Terex Italia s.r.l. is a manufacturer of heavy machinery and sold these products to a related distributor in the UK. The remuneration of the distributor had been determined based on application of the TNM-method. Following an audit for FY 2009 and 2010 the tax authorities served Terex a notice of assessment where adjustments was made to the taxable income in respect of a transfer pricing transaction, and in particular contesting the issuance of a credit note, in favour of the English company GENIE UK with the description “sales prices adjustment” recorded in the accounts as a reversal of revenue, in that, according to the Office, as a result of the adjustment made by the note, Terex would have made sales below cost to the English company, carrying out a clearly uneconomic transaction. In the same note, the non-deductibility of costs for transactions with blacklisted countries was contested. Terex lodged appeals against the assessments, but the Provincial Tax Commission upheld them only “in respect of the purchases from Hong Kong”, implicitly rejecting them in respect of the purchases made in Switzerland and explicitly rejecting them in respect of the disputed credit notes. An appeal was later rejected by the Regional Tax Commission. An appeal was then filed by Terex with the Supreme Court. In this appeal Terex stated that “The CTR, for the purposes of identifying the ‘normal value’ of the intra-group transactions relating to the relations with the English company GENIE UK, wrongly disallowed the applicability of the TNMM method (of the ‘net margin’), used by the taxpayer for the years 2009 and 2010 and presupposed the issuance of the contested credit notes and the relative reduction of the declared income, on the other hand, the Office considered that the CUP method (of the ‘price comparison’), used by the tax authorities in the findings relating to the same tax years, was applicable, with the consequent emergence of a higher taxable income, compared to that declared. The same Administration, on the other hand, with reference to the intra-group relations with the same company, located in the tax years 2007 and 2008 and subject to control without censure in the same audit, had not denied the applicability of the TNMM method, used by the taxpayer, which in such cases had led to the issuance of debit notes, with the relative increase in declared income.” Judgement of the Court The Supreme Court upheld part of the judgement (black listed costs) and refered part of it (Transfer pricing method and “sales prices adjustment”) back to the Regional Tax Commission for reconsideration. Excerpts in English 5.1. In particular, with regard to the method applicable for the purpose of determining the “normal value”, it has been clarified, with specific reference to the one referred to as the “TNMM”, that “On the subject of the determination of business income, the regulations set forth in Article 110, paragraph 7, of Presidential Decree no. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e. the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD which is based on the determination of the net margin of the transaction (so-called “TNMM”), which is based on the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the differences between the tested party and the comparable companies in terms of risks assumed or functions performed, and a reliable indicator of the level of profitability is assumed.” (Cass. 17/05/2022, no. 15668; the principle was shared by, among others, Cass. 12/09/2022, nos. 26695, 26696, 26697 and 26698; Cass. 28/04/2023, no. 11252).” “The adoption of the TNMM is particularly reliable when the functional analysis shows the existence of a party (tested party or tested party) to the controlled transaction that performs simpler functions and assumes less risk than the other party to the transaction (para. 2.64 et seq. OECD). In analogy to the RPM (Resale Price Method) or CPM (Cost Plus Method), it focuses on the profitability of the tested party in the controlled transaction, whereas it differs from it in that it operates at the level of net margins and not gross margins.” “Indeed, according to the OECD Guidelines (OECD, Guidelínes,1995), ‘The selection of a transfer pricing method is always aimed at finding the most appropriate method for a particular case. For this purpose, the following should be taken into account in the selection process: the respective advantages and disadvantages of the methods recognised by the OECD; the consistency of the method considered with the nature of the controlled transaction, as determined in particular through functional analysis; the availability of reliable information (especially on independent comparables) necessary for the application of the selected method and/or the other methods; the degree of comparability between controlled transactions and transactions between independent companies, including the reliability of comparability adjustments that are necessary to eliminate significant differences between them. No method can be used in all eventualities and it is not necessary to demonstrate the non-applicability of a given method to the circumstances of the particular case. Ministerial Circular No. 42 of 12 December 1981 also pointed out that the appropriateness of a transfer pricing method is assessed on a case-by-case basis.” “5.6. The importance that the TNMM has assumed in practice, as the most widely used means of determining transfer prices, has made it the subject of interest of the Eu Joint Transfer Pricing Forum (JTPF) body, set up by the European Commission, which, in 2019, drew up a document (EU JOINT TRANSFER PRICING FORUM, DOC: JTPF/002/2019/EN, SECTION 2), in which it describes its essential characteristics, among which, substantially tracing the ...

