A Swiss company, A AG, paid two related parties, B AG and C AG, for services in the financial years 2015 and 2016. These services had been priced using the internal CUP method based on the pricing of services provided by B Ltd to unrelated parties. Following an audit, the tax authorities concluded that the payments made by A AG for the intra-group services were above the arm’s length price and issued a notice of assessment where the price was instead determined using the cost-plus method. According to the tax authorities, the CUP method could not be applied due to a lack of reliable data. Following an appeal the court of first instance ruled mostly in favor of the tax authorities. A AG then appealed to the Federal Administrative Court. Decision of the Court The Federal Administrative Court ruled in favour of A AG. According to the Court, the CUP method is preferred to other methods and other transfer pricing methods should not be applied in cases where data on comparable uncontrolled prices are available. Therefore, the tax authorities had not complied with the OECD transfer pricing guidelines. Click here for English translation Click here for other translation ...

On 20 January 2022 the OECD released the 2022 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises. In today’s economy where multinational enterprises play an increasingly prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein and taxpayers need clear guidance on the proper application of the arm’s length principle. This latest edition consolidates into a single publication the changes to the 2017 edition of the Transfer Pricing Guidelines resulting from: The report Revised Guidance on the Transactional Profit Split Method, approved by the OECD/G20 Inclusive Framework on BEPS on 4 June 2018, and which replaced the guidance in Chapter II, Section C (paragraphs 2.114-2.151) found in the 2017 Transfer Pricing Guidelines and Annexes II and III to Chapter II; The report Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles, approved by the OECD/G20 Inclusive Framework on BEPS on 4 June 2018, which has been incorporated as Annex II to Chapter VI; The report Transfer Pricing Guidance on Financial Transactions, adopted by the OECD/G20 Inclusive Framework on BEPS on 20 January 2020, which has been incorporated into Chapter I (new Section D.1.2.2) and in a new Chapter X; The consistency changes to the rest of the OECD Transfer Pricing Guidelines needed to produce this consolidated version of the Transfer Pricing Guidelines, which were approved by the OECD/G20 Inclusive Framework on BEPS on 7 January 2022. The OECD guidance developed in regards of COVID 19 is not included in the new 2022 guidelines but is instead kept as a separate intermediate guidance. Buy an online pdf version or book version of the new 2022 Transfer Pricing Guidelines at https://oe.cd/tpg2022 ...

These Guidelines focus on the main issues of principle that arise in the transfer pricing area. The Committee on Fiscal Affairs intends to continue its work in this area. A revision of Chapters I-III and a new Chapter IX were approved in 2010, reflecting work undertaken by the Committee on comparability, on transactional profit methods and on the transfer pricing aspects of business restructurings. In 2013, the guidance on safe harbours was also revised in order to recognise that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty. In 2016, these Guidelines were substantially revised in order to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by- Country Reporting. In 2018, a revision of the guidance on the application of the profit split method in Chapter II was approved, as well as the addition of a new annex to Chapter VI which provides guidance for tax administrations on the application of the approach to hard-to-value intangibles. Finally, in 2020 a new Chapter X was added to these Guidelines to incorporate guidance on the transfer pricing aspects of financial transactions. The Committee intends to have regular reviews of the experiences of OECD member and selected non-member countries in applying the arm’s length principle in order to identify areas on which further work could be necessary ...

These Guidelines also draw upon the discussion undertaken by the OECD on the proposed transfer pricing regulations in the United States [see the OECD Report Tax Aspects of Transfer Pricing within Multinational Enterprises: The United States Proposed Regulations (1993). However, the context in which that Report was written was very different from that in which these Guidelines have been undertaken, its scope was far more limited, and it specifically addressed the United States proposed regulations ...

These Guidelines are intended to be a revision and compilation of previous reports by the OECD Committee on Fiscal Affairs addressing transfer pricing and other related tax issues with respect to multinational enterprises. The principal report is Transfer Pricing and Multinational Enterprises (1979) (the “1979 Report”) which was repealed by the OECD Council in 1995. Other reports address transfer pricing issues in the context of specific topics. These reports are Transfer Pricing and Multinational Enterprises — Three Taxation Issues (1984) (the “1984 Report”), and Thin Capitalisation (the “1987 Report”). A list of amendments made to these Guidelines is included in the Foreword ...

