Tag: Transfer Pricing Guidelines

Preface paragraph 13

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 The principal report is Transfer Pricing and Multinational Enterprises (1979) (the “1979 Report”) which was repealed by the OECD Council in 1995.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 ...

Preface paragraph 14

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 ...

Preface paragraph 19

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 ...

OECD Transfer Pricing Guidelines 2017 – New version

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 ...

Spain vs McDonald’s, March 2017, Spanish Tribunal Supremo, Case no 961-2017

This case is about adjustments made to a series of loans granted by GOLDEN ARCHES OF SPAIN SA (GAOS) to RMSA, throughout the period 2000/2004 for amounts ranging between 10,000,000 and 86,650,000 €, at a interest rate that between 3,450% and 6,020%. The tax administration argues 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”. In fact, 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 Court concludes as follows:: “As regards the OECD guidelines cited as violated the reason, this Chamber has already declared that they are not normative sources and therefore are callable on appeal. Moreover, the reference to Article 16 TRLIS contains as inspiring those application rules introduced in Law 36/2006, which does not apply ratione temporis to this case. Indeed, as we have said recently (judgment of 19 October 2016, delivered in an appeal no 2558/2015), Article 88.1.d) of this Jurisdiction Act allows the reporting of defects in iudicando that would I have incurred the judgment under appeal, noting that “1. the appeal will be based on one or more of the following reasons: … d) infringement of the rules of law or case law that are applicable to resolve issues under discussion. ” The offense is invoked on appeal must therefore should refer precisely to the rules of law, that is, to formal sources that integrate and stated in Article 1.1 of the Civil Code, which states that “… Spanish sources of law are the law, custom and general principles of law “. Within the material conception of law that expresses the precept fits include the various manifestations, hierarchically ordered, the regulatory authority (Constitution, international treaties, organic laws, ordinary laws, regulations, etc.), but you can not base a cassation plea infringement of the Guidelines of the OECD, given its lack of normative value, ie binding legal source for the courts to be preached to them, and that the Supreme Court had already ruled earlier (so the Judgment of 18 July 2012, delivered in an appeal no 3779/2009) that such guidelines are regarded as mere recommendations to States and elsewhere in the judgment, assigned an interpretive value. Such a function, to interpret legal norms, is derived, moreover, the proper role assigned to them by the Explanatory Memorandum of Law 36/2006 of 29 November on measures to prevent tax fraud, in which it is stated: “… As concerns direct taxation, the reform has two objectives. The first reference to the valuation of these transactions at market prices, so in this way it connects with the existing accounting policy resulting from application on record in individual financial statements of transactions covered by Article 16 of the Revised Text of the Corporation Tax Act, approved by Royal Legislative Decree 4/2004 of 5 March. in this sense, the purchase price by the which have to be recorded for accounting these operations must correspond to the amount that would be agreed by independent persons or entities under conditions of free competition, meaning the same market value, if a representative market or, failing that, the derivative apply certain models and techniques generally accepted in harmony with the principle of prudence. In short, the tax treatment of related party transactions includes the same endpoint that set out in the accounting field. In this sense, the tax authorities could correct the book value when determining the fair market value differs from that agreed by the persons or entities, with regulation of the tax consequences of the possible difference between the two values. The second objective is to adapt the Spanish legislation on transfer pricing international context, in particular the OECD guidelines on the matter and the European Forum on transfer pricing, in whose light the amended legislation should be interpreted. Thus, the performance of the Spanish tax authorities with neighboring countries homogenised, while also endows actions of verification for increased security to regulate the obligation to document the taxable person determining the value of market that has been agreed in the related party transactions in which it acts … “. Is necessary conclusion from the foregoing that if such guidelines are not part of our legal system, its hypothetical infringement can not be reported on appeal under Article 88.1.d) LJCA. While accepting, therefore, that the interpretative function, the legislator picks, lack of characterization as rules of law, to the effect that validly base a cassation plea in its infringement by the judgment, prevents all other considerations in this regard. Nevertheless, it should be added that the OECD guidelines on transfer pricing, as are contained in the Explanatory Memorandum of Law 36/2006, entail a mandate given to the tax authorities that, within the so check performances expressly says the law- must be tempered with the technical criteria and guiding those guidelines that are collected but not commit to the courts, resolving the legal proceedings that are competent to assess the procedural tests with full subordination to these guidelines, which do not determine or qualify its powers of discretion of the test. Moreover, the first article of Law 36/2006, under the intitulación Modification of the Consolidated Law on Corporation Tax, approved by Royal Legislative Decree 4/2004 of 5 March, which has exhaustively “… with effect for tax periods beginning on or after the entry into force of this Act – the day after its publication on November 30, 2006, final disposal Quinta-, the following changes are made to the text consolidated Corporation Tax Law, approved by Royal Legislative Decree 4/2004, of 5 March … “, among which is the reform of transfer prices or related transactions, affecting inspiration, with interpretative and therefore complementary, the OECD Guidelines. Therefore, innovations introduced by the CITA through Law 36/2006 are applicable only by express legal mandate, annual periods beginning on or after December 1, 2006, subsequent to the date of the period here concerned, without retroactive use is admissible, by express statutory prohibition – concorde, moreover, with the general rule of retroactivity established, in the absence of provision, Article 2.3 of the Civil Code, according to which “3. laws They will not have retroactive effect if it does not decide otherwise. “- Apart from the above, it is physically ill-advised invocation of paragraphs 1.12 and related provisions of the Guidelines, which refer abstractly technical criteria and guidelines for determining the principle of free competition, because we have already reasoned widely on the observance of this principle in the judgment in the process that derives this appeal.” The appeal is therefore dismissed. Click here for translation Spain vs McDonalds 020317 Tribunal Supremo 961-2017 ...

