In 2011 Samsung signed the contract with Microsoft for use of software-patent in Android-based smartphone and tablets, and for the years 2012-2015 Samsung paid royalties to a Microsoft subsidiary, MS Licensing GP, while saving 15 percent for withholding tax. The royalties paid by Samsung to Microsoft during these years amounted to 4.35 trillion won, of which 15%, or 653.7 billion won, was paid as withholding tax. In June 2016, Microsoft filed a claim for a tax refund in a amount of 634 billion won with the Tax Office. According to Microsoft royalty paid for patent rights not registered in Korea is not domestic source income, and should not be subject to withholding tax. The request was refused by the tax authorities. Microsoft then filed a lawsuit against the tax authorities in 2017. Microsoft argued that the withholding tax imposed on income from a patent unregistered in Korea resulted in double taxation. The Trail court issued a decision in favour of Microsoft. The decision of the Trail court was brought before the Court of Appeal by the tax authorities. The authorities argued that royalties paid by Samsung also included payments for Microsoft technologies whose legal status was not clear and thus subject to withholding tax. In 2019 the appellate court rejected the tax authorities appeal. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court allowed the appeal and remanded the case to the appeals court, ordering additional proceedings to re-calculate the tax refund amount. According to the court royalties paid by Samsung for patent rights not registered in Korea by Microsoft do not correspond to domestic source income subject to withholding tax. However, the calculations should have been revised in accordance with facts of the case. Excerpts “Tax Office argued in the lower court that ‘the royalties in this case include consideration for the use of copyright, know-how, and trade secrets, which are subject to withholding tax as domestic source income’. Since it can be considered that they have been added or changed, the trial court should have considered and judged these claims.” “Considering the context of the Korea-US tax treaty and the ordinary meaning of its words, Articles 6 (3) and 14 (4) of the Korea-U.S. Tax Convention According to the principle of territoriality, the patentee’s right to use the patent exclusively for the production, use, transfer, rental, import, or display of the patented product is only effective in the territory of the country in which the patent right is registered. In the case of obtaining a patent license in Korea by registering a patent right, only the income paid in exchange for the use of the patent license is defined as domestic sourced income, and the patent right cannot be infringed outside the country where the patent right is registered, so the use or consideration for the use of the patent right cannot occur. “Therefore, if a US corporation has registered a patent right abroad but not in Korea, the income received by the US corporation in connection with it cannot be considered for its use, so It cannot be viewed as source income.” “On a different premise, in the lower court’s judgment that the claim of the Dongsuwon Tax Office was not subject to the court’s examination, there was an error that affected the judgment by misunderstanding the jurisprudence regarding the subject of the court’s examination”. Click here for translation ...

In 2013, Snowy Owl Energy Inc entered into a Consultancy Agreement (Subconsultant Services Agreement) with Rolenergy Inc. – a Hong Kong-based corporation organized and registered in the British Virgin Islands. Based on the Agreement, Rolenergy would serve as Snowy Owl Energy Inc’s sub-consultant. The tax authorities issued an assessment for deficiency income tax (IT), final withholding tax (FWT) and compromise penalty in relation to the sub-consultant fees it paid for taxable year 2013. Judgement of the Tax Court The Court decided in favour of Snowy Owl Energy Inc. Section 23(F)36 in relation to Section 42(C)(3)37 of the NIRC of 1997, as amended, provides that a non-resident foreign corporation is taxable only for income from sources within the Philippines, and does not include income for services performed outside the Philippines. Excerpts: “Indubitably, the payments made in exchange for the services rendered in Hong Kong are income derived from sources outside of the Philippines, thus not subject to IT and consequently to FWT.” ...

