Tag: Volume discounts

Spain vs Tomas Bodero, S.A., July 2023, Tribunal Superior de Justicia, Case No STSJ CL 3218/2023

Tomas Bodero S.A. added a 4% fee when re-invoicing goods purchased from unrelated manufacturers to its Panamanian subsidiary. The transfer pricing documentation stated that “this fee (4%) is very similar to the fee that brokers in the sector usually charge for brokering imports of goods, so it can be concluded that a market price is charged for the services that the parent company provides to the subsidiary”. Following an audit, the tax authorities issued a tax assessment which, among other adjustments to the taxable income, also adjusted the fee received from the subsidiary. The arm’s length fee for the service provided was set at approximately 26% of the purchase price. Appeals were filed by Tomas Bodero S.A. which ended up in the High Court. Judgement of the Court In regards of procurement fee, the Court ruled in favor of Tomas Bodero A.S. Excerpts “….the method used by the Inspectorate to calculate the transfer prices is sufficiently justified; the internal comparable method is the method which, in general and a priori, provides a greater degree of accuracy and legal certainty given that it is obtained from the prices established by the interested party. However, regardless of the objections raised by the appellant regarding the sampling used by the Inspectorate – limited to a single month of the financial year and including a single Latin American client – and the possible discrepancies as regards the correct identification of the goods, the fact is that the tax authorities have not at any time called into question the specific business/financial intermediation and management model developed between the Spanish parent company and the Panamanian subsidiary. …the Inspectorate [does not] question the fact that the goods are at no time at the physical disposal of the parent company, since the supplier’s dispatch is made directly in Latin America. …we must understand that the (higher) price compared by the Inspectorate, in addition to the commercial margin of the resale itself, includes the cost of intermediation of the independent agent, which is not the case with the (lower) price re-invoiced by the parent company to its ï¬lial, which acts as a commercial intermediary with the retailers in Latin America. In fact, in the only invoice compared by the Inspectorate issued directly by the plaintiff to a Latin American customer -FacVen/9758, dated 5 January 2015- the ï¬lial TB LATAM is listed as “agent”, whereas, as we said, in the invoices issued by the appellant to its ï¬lial the legend “re-invoicing” appears. In other words, we cannot consider logical or reasonable the criterion of the Inspectorate that the price invoiced by the appellant to retailers for resales with agent intermediation is comparable to the price re-invoiced directly by the parent company to its ï¬lial in an operation of mere financial intermediation and management -without the intervention of a commercial agent, a task carried out by the ï¬lial itself-, all of which leads us to annul the regularisation for this concept. Click here for English Translation Click here for other translation Spain vs Tomas Bodero SA 11 july 2023 STSJ_CL_3218_2023 BW ...

