Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. An appeal was filed with the Administrative Court by Eli Lilly, but the Court dismissed the appeal and decided in favour of the tax authorities. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The appeal of Eli Lilly was again dismissed and the decision of the administrative court – and the assessment of additional VAT upheld. “The complainant’s objections were not capable of overturning the conclusion that the supply of marketing services and the supply of the distribution (sale) of medicines were provided to different entities and that, in the eyes of the average customer, they were not one indivisible supply.” Click here for English Translation Click here for other translation Czech vs Eli Lilly Cr August 2023 6 Afs 125-2022 - 59 ...

The Argentinian company Materia Pampa S.A. exported products to a Brazilian company, Companhia De Bedidas Das Americas in Brazil (Ambev), via a related party in Uruguay, Maltería Uruguay S.A. There was a significant difference between the price declared on export to Uruguay and the price used for the subsequent final shipment to Brazil. An assessment was made by the tax/customs authorities, which resulted in an upward adjustment of the price received for the products from the related party in Uruguay, which in turn resulted in additional taxes and VAT. The price adjustment was based on the guidance provided in the OECD TPG, and in relation to the application of the arm’s length principle in determining prices for customs purposes, reference was made to the guidance provided in paragraph 1.137 of the 2017 TPG, which states. “The arm’s length principle is broadly applied by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value of similar goods imported by independent enterprises. However, valuation methods for customs purposes may not be consistent with transfer pricing methods recognised by the OECD. Nevertheless, customs valuations may be useful to tax administrations in assessing the arm’s length character of a transfer price in a controlled transaction and vice versa. In particular, customs officials may have contemporaneous information about the transaction that may be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation that provides detailed information about the circumstances of the transaction.” ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. At the same time, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income and later similar assessments were issued for the following years. An appeal was filed with the District Court by Eli Lilly which was dismissed by the Court. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of Eli Lilly – annulled the judgement of the District Court and set aside the assessment of the tax authorities. “The Supreme Administrative Court found no reason to depart from the conclusions of the judgment in Case No 3 Afs 54/2020, even on the basis of the defendant’s additional arguments. Indeed, the applicant can be fully accepted that it is at odds with the reasoning of the Supreme Administrative Court and puts forward arguments on issues which are rather irrelevant to the assessment of the case. First of all, the defendant does not dispute in any relevant way that the disputed supplies were provided to two different entities (the distribution of medicines to the complainant’s customers and the provision of marketing services to Eli Lilly Export), and that the ‘average customer’ cannot perceive those supplies as a single supply. This conclusion does not in any way undermine the defendant’s reiteration of the complainant’s assertion at the income tax audit that, for the purposes of assessing the correctness of the transfer pricing set between the complainant and Eli Lilly Export in terms of section 23(7) of the Income Tax Act, the marketing service should be regarded as an integral part of the distribution of the medicines and cannot be viewed in isolation when assessing profitability. In terms of transfer pricing, the economic interdependence of the two activities was assessed, which was essential only to determine whether the profitability of each activity should be compared separately with entities carrying out only the relevant activity. However, the aggregate assessment of these activities in terms of Section 23(7) of the Income Tax Act, which involves offsetting profits and losses from different types of business activities and comparing profitability with entities performing a similar role (i.e. performing both marketing and distribution), does not necessarily mean that there is a single transaction for VAT purposes. This issue is assessed separately in accordance with the aspects of the VAT Act and the VAT Directive respectively. [32] Nor can the defendant’s other arguments, which it repeats in support of the conclusion that the provision of marketing services constitutes a supply incidental to the domestic sale of medicines, be accepted. It does not follow from the judgment in Case 3 Afs 54/202073 that the concept of ‘third party consideration’ cannot exist. The Supreme Administrative Court has not denied that the total value of the consideration received from the final customer for the purposes of determining the tax base may, in general, also include payments from third parties (see, for example, paragraphs 62 et seq. of the judgment referred to above). However, in the context of the present case, in the case of the distribution of pharmaceuticals, the Court held that the consideration for marketing services could not be regarded as part of the value of the consideration, since those services were not provided to ‘customers’ who were merely recipients of marketing information. The consideration for those services was not then spent on behalf of or for the benefit of the customers. As regards the defendant’s reference to the judgment of the CJEU in Firma Z, the conclusions expressed there concern a different factual situation and legal issue. The substantive issue was the offsetting of a reduction in the taxable amount of one supply against the taxable amount of another supply, which is excluded under the common VAT system. However, as noted above, in the present case the complainant does not supply any other supply to its customers at the same time as the pharmaceuticals. Therefore, if the conclusion of the tax administration were accepted, it would have received a higher amount of VAT than the amount paid for the supply which was the only supply received by the customer from the complainant (the pharmaceuticals). The complainant’s final, potential or immediate customers cannot be the recipients of a marketing service at all (see above). [33] Nor can the defendant’s view that the method of pricing the marketing services shows an ‘unquestionable link’ between the marketing services and the sale of medicines be accepted. In that connection, the defendant points out that the pricing of marketing services is not based solely on the costs of marketing, but also on the costs of distributing the goods (medicines). It therefore concludes that it is a payment by a third party (Eli Lilly Export) on top of the price of the medicines which the complainant sells at regulated prices. This argument of the defendant cannot stand. As a general rule, it is a matter for the parties to negotiate the price or the method of calculating it. Furthermore, ...

This case deals with VAT treatment of disallowed deductions for intra-group services. Following an audit, an adjustment of the taxable income was issued to “VAT Ltd.” by the tax authorities where intra-group services had been disallowed and VAT had been adjusted as a result. “VAT Ltd.” disagreed with the adjustment and filed an appeal. Judgement of the Tax Court The Tax Court upheld the assessment of the tax authorities. Click here for English translation gr-ded-ath-2074_2022 ...

A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments. 1) an internal CUP (Compared Uncontrolled Price) methodology is used, on the basis of which, net of appropriate adjustments, the price of goods charged by ALFA S.p.A. to its EU affiliates is compared with the price applied by the same company in transactions with independent third parties. The adjustments applied to the price identified by the CUP method, as clarified by the same applicant in the note forwarded at the time of submitting the supplementary documentation, consist of a discount of XX on the price of finished products that can be applied to independent third parties; this last reduction would be attributable to the higher costs borne by the subsidiaries compared to third party resellers; 2) at the end of the year, a corroborative analysis (sanity check) is carried out using the TNMM (Transactional Net Margin Method), aimed at ensuring that, without prejudice to the application of the intragroup prices identified according to the internal CUP method (net of the appropriate corrections), the margins (expressed in terms of Operating Margin or Return or Sales) of the EU affiliates are also consistent with the functional profile assumed by the same and fall within the interquartile range of the specific benchmark developed by the group. The internal CUP method described above was used to quantify the prices charged in all intra-group transfers between ALFA S.p.A. and its European subsidiaries, including those listed above, i.e. BETA Holland, BETA Hungary, BETA Prague, BETA Germany and the Austrian branch of the latter. The corroborative analysis carried out (at the end of the year) in accordance with the Group’s TP policy showed that in the year XXX the aforementioned companies achieved margins above the upper quartile of the benchmark. Consequently, in order to bring the operating margin back to levels that are consistent with their functional profile, as outlined by the specific benchmark developed by the group, it was necessary to make adjustments. Therefore, ALFA S.p.A. reports that it will “issue adjustment invoices” to the EU subsidiaries that will record an extra cost that will reduce their EBIT and therefore the relative ROS net sales revenue. In light of the above, the Company – after having highlighted that the financial transactions between the Company and the German subsidiary and the Austrian permanent establishment of the latter are subject to a procedure of Bilateral Advanced Price Agreement, for the tax periods XXX – asks for clarifications on the treatment, for the purposes of VAT, to be reserved to the “price adjustments” described above, made for the sole purpose of bringing the marginality of the above-mentioned EU subsidiaries within the range of values identified by the group’s TP policy. Tax Ruling of the Italian Revenue Agency ” … According to the Community Courts, “by allowing in certain cases to consider that the taxable amount is equal to the open market value of the transaction, Article 80(1) of the VAT Directive introduces an exception to the general rule laid down in Article 73 of the latter which, as such, must be interpreted restrictively (see. (see judgments of 21 June 2007, Ludwig, C-453/05, ECR p. I-5083, paragraph 21, and of 3 March 2011, Commission v Netherlands, C-41/09, not yet published in the ECR, paragraph 58, and the case-law cited therein)”. As a corollary to the above principle, the Court of Justice of the European Union itself has ruled that “the conditions of application laid down by Article 80(1) of the VAT Directive are exhaustive and, therefore, national legislation cannot provide, on the basis of that provision, that the taxable amount is to be equal to the open market value of the transaction in cases other than those listed in that provision, in particular where the supplier, the vendor or the purchaser is entitled to deduct VAT in full”. (In this sense judgment of 26 April 2012 in case 621/10) The Community guideline on the scope of application of Article 80 of Directive no. 112 of 2006 has been confirmed by the case law of the Supreme Court of Cassation in its judgment no. 2240 of 2018, referred to by the petitioner. Having said that, it should be noted that, as also emerges from the note forwarded by the petitioner at the time of submission of the supplementary documentation, the TP adjustments in question, although involving for the foreign subsidiaries of ALFA S.p.A. the recognition of an extra cost aimed at lowering their operating margin, are not directly related to the original sales of finished products made by the same petitioner. In other words, even if the adjustments made under the TNMM method do in fact result in the recognition of an additional cost for the foreign subsidiaries, it is not possible to establish, on the basis of the documentation provided by the applicant, that such additional cost is directly linked to the transactions (supply of goods) already carried out and, therefore, that it constitutes an upward adjustment of the VAT base of the same. Therefore, it is considered that the financial adjustments made as a result of the TP adjustments under review, which were carried out in implementation of the TP policy of the “BETA” Group, are excluded from the scope of application of VAT.” Click here for English translation Click here for other translation Italy vs Alfa Spa Risposta n. 884_2021 ...

