Japan vs C Uyemura & Co, Ltd, November 2017, Tokyo District Court, Case No. 267-141 (Order No. 13090)

Category: Intangibles - Goodwill Know-how Patents, Royalty and License Payments, Transfer Pricing Methods | Tag: , , , , , , ,
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C Uyemura & Co, Ltd. is engaged in the business of manufacturing and selling plating chemicals and had entered into a series of controlled transactions with foreign group companies granting licenses to use intangibles (know-how related to technology and sales) – and provided technical support services by sending over technical experts. The company had used a CUP method to price these transactions based on “internal comparables”.

The tax authorities found that the amount of the consideration paid to C Uyemura & Co, Ltd for the licenses and services had not been at arm’s length and issued an assessment where the residual profit split method was applied to determine the taxable profit for the fiscal years 2000 – 2004.

C Uyemura & Co, Ltd disapproved of the assessment. The company held that it was inappropriate to use a residual profit split method and that there were errors in the calculations performed by the tax authorities.

Judgement of the Court

The Court dismissed the appeal of C Uyemura & Co, Ltd. and affirmed the assessment made by the Japanese tax authority.

On company’s use of the CUP method the Court concluded that there were significant differences between the controlled transactions and the selected “comparable” transactions in terms of licences, services and circumstances in which the transactions were took place. Therefore the CUP method was not the best method to price the controlled transactions.

The Court recognised that C Uyemura & Co, Ltd had intangible assets created by its research and development activities. The Court also recognised that the Taiwanese, Malaysian and Singaporean subsidiaries had created intangible assets by penetrating regional markets and cultivating and maintaining customer relationships.

The Court found the transactions should be aggregated and that the price should be determined for the full packaged deal – not separately for each transaction.

 

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Tokyo 24 November 13090





Related Guidelines

  1. TPG2022 Chapter II paragraph 2.150Under a contribution analysis, the relevant profits, which are the total profits from the controlled transactions under examination, are divided between the associated enterprises in order to arrive at a reasonable approximation of the division that independent enterprises would have achieved from engaging...
  2. TPG2022 Chapter II paragraph 2.125The accurate delineation of the actual transaction will be important in determining whether a transactional profit split is potentially applicable. This process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to...
  3. TPG2022 Chapter II Annex II example 1365. Company A, resident in Country A, is the parent company of Retail Group, an MNE group engaged in the retail fashion industry. Over the years, Company A has developed know-how and has enhanced the value of the trademark and associated goodwill of...
  4. TPG2022 Chapter II paragraph 2.124It is sometimes argued that a transactional profit split method is rarely used among independent enterprises, and thus its application in controlled transactions should be similarly rare. Where such a method is determined to be the most appropriate, this should not be a...
  5. TPG2022 Chapter II paragraph 2.129It may also be relevant to consider industry practices. For instance, if information is available that independent parties do commonly use profit splitting approaches in similar situations, careful consideration should be given to whether the transactional profit split method may be the most...
  6. TPG2022 Chapter II paragraph 2.149There are a number of approaches to the application of the transactional profit split method, depending on the characteristics of the controlled transactions, and the information available. As has been described above, the method seeks to split the relevant profits from controlled transactions...
  7. TPG2022 Chapter II paragraph 2.144While the transactional profit split method can be applied in cases where there are no uncontrolled comparables, information from transactions between independent parties may still be relevant to the application of the method, for example to guide the splitting of relevant profits (see...
  8. TPG2022 Chapter II paragraph 2.64The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12). Thus, a transactional net...
  1. Additional guidance on the attribution of profits to permanent establishmentsThe OECD has released additional guidance on the attribution of profits to permanent establishments. This additional guidance sets out high-level general principles for the attribution of profits to permanent establishments arising under Article 5(5), in accordance with applicable treaty provisions, and includes examples...
  2. EU JTPF, March 2017, Report on the Use of Comparables in the EUIn March 2017 the JTPF agreed the Report on the Use of Comparables in the EU. The report establishes best practices and pragmatic solutions by issuing various recommendations for both taxpayers and tax administrations in the EU and aims at increasing in practice...

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