France vs ST Dupont, July 2023, Conseil d’État, Case No 464928

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) An appeal was then filed with the CAA of Paris, where in April 2022 the Court dismissed the appeal and upheld the decision of the court of first instance. Finally an appeal was filed with the Conseil d’État. Judgement of the Conseil d’État The Conseil d’État dismissed the appeal of ST Dupont and upheld the decision of the Court of Appeal. Excerpt “ 15. It is clear from the documents in the file submitted to the lower courts that, in order to assess whether the prices at which ST Dupont sold its finished products to its distribution subsidiary ST Dupont Marketing constituted a transfer of profits abroad, it compared them to the prices at which the same products were sold to the independent South Korean company SJ Duko Co and to a network of duty-free sellers in South-East Asia. It considered that this comparison revealed the existence of an advantage granted by ST Dupont to its subsidiary, which it reintegrated into the parent company’s profits. However, in its response to the taxpayer’s comments, this adjustment was reduced by a “reduction” in the arm’s length prices used by the tax authorities, which consisted of aligning the margin on transactions with duty free shops with the margin on sales to SJ Duko, and then, in accordance with the opinion issued by the departmental commission for direct taxes and turnover taxes, by a further reduction of 50% of the amounts reintegrated into the company’s results. 16. In the first place, the company criticised the method used by the tax authorities on the grounds that ST Dupont Marketing and the Korean company SJ Duko Co were not comparable, since the former operated as a wholesaler and retailer while the latter only operated as a wholesaler. In rejecting this criticism on the grounds, firstly, that SJ Duko’s wholesale activity had been supplemented by that of exclusive sales agent and retailer and, secondly, that the applicant had not provided any evidence making it possible to assess the nature and cost of the differences in functions between ST Dupont Marketing and SJ Duko Co, taking into account in particular the assets used and the risks borne, and consequently to assess the existence, if any, of differences such that they would render the comparison irrelevant if they could not be appropriately corrected, the Court did not err in law. Although the company also argued that the differences in the functions performed by ST Dupont and the duty free shops prevented the duty free shops from being considered comparable, this criticism is new in the appeal and is therefore inoperative. 17. Secondly, in order to dismiss the criticism of the administration’s method based on the failure to take account of the difference in the geographical markets in which ST Dupont Marketing and SJ Duko Co operated, respectively, the Court was able, without committing an error of law, by disregarding the rules governing the allocation of the burden of proof or distorting the documents in the file submitted to it, to rely on the fact that ST Dupont’s transfer pricing documentation itself specified that retail prices were set uniformly by continental zone. 18. Thirdly, the Court noted, in a sovereign assessment not vitiated by distortion, on the one hand, that it did not follow either from the tables attached to the rectification proposal, or from the method of determining the selling prices of finished products to the various Asian subsidiaries, that the prices charged by ST Dupont to its customers depended on the quantities sold and, secondly, that the document produced by ST Dupont showing an overall statistical correlation between volume sold and unit price, which did not guarantee that the products compared were homogeneous, did not make it possible to establish this either. In relying on these factors to dismiss the company’s criticism based on the difference in the volume of transactions with ST Dupont Marketing and SJ Duko Co respectively, the Court did not err in law. 19. Fourthly, although the company criticises the grounds of the judgment in which the Court rejected its argument that the alignment of the mark-up applied to sales to duty-free shops with that applied to sales to SJ Duko Co meant that only one term of comparison was used, it is clear from other statements in the judgment, not criticised by the appeal, that the court also based itself on the fact that the tax authorities had, as an alternative, in their response to the taxpayer’s observations, applied a 27% reduction to the prices granted to duty-free shops in order to take account of the fact that these were ...

Portugal vs “N…S.A.”, March 2023, Tribunal Central Administrativo Sul, Case 762/09.0BESNT