Malteria Pampa S.A in Argentina exported malt to a related intermediary in Uruguay that in turn sold on the goods to the brewery in Brazil at a higher price. The tax authorities applied the Sixth method and issued an assessment where the export price was determined based on the latter price used in the transaction with the brewery in Brazil. Furthermore a substantial fine was issued to the Malteria Pampa S.A. for non compliance. In February 2019 the Tax Court decided in favour of the tax authorities. “That the factual and legal points considered by the customs verification – corroborated in this pronouncement – complied with the application parameters of the TP rules invoked in the Technical Report, forming a solid conviction that the transactional prices of the sale declared in the field “Merchandise Value” of the PE 07-003-EC01-004994-P and PE N° 07-003- EC01-004995-Z of Maltería Pampa S. A. are manifestly inaccurate, constituting an under-invoicing that causes the plaintiff to engage in the conduct punishable by Article 954(1)(c) of the Civil Code, for the entry into the country -actual or potential- of an amount as an export price different from that which would have corresponded; consequently, the fine imposed by the DGA must be confirmed.” This decision was then appealed to the Federal Administrative Court. Judgement of the Federal Administrative Court The Court dismissed the appeal of Malteria Pampa SA ruled in favor of the tax authorities. “this Court hereby recognises that the interpretation that conceives of Law 22.415 and Law 20.628 as bodies of law that make up Federal Law and not as watertight compartments that run along parallel paths with no possibility of intersection is correct. The fact of export under-invoicing deserves to be analysed under the convergent application of those laws that deal with this case. From this perspective, the Chamber concludes that the application of the transfer pricing institute should be validated, in this case, so that customs can control the entry of the amount that effectively corresponds, since the operation involves the export of commodities between companies that are functionally linked.” “the veracity and accuracy of the customs declaration, as legal assets protected by section 954 of the Customs Code, involve the interest of the Federal Government in preventing price manipulation manoeuvres in international trade between companies that make up the same economic group in order to reduce prices in our country and transfer the difference to jurisdictions with lower levels of taxation and foreign exchange control, with the harmful consequences that this implies for the collection of the national treasury and the macroeconomy of the Argentine Republic.” “In view of the foregoing, the Court RESOLVES: to dismiss the appeal lodged by the plaintiff and, consequently, to uphold the judgment under appeal. With costs, as there is no merit for a waiver (art. 68, first paragraph of the CPCCN)” Click here for English Translation Click here for other translation Argentina vs Malteria October 2021 RE ...

SARL SRN Métal’s business is trading in industrial metal and steel products. Following an audit of the company for FY 2011 to 2012 and assessment was issued related to VAT, Transfer Pricing and Withholding Tax. In regards to transfer pricing, the administration considered that (1) the sales of goods made by SRN Métal to B-Lux Steel, established in Luxembourg, were invoiced at a lower price than that charged to the company’s other customers and (2) that commissions paid to Costa Rica – a privileged tax regime – were not deductible as SRN Metal did not provided proof that the expenses corresponded to real operations and that they are not abnormal or exaggerated. The company requested the administrative court of Strasbourg to discharge the assessments. This request was rejected by the court in a judgement issued 29 October 2019. This decision of the administrative court was appealed by the company to the Supreme Administrative Court Judgement of the Supreme Administrative Court The Appeal of SRN Métal was rejected by the Court. Excerpts related to sales of goods to B-Lux “In order to establish a transfer of profits resulting from a reduction in the selling price of goods sold to B-Lux Steel, the department examined twenty sales transactions carried out by the applicant company with French customers at arm’s length from it. The administration also examined, within the framework of administrative assistance to the Luxembourg authorities, fifteen resale transactions by B-Lux Steel of products acquired from SRN Métal. This examination revealed that the margin charged by SARL SRN Métal for sales to B-Lux Steel was significantly lower than that charged to its other customers, without this difference being explained by the conditions of sale, the nature of the products sold or the situation of the customers. By merely alleging, without further clarification, that the results of the administrative assistance would have shown that it charged a higher margin for transactions carried out in Luxembourg, SRN Métal does not usefully challenge the evidence gathered by the department establishing the existence of a transfer of profits to Luxembourg by reducing the selling price of its goods. “It is true that SRN Métal intends to justify the lower prices charged to B-Lux Steel by its commercial interest in winning market share from Luxembourg customers and by the need to make sales to French customers limited by a credit insurance ceiling, through B-Lux Steel. However, it did not provide any evidence to support these allegations. Consequently, the administration was right to subject the profits thus transferred to Luxembourg to corporation tax. “ Excerpts related to commissions paid to Casa Vi.De.Sa.Ro in Costa Rica “The administration reintegrated into the applicant company’s taxable profits for 2011 and 2012 the sums it paid as commission to a company established in Costa Rica. It is not disputed that the company Casa Vi.De.Sa.Ro was not subject in Costa Rica to taxation on the profits it made abroad on account of the commission in question. Consequently, it is for the applicant company to prove that those commissions corresponded to real transactions and that they are not abnormal or exaggerated.” “In order to justify the reality of the business transactions which Casa Vi.De.Sa.Ro carried out on its behalf, the appellant company reiterates its argument that those commissions were intended to enable it to obtain the clientele of Arcelor Mittal Dunkerque. However, the applicant company, which does not even have a contract signed with the disputed company, does not provide any basis for its allegations. Although the applicant company maintains that it deducted exactly the same commissions in respect of other years and that the department admitted them on the occasion of another audit of the accounts, such a circumstance is not in itself sufficient to establish the reality of the services at issue during the period audited. Consequently, the administration was right to reinstate these commissions in its taxable profits.” Click here for English translation Click here for other translation France vs SRN Métal CAA may 2021 ...

Levi Strauss South Africa (Pty) Ltd, has been in a dispute with the African Revenue Services, over import duties and value-added tax (VAT) payable by it in respect of clothing imports. The Levi’s Group uses procurement Hubs in Singapore and Hong Kong but channeled goods via Mauritius to South Africa, thus benefiting from a favorable duty protocol between Mauritius and South Africa. Following an audit, the tax authorities issued an assessment in which it determined that the place of origin certificates issued in respect of imports from countries in the South African Development Community (SADC) and used to clear imports emanating from such countries were invalid, and therefore disentitled Levi SA from entering these goods at the favorable rate of zero percent duty under the Protocol on Trade in the Southern African Development Community (SADC) Region (the Protocol). The tax authorities also determined that the transaction value of the imported goods on which duty was payable should include certain commissions and royalties paid by Levi SA to other companies in the Levi Strauss group – Singapore and Hong Kong. Judgement of the Supreme Administrative Court The Court issued a decision predominantly in favour of the tax authorities. Click here for translation SA-vs-LEV-2021 ...