The French company SMAP carries out activities in the area of advertising management and organisation of trade fairs. Following an audit of the company for FY 2008 to 2011 and assessment was issued where deduction of costs for certain intra group “services” had been denied, resulting in additional value added tax, corporate income tax surcharges, apprenticeship tax and business value added tax. The company held that the tax administration had disregarded fiscal procedures, and that the reality of the services – and deductibility of the costs – cannot be disregarded on mere presumptions. Decision of the Court The Appeal of SARL SMAP was rejected by the Court. “Firstly, the administration notes that by virtue of a Lebanese legislative decree n° 46 of 24th June 1983, companies governed by Lebanese law … carrying out their essential activities outside the national territory are considered as offshore companies and as such benefit from a privileged tax regime. In particular, Article 4 of this legislative decree exempts these companies from the tax on the annual profits of joint stock companies. As mentioned in point 6, the activities of APCOM, as they are only covered by the 2004 contracts signed with SMAP SARL, concern administrative and financial services and commercial representation activities for companies not domiciled in Lebanon, and are therefore subject to the provisions of the Legislative Decree No. 46 of 24 June 1983. By merely maintaining that the company APCOM paid taxes in Lebanon, without producing any documents in support of its allegations, the applicant did not usefully contest the elements put forward by the administration. The latter must, therefore, be regarded as establishing that APCOM benefits from a privileged tax regime in Lebanon. It was therefore not required to establish the existence of a link of dependence between the two companies.” “…the claimant has not produced any documents to establish the reality of the services that APCOM performs on behalf of SMAP. Finally, the APCOM supplier account opened in the accounts of SMAP SARL functions as a partner’s current account. A transfer of 25,982 euros to SMAP was also entered there under the heading “loan repayment”, without any explanation being given by the applicant. Under these conditions, the administration must be considered as having produced elements likely to establish that the sums paid by SMAP SARL to APCOM constituted pure generosity granted in an interest other than that of the applicant company.” “…in order to establish the link of dependence between the applicant company and SMAP EXPO SL, the administration relies on the circumstance that the two companies shared the same director. Moreover, it is clear from the terms of the two proposed corrections that the administration also noted that the Spanish company, a sister company to SMAP EXPO S.L., had been the applicant company’s director.” “SARL SMAP, which does not have the material and human resources necessary to carry out its activity of organising trade fairs in Spain, relies on those of the applicant company. In these circumstances, the administration must be considered as establishing the link of dependence between the applicant and SMAP EXPO SL.” “As stated in paragraph 7, there is no evidence to establish the reality of the services which would have been provided by SMAP EXPO SL to SMAP SARL. Moreover, the applicant does not contest the transfer of profits to SMAP EXPO SL.” “It follows from what has just been said in the preceding points that the plea alleging that the administration has disregarded the provisions of Article 57 of the General Tax Code must be dismissed.” “It follows from all of the foregoing that SMAP SARL is not entitled to argue that the Montreuil Administrative Court wrongly rejected its claims in the contested judgment”. Click here for English translation Click here for other translation ...

“AC S.A” is engaged in sale of ventilation, heating and cooling equipment in Panama. AC S.A pays royalties for use of IP owned by the parent company of the AC Group. Following a audit carried out by the Tax Administration in Panama it was concluded that the profits of AC S.A 2.04% was below the arm’s length range determined by application of a TNM-method. After removing non-comparables from the benchmark study provided by the company, the interquartile range had a lower quartile of 6.15% and a median of 8.41%. Hence an assessment of additional taxable income was issued for FY 2014, bringing the profits of AC S.A up to the median (8.41%) of the adjusted benchmark. AC Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities, but made adjustment to the benchmark resulting in a lower quartile of 3.16% and a median of 6.2%. The adjustment issued by the tax authorities was therefore reduced by one third. Click here for English translation ...

“Oil Export S.A” Panama, was issued a fine of $ 1 mill. for not filing Transfer Pricing Report – Form 930 – for the fiscal year 2012. Article 762-I of the Tax Code in Panama establishes that “Failure to submit the report shall be sanctioned with a fine equivalent to 1% of the total amount of the operations with related parties. For the calculation of the fine, the gross amount of the operations shall be considered, regardless of whether they are representative of income, costs, or deductions.” The fine referred to in the paragraph shall not exceed one million balboas (B/.1,000,000.00). The decision of the Court “Consequently, since it has been demonstrated that —[“Oil Export S.A”]— did not comply with the formal obligation to submit the Transfer Pricing Report contained in Article 762-I of the Tax Code, the Tax Administration considers that it is appropriate to confirm Resolution No. 201-1429 of 24 October 2014 and its confirmation act.“ Click here for English translation ...