The tax authorities had issued a notice of assessment which, among other adjustments, disallowed a bad debt loss and certain costs as tax deductible. In addition, royalties paid to the parent company were adjusted on the basis of the arm’s length principle. N…S.A. appealed to the Administrative Court, which partially annulled the assessment. Both the tax authorities and N…S.A. then appealed to the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal partially upheld the assessment of the tax authorities, but dismissed the appeal in respect of the royalty payments. According to the Court, a transfer pricing adjustment requires a reference to the terms of the comparable transaction between independent entities and a justification of the comparability factors. Extracts from the judgement related to the controlled royalty payment. “2.2.2.2 Regarding the correction for ‘transfer pricing’, the applicant submits that the Judgment erred in annulling the correction in question since the defendant calculated the royalty payable to the mother company in a manner that deviated from similar transactions between independent entities. It censures the fact that the rappel discount was not included in the computation of net sales for the purposes of computing the royalty under review. “[S]ince rappel is a discount resulting from the permanent nature of the contractual relationship between the supplier and the customer, (in the case of the Defendant, set at one year) constituting a reduction in the customer’s pecuniary benefit structurally linked to the volume of goods purchased, it can hardly be argued that it has a temporary nature, in the sense of ‘momentary’ or of ‘short duration'”; “(…) by excluding the rappel of rebates deductible from the gross value of sales, for the purposes of determining the net value of sales pursuant to Clause 32 of the Licence Agreement, the Tribunal a quo erred in fact”; “[that] on the transfer pricing regime, the AT demonstrated, by the reasoning of fact and law contained in the final inspection report that the existence of special relations between the Defendant and SPN led to the establishment of different contractual conditions, in the calculation of the royalties payable, had they been established, between independent persons”. In this regard, it was written in the contested judgment as follows: “(…) // In fact, the exceptions provided for in clause 32 of the Licence Agreement, which have a broad content, allow the framing of the so-called rappel situations, contracted by the Impugnant with its clients for a determined period of time and subject to periodic review, given their temporary nature. // Which means that, as to the form of calculation of the tax basis of the royalties payable to SPN, no violation of the provisions of the Licence Agreement has occurred. // For this reason, one cannot accept the conclusion of the Tax Authority in the inspection report, that such discounts do not fall within the group of those which, as they have a limited timeframe for their validity, should not be considered as a negative component of the sales for the purposes of calculation of the royalties, in accordance with the contract entered into between the Impugnant and SPN. // In addition, the Tax Authority failed to demonstrate in the inspection report to what extent the conditions practiced in the calculation of the royalties payable by the Impugnant to SPN diverge from the conditions that would be practiced by independent entities, not having been observed the provisions of article 77, no. 3, of the General Tax Law (LGT)”. Assessment. The grounds for the correction under examination appear in item “III.1.1.6 Transfer prices: € 780,318.77” of the Inspection Report. The relevant regulatory framework is as follows: i) “In commercial transactions, including, namely, transactions or series of transactions on goods, rights or services, as well as in financial transactions, carried out between a taxable person and any other entity, subject to IRC or not, with which it is in a situation of special relations, substantially identical terms or conditions must be contracted, accepted and practiced to those that would normally be contracted, accepted and practiced between independent entities in comparable transactions”(12). (ii) ‘When the Directorate-General for Taxation makes corrections necessary for the determination of the taxable profit by virtue of special relations with another taxpayer subject to corporation tax or personal income tax, in the determination of the taxable profit of the latter the appropriate adjustments reflecting the corrections made in the determination of the taxable profit of the former shall be made’.) (iii) “The taxable person shall, in determining the terms and conditions that would normally be agreed, accepted or carried out between independent entities, adopt the method or methods that would ensure the highest degree of comparability between his transactions or series of transactions and other transactions that are substantially the same under normal market conditions or in the absence of special relations…”.) (iv) “The most appropriate method for each transaction or series of transactions is that which is capable of providing the best and most reliable estimate of the terms and conditions that would normally be agreed, accepted or practised at arm’s length, the method which is the most appropriate to achieve the highest degree of comparability between the tied and untied transactions and between the entities selected for the comparison, which has the highest quality and the most extensive amount of information available to justify its adequate justification and application, and which involves the smallest number of adjustments to eliminate differences between comparable facts and situations”. (v) ‘Two transactions meet the conditions for comparable transactions if they are substantially the same, meaning that their relevant economic and financial characteristics are identical or sufficiently similar, so that the differences between the transactions or between the undertakings involved in them are not such as to significantly affect the terms and conditions which would prevail in a normal market situation, or, if they do, so that the necessary adjustments can be made to eliminate the material effects of the differences found’ (16). (vi) “In the case of operations ...

France vs ST Dupont , April 2022, CAA of Paris, No 19PA01644

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) Still not satisfied with the result, an appeal was filed by ST Dupont with the CAA of Paris. Judgement of the CAA The Court of appeal dismissed the appeal of ST Dupont and upheld the decision of the court of first instance. Excerpt “It follows from the above that the administration provides proof of the existence and amount of an advantage granted to ST Dupont Marketing that it was entitled to reintegrate into ST Dupont’s results, pursuant to the provisions of Article 57 of the General Tax Code, before drawing the consequences on the amount of the deficits declared by this company in terms of corporation tax, on the liability of the sums thus distributed to the withholding tax and on the integration in the base of the minimum contribution of professional tax and the contribution on the added value of companies. 29. It follows from all the foregoing that ST Dupont is not entitled to maintain that it was wrongly that, by the contested judgment, the Paris Administrative Court rejected the remainder of its claim. Its claims for the annulment of Article 4 of that judgment, for the discharge of the taxes remaining in dispute and for the restoration of its declared carry-over deficit in its entirety must therefore be rejected.” Click here for English translation Click here for other translation France CAA de PARIS, 2ème chambre, 13_04_2022, 19PA01644, Inédit au recueil Lebon ...