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the Administrative Court and in a decision issued 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed by the tax authorities and in June 2021 the Administrative Court of Appeal set aside the decision of the administrative court and decided in favor of the tax authorities. An appeal was then filed by SA Compagnie Gervais Danone with the Supreme Court. Judgement of the Conseil d’État The Supreme Court set aside the decision of the Administrative Court of Appeal and decided in favor of SA Compagnie Gervais Danone. Excerpts from the Judgement “3. It is apparent from the documents in the files submitted to the trial judges that Compagnie Gervais Danone entered into an agreement with Danone Tikvesli, a company incorporated under Turkish law, granting the latter the right to use Groupe Danone’s dairy product trademarks, patents and know-how, of which it is the owner, in order to manufacture and sell dairy products on the Turkish market. In order to deal with the net loss of nearly 40 million euros recorded by Danone Tikvesli at the end of the 2010 financial year, which, according to the undisputed claims of the companies before the trial judges, should have led, under Turkish law, to the cessation of its business, Danone Tikvesli was granted the right to use Groupe Danone’s dairy product brands, patents and know-how, Compagnie Gervais Danone paid it a subsidy of EUR 39,148,346 in 2011, which the tax authorities allowed to be deducted only in proportion to its 22.58% stake in Danone Tikvesli. In order to justify the existence of a commercial interest such as to allow the deduction of the aid thus granted to its subsidiary, Compagnie Gervais Danone argued before the lower courts, on the one hand, the strategic importance of maintaining its presence on the Turkish dairy products market and, on the other hand, the prospect of growth in the products that it was to receive from its Turkish subsidiary by way of royalties for the exploitation of the trademarks and intangible rights that it holds. 4. On the one hand, it is clear from the statements in the judgments under appeal that, in ruling out the existence of a commercial interest on the part of Compagnie Gervais Danone in paying aid to its subsidiary, the Court relied on the fact that Danone Hayat Icecek, majority shareholder in Danone Tikvesli, also had a financial interest in preserving the reputation of the brand, which prevented Compagnie Gervais Danone from bearing the entire cost of refinancing Danone Tikvesli. In inferring that Compagnie Gervais Danone had no commercial interest from the mere existence of a financial interest on the part of Danone Tikvesli’s main shareholder in refinancing the company, the Court erred in law. 5. Secondly, it is clear from the statements in the contested judgments that, in denying that Compagnie Gervais Danone had its own commercial interest in paying aid to its subsidiary, the Court also relied on the fact that the evidence produced by that company did not make it possible to take as established the alleged prospects for growth of its products, which were contradicted by the fact that no royalties had been paid to it before 2017 by the Turkish company as remuneration for the right to exploit the trade marks and intangible rights which it held. In so ruling, the Court erred in law, whereas the fact that aid is motivated by the development of an activity which, at the date it is granted, has not resulted in any turnover or, as in the present case, in the payment of any royalties as remuneration for the grant of the right to exploit intangible assets, is nevertheless capable of conferring on such aid a commercial character where the prospects for the development of that activity do not appear, at that same date, to be purely hypothetical.” Click here for English translation Click here for other translation ...

H-Customs GmbH – the applicant and appellant – is a subsidiary of H, Japan. In the period at issue, from 17 October 2009 to 30 September 2010, H-Customs GmbH imported more than 1,000 consignments of various goods from H, which it had cleared for free circulation under customs and tax law at the defendant HZA (Hauptzollamt – German Customs Authorities). H-Customs GmbH declared the prices invoiced to it by H Japan as the customs value. Some of the imported articles were duty-free; for the articles that were not duty-free, the HZA imposed customs duties of between 1.4 % and 6.7 % by means of import duty notices. In 2012, H-Customs GmbH applied to the HZA for a refund of customs duties for the goods imported during the period at issue in the total amount of… €. It referred to an Advance Pricing Agreement (APA) concluded between it and H for transactions in the tax field and stated that the adjustments to the transfer prices carried out on the basis of the APA had not been taken into account when declaring the goods for customs clearance and that it was now doing so. The APA had already been concluded in 2009 as part of a mutual agreement procedure under the agreement between the Federal Republic of Germany and Japan for the avoidance of double taxation with regard to taxes on income and certain other taxes. The Federal Central Tax Office and the local Tax Office had approved the APA. The customs authorities had not been involved. The APA covered the sale of end products and components from H Japan to H-Customs GmbH as well as other business transactions related to the trade in goods. On the basis of the APA, transfer prices were determined for certain business transactions. In the process, H initially invoiced H-Customs GmbH a certain amount for each of the goods it supplied. The sum of these amounts was reviewed after the end of the business year and, if necessary, corrected in favour of or to the detriment of H-Customs GmbH. In this way it was to be ensured that the transfer prices stood up to an arm’s length comparison. For this purpose, the German and Japanese authorities involved chose the so-called residual profit split method at the request of H-Customs GmbH and with reference to point 3.19 of the transfer pricing principles of the Organisation for Economic Cooperation and Development. According to this method, the combined profit of H-Customs GmbH and H Japan from the audited intra-group transactions was split in two stages. In a first stage, each party was first allocated a sufficient profit to achieve a minimum return. As a starting point, the returns on sales routinely achieved by comparable companies with similar operating profiles were used. In order to calculate the routine profit to be allocated, the full cost mark-up was used as profit indicators for H and the return on sales for the applicant. After apportioning the routine profit, in a second step the remaining residual profit was apportioned proportionally according to the profit apportionment factors. After determining the routine profit and the residual profit, the target range of the applicant’s return on sales (operating margin) was set. If the applicant’s actual profit was outside the target range, the profit was adjusted to the upper or lower limit of the target range and credits or debits were made to the applicant. H-Customs GmbH’s return on sales was below the target range set out in the APA. For this reason, H-Customs GmbH and H Japan adjusted the transfer prices after the end of the accounting period for 2009/2010 by way of a credit note in the amount of … €. The report of the Main Customs Office Cologne, Federal Customs Valuation Office, to which the Fiscal Court (Finanzgericht, FG) refers in the contested judgment, states that the amount had been allocated to various product groups on the basis of an allocation key; there had been no explanation of the individual product groups. The apportionment formula applied had been specified by H; the applicant was not aware of the basis on which H had determined this apportionment formula. H-Customs GmbH had calculated the duty to be refunded in its view by reducing the sum of all original customs values by the amount of the adjustment from the APA and then applying an average duty rate of 1.02% rounded up to the original or the adjusted customs value. The refund amount sought by the applicant resulted from the difference between the two values determined in this way. H-Customs GmbH did not allocate the adjustment amount to the individual imported goods. In its decision of 4 June 2014, the German Customs Authorities rejected the refund application on the grounds that the method chosen by the applicant in the form of a global correction of the total price was not compatible with Article 29(1) of the Customs Code in conjunction with Article 144 of the Implementing Regulation. Article 144 of the Customs Code Implementing Regulation (CCIP). Due to the fact that the amount of the adjustment was not broken down by product, it was ultimately not possible to clarify and prove to which specific import goods the adjustment exactly related and in what amount it was to be made for them. By decision of 2 July 2015, the German Customs Authorities rejected H-Customs GmbH’s objection as unfounded. An appeal was then filed by H-Customs GmbH with the Tax Court. In a judgement issued in 2019 the appeal was dismissed and the assessment of the German Customs Authorities upheld. An appeal was then filed with the Bundesfinanzhof Judgement of the Bundesfinanzhof The Court dismissed the appeal as unfounded and upheld the decision of the Tax Court. Excerpts “The contested decision by which the HZA refused to refund the import duties sought by the plaintiff is lawful (§ 101 sentence 1 FGO). The applicant is not entitled to a refund of part of the duty it paid under the first ...