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”). Both the payment of royalties and the purchase fee are further regulated in the group’s transfer pricing document. Following an audit, the Customs Directorate added the payment of concept fee to the price of the acquired products for customs purposes. Decision of the Court The Court of Appeal ruled that the Customs Directorate’s decision on determining the customs value for the import of clothing and gift items was invalid. There was no basis for including a paid “concept fee” in the customs value. The condition of payment of concept fee had no connection to the sellers of the goods, but sprang from the buyer’s own internal organization. Click here for translation Borgarting lagmannsrett - Dom_ LB-2020-10664 ...

A tax assessment had been issued for FY 2013 resulting in additional taxes of to CZK 227,162,210. At first the tax administration disputed that the applicant had purchased 1 TB SSDs for the purpose of earning, maintaining and securing income. It therefore concluded that the Starcom Internatioal had not proved that the conditions for tax deductions were met. On appeal, the tax administrator changed its position and accepted that all the conditions for tax deductions were met, but now instead concluded that Starcom Internatioal was a connected party to its supplier AZ Group Czech s.r.o. It also concluded that the transfer prices had been set mainly for the purpose of reducing the tax base within the meaning of Section 23(7)(b)(5) of the ITA. It was thus for the tax authorities to prove that Starcom Internatioal and AZ Group Czech s.r.o. (‘AZ’) were ‘otherwise connected persons’ and that the prices agreed between them differed from those which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. Judgement of the Regional Court The Court allowed the appeal and decided predominantly in favour of Starcom Internatioal. “It can therefore be summarised that for the application of section 23(7) of the ITA it is necessary to prove that they are related persons within the meaning of the Income Tax Act, while respecting the case law cited above. A further condition is that the tax authority must prove that the prices agreed between these persons differ from the normal prices that would have been agreed between independent persons in normal commercial relations under the same or similar conditions. It is then up to the taxable person (if he wishes to avoid adjusting the tax base) to explain and substantiate the difference found to his satisfaction.” “Since the applicant was fully successful in the proceedings, it was entitled to the costs of the proceedings, which the court ordered the defendant to pay, in accordance with Article 60(1) of the Civil Procedure Code. The applicant’s costs of the proceedings consist of the court fee paid for filing the action in the amount of CZK 3,000, as well as the lawyer’s fee in accordance with Decree No 177/1996 Coll. in the amount of CZK 3,100, pursuant to Article 7(5) in conjunction with Article 9(4)(d) of Decree No 177/1996 Coll, for three acts of legal service – preparation and acceptance of representation and drafting of the application and the reply to the defendant’s statement of defence, as well as three times the overhead allowance of CZK 300 for each of those acts of legal service pursuant to Article 13(4) of the Ordinance and VAT on those amounts, with the exception of the court fee paid pursuant to Article 57(2) of the Civil Procedure Code. The Court ordered the defendant to pay the costs reasonably incurred in the total amount of CZK 15 342 to the applicant’s representative pursuant to Section 149(1) of Act No 99/1963 Coll. of the Civil Procedure Code in conjunction with Section 64 of the Code of Civil Procedure.” Click here for English Translation Click here for other translation 25Af_18_20210428081536.2019_20210428095738_prevedeno ...

A Swiss company, Ashland Industries Europe GmbH, had not declared a presence in Spain for VAT purposes and did not charge VAT for local sales. However, the Swiss company used the resources of its Spanish subsidiary when performing these local sales of goods in Spain. On that basis, the Spanish tax authorities found that the company had a permanent establishment for in Spain for VAT purposes and issued an assessment. An appeal was filed by Ashland Industries, but the appeal was dismissed by the courts. The Spanish Supreme Court concluded that: “First. To determine whether a permanent establishment can be deemed to exist in the Spanish territory of application of VAT where the only transactions carried out subject to that tax are supplies of goods other than supplies of gas, electricity, heat or refrigeration. Second. If the answer to the previous question is in the affirmative, what conditions are necessary to establish that a Spanish subsidiary constitutes a permanent establishment in the Spanish territory of application of value added tax? The answer to the first question, in accordance with our reasoning, must be that, on an interpretation of Articles 69(3) and 82(2) of Law 37/1992, Articles 44 and 45 of Directive 2006/112 and Article 11(1) of the implementing regulation (EU) of 15 March 2011, a permanent establishment may be deemed to exist in the Spanish territory in which VAT is applicable where the only transactions carried out subject to that tax are supplies of goods other than gas, electricity, heat or refrigeration. The answer to the second question, in accordance with our reasoning, must be that the conditions necessary for holding that a Spanish subsidiary constitutes a permanent establishment in the Spanish territory where value added tax is applied are those which derive from the case-law of the Court of Justice of the European Communities and which have been set out in the case-law of that Chamber, judgment of 23 March 2018 (RCA 68/2017). It follows from the case-law that, in order to be able to speak of a permanent establishment for VAT purposes, the following conditions must be met: (a) The existence of a fixed place of business which determines the link with the territory of application of the tax A physical link with the place of business is therefore required and it must have a sufficient degree of permanence (judgments of 4 July 1985, Berkholz, 168/84, EU:C:1985:299, paragraphs 18 and 19; and of 28 June 2007, Planzer Luxembourg, C-73/06, EU:C:2007:397 , paragraph 54). (b) An adequate structure in terms of human and technical resources (Berkholz, paragraphs 18 and 19, and Planzer Luxembourg, paragraph 54; also, judgment of 16 October 2014, Welmory, C-605/12 , EU:C:2014:2298, paragraph 58). Therefore, Articles 84(2) LIVA and 31(2) LFIVA, by requiring the permanent establishment to intervene in the supply of goods or services, consider that such an intervention takes place when the establishment arranges its material and human factors of production or one of them for the purpose of carrying out the transaction subject to VAT. It is not essential to have their own structures, and agencies or representatives authorised to contract in the name or on behalf of the taxable person may be considered permanent establishments [ see Article 69(3)(2)(a) Vat]. It must also have a sufficient degree of permanence and a structure suitable, from the point of view of its human and technical resources, to enable it to carry out autonomously the transactions in question (Case C-190/95 AROLease [1997] ECR I-0000). I-4383, paragraph 16, and Case C-390/96 Lease Plan [1998] ECR I-2553, paragraph 24). (c) With a few exceptions, it does not have to be a subsidiary, since it has legal personality. In such situations, it is the subsidiary which becomes liable for VAT, and not the parent company, which, in order to be regarded as such, must not act through subsidiaries but through permanent establishments in the territory where the tax is applied (see Article 87(2) LFIVA and Article 31(2) LFIVA). However, by way of exception, a subsidiary may be regarded as a permanent establishment where it is wholly controlled by the parent company on which it is wholly dependent and where it operates as a mere subsidiary. In such situations, the underlying economic reality must prevail over legal independence (judgments of 20 February 1997, DFDS, C-260/95, EU:C:1997:77 , paragraph 29; and 25 October 2012, Daimler Widex, C-318/11 and C-319/11, EU:C:2012:666, paragraphs 48 and 49).” Click here for English Translation Click here for other translation SPA PE VAT STS_3727_2020 ...

What “Vehicles Distributor” seeks to achieve in the present case is an attempt to adjust (reduce) the transaction price retrospectively by reference to a new transfer price, and not to claim repayment of the customs duty overpaid as a result of an incorrect customs value in the customs declarations upon release for free circulation. The customs declarations at issue were lodged as regular declarations and customs duties were levied on the value of the goods determined therein. It is not, therefore, the case that the value indicated in the declarations was arbitrary or fictitious or that the price at the time of sale of the goods could not be determined. Nor is there any basis in the facts for the applicant’s allegation that the goods were released for free circulation on the basis of the provisional value of the goods. Click here for English translation Click here for other translation UPRS_Sodba_III_U_208_2018-12-24.09.2020 ...