TPG2022 Chapter IX paragraph 9.25

For example, a business restructuring may involve the setting up by an MNE group of a central procurement operation that replaces the procurement activities of several associated enterprises. Similar to the guidance at paragraph 1.180 the MNE group has taken affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts and potential savings in administrative costs. In accordance with the guidance in Chapter I, the benefits due to deliberate concerted group action should be allocated to the associated enterprises whose contributions create the synergies. However, in a business restructuring, the central procurement company may also contractually assume risk associated with buying, holding, and on-selling goods. As stated in the previous section, an analysis of risk under the framework provided in Section D. 1.2.1 of Chapter I will determine the economic significance of the risk and which party or parties assume that risk. Although the central procurement operation is entitled to profit potential arising from its assumption of the risk associated with buying, holding, and on-selling goods, it is not entitled to retain profits arising from the group purchasing power because it does not contribute to the creation of synergies (see paragraph 1.188) ...

TPG2022 Chapter II paragraph 2.26

As another example, assume a taxpayer sells 1000 tons of a product for $80 per ton to an associated enterprise in its MNE group, and at the same time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analysing transactions in similar products to determine typical volume discounts ...

Portugal vs “Welding Mesh SA”, December 2021, CAAD Tax Arbitration, Case No 194/2021-T

A Portuguese subsidiary – A SA – had received intra group loans in foreign currency and had various other transactions with foreign group companies. The tax authorities claimed that the pricing of the transactions had not been at arm’s length and that the interest payment and exchange losses on the loans were not tax deductible. Decision of CAAD The CAAD set aside the assessment and decided in favour of “Welding Mesh SA” Click here for English translation Portugal - P194_2021-T - 2021-12-07 ...

Italy vs E.I S.r.l., February 2021, Administrative Court, Case No 12/02/2021 n. 546

Transactions had taken place between E.I. S.r.l. and a related Spanish company, S. Sa. where the pricing had been determined based on the cost plus method. An assessment was issued by the tax authorities on the basis of a “comparable” transactions (internal CUP) between the E.I. S.r.l. and an independent third company where the price had been higher. The Court of first instance held in favour of E.I S.r.l. This decision was appealed by the tax authorities. Judgement of the Court The Court dismissed the appeal of the tax authorities and decided in favour of E.I. S.r.l. Excerpts: “The Commission observes that the judges at first instance correctly and in detail reasoned their decisions, with a wealth of detail and a careful examination of all the circumstances examined. On the other hand, the Office has slavishly repeated its observations, merely objecting to the fact that they were not given due consideration by the first instance judges.” “The OECD Guidelines state that: Part 2, B.1, paragraph 2.26: “As a further example, assume that a taxpayer sells 1000 tonnes of a product to an associated enterprise in its multinational group at a price of $80 per tonne and simultaneously sells 500 tonnes of the same product to an independent enterprise at $100 per tonne. In this case it is necessary to assess whether the different quantities should lead to a correction of the transfer price. The relative market should be studied by analysing transactions for similar products in order to determine discounts normally applied depending on the quantity supplied. The example quoted is identical to the case under consideration today; according to the OECD Guidelines, a transfer pricing analysis cannot disregard the need to make an adjustment to the transactions in order to take into account the different quantities supplied to the two parties and to make the quantities comparable;” “National Jurisprudence, on the other hand, is recalled for the Cassation Civil Section, with sentence no. 20805 of 06 September 2017 states that: “(…) the essential aspect of transfer pricing does not concern the justification of the lower price from an economic point of view, but whether the discounts can be considered justified from a fiscal point of view, that is, whether they respond to the principle of free competition, in accordance with the teachings of the Supreme Court.” Click here for English translation Click here for other translation Sentenza del 12_02_2021 n. 546 - Comm. Trib. Reg. per la Lombardia Sezione_Collegio 9 ...