If necessary to reflect an arm’s length result, a controlled taxpayer may report on a timely filed U.S. income tax return (including extensions) the results of its controlled transactions based upon prices different from those actually charged. Except as provided in this paragraph, section 482 grants no other right to a controlled taxpayer to apply the provisions of section 482 at will or to compel the district director to apply such provisions. Therefore, no untimely or amended returns will be permitted to decrease taxable income based on allocations or other adjustments with respect to controlled transactions. See § 1.6662-6T(a)(2) or successor regulations ...

As part of tax legislation recently enacted in Hungary, rules governing the application of statistical tools – arm’s length range and adjustments within the range – will now be governed by law. When determining arm’s length prices based on benchmarks of comparables it will now be mandatory to use the interquartile range. If the price falls outside the arm’s length range, adjustment must be made to the median value – unless the taxpayer can prove that another value within the range is more appropriate. Where the price is within the arm’s length range, taxpayers will no longer be allowed to make year-end adjustments. The above amendments will have effect for FY 2022 and forward. Furthermore, certain information related to controlled transactions will now have to be provided in the corporate tax return. Details in this regard will be contained in a later Ministerial Decree. Click here for unofficial English translation Click here for other translation ...

However, compensating adjustments are not recognised by most OECD member countries, on the grounds that the tax return should reflect the actual transactions. If compensating adjustments are permitted (or required) in the country of one associated enterprise but not permitted in the country of the other associated enterprise, double taxation may result because corresponding adjustment relief may not be available if no primary adjustment is made. The mutual agreement procedure is available to resolve difficulties presented by compensating adjustments, and competent authorities are encouraged to use their best efforts to resolve any double taxation which may arise from different country approaches to such year-end adjustments ...

Both the arm’s length price-setting and the arm’s length outcome-testing approaches, as well as combinations of these two approaches, are found among OECD member countries. The issue of double taxation may arise where a controlled transaction takes place between two associated enterprises where different approaches have been applied and lead to different outcomes, for instance because of a discrepancy between market expectations taken into account in the arm’s length price-setting approach and actual outcomes observed in the arm’s length outcome-testing approach. See paragraphs 4.38 and 4.39. Competent authorities are encouraged to use their best efforts to resolve any double taxation issues that may arise from different country approaches to year-end adjustments and that may be submitted to them under a mutual agreement procedure (Article 25 of the OECD Model Tax Convention) ...

In other instances, taxpayers might test the actual outcome of their controlled transactions to demonstrate that the conditions of these transactions were consistent with the arm’s length principle, i.e. on an ex post basis (hereinafter “the arm’s length outcome-testing” approach). Such test typically takes place as part of the process for establishing the tax return at year-end ...