Switzerland vs. Corp, Jan. 2015, Case No. 2C_1082-2013, 2C_1083-2013

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 Swiss case law 2C_1082-2013, 2C_1083-2013 ...

Kenya vs Unilever Kenya Ltd, October 2005, High Court of Kenya, Case no. 753 of 2003

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 it. The tax administration has submitted that this arrangement has been made deliberately to show lesser earnings. But is that really so? There is no evidence of tax fraud or tax cheating. The only evidence, material, is in regard to methods used for computation of tax. Use of different methods, so long as proper or lawful or rather not unlawful, is permissible and ought to be permissible so long as there is no fraudulent trading with a view to “evading” tax. The tax administration says the sub-section is not ambiguous at all and must be read as literally as it is. Ordinarily a statute ought to be interpreted as per its wording if the wording is clear. But what when certain words or sentence is amendable to two interpretations? Was the course of business between UKL and UUL so arranged as to enable UKL to make no profits or less profits? I am unable to see such an “arrangement”. What when several possible methods are suggested almost worldwide to arrive at arm’s length prices for the purpose of taxation? When the Act provides no guidelines, other guidelines should be looked at. In this particular case my task is to decide whether UKL’s business with UUL was so arranged as to show, deliberately, less profits. To consider this issue it the fact that if UKL charged UUL prices such as applicable to other importers or customers obviously UUL would buy from elsewhere is taken into account. The fact that UUL has its own programme for selling the products in Uganda for which it incurs expenses which expenses so far as UKL is concerned are saved is also taken into account . The court sees no special price fixing agreement so as to evade tax. Section 18(3) of the Act does not tell tax payers what KRA will accept as arm’s length, or how to prove it to them or if they are willing to negotiate pricing arrangements. Accordingly, and for reasons outlined, the court do no think that the costs plus method used by UKL is a wrong method of arriving at an arm’s length price in the particular circumstances of this case. The appeal is allowed with costs with the result that the assessment in question is ordered to be annulled to the extent of tax levied by the respondent in accordance with section 18(3) of the Act arising from deemed profits from UKL’s business with UUL in 1995 and 1996. It is further ordered that no tax shall be levied by the respondent in accordance with section 18(3) of the Act arising from deemed profits from the business with UUL in 1995 and 1996. Unilever-Kenya-Ltd-v-Commissioner-KRA-Income-Tax-Appeal-753-of-2003 ...