SAS Weg France is owned by the Spanish company Weg Iberia, which in turn is wholly owned by the head company of the Weg Equipamentos Electricos SA group, based in Brazil. At the end of an audit covering the financial years 2010, 2011 and 2012, the tax authorities noted that SAS Weg France, which had not provided any documentation justifying the transfer pricing policy within the group, paid its suppliers, who were members of the group, within a maximum of 30 days of shipment of the goods, whereas delivery times averaged two months from Brazil and three months from China, and that its customers paid its invoices between 45 and 90 days after invoicing. According to the tax authorities SAS Weg France thus performed a gratuitous financial function which constituted an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. The tax authorities adjusted the company’s operating profit to the median of a benchmark study of fourteen comparable companies. As a result, the tax authorities reduced the losses declared by SAS Weg France for the financial year 2009, made it liable for additional corporate tax contributions for the financial years 2011 and 2012 and subjected the amounts transferred abroad to withholding tax. These taxes were subject to a 10% surcharge for failure to file a tax return pursuant to Article 1728 of the French General Tax Code. SAS Weg France was also fined for failing to provide transfer pricing documentation as required by the French General Tax Code. Dissatisfied with the assessment, SAS Weg France appealed to the Administrative Court, which dismissed the appeal in 2021. SAS Weg France then appealed against the decision of the Administrative Court to the Court of Administrative Appeals. Judgment of the Court The Appeals Court overturned the decision of the Administrative Court and ruled in favour of SAS Weg France. Excerpts: “4. In order to consider that the service provided by Weg France constituted an unjustified advantage that was not part of normal commercial management for the benefit of the group’s suppliers, the department compared the net margin rate of SAS Weg France, calculated after elimination of financial charges, with that of independent companies that did not have a specific financial function. The tax authorities selected a sample of fourteen independent companies that had adopted the same NAF code as SAS Weg France, i.e. wholesale of electrical equipment and wholesale of miscellaneous industrial supplies and equipment, with sales in excess of €5 million for 2010 and 2011 and whose sales amounted to less than 90% of sales, and that were positioned as wholesalers/dealers. 5. Weg France maintains, without being challenged on this point either at first instance or on appeal, that the products it distributes are intended solely for the industrial sector, whereas the sample of comparable companies used by the tax authorities includes companies that sell to individuals and companies that distribute household equipment, In this respect, the differences in margins noted by the department can be explained by the difference in situation between it and nine of the companies on the panel. In addition, the applicant company argued that, although five of the companies on the panel selected by the authorities could be considered comparable, their operating margins appeared to be consistent with the margins it had itself achieved during the period under review. In the absence of any challenge by the tax authorities to the arguments put forward by the applicant company in support of its plea, the tax authorities cannot be regarded as establishing the existence of a practice falling within the scope of Article 57 of the General Tax Code. It follows that Weg France is entitled to argue that the tax authorities were wrong to call into question the loss carried forward for 2009, to reinstate the sums considered as profit transfers in its taxable income for the financial years 2011 and 2012 and to consider that the benefits granted to the companies in the group constituted distributed income within the meaning of c. of Article 111 of the French General Tax Code subject to withholding tax.” Click here for English translation Click here for other translation ...

One illustrative case where adjustments may be required is where the circumstances surrounding controlled and uncontrolled sales are identical, except for the fact that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. factory. The differences in terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price. Therefore, to determine the uncontrolled sales price, adjustment should be made to the price for the difference in delivery terms ...