The company is a producer of household chemicals and belongs to the R. B. (“the Group”), which is active in the manufacture and sale of consumer products in the home, health and hygiene products industry. The Company has entered into supply agreements for the goods it produces with Group companies. On the basis of the agreements, the Applicant sells goods produced by it to entities of the Group indicated by R. A. h. Companies and to R.B. [E.] B.V. The remuneration of the Polish company was determined based on a target margin – and if the profits were below or above the target margin, an invoice was issued subtracting or adding income to arrive at the target income. The tax authorities held that the quarterly “Transfer Pricing-adjustment” was not a transfer in regards of VAT. The company then filed a request for a individual interpretation (binding ruling), which was rejected by the authorities. A complaint was filed by the company to the Court of first instance, where the decision of the tax authorities was set aside. The tax authorities then filed an appeal to the Supreme Administrative Court. The tax authorities requested that the appealed decision be reversed in its entirety, that the Company’s complaint be examined and dismissed, or alternatively, in the event that the merits of the case are not sufficiently clarified, hthat the appealed decision be reversed in its entirety and the case be referred back to the Court of First Instance for re-examination. Judgement of the Supreme Administrative Court The Court decided in favour of the tax payer. “In the Company’s view, the issue requiring interpretation referred only to the question of the moment of making the correction, and not to the correctness of the adopted model for correcting income. Therefore, the Court of First Instance rightly pointed out that the prerequisites referred to in Article 165a of the Tax Code relating to the lack of possibility to institute proceedings were not exhausted in the case because the phrase “proceedings may not be instigated” used in Article 165a § 1 of the Tax Code should be referred to the C In view of this, the allegation of a violation of Article 145 § 1 (1) (c) of P.p.s.a. in conjunction with Article 165a § 1 and in conjunction with Article 14h and 14b § 1 of the Code of Civil Procedure should be deemed unjustified. ” … As already indicated above, the mechanism of “profitability” adjustment is in the case under consideration an assumption of factual nature and as such does not require the interpretation authority to confirm the correctness of its application by the Company.” ” Click here for English Translation Click here for other translation ...

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the administrative court. In a decision of 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed to Administrative Court of Appeal by the tax authorities. Judgement of the Court The Administrative Court of Appeal decided in favor of the tax authorities and annulled the decision of the administrative court. Excerpts from the Judgement “Firstly, it appears from the investigation that SA Compagnie Gervais Danone entered in its accounts for the financial year ending in 2011 a subsidy recorded under the name “loss compensation Danone Tikvesli”, paid to its Turkish subsidiary facing financial difficulties characterised by a negative net position of almost 40 million euros as at 31 December 2010, a deficit situation incompatible with Turkish regulations. The deductibility of this aid was allowed, in proportion to the 22.58% stake held by SA Compagnie Gervais Danone in this company. In view of the relationship of dependence between the applicant company and its beneficiary subsidiary, it is for SA Compagnie Gervais Danone to justify the existence of the consideration it received in return. In order to justify its commercial interest in taking over the whole of the subsidy intended to compensate for its subsidiary’s losses, Compagnie Gervais Danone argues that it was imperative for it to remain present on the Turkish dairy products market, a strategically important market with strong development potential, in order to preserve the brand’s international reputation, and that it expected to receive royalties from its subsidiary in a context of strong growth. However, the 77.48% majority shareholder, Danone Hayat Icecek, a company incorporated under Turkish law and wholly owned by Holding Internationale de boisson, the bridgehead company of the Danone group’s ‘water’ division, had an equal financial interest in preserving the brand’s reputation, so that this reason does not justify the fact that the cost of refinancing Danone Tikvesli had to be borne exclusively by SA Compagnie Gervais Danone. Although the applicant company relies on the strategic importance of the Turkish dairy products market, having regard to Turkish eating habits, its population growth, the country’s GDP growth rate and its exports to the Middle East, the extracts from two press articles from 2011 and 2015 and the undated table of figures which it produces in support of that claim do not make it possible to take the alleged growth prospects as established. Moreover, these general considerations are contradicted, as the administration argues, by the results of the exploitation by Danone Tikvesli of its exclusive licence contract for the production and distribution of Groupe Danone branded dairy products, since it is common ground that SA Compagnie Gervais Danone, which had not received any royalties from its subsidiary since the acquisition of the latter in 1998, did not benefit from any financial spin-off from this licensing agreement until 2017, the royalties received since 2017, which in any case are subsequent to the years of taxation, being moreover, as the court noted, out of all proportion to the subsidy of more than 39 million euros paid in 2011. In these circumstances, the tax authorities must be considered as providing evidence that, as the expected consideration was not such as to justify the commercial interest of SA Compagnie Gervais Danone in granting this aid to Danone Tikvesli, this subsidy constituted, for the fraction exceeding its shareholding, an abnormal act of management constituting a transfer of profits abroad within the meaning of Article 57 of the General Tax Code.” “It follows from the foregoing that the Minister for the Economy, Finance and Recovery is entitled to maintain that it was wrongly that, by the contested judgment, the Montreuil Administrative Court discharged SA Compagnie Gervais Danone from the taxes in dispute. It is therefore appropriate to annul the judgment and to make SA Gervais Danone liable for these taxes.” Click here for English translation Click here for other translation ...

31 March 2021 the Polish Ministry of Finance issued tax clarifications on transfer pricing – No. 2: Transfer Pricing Adjustments Click here for unofficial English translation ...