OECD Transfer Pricing Guidelines 2017 – New version The OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations provide guidance on the application of the “arm’s length principle”, which is the international consensus on transfer pricing, i.e. on the valuation for tax purposes of cross-border transactions between associated enterprises. In a global economy where multinational enterprises (MNEs) play a prominent role, transfer pricing continues to be high on the agenda of tax administrations and taxpayers alike. Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction and that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s length remuneration for their cross-border transactions with associated enterprises ...

These Guidelines focus on the main issues of principle that arise in the transfer pricing area. The Committee on Fiscal Affairs intends to continue its work in this area. A revision of Chapters I-III and a new Chapter IX were approved in 2010, reflecting work undertaken by the Committee on comparability, on transactional profit methods and on the transfer pricing aspects of business restructurings. In 2013, the guidance on safe harbours was also revised in order to recognise that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty. Finally, in 2016 these Guidelines were substantially revised in order to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. Future work will address the application of the transactional profit split method, the transfer pricing aspects of financial transactions, and intra-group services. The Committee intends to have regular reviews of the experiences of OECD member and selected non-member countries in applying the arm’s length principle in order to identify areas on which further work could be necessary ...

These Guidelines also draw upon the discussion undertaken by the OECD on the proposed transfer pricing regulations in the United States [see the OECD Report Tax Aspects of Transfer Pricing within Multinational Enterprises: The United States Proposed Regulations (1993). However, the context in which that Report was written was very different from that in which these Guidelines have been undertaken, its scope was far more limited, and it specifically addressed the United States proposed regulations ...

These Guidelines are intended to be a revision and compilation of previous reports by the OECD Committee on Fiscal Affairs addressing transfer pricing and other related tax issues with respect to multinational enterprises. The principal report is Transfer Pricing and Multinational Enterprises (1979) (the “1979 Report”) which was repealed by the OECD Council in 1995. Other reports address transfer pricing issues in the context of specific topics. These reports are Transfer Pricing and Multinational Enterprises — Three Taxation Issues (1984) (the “1984 Report”), and Thin Capitalisation (the “1987 Report”). A list of amendments made to these Guidelines is included in the Foreword ...

An adjustments had been made by the tax authorities to a series of loans granted by GOLDEN ARCHES OF SPAIN SA (GAOS), domiciled in Ireland, to RESTAURANTES MC DONALDS, S.A. (RMSA), throughout the period 2000/2004 for amounts ranging between 10,000,000 and 86,650,000 €, at interest rates between 3,450% and 6,020%. The tax administration held that GAOS “has no structure or means to grant the loan and monitor compliance with its conditions … it does not have its own funds to lend, it receives them from other companies in the group”. The Administration refers to a loan received by GAOS from the parent company at a rate of 0%, which is paid in advance to receive another with an interest rate of 3.3%. The Administration indicates that “nobody, under normal market conditions, cancels a loan to constitute another one under clearly worse conditions”. The arm’s length interest rate was determined by reference to the interest rate RMSA would have paid to an independent bank. In 2005 there were external bank loans in the same company for more than 100,000,000 euros at an average interest rates of 2.57%. Judgement of the Court: “As regards the valuation at market price of the interest rate on the loans or lines of financing …, it has already been shown above that the loans were granted throughout the period 2000/2004 for amounts between 10,000,000 and 86,650,000 euros, with different interest rates ranging between 3.450% and 6.020%. These rates are notably higher than those demanded from RMSA by the banks – independent third parties – that granted it loans, so that in the financial year 2005 there are credit lines of more than 100,000,000 euros at average rates of 2.57% (credit lines for one year and renewable). “This being so, the reasonableness of the judgment cannot be disputed in appealing to the credit obtained by RMSA from independent entities, even though the conditions were different in some of their distinctive features to those of the loans received from GAOS, especially when the Court of First Instance rightly expresses the reasons why such alleged differences are irrelevant.” “…As regards the OECD Guidelines cited as infringed in the plea, this Court has already held that they are not sources of law and therefore cannot be relied on in cassation. Moreover, the reference in Article 16 TRLIS to them as rules inspiring application was introduced in Law 36/2006, which is not applicable ratione temporis to this case. Indeed, as we have recently stated (judgment of 19 October 2016, handed down in appeal no. 2558/2015), article 88.1.d) of the Law of this Jurisdiction allows for the complaint of defects in iudicando in which the contested judgment may have incurred, stating that “1. The appeal must be based on one or some of the following grounds: …d) Infringement of the rules of the legal system or case law that were applicable to resolve the issues under debate”. The infringement invoked in cassation, therefore, must refer precisely to the rules of the legal system, that is to say, to the formal sources which comprise it and which are set out in Article 1.1 of the Civil Code, which establishes that “…the sources of the Spanish legal system are the law, custom and the general principles of law”. Within the material concept of law expressed in the precept, it is possible to include the different manifestations, hierarchically ordered, of normative power (Constitution, international treaties, organic law, ordinary law, regulations, etc.). ), but it is not possible to base a ground of appeal on the infringement of the aforementioned OECD Guidelines, given their lack of normative value, that is to say, of a binding legal source for the Courts of Justice that can be predicated on them, and which this Supreme Court had already declared previously (thus, the Judgment of 18 July 2012, handed down in appeal no. 3779/2009 ), in which such guidelines are considered as mere recommendations to the States and, elsewhere in that judgment, it assigns them an interpretative value. Such a function, that of interpreting legal rules, derives, moreover, from the very role assigned to them by the Explanatory Memorandum to Law 36/2006, of 29 November, on measures for the prevention of tax fraud, which states the following: “…As far as direct taxation is concerned, this reform has two objectives. The first refers to the valuation of these operations according to market prices, thus linking them to the existing accounting criteria applicable to the recording in individual annual accounts of the operations regulated in article 16 of the Consolidated Text of the Corporate Income Tax Law, approved by Royal Legislative Decree 4/2004, of 5 March. In this respect, the acquisition price at which these transactions must be recorded for accounting purposes must correspond to the amount that would be agreed by independent persons or entities under conditions of free competition, understood as the market value, if there is a representative market or, failing that, the amount derived from applying certain generally accepted models and techniques and in harmony with the principle of prudence. In short, the tax regime for related-party transactions is based on the same valuation criterion as that established in the accounting field. In this sense, the tax administration could correct the book value when it determines that the normal market value differs from that agreed by the related persons or entities, with regulation of the tax consequences of the possible difference between the two values. The second objective is to adapt Spanish transfer pricing legislation to the international context, in particular to the OECD guidelines on the subject and to the European Transfer Pricing Forum, in the light of which the amended legislation must be interpreted. In this way, the actions of the Spanish tax authorities are brought into line with those of other countries in the region, while at the same time providing greater security for verification procedures by regulating the obligation of the taxpayer to document the determination of the market value agreed in the related-party transactions ...