Italy vs E.I. S.r.l., February 2021, Regional Tax Commission, Case No 12/02/2021 n. 546/9

Transactions had taken place between E.I. S.r.l. and a related Spanish company, S. SA, where the pricing had been determined based on the cost plus method. An assessment was issued by the tax authorities on the basis of a “comparable” transactions (internal CUP) between the E.I. S.r.l. and an independent third company where the price had been higher. An appeal was filed by E.I. S.r.l. with the Provincial Tax Commission where E.I S.r.l. argued that the price difference was due to volume discounts. The Provincial Tax Commission held in favour of E.I S.r.l. An appeal was then filed by the tax authorities with the Regional Tax Commission. Judgement of the Regional Tax Commission The Regional Commission dismissed the appeal of the tax authorities and decided in favour of E.I. S.r.l. Excerpts: “The Commission observes that the judges at first instance correctly and in detail reasoned their decisions, with a wealth of detail and a careful examination of all the circumstances examined. On the other hand, the Office has slavishly repeated its observations, merely objecting to the fact that they were not given due consideration by the first instance judges.” “The OECD Guidelines state that: Part 2, B.1, paragraph 2.26: “As a further example, assume that a taxpayer sells 1000 tonnes of a product to an associated enterprise in its multinational group at a price of $80 per tonne and simultaneously sells 500 tonnes of the same product to an independent enterprise at $100 per tonne. In this case it is necessary to assess whether the different quantities should lead to a correction of the transfer price. The relative market should be studied by analysing transactions for similar products in order to determine discounts normally applied depending on the quantity supplied. The example quoted is identical to the case under consideration today; according to the OECD Guidelines, a transfer pricing analysis cannot disregard the need to make an adjustment to the transactions in order to take into account the different quantities supplied to the two parties and to make the quantities comparable;” “National Jurisprudence, on the other hand, is recalled for the Cassation Civil Section, with sentence no. 20805 of 06 September 2017 states that: “(…) the essential aspect of transfer pricing does not concern the justification of the lower price from an economic point of view, but whether the discounts can be considered justified from a fiscal point of view, that is, whether they respond to the principle of free competition, in accordance with the teachings of the Supreme Court.” Click here for English translation Click here for other translation Sentenza del 12_02_2021 n. 546 - Comm. Trib. Reg. per la Lombardia Sezione_Collegio 9 ...

France vs ST Dupont, March 2019, Administrative Court of Paris, No 1620873, 1705086/1-3

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation France vs ST Dupont 1092183260 ...

Russia vs Burdinsky A.V., March 2018, Supreme Court, Case No. No. Ð04-9989/2016

Burdinsky A.V. sold building products to both related and unrelated parties. Following an audit of FY 2012-2014, the tax authorities concluded that Burdinsky had understated the price of goods in transactions with related parties in order to save on taxes and obtain unjustified tax benefits. Price discrepancies were in the range of 11% to 52%. Due to lack of information the tax authorities did not apply the CUP method method. Instead prices ware determined based on the gross markup. The Courts of first and second instances found the assessment of the tax authorities lawful and reasonable. The application of the inspection’s own method of determining whether prices had been at arm’s length (which implies the determination of the minimum trade mark-up at the subsequent sale) was not in conflict with the tax legislation, did not violate the rights of IEs. The Supreme Court cancelled the decision of the lower courts and ruled in favor of Burdinsky A.V.The difference between the price applied in a transaction and the market price level cannot serve as the sole basis for concluding that the taxpayer has received an unjustified tax benefit, and price deviations in the range from 11 to 52% are not multiple.Furthermore, the tax authorities did not establish comparability between the related and unrelated transactions, in particular the volume of goods sold to unrelated parties were significantly lower than the volumes sold to related parties. A relatively higher price to unrelated parties therefore had a reasonable economic justification. Click here for translation A04-9989-2016_20180329_Opredelenie ...