Weitian Technology Co. Ltd (AKA ProLight Opto Technology Corp), a Taiwanese company active in the global LED industry, claimed that factors affecting market prices had not been fully considered while determining the prices of products sold to its subsidiary in Shanghai, and that this had caused major losses in the subsidiary. To account for these losses, at the end of 2015, a year end adjustment was made, which was reported as a tax deductible sales allowance in the tax returns. The tax authorities denied the deduction. An appeal was filed by the company with the Supreme Administrative Court in 2019. Judgement of the Supreme Administrative Court The court dismissed the appeal. Deductions for the year end adjustment could not be allowed in this case for the following reasons: A year end adjustment is a mechanism provided to MNEs to achieve an arm’s-length result when the agreed terms and conditions pertaining to the price-relevant factors are changed. Documents must demonstrate the reasons for making the adjustment, the method for the adjustment, and the terms and conditions of the adjustment. Weiwei Technologies provided only internal approvals and debit notes. There were no documents showing conditions or terms, whether price-relevant factors had been concluded by both parties, or how the adjustment would occur for each transaction. Click here for English Translation Taiwan 109-661 Click here for other translation ...

K. sp. z o.o. is a Polish company belonging to an international group. The main activity of K is local sale of goods purchased from a intra group supplier. K is best characterized as a limited risk distributor and as such should achieve an certain predetermined level of profitability as a result of its activities. In order to achieve the determined level of profitability, the group had established that, if the operating margin actually achieved by the distributor during a given period is less or more than the assumed level of profit, it will be adjusted. The year-end adjustment will not be directly related to the prices of goods purchased from the intra-group supplier and will be made after the end of each financial year. The Administrative Court decided that the year-end adjustment is not sufficiently linked to obtaining, maintaining or securing the company’s income. Hence the adjustment cannot be recognized as a deductible cost within the meaning of Article 15 Section 1 of the CIT Act. The decision of the Administrative Court was appealed to the Supreme Administrative Court by K. The Supreme Administrative Court upheld the result reached by the Administrative Court according to which year-end adjustments (for the years in question) was not recognised as tax deductible costs. “Although the assessment presented was lacking in the grounds of the judgment under appeal, the manner in which the case was decided by dismissing the application is correct.” Excerpts from the reasoning of the Supreme Administrative Court “The legal problem examined in this case relates to the use by the applicant company of a mechanism applied in economic practice, in group settlements, referred to as a ‘compensating adjustment’. Generally speaking, that mechanism consists in an upward (true-up) or downward (true down) adjustment of the price between the supplier and the distributor, depending on whether the latter obtains income from sales to third parties which exceeds or is less than the margin fixed in the agreement between those entities. In the present case, the essence of the dispute concerns the tax consequences, in terms of corporation tax, of offsetting the net operating margin downwards (true down), under an agreement concluded by the applicant with the controlling company (the supplier). That means that the applicant (distributor) transfers funds to the supplier at an amount corresponding to the excess of the margin set in the contract concluded previously by those entities. There is no doubt that those entities (supplier and distributor) constitute related companies within the meaning of the transfer pricing rules. However, in the case in question, the disputed problem does not concern the assessment of whether the settlements between the supplier and the distributor comply with the arm’s of lengh rules established in the interpretation of Article 11 of the CFR in force on the date of issue of the interpretation of Article 11 of the CFR, to what extent determining whether the downward adjustment of the operating margin described in the application may be recognised as a deductible cost within the meaning of Article 15(1) of the CFR. According to this provision, in the wording referring to the realities of the case, deductible expenses are costs incurred in order to obtain revenue from a source of revenue or to preserve or secure a source of revenue, except for the costs listed in Article 16(1). Since the definition of a legal deductible expense is of a general nature, each cost (including expenditure) incurred by a taxpayer should be subject to individual assessment, with a view to examining the existence of a causal link between its incurrence and the generation of revenue (a real chance of generating revenue) or preserving or securing the source of revenue. Exceptions – both positive and negative – may of course be provided for by the legislator. However, the Supreme Administrative Court, in its composition adjudicating on this case, is of the opinion that the cash transfer incurred by the appellant to the supplier does not meet the criteria set out in Article 15(1) of the Polish Code of Civil Procedure, and in the legal status in force before 1 January 2019 there was no specific provision in the Tax Act allowing for the cost settlement of transfer price adjustments.” BE AWARE! – the result of the decision – non deductibility of downward year-end adjustments – is only applicable in Poland for years prior to 2019 “On the other hand, in the legal status in force before 2019, a typical transfer pricing arrangement concerned settlements between related companies for the direct supply of goods or services. For the sake of order, it should be recalled that until the end of 2018 the legislator, both in the Corporate Income Tax Act, the Personal Income Tax Act and the Value Added Tax Act, did not use the term “transfer prices” but used the term “transaction prices”. The term “transfer prices” was commonly used in the judicature and the literature and there is no doubt that both concepts are related to the same subject matter. The notion of “transaction price” was defined in Art. 3.10 of the Act of 29 August 1997 – Tax Ordinance (Journal of Laws of 2018, item 800 as amended). According to this regulation, the transaction price was to be understood as the price of the subject of the transaction concluded between related entities within the meaning of the tax law regulations concerning personal income tax, corporate income tax and value added tax. “As a result, in the legal status prior to 2019, the margin adjustment, meaning in fact an adjustment of the Company’s profitability, made on the basis of the adopted transfer pricing policy, does not meet the prerequisites resulting from art. 15 section 1 of the Corporate Income Tax Act, and in particular the most important prerequisite, i.e. connection with income. The very nature of the income adjustment excludes that it is a fee for services provided by the supplier to the distributor.” “The situation has fundamentally changed as of 1 January 2019, due ...