In this ruling Bondo Tea Estates Ltd. challenged an adjustment made by the tax authorities to the price at which green leaf tea was supplied by the applicant to Kijura Tea Company Limited, a related party. The ruling also concerns disallowance of an assessed loss of Shs. 220,985,115. Bondo Tea Estates Ltd. is an out grower of tea which it supplies to an associated company, Kijura Tea Company Limited. In 2018, the tax authorities conducted an audit for FY 2016/2017 which purportedly revealed that the company had under declared its sales (price of 320 compared to range of 500-700) and that it had unreconciled retained earnings and current liabilities. On that basis the tax authorities adjusted the price of the related party transactions and issued an assessment of Shs. 544,409,110 of which Shs. 174,409,650 was principal income tax, Shs. 348,819,302 penalty and Shs. 20,929,158 interest. Bondo Tea Estates Ltd. did not agree with the assessment and filed an appeal with the Tax Appeals Tribunal where the following issues were set down for determination. Whether there was under-declaration of sales by the applicant to the respondent for the financial year ending 31stMarch 2017? Whether the average price adjustment by the respondent is in conformity with the law? Whether there was loss incurred by the applicant for the year ending 31stMarch, 2017 which was not recognized by the respondent? What remedies are available to the parties? Judgement of the Tax Appeals Tribunal The tribunal allowed the appeal of Bondo Tea Estates Ltd. and set aside the assessment issued by the tax authorities in regards of transfer pricing. Excerpt “The question the Tribunal has to ask itself, was the price set by the applicant and its associate, Kijura Tea Company limited, one that could be considered as one between unrelated parties?   In order to understand whether the applicant’s price to Kijura Tea Company was at arm’s length one has to ask how was the price set? The minutes of a tea stakeholders meeting of 7th January 2015 at Toro Club, Fort Portal, exhibit A5 show that it was attended by representatives of all the major green leaf buyers, namely; Mpanga Growers Tea Factory, Kijura Tea Company, Mabale Growers Tea Factory, Rusekere Growers Tea Factory and others. The meeting agreed to reduce the price of green leaf from the current Shs. 350 per kg to Shs, 280 per kg with effect from 16th January 2016 due to the fall in prices at the auction market. The meeting also reduced transport cost from Shs. 100 to Shs. 80 per kg of green leaf. The meeting resolved that stakeholders using the services of transporters should ensure that the prices offered to farmers did not exceed Shs. 280 per kg. By April 2016, 14 months after the price was fixed by the tea factories, the applicant was selling Shs. 320 per kilogram, an increment of Shs. 40. The price of the applicant was above the price set by the different stakeholders. It would have been a different matter if the price was below that set by the stakeholders. One cannot say the applicant’s price to Kijura Tea Company was not at arm’s length.   Further the applicant contended that its price did not include transport charges which varied from where the out growers came from. The applicant contended that the respondent did not state whether the Shs. 500 per kilogram paid to out growers included transport costs. The field report the respondent conducted was on 12th September 2018. The income tax period in issue is April 2016 to March 2017. The prices of tea is not static. One cannot use the price of tea in September 2018 to ascertain the price from April 2016 to March 2017. The prices at the auction market in September 2018 may have increased.  The said inspection report is not signed. Furthermore it does not disclose which unrelated companies and their officials the respondent interacted with. No sale invoices of unrelated companies are attached. Further, the interview was not representative of the local green leaf market, only five out growers were interviewed. The minutes of the stakeholders show that there are more than 5 tea factories in the Toro tea growing region which rely on hundreds of individual out growers for their supply of green leaf. The respondent’s representatives ought to have interviewed out growers selling green leaf to Kijura Tea Company to establish what price they were charging. The representatives only interviewed out growers selling their green leaf to Rusekere Growers Tea Company, McLeod Russell Uganda Limited and Mabale Growers Tea Factory Limited. This would enable establish if the differences between the applicant’s sale price and that of other out growers were not due to distortions arising from factors like transport costs or the quality of green leaf. The report does not state the locations of fields of the five to determine the distance between their fields and the tea factories. The report does not show whether the out growers incurred additional expenses such as transport. The respondent’s failure to take these factors into account substantially affect the credibility of the field inspection report. From the evidence before us, we have failed to find sufficient justification for the adjustment by the respondent of the applicant’s sales price. We accordingly find that there was no under-declaration by the applicant of its sales of green leaf to Kijura Tea Company limited for the financial year 2016/2017. We also find that the average price adjustment by the respondent was, for the above reasons, not in conformity with the law.” Click here for other translation ...