In this case, the Swiss Court elaborates on application of the arm’s length principel, transfer pricing methods, OECD TPG, and the burden of proof in Switzerland. Excerp in English (unofficial translation) “5.1. The question of whether there is a disproportion between the service provided by the company and the compensation it provides is determined by comparison with what has been agreed between independent persons (“Drittvergleich”): the question is whether the benefit would have been granted, to the same extent, to a third party outside the company, or to check whether the “arm’s length” was respected. This method makes it possible to identify the market value of the property transferred or the service rendered, with which the counter-benefit actually required must be compared. 5.2. Where there is a free market, the prices charged therein are decisive and allow an effective comparison with those applied in the transaction examined. If there is no free market, but transactions with the same characteristics have been concluded with a third party or between third parties, the price at issue must be compared with that which has been carried out in those transactions. This method corresponds to the comparable free market price method as set out in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010 edition, see especially § 2.13). ss, hereinafter: Principles). In order for this method to be applicable, the transaction with a third party or between third parties must be similar to the transaction examined (Locher, op.cit., 103 ad art 58 DBG), that is to say having been concluded in circumstances comparable to this one. The concept of ” comparable transaction ” is not easy to define. The relevance of the comparison with transactions concluded with third parties assumes that the relevant economic circumstances of these transactions are similar to those of the transaction examined. The comparability of the transactions is determined by their nature and the totality of the circumstances of the case. If the relevant economic conditions differ from those of the transaction under review, adjustments must be made to erase the effects of these differences. However, it can not be ruled out that a comparable transaction was not concluded at market price. The formation of the price can indeed be influenced by several elements, such as market conditions, contractual conditions (for example, the existence of secondary benefits, the quantity of goods sold, terms of payment), the commercial strategy pursued by this third party purchaser or the economic functions of the parties. Nevertheless, the price charged in a comparable transaction is presumed to correspond to the market price; in case of dispute, proof to the contrary lies with the company. In the absence of a comparable transaction, the examination of the arm’s length principle is then based on a hypothetical value determined by other methods, such as the cost-plus method or, in the context of transactions such as the distribution of goods, the resale price.” Click here for translation ...