Atlas Copco Tanzania Ltd. is part of Atlas Copco Group, a conglomerate of multinational companies headquartered in Sweden. The group produces and sell compressors, vacuum solutions, generators, pumps, power tools etc. Apart from supplying generators in Tanzania on its own, Atlas Tanzania sold generators as an agent of its sister companies which had no presence in the country. For the latter type of sales, known as “indent sales”, Atlas Tanzania earned a commission. Being oblivious that the commission income attracted Value Added Tax (“VAT”), Atlas Tanzania did not file any VAT returns on indent sales until its external auditors, KPMG, informed it of the requirement. By then, Atlas Tanzania had posted in its sales ledgers commission income amounting to TZS. 134,413,682,281.00 for FY 2007 and 2008. Atlas Tanzania then accounted for VAT on the commission for the years 2007 and 2008 amounting to TZS. 5,692,574,000.00, which was paid through the VAT returns filed in 2009. This amount was much smaller than the sum of TZS. 13,413,682,281.00 originally booked in the sales ledgers for the two Fiscal Years. This was due to the fact, that Atlas Tanzania had reduced the amount on the ground that there was an overstatement of the commission by TZS.7,721,108,281.00, which was then corrected through an accounting reversal based on ordinary accounting practices. The tax authorities did not agree with the alleged overstatement and issued a notice of additional assessment for the sum of TZS. 2,118,115,834.00 representing the outstanding VAT plus interest. On appeal, the assessment issued by the tax authorities was upheld by the Appeals board and Tax Tribunal. Atlas Copco Tanzania Ltd. then appealed the decision to the Court of Appeal. Judgement of Court of Appeal The Court dismissed the appeal of Atlas Tanzania. “We would thus conclude that the present appeal presents no question of law but matters of fact that do not merit the attention of the Court in terms of section 25 (2) of the TRAA.” Click here for translation atlas-copco-tanzania-ltd-vs-tra-civ-app-no-167-2019 ...

“P Services! provided services to a Peruvian consortium. In 2014, the parties entered into an interest-free loan agreement. According to the loan agreement, payment for the services performed in 2013 was going to be offset against the funds received under the agreement. The tax authorities found that the “loan arrangement”, in reality constituted advances for the services provided by “P Services”- According to the authorities the arrangement had been established for the purpose of avoiding VAT on the advances received for the services. Decision of the Tax Court The tax court issued a decision in favour of the tax authorities. Click here for English translation Click here for other translation Peru vs Taxpayer 2020_5_03052 (002) ...

At issue was deduction of VAT on purported costs incurred for intra-group services. Cost allocated to Rohm and Hass under a cost sharing agreement had been deemed non-deductible for VAT purposes by the Italien Tax Authorities, as the taxpayer had not been able to prove the effectiveness and relevance of these services. The Regional Tax Commission (C.t.r.) dismissed an appeal filed by Rohm and Hass. In particular, the court noted that Rohm and Haas had not proved “that the services, allegedly provided by the other subsidiaries, forming part of a single group, had in some way directly and positively influenced the company’s performance, reduced any costs, favoured the improvement of the production and marketing of products, or reduced costs previously assumed for similar services, or even that the provision of new services had, even on a provisional basis, increased the company’s potential“. Judgement of Supreme Court The Supreme Court upheld the decision of the Regional tax commission and dismissed the appeal filed by Rohm and Hass as unfounded. In order for intra-group cost to be deductible for VAT purposes, the taxpayer must prove that, a real service have been received which is objectively determinable and adequately documented. This burden of proof had not been lifted by the taxpayer. Excerpt “Moreover, the C.t.r. found that “the taxpayer has not proved that the services allegedly provided by the various subsidiaries had a direct and positive influence on the company’s performance, reduced any costs, favoured the improvement of the production and marketing of products, or reduced costs previously assumed for similar services, or even that the provision of the new services had, even on a provisional basis, increased the company’s potential”. Although the grounds of the judgment under appeal contain a reference (inappropriate as regards VAT) to the lack of proof of the economic advantages achieved by the taxpaying company, the decision is based essentially on the consideration that the company has failed to discharge its burden of proof, failing to prove both the reality of the costs ‘allegedly’ incurred and their direct connection with the business activity carried out in practice (for example, with reference to the type of business organisation and the production needs of the subsidiary) and with the subsequent commercial operations carried out. It should also be recalled that EU case law on the deductibility of VAT paid on overheads has underlined the need for an economic link between upstream and downstream supplies and, therefore, for proof that the expenditure concerned is part of the constituent elements of the price for all the taxable person’s products or services (Court of Justice, 29 October 2009, C-29/08, SKF, paragraph 57; Court of Justice, 22 October 2015, Case C-126/14, Sveda). As regards the unfoundedness of the tax claim, put forward by the applicant in its defence, in the light of the ius superveniens, this Court, in a substantially similar case concerning subjectively non-existent transactions involving the supply of scrap, subject to the effects of VAT and the reverse charge system, set out the following principle of law: “as regards VAT, supply transactions carried out under the reverse charge system (the so-called “reverse charge”) are not subject to VAT. “reverse charge”), even if carried out under the apparent observance of formal requirements, are non-deductible in case of violation of substantive obligations, where the correspondence, even subjective, of the invoiced transaction with the one actually carried out, with the consequent non-existence of the obligation to pay the tax indicated on the invoice” (see judgment no. 16679 of 09/08/2016; Section 5, Order no. 2862 of 31/01/2019 Rev. 652333-01). In the present case, too, although it is not disputed that the taxpaying company has duly carried out the reverse charge at its expense and made the transactions neutral, the absence of the substantive conditions, with regard to the proof of the effectiveness and pertinence of the costs, where established, would make the VAT relating to them non-deductible.” Click here for English translation Click here for other translation Sentenza Cassazione Civile n. 3599 del 13022020 ...

At issue was deduction of VAT on purported costs incurred for intra-group services, which had been deemed non-deductible for tax as well as VAT purposes by the Italien Tax Authorities, as the taxpayer had not been able to prove the effectiveness and relevance of these services. The Supreme Court found that in order for intra-group cost to be deductible (and VAT deductible) taxpayer must prove that, a real service have been received which is objectively determinable and adequately documented. This burden of proof had not been lifted by the taxpayer and VAT payments on the purported services were consequently non-deductible. Click here for English translation Sentenza Cassazione Civile n. 3599 del 13022020 ...

At issue was deduction of VAT on purported costs incurred for intra-group services, which had been deemed non-deductible for tax as well as VAT purposes by the Italien Tax Authorities, as the taxpayer had not been able to prove the effectiveness and relevance of these services. The Supreme Court found that in order for intra-group cost to be deductible (and VAT deductible) taxpayer must prove that, a real service have been received which is objectively determinable and adequately documented. This burden of proof had not been lifted by the taxpayer and VAT payments on the purported services were consequently non-deductible. Click here for English translation Sentenza Cassazione Civile n. 3599 del 13022020 ...