Italy vs Recordati Industria Chimica e Farmaceutica S.p.A, September 2017, Supreme Court, Case No 20805

Recordati Industria Chimica e Farmaceutica S.p.A had been issued an assessment by the tax authorities for FY 2003 on various issues related to transfer pricing. Recordati Industria Chimica e Farmaceutica S.p.A. disagreed with the assessment and brought the case to court. The Regional Tax Commission of Lombardy (Ctr) issued a decision where it partially annulled the assessment. This decision was challenged both by the tax authorities and Recordati Industria Chimica e Farmaceutica S.p.A. Judgement of the Supreme Court Before the Supreme Court there were 29 issues to be resolved. The Supreme Court predominantly ruled in favour of the tax authorities. The court confirms that transfer pricing adjustments are applicable even in the absence of proof by the administration of a concrete tax advantage by the taxpayer. The shift of taxable income following transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence of “transactions” between companies linked at an apparently lower than normal price. The court also states that it cannot be excluded that overall business strategy can induce companies to carry out uneconomic operations in view of and in function of other benefits “(…) the essential aspect of transfer pricing does not concern the justification of the lower price from an economic point of view, but whether the discounts can be considered justified from a fiscal point of view, that is, whether they respond to the principle of free competition, in accordance with the teachings of the Supreme Court.” Click here for English translation Click here for other translation Sentenza del 06_09_2017 n. 20805 - Corte di Cassazione - Sezione_Collegio 5 ...

TPG2017 Chapter IX paragraph 9.25

For example, a business restructuring may involve the setting up by an MNE group of a central procurement operation that replaces the procurement activities of several associated enterprises. Similar to the guidance at paragraph 1.160 the MNE group has taken affirmative steps to centralise purchasing in a single group company to take advantage of volume discounts and potential savings in administrative costs. In accordance with the guidance in Chapter I, the benefits due to deliberate concerted group action should be allocated to the associated enterprises whose contributions create the synergies. However, in a business restructuring, the central procurement company may also contractually assume risk associated with buying, holding, and on-selling goods. As stated in the previous section, an analysis of risk under the framework provided in Section D. 1.2.1 of Chapter I will determine the economic significance of the risk and which party or parties assume that risk. Although the central procurement operation is entitled to profit potential arising from its assumption of the risk associated with buying, holding, and on-selling goods, it is not entitled to retain profits arising from the group purchasing power because it does not contribute to the creation of synergies (see paragraph 1.168) ...

TPG2017 Chapter II paragraph 2.26

As another example, assume a taxpayer sells 1000 tons of a product for $80 per ton to an associated enterprise in its MNE group, and at the same time sells 500 tons of the same product for $100 per ton to an independent enterprise. This case requires an evaluation of whether the different volumes should result in an adjustment of the transfer price. The relevant market should be researched by analysing transactions in similar products to determine typical volume discounts ...

Czech Republic vs. FISH MARKET a.s., January 2013, Supreme Administrative Court , Case No 1 Afs 101/2012 – 31