Back in 2017 the European Commission opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. The EU commission concluded its investigations in a decision issued 2 April 2019. According to the decision the UK “Group Financing Exemption” is in breach of EU State aid rules. Under the Scheme foreign multinationals would benefit from tax exemption of profits related to payments of interest on intragroup loans. “In conclusion, the Commission finds that the United Kingdom has unlawfully implemented the contested measure to the benefit of certain UK resident companies in breach of Article 108(3) of the Treaty. The Commission also finds that the Group Financing Exemption constitutes State aid that is incompatible with the internal market within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of TIOPA. By virtue of Article 16 of Regulation (EU) 2015/1589 the United Kingdom is required to recover all aid granted to the beneficiaries of the Group Financing Exemption.” “The group financing exemption scheme, included in the Taxes Acts as Chapter 9 of Part 9A of Taxation (International and Other Provisions) Act 2010, constitutes aid within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of Part 9A of TIOPA. It does not constitute aid when applied to non-trading finance profits from qualifying loan relationships that fall within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and that do not fall within Section 371EB (UK activities) of Part 9A of TIOPA. To the extent that the group financing exemption scheme constitutes aid, it forms an ‘aid scheme’ within the meaning of Article 1(d) of Regulation (EU) No. 2015/1589. The aid granted under the aid scheme is incompatible with the internal market and was unlawfully put into effect by the United Kingdom in breach of Article 108(3) of the Treaty. “The United Kingdom shall recover all incompatible aid granted under the aid scheme from the beneficiaries of that aid.” “Recovery of the aid in accordance with Article 2 shall be immediate and effective.” “(1) Within two months following notification of this Decision, the United Kingdom shall submit the following information to the Commission: (a) a list of the beneficiaries that have received aid under the aid scheme; (b) a list of the tax payers that have applied the group financing exemption to non-trading finance profits from qualifying loan relationships falling within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and not falling within Section 371EB (UK activities) of Part 9A of TIOPA; (c) for each beneficiary, the CFC charge actually charged in determining the beneficiary’s liability under the corporate income tax return, for each tax year that he has applied the group financing exemption, as well as the relevant corporate income tax return forms;128 (d) for each beneficiary, the CFC charge that would have been charged if he had not applied the group financing exemption, including underlying calculations, for each tax year that the beneficiary has applied the group financing exemption; (e) the total aid amount and its detailed calculation (principal aid amount and recovery interest) to be recovered from each beneficiary; (f) documents demonstrating that the beneficiaries have been ordered to repay the aid. (2) For each beneficiary, the United Kingdom shall supply the Commission with supporting evidence demonstrating how the extent to which non-trading finance profits from qualifying loan relationships fall within Section 371EB of Part 9A of TIOPA has been calculated. (3) For each tax payer, referred to in paragraph (1)(b) of this Article, the United Kingdom shall supply the Commission with supporting evidence demonstrating that the non-trading finance profits from qualifying loan relationships fall within Section 371EC of Part 9A of TIOPA and do not fall within Section 371EB of Part 9A of TIOPA. (4) The United Kingdom shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid in accordance with Article 2 has been completed. On request by the Commission, it shall immediately submit information on the national measures already taken and on those planned to be taken, in order to comply with this Decision, including detailed information on the amounts of aid and recovery interest already recovered from the beneficiaries.” The UK government together with a long list of 75 Multinational Groups benefitting from the Scheme have appealed the decision to the General Court of the European Union. Related TP guidelinesRelated TP case laws TPG2022 Chapter X paragraph 10.66As a credit rating depends on a combination of quantitative and qualitative factors, there is still likely to be some variance in creditworthiness between borrowers with the same credit rating. In addition, when making comparisons between borrowers using the kind of financial metrics... TPG2022 Chapter X paragraph 10.96In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment... Rio Tinto has agreed to pay AUS$ 1 billion to settle a dispute with Australian Taxation Office over its Singapore Marketing HubOn 20 July 2022 Australian mining group Rio Tinto issued a press release announcing that a A$ 1 billion settlement had been reached with the Australian Taxation Office. “The agreement resolves the disagreement relating to interest on an isolated borrowing used to pay... TPG2022 Chapter X paragraph 10.72Publicly available financial tools are designed to calculate credit ratings. Broadly, these tools depend on approaches such as calculating the probability of default and of the likely loss should default occur to arrive at an implied rating for the borrowing. This can then... TPG2022 Chapter X paragraph ...