Kenya Fluospar Company Ltd (KFC) had been issued an assessment related to VAT and transfer pricing – leasing of mining equipment, mining services and management services. The assessment was later set aside by the Tax Tribunal and an appeal was then filed by the tax authorities with the High Court THE JUDGEMENT The High Court dismissed the appeal of the tax authorities and decided in favour of KFC. Excerpts “B. Whether the Commissioner was right in the using Transactional Nett Margin Method (TNMM) instead of Split Profit Method (SPM) in determining how to share the income tax between KFC EPZ. 48. Rule 7 thus gives the various methods of choice, one of them being the profit split method. In this regard also, Rule 8(2) provides as follows – 8(2). A person shall apply the method most appropriate for his enterprise, having regard to the nature of the transaction, or class of related persons or function performed by such persons in relation to the transaction. 49. In my view, it follows from the above provisions that the choice of the most favourable tax assessment method is that of the tax payer and not the Commissioners. In this regard, I agree with the reasoning in the case of Unilever Kenya Ltd – vs – The Commissioner of Income Tax [2005]eKLR wherein it was held that the tax payer is entitled to choose the most favourable method to their advantage as far liability to tax is concerned. 50. I however, agree that the Commissioner can intervene where there is evidence of fraud or evasion of taxes. The Commissioner can also intervene and re-asses income tax of a taxpayer and raise additional assessments – see Pilli Management Consultants Ltd – vs – Commissioner of Income Tax – Mombasa HC Misc. Application No.525 of 2016. 51. The main issue that has arisen herein is that instead of addressing the objection raised using the selected profit margin method, the Commissioner changed to the Transactional Nett Margin Method without indicating the law that confers on the Commissioner the power to change the method. 52. Even in this appeal the Commissioner has not pointed the section of the law that gives it the right to change the choice method elected by the taxpayer. The Commissioner maintains that it has general power to change the method because they found new intangible assets of KFC. 53. First of all, there is no evidence that the mining and prospecting licences were new assets not known in the profit split method. Secondly, even if they were new intangible assets, the Commissioner would have to back his change of method with the law, which they have not. I thus find that the Commissioner had no legal power to change to a new method of Transaction Nett Margin method. The Commissioner could only use the Profit Split method chosen by the tax payer. The Commissioner was thus right in using the Transactional Nett Margin Method.” “C. Whether the alleged non benchmarked management services offered to KFC by a related non – resident company (KCMC) do in fact exist, and if so what value could be attributed to the same. 54. It is not in dispute that KFC entered into a management consultancy agreement with Kestrel Capital Management Limited (KCMC), such services to be provided upon requests. The Commissioner contends that no such management consultancy services were provided as no requests were made by KFC to KCMC for such services. KFC on the other hand maintains that they were provided with such management consultancy services by KCMC through meetings and other interactions on financial, investment and human resources matters, and relied on minutes of meetings held which were not disputed by the Commissioner. 55. In my view though indeed there is no evidence that any formal written requests for such management consultancy services was produced by KFC, there was evidence of interactions and meetings held. Such interactions and meetings between KFC and KCMC in my view were adequate proof of consultancy services provided. An adviser is an adviser and the final decision will still have to be made by the principal. If an adviser and a principal hold meetings and discuss items on the operations and management of the business affairs of the principal, in my view, that is adequate to satisfy the provision of consultancy services by the consultant. The fact that members of one corporate institution are the same in another corporate institution does not make a difference in law. As for the value to be attributed to the professional services provided, that will go according to the respective contract, and this court is not suited to determine the same with the facts placed before it.” “63. Consequently, and for the above reasons, I find that both appeals have no merits. I thus dismiss Appeal No. 2 of 2018 and No.3 of 2018 herein. Each of the parties will bear their respective costs of appeal.” Click here for other translation Kenya vs KFC ITA_3_&_2_of_2018__ Feb 2020 ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. Judgement of the Court The Court dismissed the appeal of Eli Lilly CR s.r.o. and decided in favour of the tax authorities. According to the court marketing services constituted partial supply that was part of the distribution activities and should have been considered, from the VAT perspective, a secondary activity used for the purpose of obtaining benefit from the main activity. Therefore, Eli Lilly CR s.r.o should have been paying VAT on income from the marketing services. “a customer purchasing medicinal products from the claimant is the recipient of a single indivisible supply (distribution and marketing),” “the aim of such marketing is certainly to increase the customer awareness of medicines distributed by the claimant, and, as a result to increase the marketability of these medicines” For Eli Lilly Export S.A., marketing was a secondary benefit. Eli Lilly CR s.r.o. was the owner of the products when the marketing services were provided. Eli Lilly Export S.A. was not the manufacturer of the products and did not hold the distribution license for the Czech market. Therefore, Eli Lilly Export S.A. could not be the recipient of the marketing services provided by Eli Lilly CR s.r.o. Hence, the payment received by Eli Lilly CR s.r.o. for marketing services was in fact “a payment received from a third person”. An appeal to the Supreme Administrative Court was filed on 14 February 2020 by Eli Lilly CR. Click here for English Translation Click here for other translation Czech vs Eli Lilly 2020 ...

A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments. “Alfa represents that it is part of a multinational Group (hereinafter, the “Group”). The Group is implementing a new integrated development plan, aimed at the joint creation of products and platforms necessary for the production and marketing of goods under brand X. The legal and economic ownership of the X trademark and of the relevant know-how belongs to the non-EU company Beta, which acts as “Principal” and assumes all risks connected to the production and marketing of the goods, granting the trademark and the know-how free of charge to the subsidiaries engaged in the production and marketing of the X goods. The plaintiff entered into an intra-group agreement (the ‘Agreement’) with Beta, whereby Beta undertakes to act as contract assembler for the purpose of manufacturing X products, putting its own equipment at the disposal of Gamma (a company incorporated under Italian law which acts as a contract manufacturer). In particular, Alfa has contractually assumed the task of coordinating all production factors relating to the production of the goods, as well as those relating to the marketing of the same, through the Group’s distribution network, and the task of managing logistics and quality control activities, in the interests of Beta. The X goods, produced by the company Gamma, are therefore purchased by the company Alfa at a price in line with the policy adopted by the Group in terms of transfer prices, consistent with the criterion of free competition (the so-called “Arm’s length”). Subsequently, they are marketed, through Beta, in the North American and Rest of the World markets and, through Delta, in the European, Middle Eastern and African markets (the so-called EMEA market). In this regard, the questioning Company points out that also the sales made by it to Beta and Delta take place at a price in line with the Group’s policy in terms of transfer prices, consistently with the criterion of free competition. In accordance with the transfer pricing model followed by the Group, the Agreement provides that, if the actual profits recorded by the respondent company in a given year falls outside the interquartile range of reference, specific adjustments must be made in order to comply with the above-mentioned arm’s length criterion. As a result of this, Beta undertakes to recognise, where necessary, the payment of a contribution in favour of Alfa whenever the latter incurs operating losses, such as those resulting from the activities carried out and from the considerable costs incurred for the purchase of equipment used in the production cycle. In light of the above, the Company asks to know whether or not the contribution possibly recognised by Beta in favour of the latter, in case of a difference between the profit realised by the latter and the profit determined according to the arm’s length criterion, can be considered relevant for VAT purposes pursuant to Article 3 of Presidential Decree No. 633 of 1972.” Tax Ruling of the Italian Revenue Agency ” … In order for transfer pricing adjustments to affect the determination of the taxable amount for VAT, by increasing or decreasing the consideration for the sale of the goods or the provision of the service, it is therefore necessary that: (a) there must be consideration, i.e., a monetary or in-kind adjustment for such an adjustment; (b) the supply of goods or services to which the consideration relates is identified; (c) there is a direct link between the supplies of goods or services and the consideration. As pointed out by the European Commission itself in the aforementioned document no. 923, “while the principle of free competition must generally be observed in all intra-group transactions, on the basis of the transfer pricing rules applied for the purposes of direct taxation, the scope of the principle of free competition laid down by the VAT Directive seems much more circumscribed. In fact, such a rule is susceptible to optional application by Member States and can only be applied for the purpose of preventing tax evasion and avoidance under well-defined circumstances” (see paragraph 3.1.1). Such circumstances are specifically identified by Article 80 of Directive 2006/112/EC – implemented in Italy by Article 13, third paragraph, of Presidential Decree No. 633 of 1972 – as an exception to the general criteria for determining the VAT taxable amount set forth in Article 73 of the Directive. In this respect, according to the case-law of the EU Court of Justice, “the conditions for the application of the latter article [Article 80 of Directive 2006/112/EC] are mandatory and national legislation may not provide, on the basis of that provision, that the taxable amount is to be equal to the open market value in cases other than those listed in that provision” (see the judgment of 8 May 2013, in case C-142/12, and the judgment of 26 April 2012, in cases C-621/10 and C-129/11). This orientation is, moreover, confirmed by the most recent case law of the Supreme Court of Cassation, according to which “transfer pricing is based on the concept of normal market value pursuant to Presidential Decree no. 917 of 22 December 1986, Article 9 and Article 76, paragraph 5 (now 110, paragraph 7) (…) and responds to the need for a fair division of profits in the various countries where multinational groups operate. For VAT, on the other hand, the consideration actually received is a pivotal element of the mechanism for applying the tax, based on the principle of neutrality of the tax (which would be violated if the taxable base were calculated as an amount per hypothesis higher than the consideration received: a principle that has always been derived from the EU directives (most recently made explicit in Article 73 of Directive 112/2006/Cee) and implemented in Italy by Presidential Decree No. 633, Article 13 of 26 October 1972″ (Judgment No. 2240 of 2018). On the basis of these principles, with reference to the present case, the Agreement between ...