Unilever Kenya Limited (UKL) is engaged in the manufacture and sale of various household goods including foods, detergents and personal care items. UKL is a part of the world-wide Unilever group of companies. Unilever plc., a company incorporated in the United Kingdom has a very substantial shareholding in the UKL. UKL and Unilever Uganda Limited (UUL) are related companies. In august 1995 UKL and UUL entered into a contract whereby UKL was to manufacture on behalf of UUL and to supply to UUL such products as UUL required in accordance with orders issued by UUL. UKL supplied such products to UUL during the years 1995 and 1996.  UKL manufactured and sold goods to the Kenyan domestic market and export market, to customers not related to UKL. The prices charged by UKL for identical goods in domestic export sales were different from those charged by it for local domestic sales. The prices charged by UKL to UUL differed from both the above sales and were lower than those charged in domestic sales and domestic export sales for identical goods. In other words, UKL charged lower prices to UUL then it charged its domestic buyers and importers not related to UKL. The Commissioner of Income Tax raised assessments against UKL in respect of the years 1995 and 1996, in respect of sales made by UKL to UUL on the basis that UKL’s sales to UUL were not at arm’s length. The Commissioner of Income Tax in raising such an assessment relied on Section 18 (3) of the Act which reads:- “18(3) where a non-resident person carries on business with a related resident person and the course of that business is so arranged that it produces to the resident person either no profits or less than ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arms length”. However, the important and relevant words in the said sub-section are: “The course of that business is so arranged that it produces to the resident person either no profits or less than ordinary profits which might be expected to accrue from that business if there had been no such relationship……....” Hence the most important issue that arises for determination is whether or not the course of business between UKL and UUL was so arranged as to produce less profits. The Commissioner of Income Tax found that as a result of special relationship between UKL and UUL the transactions between them resulted in less taxable profits to UKL. The sale of products by UKL to UUL at a price lower than the comparable prices charged to Kenyan buyers or to outside Kenya importers represents a transfer price and hence the difference becomes subject to taxation on the basis of sales at arms length prices. Unilever Kenya Limited statet that the term “transfer pricing” describes the process by which related or connected entities set the process at which they transfer goods or services between each other and that the term “transfer pricing” therefore is simply a reference to the price at which related parties transfer goods and services to each other. The company puts forward a further argument to the effect that the prices charged by UKL to UUL are nothing but “discounted prices”. At the time no guidelines on how companies were to comply with Transfer Pricing (TP) requirements had been issued in Kenya:- UKL argues that in the absence of specific guidelines having been issued by Kenya Revenue Authority under section 18(3) of the Act the determination of these principles ought to be made in accordance with international best practice as represented by the OECD Transfer Pricing guidelines for Multinational Enterprises and Tax Administration Guidelines (The OECD Guidelines). The tax administration having applied the CUP method ought to have considered whether the average price charged by UKL in Domestic Sales is a ‘Comparable Uncontrolled Price’ to that charged by UKL in the UUL sales for the purposes of section 18(3) of the Act and whether the average price charged by UKL in Domestic Export Sales is a Comparable Uncontrolled Price to that charged by UKL in the UUL sales for the purposes of section 18(3) of the Act.The tax administation has made no adjustments to reflect the material effects of differences between Domestic Sales and UUL Sales which would materially affect the price in the open market and has made no allowances for the cost of marketing goods in Kenya with all resultant overheads as opposed to selling goods directly to UUL for UUL to market the goods in Uganda, at its (UUL’s) costs. The tax administration disaggres with the methods suggested by UKL in arriving at arm’s length principle including references to foreign law and OECD principles etc as not applicable or even worthy of consideration as section 18(3) of our Act does not allow such references. THE JUDGEMENT The court noticed that the very lengthy submissions made by UKL on guidelines adopted by other countries have been ignored by the tax administration on the basis that these simply do not apply to Kenya. Now, these guidelines do not form the laws of the countries in question. They are simply “guidelines”, guiding the world of business, that is business enterprises and the taxing authorities of those countries in arriving at proper Transfer Pricing principles for the purposes of computation of income tax. The court is, unable to accept the argument that in view of the alleged clear wording of section 18(3) of the Act, no guidelines are necessary here in Kenya. That is rather simplistic, and devoid of logic. Section 18(3) of the Act has used words “and the course of that business is so arranged that …”. The sub-section implies that the business so arranged must be such as to show less income to enable the tax authorities to challenge ...