A Polish subsidiary performed manufacturing on a limited risk basis (a so-called contract manufacturer) on behalf of the group parent and should be remunerated based on the functions performed. During the year, sales of products are made at constant registration prices based on the standard cost. It is only after the end of the year and the summary of costs and revenues of operations that the applicant is able to determine her own profit level to a fixed level at the level of operating profit. In view of the above, the parties apply a mechanism for determining profitability, including the correction of mutual settlements. The necessary adjustment of profitability to a certain level can take place only after an annual summary of costs and revenues of operations, with detailed data on the applicant’s actual profitability only available at the end of the year or even afterwards. Given that the operating result obtained by the applicant is subject to verification and correction at the end of a given financial year, in practice it is possible that the correcting invoice ( or other document confirming the reasons for the correction ), which respectively increases or decreases the value of remuneration for sold goods or services a) will be issued after the end of the year, or b) will be issued during the ( last day ) of the financial year. Against the background, the company asked whether the year end adjustments should be taken into account for the accounting period in which those adjustment-invoices or documents were issued? In the company´s opinion, the current provisions clearly indicate that adjustments to revenues or tax deductible costs should be made in the accounting period in which the corrective invoice was issued or received or – in the absence of an invoice – another document confirming the reasons for the correction. Only in the event that the correction is caused by a calculation error or other obvious mistake, should the correction be made in the accounting period in which the original income or tax deductible expenses were recorded. The tax authorities considered the position presented by the applicant to be incorrect. As a rule, the moment when the revenue related to business activity arose shall be considered the date of “delivery”. Decision of the Administrative Court The court notes that the applicant applies the profitability adjustment mechanism to a certain level. Under international tax law, the concept of compensating adjustments has developed, which should be understood as a correction by which the taxpayer himself adjusts the price ( income ) in transactions with related entities to a level that in his opinion corresponds to market value, even if the price differs from the amount, which was actually settled between the related parties. In the court’s view, the essence of the mechanism of adjusting the profitability presented by the applicant to the previously assumed level does not manifest itself in the fact that the price of specific , individualized products sold earlier is changed. As a result of its application, the applicant’s profitability level is equalized to the level assumed in advance. The purpose of the correction is not to modify the prices at which specific, individual transactions were carried out during the tax year. Given the specifics of the profitability adjustment described by the applicant, the court concludes that this adjustment should be considered as a new event resulting from an agreement stating that the applicant, in connection with the business activity, should achieve the assumed level of profitability appropriate for the subsidiaries function in the group. The event giving rise to the margin to the previously assumed amount is not due in any way to the incorrect recognition of the amount of revenue previously achieved by the applicant. In this situation, according to the court, the authority did not correctly answer the question aimed at determining the moment at which revenue adjustment should have been made. However, the authority correctly stated that in the facts presented in the application there are no grounds to reduce the value of previously recognized revenues. The authority also correctly stated that the payment received by the applicant would constitute revenue from the moment they were received. Click here for translation ...

The question in this case was whether or not year-end-adjustments/profit adjustments should be considered part of the market price for acquisition of raw materials used in the production of non-wovens products in the Polish company operating partially under a tax exempt zone. The Court of First Instance had come to the conclusion, that the payment of year end adjustments were part of the price for acquisition of raw materials and thus not tax deductible as related to tax exempt activities. This decision was appealed by the company. The Supreme Administrative Court considered the following : The appeal should be upheld. It should be noted that one of the assumptions of transfer prices is respect for the so-called market price rules. It consists in the fact that when transactions are concluded by related entities , the agreed conditions should be consistent with the conditions applied in comparable transactions by independent entities. The means of implementing this principle are the so-called profitability adjustments. In accordance with the OECD Guidelines (OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017), the compensating adjustment is a correction made by the taxpayer in which the taxpayer himself determines the transfer price for tax purposes , i.e. one that in his opinion corresponds to the arm’s length principle in relation to the transaction concluded with a related entity. The so-called profitability adjustments are therefore an issue closely related to transfer prices . It should be noted that in the legal status in force until the end of 2018, the Corporate Income Tax Act did not contain provisions directly referring to the possibility of applying the transfer price adjustments described above. It was not until January 1, 2019 that the legislator regulated in art. 11e. rules for making periodic adjustments that bring the result or transfer price to market level. This means that at the date of issuing the individual interpretation being the subject of the assessment in these proceedings , it should be considered unacceptable to interpret the tax law in a manner that would lead to the application of the indicated institution despite its non-regulation by the national legislator. In the opinion of the Supreme Administrative Court, in the panel hearing the present case, in the legal status in force on the day of issuing the contested individual interpretation, the profitability adjustment described in the application for its issue, which aimed to guarantee the Seller an adequate level of profitability, had to be qualified as a separate economic event, with all the resulting of this circumstance with tax consequences. Therefore, the position presented in the justification of the judgment of the Court of First Instance, according to which profitability adjustment is not an independent economic event and should be considered in connection with the original purchase or sale of goods or services should be considered incorrect. The case was sent back to the Administrative Court for re-examination under the considerations contained in the ruling. Click here for translation ...

