Category: Arm’s Length Principle

The authoritative statement of the arm’s length principle as used in transfer pricing is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries.

Article 9 provides: [Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

The analysis required to apply the arm’s length principle on controlled transactions is referred to in the transfer pricing guidelines as a comparability analysis. See TPG 1.6.

Tanzania vs Atlas Copco Tanzania Ltd., August 2020, Court of Appeal, Case No 167 of 2019, TZCA 317

Tanzania vs Atlas Copco Tanzania Ltd., August 2020, Court of Appeal, Case No 167 of 2019, TZCA 317

Atlas Copco Tanzania Ltd. is part of Atlas Copco Group, a conglomerate of multinational companies headquartered in Sweden. The group produces and sell compressors, vacuum solutions, generators, pumps, power tools etc. Apart from supplying generators in Tanzania on its own, Atlas Tanzania sold generators as an agent of its sister companies which had no presence in the country. For the latter type of sales, known as “indent sales”, Atlas Tanzania earned a commission. Being oblivious that the commission income attracted Value Added Tax (“VAT”), Atlas Tanzania did not file any VAT returns on indent sales until its external auditors, KPMG, informed it of the requirement. By then, Atlas Tanzania had posted in its sales ledgers commission income amounting to TZS. 134,413,682,281.00 for FY 2007 and 2008. Atlas Tanzania then accounted for VAT on the commission for the years 2007 and 2008 amounting to TZS. 5,692,574,000.00, ... Continue to full case
Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-A

Norway vs A/S Norske Shell, May 2020, Supreme Court, Case No HR-2020-1130-A

A / S Norske Shell runs petroleum activities on the Norwegian continental shelf. By the judgment of the Court of Appeal in 2019, it had been decided that there was a basis for a discretionary tax assessment pursuant to section 13-1 of the Tax Act, based on the fact that costs for research and development in Norway should have been distributed among the other group members. According to section 13-1 third paragraph of the Norwegian Tax Act the Norwegian the arms length provisions must take into account OECD’s Transfer pricing guidelines. And according to the Court of Appeal the Petroleum Tax Appeals Board had correctly concluded – based on the fact – that this was a cost contribution arrangement. Hence the income determination then had to be in accordance with what follows from the OECD guidelines for such arrangements (TPG Chapter VIII). The question before ... Continue to full case
European Commission vs Belgium and Ireland, February 2019, General Court Case No 62016TJ0131

European Commission vs Belgium and Ireland, February 2019, General Court Case No 62016TJ0131

In 2016, the Commission requested that Belgium reclaim around €700 million from multinational corporations in what the Commission found to be illegal state aid provided under the Belgian “excess profit” tax scheme. The tax scheme allowed selected multinational corporations to exempt “excess profits” from the tax base when calculating corporate tax in Belgium. The European Court of Justice concludes that the Commission erroneously considered that the Belgian excess profit system constituted an aid scheme and orders that decision must be annulled in its entirety, in as much as it is based on the erroneous conclusion concerning the existence of such a scheme. For state aid to constitute an ‘aid scheme’, it must be awarded without requiring “further implementing measures.” According to court, “the Belgian tax authorities had a margin of discretion over all of the essential elements of the exemption system in question.” Belgium could ... Continue to full case
India vs. L.G. Electronic India Pvt. Ltd., January 2019, TAX APPELLATE TRIBUNAL, Case No. ITA No. 6253/DEL/2012

India vs. L.G. Electronic India Pvt. Ltd., January 2019, TAX APPELLATE TRIBUNAL, Case No. ITA No. 6253/DEL/2012

LG Electronic India has incurred advertisement and AMP expenses aggregating to Rs.6,89,60,79,670/- for the purpose of its business. The tax authorities undertook benchmarking analysis of AMP expenses incurred by LG Electronic India applying bright line test by comparing ratio of AMP expenses to sale of LG Electronic India with that of the comparable companies and holding that any expenditure in excess of the bright line was for promotion of the brand/trade name owned by the AE, which needed to be suitably compensated by the AE. By applying bright line test, the tax authorities compared AMP expenditure incurred by LG Electronic India as percentage of total turnover at 8.01% with average AMP expenditure of 4.93% of comparable companies. Since AMP expenses incurred by LG Electronic India  as percentage of sales was more than similar percentage for comparable companies, LG Electronic India had incurred such AMP expenditure ... Continue to full case
Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case No SKM2018.627.HR and SKM2018.635.HR

Denmark vs Water Utility Companies, November 2018, Danish Supreme Court, Case No SKM2018.627.HR and SKM2018.635.HR

