna Convention provides that a party may not invoke the provisions of its domestic law to justify breach of a treaty (art. 27), in reverence for the basic principle of good faith. 7. In the case of a controlled company, endowed with its own legal personality, distinct from that of the parent company, under the terms of the International Treaties, the profits earned by it are its own profits, and thus taxed only in the Country of its domicile; the system adopted by the national tax legislation of adding them to the profits of the Brazilian parent company ends up violating the International Tax Pacts and infringing the principle of good faith in foreign relations, to which International Law does not grant relief. 8. Bearing in mind that the STF considered the caput of article 74 of MP 2158-35/2001 to be constitutional, the STF adheres to this stand and considers that the profits earned by a subsidiary headquartered in Bermuda, a country with which Brazil has no international agreement along the lines of the OECD, must be considered to have been made available to the parent company on the date of the balance sheet on which they were ascertained. 9. Art. 7, § 1 of IN/SRF 213/02 exceeded the limits imposed by the Federal Law itself (art. 25 of Law 9249/95 and 74 of MP 2158-35/01) which it was intended to regulate; in fact, upon analysis of the legislation supplementing art. 74 of MP 2158-35/01, it may be verified that the prevailing tax regime is that of art. 23 of DL 1. 598/77, which did not change at all with respect to the non-inclusion, in the computation of the taxable income, of the methods resulting from the evaluation of investments abroad by the equity accounting method, that is, of the counterparts of the adjustment of the value of the investment in controlled foreign companies. 10. Therefore, I hereby examine the appeal and partially grant it, partially granting the security order claimed, in order to affirm that the profits earned in the Countries where the controlled companies headquartered in Belgium, Denmark, and Luxembourg are established, are taxed only in their territories, in compliance with article 98 of the CTN and with the Tax Treaties (CTN). The profits ascertained by Brasamerican Limited, domiciled in Bermuda, are subject to article 74, main section of MP 2158-35/2001, and the result of the contra entry to the adjustment of the investment value by the equity accounting method is not part of them.” “Therefore, I hereby examine the appeal and partially grant it, partially granting the security order claimed, in order to affirm that the profits earned in the Countries where the controlled companies headquartered in Belgium, Denmark, and Luxembourg are established, are taxed only in their territories, in compliance with article 98 of the CTN and with the Tax Treaties (CTN). The profits ascertained by Brasamerican ...

In the case of Panasonic Indonesia the tax authorities had disallowed deductions for services and royalties paid for by the local company to the Panasonic Corporation Japan. The tax authorities held that Panasonic Indonesia did not received the purported services and that the company should not pay royalty due to its status as a contracting manufacturer. Judgement of the Tax Court The Court decided predominantly in favour of the tax authorities. The court found that Panasonic Indonesia had been unable to prove that actual ‘services’ had been received for an amount equal to 3% of net sales of all product manufactured and 1% of net sales for technical assistance and brand fees. Furthermore it was notet that Panasonic Indonesia reported consistent losses. Click here for translation ...