The French Supreme Court issued a decision on 4 April 2018, concluding that a permanent establishment (PE) existed in France for purposes of determining nonresident companies’ exposure to French VAT in a case involving a transport commissionaire arrangement. The decisions clarify the criteria for determining whether a service provider will be considered to have sufficient substance in France to enable the services to be performed in an independent manner, and thus constitute a PE. A UK sea carriage commissionaire signed a client assignment contract with a French company carrying out the same activity, as well as a contract for the French company to organize and provide transport services. The UK company was required to approve any new clients or suppliers. The UK company also managed the reservation systems for clients to book the transport and communicated with the clients regarding the transport and the insurance linked to the business. The French company was responsible for the overall development of the business through identifying new clients, and it physically organized the transport services. The French company had the authority to negotiate independently with clients and suppliers in the name of the UK company, including the negotiation of prices. For this purpose, the company had three offices in France with customer service personnel to receive orders and organize the transport services, as well as a sales department. The Supreme Court concluded that the French company had sufficient human and technical resources to provide the transport commissionaire services. Accordingly, the court held the that the UK company had a PE in France, even though the company had no means of providing the transport services on its own, since the transport services were organized and carried out independently by the French company. Click here for translation Conseil_d_État_3ème_-_8ème_chambres_réunies_04_04_2018_399884_Inédit_au_recueil_Lebon ...

The court ruled that, based on all the findings in the proceedings (the plaintiff did not provide documentation, did not follow the tax authority’s instructions), the tax authority had the possibility to establish the tax base by assessment pursuant to Article 68 of ZDATP-2. The tax authority concluded that the application of the cost plus method was not applicable in the specific case and decided to apply the transactional net margin method. The so-called primary adjustment still did not restore the situation as it would have been if the transactions had been carried out on an arm’s length basis. Therefore, the tax authority correctly made a secondary adjustment in the form of a disguised profit payment Click here for English translation Click here for other translation UPRS_sodba_I_U_328_2016-04.10.2016 ...

Following a judgement by Regional Administrative Tribunal an appeal was filed by Coim S.p.A Among various other issues Coim S.p.A. complains of breach and misapplication of Article 9 of Presidential Decree No 917 of 22 December 1986, pursuant to Article 360(1)(3) of the Code of Civil Procedure, on the ground that the Regional Administrative Tribunal held that the recovery of the higher price calculated on the basis of the presumed normal value of the transfers made by the taxpayer to certain subsidiaries was lawful. The taxpayer claims that the appeal judges erred in finding that the Office had correctly applied the so-called CUP (comparable uncontrolled price method) price comparison method to determine normal value, in particular as regards the identification of the relevant market, the different stage of marketing of the goods tested compared to the comparative goods and the different commercial functions performed by the subsidiaries compared to the comparators. Judgement of the Supreme Court Indeed, the grounds of the judgment under appeal do not indicate the application of different parameters for the purpose of calculating the normal value of the goods or services transferred from those laid down by the OECD Guidelines referred to in the application. The criticism is therefore intended, rather, to challenge the result of the assessment made in this regard on the basis of the alleged use of reference data different from those prescribed or in any event inadequate, thus placing the criticism not on the rule of judgement applied but rather on the recognition of the fact, which can be criticised, if necessary, only in terms of motivation, pursuant to and within the limits of Article 360, paragraph 1, no. 5, of the Code of Civil Procedure. … 16. By the third ground of appeal, the appellant alleges infringement and misapplication of Article 9 of the consolidated law on income tax, Article 11 of the Sixth Council Directive 77/388/EEC of 17 May 1977 and Article 13 of Presidential Decree No 633 of 26 October 1972, in relation to Article 360(1)(3) of the Code of Civil Procedure, in so far as the C.T.R. failed to find that the act imposing penalties was unlawful because it erroneously assumed that the normal value of the prices of goods sold between intra-group companies was also relevant for the purpose of determining the taxable amount for VAT, and in any event because it determined that value on the basis of criteria which did not comply with the OECD directives. The appellant also complains, at the same time, of a defect in the statement of reasons, on the ground that the C.T.R. made irrelevant and wholly inadequate findings. … 18. The third ground of appeal is well-founded in so far as it alleges, in a manner which is sufficient to answer all other complaints, breach of the law in relation to the deemed applicability of the rules on transfer pricing also for the purposes of determining the VAT taxable amount. Transfer pricing is based on the concept of normal market value as set forth in Articles 9 and 76, paragraph 5 (now 110, paragraph 7) of Presidential Decree No. 917 of 22 December 1986 (see also Article 9 of the OECD Model Convention) and meets the need for a fair division of profits in the various countries where multinational groups operate. For VAT, on the other hand, the consideration actually received is a key element of the tax application mechanism, based on the principle of neutrality of the tax (which would be violated if the taxable base were calculated as an amount hypothetically higher than the consideration received): a principle which has always been derived from the EU Directives (most recently set forth in Article 73 of Directive 112/2006/EC) and implemented in Italy by Article 13 of Presidential Decree No. 633 of 26 October 1972. In particular, Article 17 of the Sixth Council Directive 77/388/EEC of 17 May 1977 links the right to deduct to the chargeability and inherent nature of the acquisition of the goods or services, without making any reference, and in any event not directly, to the value of the goods or services. The European Court has also held that the fact that an economic transaction is carried out at a price above or below the normal market price is irrelevant (ECJ, 20 January 2005, Case C-412/03, Hotel Scandic Gasabach, p. 22). Nor is there tax avoidance or evasion if the goods or services are supplied at artificially low or high prices between the parties, both of whom have a right to deduct VAT, as it is only at the level of the final consumer that tax losses may occur (CJEC 26 April 2012, Joined Cases C-621/10 and C-129/11, Balkan, p.47). The taxable amount for the supply of goods or services for consideration thus consists of the consideration actually received by the taxable person and represents the subjective value actually received and not an estimated value according to objective criteria (CJEU, 19 December 2012, case C-549/11, p. 48-49; CJEU, 26 April 2012, cited above, p. 43; CJEU, 5 April 2012, cited above, p. 43), p.43; Court of Justice, 5 February 1981, Cooperatieve Aardappelenbewaarplaats, 154/80, p.13; guideline reiterated also for group transactions: Court of Justice, 9 June 2011, case C-285/10, Campsa Estaciones de Servicio SA, p.27). Explicit confirmations in this regard are also to be found in the recent intervention of the European Commission, summarised in Working Paper 923 of 28 February 2017. It should therefore be reiterated that “under normal conditions, the Administration is not allowed to recalculate the value of the services purchased by the entrepreneur, excluding the right to deduct if the value is deemed uneconomic and therefore different from the one to be considered normal or in any case such as to produce an economic result” (Court of Cassation 04/06/2014, no. 12502, to which we refer also for other case law references). The calculation of VAT on the consideration may be disregarded if the tax authorities demonstrate the manifest and macroscopic uneconomic nature ...