East African Breweries International Ltd (applicant) is a wholly owned subsidiary of East African Breweries Limited, and is incorporated in Kenya. East African Breweries International Ltd was involved in developing the markets of the companies in countries that did not have manufacturing operations. The company did not carry out marketing services in Uganda but was marketing Ugandan products outside Uganda. After sourcing customers, they pay to the applicant. A portion is remitted to Uganda Breweries Limited and East African Breweries International Ltd then adds a markup on the products obtained from Uganda Breweries Limited sold to customers in other countries. East African Breweries International Ltd would pay a markup of 7.5 % to Uganda Breweries and then sell the items at a markup of 70 to 90%. In July 2015 the tax authorities (respondent) audited Uganda Breweries Limited, also a subsidiary of East African Breweries Limited, and found information relating to transactions with the East African Breweries International Ltd for the period May 2008 to June 2015. The tax authorities issued an assessment of income tax of Shs. 9,780,243,983 for the period June 2009 to June 2015 on the ground that East African Breweries International Ltd was resident in Uganda for tax purposes. An appeal was filed by East African Breweries International Ltd where the agreed issues were: 1. Whether the applicant is a taxable person in Uganda under the Income Tax Act? 2. Whether the applicant obtained income from Uganda for the period in issue? 3. What remedies are available to the parties? Judgement of the Tax Appeals Tribunal The tribunal dismissed the appeal of East African Breweries International Ltd and upheld the assessment issued by the tax authorities. Excerpt “From the invoices and dispatch notes tendered in as exhibits, it was not clear who the exporter of the goods was. There was no explanation why the names of the parties were crossed out and replaced with others in some of the invoices and dispatch notes. While the applicant did not have an office or presence in Uganda it was exporting goods. In the absence of satisfactory explanations, the Tribunal would not fault the Commissioner’s powers to re-characterize transactions where there is a tax avoidance scheme. The arrangement may not only be a tax avoidance scheme but also one where the form does not reflect the substance. The markup the applicant was paying Uganda Breweries was extraordinarily low compared to what the applicant was obtaining from its sale to third partied. Once again in the absence of good reasons, the form does not reflect the substance. If the Commissioner re-characterized such transactions, the Tribunal will not fault him or her. The Commissioner cannot be said to have acted grossly irrationally for the Tribunal to set aside the decision. The Tribunal notes that the activities of the group companies were overlapping. It is not clear whether they were actually sharing TIN, premises and staff. The witness who came to testify on behalf of the applicant was from East African Breweries Limited. Despite the applicant selling goods to many countries it does not have an employee or officer to testify on its behalf. The markup of the sale of the goods by Uganda Breweries Limited to the applicant was far lower than that between the applicant and the final consumers in Sudan, Congo and Rwanda. While Uganda Breweries Limited was charging the applicant a markup of 7.5% the applicant was charging its customers 70 to 90%. This is part of a transfer pricing arrangement where the companies are dealing with each other not at arm’s length. The arm’s length principle requires inter-company transactions to conform to a level that would have applied had the transactions taking place between unrelated parties, all other factors remaining the same. Under. S. 90 of the Income Tax Act, in any transaction between associates, the commissioner may distribute, apportion or allocate income, deductions between the associates as is necessary to reflect the income realized by the taxpayer in an arm’s length transaction. An associate is defined in S. 3 of the Income Tax Act. In making any adjustments the commissioner may determine the source of income and the nature of any payment or loss. The transfer pricing arrangement originated in Uganda. The Commissioner apportion taxes according to the income received by the applicant. In Unilever Kenya Limited v CIT Income Tax Appeal No. 753/2003 (High Court of Kenya) Unilever Kenya Limited (UKL) and Unilever Uganda Limited (UUL) were both subsidiaries of Unilever PLC, a UK multinational group. Pursuant to a contract, UKL manufactured goods on behalf of and supplied them to UUL, at a price lower than UKL charged to unrelated parties in its domestic and export sales for identical goods. The Commissioner raised an assessment against UKL in respect of sales made by UKL to UUL on the basis that UKL’s sale to UUL were not at arm’s length prices. In that matter it was held that in the absence of guidelines under Kenya law, the taxpayer was entitled to apply OECD transfer pricing guidelines. In this application, the issue is not about which rules to apply. What the Tribunal can note is that the Commissioner has powers to apportion income on an intergroup company and issue an assessment. In this case the Commissioner chose the applicant over Uganda Breweries Limited. The Tribunal feels that the Commissioner was acting within his discretion and was justified to do so. Taking all the above into consideration, the Tribunal finds that the applicant did not discharge the burden placed on it to prove the respondent ought to have made the decision differently. Click here for other translation ...

One illustrative case where adjustments may be required is where the circumstances surrounding controlled and uncontrolled sales are identical, except for the fact that the controlled sales price is a delivered price and the uncontrolled sales are made f.o.b. factory. The differences in terms of transportation and insurance generally have a definite and reasonably ascertainable effect on price. Therefore, to determine the uncontrolled sales price, adjustment should be made to the price for the difference in delivery terms ...