Haier Europe Trading Srl, an Italien subsidiary of the Chinese Haier group (active within home appliances and consumer electronics), challenged an assessment for FY 2007, with which the tax authorities had recovered for taxation the difference with respect to the normal value in relation to transactions of goods with other companies of the group not resident in Italy. An appeal was filed by Haier with the Tax commission which was considered well-founded. The tax authorities then filed an appeal with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court found that the appeal in regards of transfer pricing was well founded and set aside the Judgement of the Tax Commission. Excerpt “3.2 Now, in the case at hand, the CTR affirms that “in the case at hand, as demonstrated, the prices paid are correct and in line with (i.e. lower than) those of the domestic market”. This ruling, moreover, is followed by the observation that the payment of monetary contributions (for € 11,612,189.50) by the Chinese parent company “as a partial adjustment of the transfer prices” was functional “to support its economic results and ensure that the profitability of the taxpayer company corresponds to that of the market”. In other words, on the one hand an apparent congruence of the transfer prices with market values seems to be affirmed – and therefore with an asserted “normal” value, a value which, moreover, is related to purchases from the subsidiary alone on the domestic market and not in free market conditions between independent parties – while on the other hand the achievement of a profitability corresponding to that of the market requires a substantial monetary contribution by the parent company, the allocation and purpose of which remains unclear in practice. 3.3. It follows, therefore, that the appellate court, in assessing the congruity of the transfers, i.e. whether they took place at a normal price, did not take into account that the alleged normality did not take place in a condition of competitiveness and in the absence of any adequate corrective and applied, in reality, a criterion of normalisation “a posteriori”, having considered the price “normal” not because it complied with the criteria of the law but because it was supplemented, subsequently, by the parent company. It must be reiterated, moreover, that it is settled case law that “the ‘normal value’ of the consideration, in transactions between companies belonging to the same multinational group, pursuant to Article 76 (now 110) of Presidential Decree No. 917 of 22 December 1986, must be inferred from the “normal value” of the consideration of the transaction. 917, must be deduced from a comparison that is highly contextualised in qualitative, commercial, temporal and local terms, aimed at identifying an average value from which only the destabilising factor of non-competitiveness must be expunged, so that the price lists or tariffs of the entity that provided the goods or services constitute the priority criteria, and in the absence thereof, the price lists or tariffs of the chambers of commerce and the professional tariffs, taking into account customary discounts, or, in the case of imposed prices, the measures in force, and, finally, in the absence of such elements, the objectively significant and numerically appreciable data, which it is the taxpayer’s burden to attach” (Cass. No. 17953 of 19/10/2012). 3.4. The CTR, therefore, erred in applying Article 110, Paragraph 7, tuir and the criteria set forth in Article 9, Paragraph 3, tuir, as it was totally incomprehensible whether or not the value of the transactions corresponded to the normal value.” Click here for English translation Click here for other translation ...

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 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.” ...

An agreement between a Swedish company, VSM Group AB, and an American distributor, VSM Sewing Inc, stated that the distributor would receive compensation corresponding to an operating margin of three percent. Benchmark studies showed that the agreed compensation was arm’s length. Each year, the company made a year end adjustment to ensure that the pricing was arm’s length. In cases where the outcome was outside the interquartile range, additional invoicing took place so that the operating margin was adjusted to the agreed level. But no additional invoicing took place where the operating margin deviated from what was agreed but was within the interquartile range. The company argued that the pricing was correct as long as the operating margin was within the interquartile range. The company also argued that the agreement between the parties had a different content than the written agreement because the parties consistently applied an understanding of the arrangement that deviated from the written content. The Court of Appeal considered that the wording of the agreement was clearly formulated and lacked room for interpretation. The agreement had also been followed and the compensation had been adjusted to the agreed level in cases where additional invoicing had taken place. The mere fact that the parties deviated from the terms of the written agreement in cases where the level of compensation proved to be within the interquartile range, cannot mean that the agreement is given a different meaning, even if it has been done consistently. The Court of Appeal found that such a deviation would not have been accepted by an independent party and that it was clear that an incorrect pricing had taken place which had a negative effect on the Swedish company’s results. Click here for translation ...

Both the arm’s length price-setting and the arm’s length outcome-testing approaches, as well as combinations of these two approaches, are found among OECD member countries. The issue of double taxation may arise where a controlled transaction takes place between two associated enterprises where different approaches have been applied and lead to different outcomes, for instance because of a discrepancy between market expectations taken into account in the arm’s length price-setting approach and actual outcomes observed in the arm’s length outcome-testing approach. See paragraphs 4.38 and 4.39. Competent authorities are encouraged to use their best efforts to resolve any double taxation issues that may arise from different country approaches to year-end adjustments and that may be submitted to them under a mutual agreement procedure (Article 25 of the OECD Model Tax Convention) ...