CF (Pvt) Ltd’s main business was import, distribution and marketing of motor vehicles and spare parts of a specified brand. Following an audit CF had been issued a tax assessment related to the transfer pricing and VAT – import prices, management fees, audit costs etc. Judgement of the High Court The High Court issued a decision predominantly in favor of the tax authorities. In its judgement, the court stated that either the general deduction provision under section 15 (2) or section 24 or section 98 of the Income Tax Act could be employed to deal with transfer pricing matters. Excerpts: “It seems to me that the unsupported persistent assertions maintained by the appellant even after the concession of 14 November 2014 were indicative of both corporate moral dishonesty and a lack of good faith. I therefore find that the appellant through the mind of its management evinced the intention to evade the payment of the correct amount of tax as contemplated by s 46 (6) of the Income Tax Act by claiming the deduction of management fees paid to the intermediary, who was not entitled to such fees. The Court or the Commissioner have no option but to impose a 100% penalty. The penalty imposed by the Commissioner is accordingly confirmed.” “It seems to me that the Commissioner may very well have been justified in invoking the provisions of s 24 of the Income Tax Act by the acts of commission and omission of the appellant in respect of both management fees and goods in transit at the time he did. However, in accordance with the provisions of s 65 (12) of the Income Tax Act I did not find the claim of the Commissioner unreasonable even in respect of the interest issue that the Commissioner conceded at the eleventh hour or the grounds of appeal frivolous. I will therefore make no order of costs against either party other than that each party is to bear its own costs. Disposal Accordingly, it is ordered that: 1. The amended assessments number 20211442 for the year ending 31 December 2009, 20211443 for the year ending 31 December 2010, 202211446 for the year ending 31 December 2011 and 20211448 for the year ending 31 December 2012 that were issued against the appellant by the respondent on 27 June 2014 are hereby set aside. 2. The Commissioner is directed to issue further amended assessments against the appellant in respect of each year of assessment in compliance with this judgment and in doing so shall: a. Add back to income 7% interest on the cost of services rendered by the appellant for the consignment stock in transit to Zambia, Malawi and Tanzania in the sum of US$2 240 for 2009, US$ 2 505.87 for 2010, US$ 2 198.13 for 2011 and US$3 273.20 for 2012 tax years, respectively. b. Add back to income management fees that were deducted by the appellant in each year in the sum of US$130 000 for 2009, US$140 000 for 2010, US$ 256 629 for 2011 and US$ 140 000 for 2012 tax year, respectively. c. Bring to income the provisions for leave pay in the sum of US$10 000 for 2009, US$ 9 960 for 2010, US$2 049 for 2011 and US$ 491 for 2012 tax year. d. Bring to income provisions for audit fees in the sum of US$ 10 199.17 for 2009, US$12 372 for 2010, US$10 575 for 2011 and US$ 1 260 for the 2012 tax year, respectively. e. Discharge the notional interest he sought to impose on loans and advances made to ADI and GS, respectively. 3. The appellant is to pay 100% additional tax on management fees, 4. The appellant shall pay additional penalties of 10% in respect of leave pay and audit fee provisions. 5. The tax amnesty application is dismissed. 6. Each party shall bear its own costs.” Click here for other translation 2018-zwhhc-99 ...

The case concerns the effect of transfer pricing year-end adjustments on VAT – the relationship between transfer pricing and the valuation of goods for customs (VAT) purposes (Hamamatsu case C-529/16). Hamamatsu Photonics Deutschland GmbH (Hamamatsu) is a German subsidiary of the Japanese company Hamamatsu, and it acts as a distributor of optical devices purchased from the parent company. The transfer pricing policy of the group, which is covered by an Advanced Pricing Agreement (APA) with the German Tax Authorities, provides that the consideration paid by Hamamatsu to purchase the goods sold allows Hamamatsu Photonics a target profit. Hamamatsu accounted for an operating margin below the threshold agreed upon in the APA. The Japanese parent company consequently carried out a downward adjustment to allow the achievement of the target profitability by its German subsidiary. Hamamatsu filed a refund claim for the higher customs duties paid on the price that was declared to customs at the time of importation. Customs, at that stage, did not seem to have challenged the carrying of adjustments but refused the refund claim, arguing that no allocation of the adjustment to the individual imported goods was made. The Finanzgericht München handling the case i Germany refered the following questions to the Court of Justice for a preliminary ruling: . (1) Do the provisions of Article 28 et seq. of [the Customs Code] permit an agreed transfer price, which is composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, using an allocation key, regardless of whether a subsequent debit charge or credit is made to the declarant at the end of the accounting period? (2) If so: May the customs value be reviewed and/or determined using simplified approaches where the effects of subsequent transfer pricing adjustments (both upward and downward) can be recognised?’ The CJEU Ruling According to CJEU jurisprudence, the transaction method is the primary criterion for customs valuation, and it only should be derogated if the price actually paid or payable for the goods cannot be determined. Customs value must thus reflect the real economic value of an imported good and take into account all of the elements of that good that have economic value. Thus, the transaction value may have to be adjusted where necessary in order to avoid an arbitrary or fictitious customs value. However, a subsequent adjustment of transaction value is limited to specific cases such as, for instance, the presence of defected or damaged goods. The court ruled as follows: (1) “…in the version in force, the Customs Code does not impose any obligation on importer companies to apply for adjustment of the transaction value where it is adjusted subsequently upwards and it does not contain any provision enabling the customs authorities to safeguard against the risk that those undertakings only apply for downward adjustments. The Customs Code, in the version in force, does not allow account to be taken of a subsequent adjustment of the transaction value, such as that at issue in the main proceedings. Therefore, Articles 28 to 31 of the Customs Code, in the version in force, must be interpreted as meaning that they do not permit an agreed transaction value, composed of an amount initially invoiced and declared and a flat-rate adjustment made after the end of the accounting period, to form the basis for the customs value, without it being possible to know at the end of the accounting period whether that adjustment would be made up or down.” (2) “As the second question expressly applies only if the first question is answered in the affirmative, there is no need to answer it.” Europe vs Hamamatsu 20 Dec 2017 European Court of Justice No C-529-16 ...

On the basis of the detailed evidence provided by the tax administration, the defendant stated that the essence of the case is to assess whether the applicant has proved that the taxable supply declared in invoice No 2010036 took place, i.e. that Dosnetex plus s.r.o. provided the invoiced supply (production of graphic designs) to the applicant. However, it found that Dosnetex plus had become uncontactable at the end of 2010 and had filed a VAT return for the previous period, but that procedures for the removal of doubts had been initiated and that the company had not paid the actual tax assessed on the basis of those procedures. The company did not file an income tax return for 2010. It was established from the Commercial Register that on 12 November 2010 there was a change in the company’s composition, when the company’s managing director, Mr J.S., was replaced by Mr R.T., who also became the sole shareholder. Mr T. is a homeless person, without financial means and not contactable by the tax authorities; he could only be reached in the building of the District Social Security Administration in Přerov. Nevertheless, he was supposed to buy Dosnetex plus from Mr S. for the value of the contribution of CZK 200 000 (when he was supposed to hand this amount over to Mr S. personally, at the same time taking over all the accounting documents, all in the car park). Although Mr S. is virtually unknown to Mr T., he remains the general representative of Dosnetex plus. The applicant brought an action against the contested decision before the Regional Court. He disagreed with the defendant’s assessment of the various witness statements which showed that the applicant had obtained graphic work from Dosnetex plus. However, all the discrepancies found by the tax authority were not caused by the applicant but by its supplier, which were therefore in no way within the applicant’s control, particularly since he was unaware of them. It stressed that Dosnetex plus only became uncontactable at the end of 2010, which could not have been foreseen by the applicant in October 2010, when the invoice in question was submitted. The defendant breached its duty to correctly determine and assess the tax, as it did not correctly assess the evidence adduced, and therefore considered that the tax authority had not discharged its burden of proof with regard to challenging the witness statements and the applicant’s involvement in the VAT fraud. It was for the tax authorities to prove beyond doubt that the applicant knew or ought to have known that the delivery was part of a tax fraud committed by Dosnetex plus. The defendant argued that the principle of liability for tax, on which the defendant appears to rely, was introduced into the VAT Act only as from 1 April 2011 and therefore cannot apply to the present case. He therefore concluded that, in relation to Dosnetex plus, he had always acted in good faith in the correctness of its conduct. Judgement of the Court In view of all the above, the Supreme Administrative Court found no reason to depart from the judgment of 5 October 2016, No 6 Afs 170/2016-30, which concerned a similar situation, and therefore concluded that the appeal was manifestly unfounded and dismissed it in accordance with Article 110(1) in fine of the Code of Civil Procedure. Excerpt “The Supreme Administrative Court has consistently held that the conclusions that the taxable supply was not proven to have been effected by the taxable person and that the taxable person was involved in fraud are not compatible. Before the tax administration starts to investigate and prove any possible participation in tax fraud, it must be certain whether the taxable supply was actually carried out (cf. e.g. the above-referenced judgment No 6 Afs 170/2016 – 30). It is necessary to distinguish carefully between cases in which the taxpayer is not entitled to deduct VAT at all, because the taxpayer fails to prove that the taxable supply was carried out at all or to the extent declared, and situations in which the right to deduct does arise (because the taxable supply was actually carried out), but for certain reasons cannot be granted to the taxpayer (which, as the complainant correctly points out, would be in accordance with the case-law of the CJEU, particularly in the case of a claim for deduction made in an abusive manner or as a result of tax fraud). It is only if the taxpayer can prove that the transaction to which the deduction relates actually took place that it is appropriate to ask whether it was the result of abusive or fraudulent conduct. However, if the taxable supply did not take place at all, or the taxable person did not bear the burden of proof in this respect, it is unnecessary to deal with possible fraudulent conduct by the nature of the case, since there was no (abusive or other) tax-relevant conduct of the VAT payer. The conduct of a taxable person who declares a non-existent supply on the basis of which he subsequently claims a VAT deduction may also be regarded as fraudulent in a certain sense, but in that case his tax liability will be increased not because he has committed or participated in fraud, but because he has not been entitled to the deduction at all, since no taxable supply has actually been made. The appellant should therefore have first examined the tax authorities’ conclusion that no taxable supply had been made, a consideration which must necessarily be reflected in the grounds of the appeal decision. Only if the complainant had reached a conclusion contrary to that of the tax administrator, i.e. that the taxable supply had been effected, even if it was not certain from which supplier the applicant had obtained the graphic designs, could it have further examined the existence of circumstances giving rise to suspicion that the applicant had been involved in tax fraud (cf. By analogy, the judgment of ...