FISH MARKET a.s. was engaged, among other things, in the sale of live freshwater fish and that the margin on sales to a related party (KOLTER, a.s.) was much lower than on sales to other independent companies. The tax authorities therefore began to examine the reasonableness of the difference in the agreed selling prices of the fish. During the audit, the tax administrator found that the quantity of fish purchased from the selected distributors did not affect the price of the goods (e.g. the customer Human purchased 4.8 tonnes of live scaled carp at CZK 45.23 per 1 kg, the trading company Schultheiss GmbH purchased 27 tonnes in the period in question at CZK 46.1 per 1 kg. The claim that KOLTER had taken surplus fish and was therefore charged a lower price was not substantiated by the applicant and no evidence of discounted sales was produced or appears in the administrative file. The Regional Court agreed with that assessment. An appeal was then filed by FISH MARKET with the Supreme Administrative Court. Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities . When issuing a decision the tax authorities must prove that the price of the disputed transaction (the so-called transfer price) was agreed between related parties and that the transfer price differs from the price that would have been agreed between independent persons in normal commercial relations under the same or similar conditions (the so-called reference price). If these first two steps are fulfilled and the authorities finds a difference between the transfer price and the reference price, it must give the taxpayer an opportunity to explain and substantiate the difference. The burden of proof in the first two steps lies with the tax administration and shifts to the taxpayer only if it can prove that the parties are related and that they have agreed on a price that differs from the reference price. The taxpayer (if it wants to defend the amount of the agreed price) must then claim and prove special and normal market conditions, but at the same time economically rational reasons why the price between it and the related party was agreed differently from the reference price. Excerpts “Where the tax authority establishes a reference price on the basis of data on the actual prices actually achieved for an identical or similar commodity between genuinely existing independent operators, it must carefully examine the extent to which those prices were achieved under the same or similar conditions as those under which the price was negotiated by the connected persons and, if those conditions differ, make an appropriate adjustment to the reference price. The burden of proof on the tax authorities also relates to establishing the circumstances in which the price was negotiated by the connected persons. Also, where the tax authority establishes the reference price on the basis of data on the prices actually achieved for an identical or similar commodity between actually existing independent entities, this will normally lead to the establishment of a range of specific prices so achieved (e.g. For the purposes of determining the difference between prices, the price must be based on the range of prices within the evidentially fixed interval (see the judgment of the Supreme Administrative Court of 31 March 2009, No. 8 Afs 80/2007 – 105, published under No. 1852/2009 Coll. of the Supreme Administrative Court).” “In the present case, the tax administrator used the ‘comparable uncontrolled price method’ (CUP) to determine price comparability. This is the preferred method of comparison, which is used in transactions where there is a fully comparable (identical) product – a commonly traded commodity sold by the undertaking under examination to both related and independent undertakings. The identity of the product or commodity sold is thus an essential element. The tax authority analysed the structure of the applicant’s customers – distributors who purchased the same goods during the period under review; it found that Schultheiss GmbH (Germany), Bihl Raymond + Cie (France), TEHAG (Hungary), Human Inh. Paulus – Fischgrosshandlung (Germany), GYORI ‘ELORE’ HALÃSZATI TZS (Hungary). It found that Schultheiss GmbH (Germany) came closest to the volume of business carried out between the applicant and KOLTER a.s. The tax authorities thus selected six independent entities purchasing exactly the same product from the applicant during the periods under consideration. The result was to find the price range within which the agreed prices per kg of the identical product purchased during the period under consideration by the independent customers varied and to compare it with the price agreed with the dependent party-KOLTER a.s. With regard to the applicant’s claim that the price agreed with KOLTER a.s. is influenced by the low price level in Slovakia, the defendant argued that the price level in Hungary, for example, from where the three distributors in the comparative sample were selected, is entirely comparable. Moreover, the price level in the individual countries is not relevant; what is relevant is the level of the price arrangement between various independent persons at which those customers purchased the product from the applicant (it is therefore irrelevant at what price they then resold it on the market). The Supreme Administrative Court agreed with that conclusion. Moreover, by comparing the cost and revenue accounts of these persons, the tax administrator found that, in the period under review, the applicant’s margin on sales of fish to the related person, KOLTER, a.s., was significantly lower (1,71 %) than on sales to another independent customer, Schultheiss, GmbHP (11,62 %); the margin of KOLTER a.s. (these findings also support the defendant’s conclusion that the person associated with the applicant enjoyed commercial advantages, although the tax authorities did not use this finding as evidence but it became the initial reason for investigating whether any differences in the agreed prices existed). In so far as the applicant reiterates, both in the application and in the appeal, that the comparison between KOTLER a.s. and Schultheiss, GmbHP and Human and Schultheiss, GmbHP cannot be made ...