VingCard / Elsafe had entered into a distribution agreement with related party AAH Inc. The agreement governed the internal price setting so that AAH Inc was guaranteed an annual net margin of between 1% and 5%. The interval was later changed to 1.1% – 2.9% in line with the conclusions in the internal price study. In question was the use of the Transactional Net Margin Method (TNMM) method in connection with pricing. Judgement of the Court The court pointed out that the US distributor company was left with a limited profit which reflected the company’s role in the transaction, and that it should be possible for group companies to enter into such an a agreement. A transfer pricing model which grants guaranteed return to a foreign distributor (return on sales method with a range) as well as true-up payments including year-end adjustments of the income of the distributor, could be accepted from a Norwegian tax perspective. Click here for translation ...

Spedition Gmbh entered a written agreement – at year-end – to pay management fees to its Dutch parent for services received during the year. The legal question was the relationship between arm’s-length principle as included in double tax treaties and the norms for income assessments in German tax law. The assessment of the tax office claiming a hidden distribution of profits because of the “retrospective” effect of the written agreement, was rejected by the Court. According to the Court the double tax treaty provisions bases the arm’s length standard on amount, rather than on the reason for, or documentation, of a transaction. Click here for English translation Click here for other translation ...

In this case the Italien company, T. S.r.l. is entirely controlled by H. S.A., registered in Switzerland, and is part of the American multinational group T., being its only branch in Italy for the exclusive marketing of its software products (games for personal computers, play station, etc.). T. S.r.l. imports these products through T. Ltd (which is also part of the same multinational group and controlled by the same parent company), which is registered in the United Kingdom and is the sole supplier of the products that are marketed by the Italian branch. On 31st October 2004 (the last day of the financial year), T. S.r.l. posted an invoice that the British company T. Ltd had issued on that date for £ 947,456. This accounts document referred to “Price adjustment to product sold during FY 2003/2004”, and charges the Italian company with adjustment increases to previously applied prices relative to certain software products the company had purchased during the aforesaid financial year. The Inland Revenue challenged the operation claiming it was evasive, and addressed to reducing the taxable profit of the Italian company by the abusive use of transfer pricing. To back up these claims the Inland Revenue emphasised that: • the operation was carried out on the last day of the financial year; • it involved posting an invoice for the adjustment increases to previously applied prices by the English supplier company; • the prices differ from the average purchase price for the same products by T. S.r.l.. Supreme Court established that: “(…)the application of transfer pricing regulations does not fight the concealment of the price, which is a form of evasion, but the manoeuvres that affect an evident price, allowing the surreptitious transfer of profits from one country to another, which has a tangible effect on the applicable tax regime. Therefore, given these essential requirements it must be considered that this regulation constitutes – according to the more widespread interpretation in case law in this court – an anti-avoidance provision (…)”. The infringement of an anti-avoidance provision means that the burden of proof for recourse to this premise of fact, in principle is the responsibility of the Inland Revenue office that intends carrying out the controls. Therefore, the Supreme Court felt that: “(…) when determining company income, or rather, the problem of sharing the intra-group costs, the question of pertinence must be considered as well as the existence of the declared costs further to charging for a service or asset transfer to the subsidiary from the holding, or another company that is controlled by the same company (…). The burden for demonstrating the existence and pertinence of these negative income items, and, as in the case in question, it concerns costs derived from services or assets loaned or transferred by a foreign holding to an Italian subsidiary, each element that enables the inland revenue to verify the arm’s length value of the relative costs – further to the so-called principle of sphere of influence– can only be the responsibility of the taxpayer”. Transfer pricing legislation is included among the anti-avoidance dispositions, as it is addressed to fight the transfer of income from one country to another by “manipulating” the intra-group costs. Consequently, the burden of proof that there are the premises of fact of evasion lies, mainly, with the Inland Revenue, which should prove the grounds for the adjustment, or the deviation from the applied cost with respect to the arm’s length value. However, as the sharing of intra-group costs also involves the matter of whether the costs exist and are pertinent, the burden of proof of the costs to the company’s business lies with the taxpayer according to the Supreme Court. The Italien Supreme Court have drawn a distinction between cases regarding income and cases regarding expenses. In cases regarding income the burden of proof lies with the tax authorities. In cases regarding costs, the burden of proof lies with the taxpayer. Click here for English translation Click here for other translation ...

Cadence is a US group active in the business of electronic design automation. Cadence Taiwan provided R&D services to Cadence US. In 2003, based on a transfer pricing study, Cadence US concluded that the service fees that it had paid to Cadence Taiwan in 2002 were too high and therefore instructed Cadence Taiwan to book a significant sales allowance amount in it’s 2003 and 2004 accounts. A debit note was send to Cadence Taiwan and a tax deduction was claimed. Cadence brought the case to court The Supreme Administrative court rejected Cadence’s appeal. The service agreement between Cadence US and Cadence Taiwan did not contain any provision for a retroactive adjustment of the service fees. The debit notes from Cadence US were not signed off by Cadence Taiwan to acknowledge its agreement to the adjustments. Therefore, the subsequent sales allowances booked by Cadence Taiwan were purely for the purpose of allocating profits without any economic substance, and thus could not be allowed. Click here for English Translation ...