At issue in the Philip Morris case was the scope of the definition of permanent establishments – whether or not activities in Italy performed by Intertaba s.p.a. constituted a permanent establishment of the Philip Morris group. According to the tax authorities the taxpayer had tried to conceal the P.E. in Italy by disguising the fact that the Italian company was also acting in the exclusive interest of the Philip Morris group. On the basis of a tax audit report the Revenue Department – VAT office of Milan, by means of separate adjustment notices for the years 1992 to 1995, charged AAA, and on its behalf BBB s.p.a, for having failed to invoice the amounts paid by the State Monopolies Administration for the supply-distribution in the national territory of cigarettes under the CCC brand. In addition, according to the Administration, the company had failed to self-invoice the amounts for transport and distribution of the tobacco in the national territory. The Court of Appeal set aside the assessment issued by the tax authorities, and the tax authorities in turn filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the court of first instance and remanded the case with the following instructions: “…Ultimately, the activity in question – especially if it relates to the distribution of goods in a large market – does not seem to be comparable to that of a broker or a general or independent agent, which do not give rise to a permanent establishment, as expressly provided for in Article 5(6) of the OECD Model. 3.8. In conclusion, it must be held that the Regional Tax Commission not only failed to provide an adequate statement of reasons for the evidence offered by the office, in particular by failing to provide a full account of the evidence gathered in the inspection by the Guardia di Finanza and to carry out an analytical assessment in the light of the reasons of the parties, but also infringed and/or misapplied the rules and principles contained in the OECD Model and incorporated in the bilateral Italy-Germany Convention. The upholding of the appeal entails the cassation of the contested judgment, with referral to another section of the Regional Tax Commission of Lombardy. The referring judges must therefore, after analytically examining the content of the documentation offered and the findings made in the assessment, an examination of which they must give adequate reasons, comply with the following principles of law: (I) a corporation with its registered office in Italy may take on the role of a multiple permanent establishment of foreign companies belonging to the same group and pursuing a single strategy. In such a case, the reconstruction of the activity carried out by the domestic company, in order to ascertain whether or not it is an ancillary or preparatory activity, must be unitary and related to the group’s program considered as a whole; (II) an independent supply of services rendered in the national territory for consideration, when there is a direct and immediate link between the supply and the consideration, constitutes a transaction subject to VAT and to the related obligations of invoicing or self-billing, declaration and payment of the tax, regardless of whether it is part of a contract providing for other services to be rendered by the recipient and regardless of whether the latter, being a non-resident, has a fixed establishment in Italy; (III) the activity of controlling the exact performance of a contract between a resident and a non-resident person cannot in principle be regarded as an auxiliary activity within the meaning of Article 5(4) of the OECD Model Law and Article 5(3)(e) of the Convention between Italy and the Federal Republic of Germany against double taxation of 18 October 1989, which was ratified and made enforceable in Italy by Law No 459 of 24 November 1992? (IV) the entrusting to a domestic structure of the function of business operations (management) by a company not having its seat in Italy, even if it concerns a certain area of operations, entails the acquisition by that structure of the status of a permanent establishment for the purposes of VAT; (V) the assessment of the requirements of the permanent establishment or fixed establishment, including that of dependence and that of participation in the conclusion of contracts, must be conducted not only at the formal level, but also – and above all – at the substantive level. If it reaches the conclusion that BBB s.p.a. acted as a permanent establishment of AAA, the Regional Commission will have to decide on the issues raised in relation to the finding of omitted invoicing without payment of tax and on the other issues raised in the preliminary appeals, which have been absorbed by the upholding of the complaints on the non-existence of a permanent establishment.” Click here for English translation Click here for other translation Italy vs PM 2002-3368 ...

An Australian subsidiary of Estee Lauder paid a licence fees to licensor on sales of cosmetics in Australia whether imported or made locally. At issue is whether this fees should be taken into account in determining price and thus “transaction value” of goods for purposes of assessing customs duty. Judgement of the Federal Court The Court found that the fee should not be included. “The royalties will also be part of the price of the goods if it were open to a Collector to conclude that the licence agreement was so closely connected with the contracts of sale pursuant to which the goods were imported and to the goods that together they formed a single transaction. I do not think there is any basis for the taking of such a view. The licence agreement was made in 1969 and appointed the applicant exclusive licensee of the relevant trade marks in Australia. The agreement entitled the applicant to use the trade marks on goods manufactured in Australia as well as upon finished goods imported here. The applicant’s manufacturing operations in Australia were and are extensive so that its sales comprise substantial quantities of cosmetics manufactured here in addition to those which are imported. Then there is the fact that the licence fees are calculated on sales. For this purpose locally manufactured cosmetics and imported cosmetics are treated indistinguishably. There is also the circumstance that not all goods imported or manufactured by the applicant are sold. Some are given away either in the course of promotions or for reasons not so directly connected with the applicant’s advertising and marketing activities. All these factors lead, in my opinion, to the conclusion that it could not be correct to say that either of the contracts pursuant to which the goods were imported and the licence agreement together formed a single transaction. The question, in relation to “price related costs”, is, firstly, whether the royalties paid under the agreement are paid directly or indirectly by or on behalf of the purchaser to the vendor or to another person “under the import sales transaction”. If they are, the further question arises whether the only relationship which the royalties have to the imported goods is insubstantial or incidental. In order for the Comptroller to succeed, the royalties must be paid “under” each of the import sales transactions. “Under” in this context is synonymous with “pursuant to”. In my opinion the royalties were not paid pursuant to either of the import sales transactions. The transactions stood separately and apart from the licence agreement which entitled the Canadian company to a royalty in respect of all sales – not imports or purchases – of Estee Lauder products. If I be wrong in this conclusion, then I do not think that the relationship of the royalties to the imported goods is otherwise than insubstantial or incidental. I do not think it possible to take any other view of the matter when one considers what is involved in the licence agreement and considers it in relation to the import transactions and the surrounding facts and circumstances. The explanatory memoranda earlier referred to show that a principal purpose of the amendments which were made to the legislation in 1989 was to overcome what was referred to as “transaction split”. To the extent that the new sections were designed to overcome the mischief of transaction splitting, it has to be said that no such considerations affected the transactions which are in question here. The evidence shows a long standing licence agreement and a continuing business relationship in which goods bearing the Estee Lauder trade marks were imported by the applicant and, independently of those importations, royalties being paid to the Canadian company. I mention this matter only because of the emphasis placed upon it in argument. I do not think it has any ultimate bearing on the outcome of the case because it would not be right to limit the operation of the provisions of the new Division 2 to transactions which, although not properly characterised as transaction splitting, nevertheless fell within the words of the relevant sections. In the result neither the Comptroller nor the Collector was, in my opinion, entitled to take into account the royalties paid by the applicant to the Canadian company when the transaction values of the goods were assessed. The applicant is thus entitled to succeed. In its application it claimed injunctive as well as declaratory relief. I do not think this is a case where it is appropriate to grant injunctive relief. The applicant will be sufficiently protected by the making of appropriate declarations. The respondents are to pay the applicant its costs of the application.” ”Australia FCA 359″] ...