These two triel cases concerned the calculation of the basis for tax depreciation (value of assets) in a number of Danish Water utility companies which had been established in the years 2006 – 2010 in connection with a public separation of water supply and wastewater utility activities. The valuation of the assets would form the basis for the water utility companies’ tax depreciation. The transfer was controlled and subject to Danish arm’s length provisions. The Supreme Court found that the calculation method (DCF) used by the Danish Tax Agency did not provide a suitable basis for calculating the tax value of the transferred assets. The Court stated that for water supply and wastewater treatment it is true that the companies are legaly obligated to provide these facilities and that the governmental regulation of the activity – the “rest in itself” principle – means that no income can be ... Continue to full case
Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi. The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length. However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines. Eastern Produce Limited complained to the High Court and argued that: “The decision and proceeding by MRA to use OECD (Organisation for Economic Cooperation and Development) guidelines whilst performing transfer pricing analysis and as a basis for effecting amendments to tax assessments was illegal. CONSIDERATIONS OF THE COURT, EXCERPS “With regard to transfer pricing in 2014, the law was contained in Section 127A. Section 127A provides as follows: “where a person who is not resident in Malawi carries ... Continue to full case
Poland vs "Blueberry Factory" Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income ... Continue to full case
Brazil vs Eli Lilly, April 2018, CARF Case No 1302-002-725F

Brazil vs Eli Lilly, April 2018, CARF Case No 1302-002-725F

This case concerns imports from related companies and use of the RPM method. Click here for translation Brazil vs Eli Lilly 11 april 2018 CARF Case No 1302-002-725F ... Continue to full case
Spain vs EPSON IBÉRICA S.A.U., Feb 2018, High Court, Case No 314/2016

Spain vs EPSON IBÉRICA S.A.U., Feb 2018, High Court, Case No 314/2016

EPSON IBÉRICA S.A.U. had deducted the full employee pension costs of a CEO that had worked both for the HQ in the Netherlands and the local Spanish Company. The tax authorities issued an assessment where 90% of the pension costs had been disallowed in regards to the taxable income in Spain. The disallowed percentage of the costs was based on the CEO’s salary allocation between Netherlands (90%) and Spain (10%), cf. the agreement entered between the parties. EPSON IBÉRICA S.A.U. brought the assessment to the Courts. Judgement of the Court The High Court dismissed the appeal of EPSON IBÉRICA S.A.U. and decided in favour of the tax authorities. Excerpt “…this Chamber shares and endorses the detailed reasoning of the TEAC starting from a fundamental fact, that if the contract of 25 June 2004, firmado between Mr. Humberto and Sek, by which the latter was appointed as Riji ... Continue to full case
Norway vs. Exxonmobil Production Norway Inc., January 2018, Lagsmanret no LB-2016-160306

Norway vs. Exxonmobil Production Norway Inc., January 2018, Lagsmanret no LB-2016-160306

An assessment was issued by the Norwegian tax authorities for years 2009 2010 and 2011 concerning the interest on a loan between Exxonmobil Production Norway Inc. (EPNI) as the lender and Exxon Mobile Delaware Holdings Inc. (EMDHI) as the borrower. Both EPNI and EMDHI are subsidiaries in the Exxon Group, where the parent company is domiciled in the United States. The loan agreement between EPNI and EMDHI was entered into in 2009. The loan had a drawing facility of NOK 20 billion. The agreed maturity was 2019, and the interest rate was fixed at 3 months NIBOR plus a margin of 30 basis points. The agreement also contained provisions on quarterly interest rate regulation and a interest adjustment clause allowing the lender to adjust the interest rate on changes in the borrower’s creditworthiness. The dispute concerns the margin of 30 basis points and the importance ... Continue to full case
Europe vs Hamamatsu, Dec 2017, European Court of Justice, Case No C-529-16

Europe vs Hamamatsu, Dec 2017, European Court of Justice, Case No C-529-16

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 ... Continue to full case
France vs Office Depot, December 2017, CE, Case No. 387975

France vs Office Depot, December 2017, CE, Case No. 387975

Re-invoicing to a Office Depot France, by the controlling US company Office Depot Inc, of a part of the cost of an audit service, as it related to the internal control procedures of the French company. Office Depot France was audited for the period from 28 December 2003 to 31 December 2005, after which the administration notified it of a VAT reminder and a withholding tax on the re-invoicing by the US company Office Depot Inc. of a portion of the cost of an audit service relating to its own internal control procedures. The cost was not necessary for the operation of Office Depot France and thus not deductible. The charge in question corresponded to an indirect transfer of profits abroad. Click here for translation France vs Office Depot_13_12_2017_387975_Inédit_au_recueil_Lebon ... Continue to full case

July 2017: ATO guidance on related party financing arrangements

The Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach to the taxation outcomes associated with a ‘financing arrangement’, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into with a cross border related party. Such an arrangement, transaction or contract is referred to in this Guideline as a ‘related party financing arrangement’. This Guideline does not cover financing arrangements characterised as equity in accordance with Division 974 of the ITAA 1997. The framework in these Guideline and the accompanying schedules are used to assess risk and tailor engagement according to the features of the related party financing arrangement, the profile of the parties to the related party financing arrangement and the choices and behaviours of the group. The tax risk associated with the related party financing arrangement is assessed having ... Continue to full case

December 2016: EU Study on Comparable Data used for transfer pricing

The Study on Comparable data used for Transfer Pricing in the EU provides an overview and assessment of the availability and quality of market data ('comparables') used for transfer pricing purposes in the EU. Furthermore it assesses and evaluates situations characterising the lack and/or non-reliability of comparable data as well as the situation for pan-European comparable searches ... Continue to full case
US-vs-Analog-Devices-Subsidiaries-Nov-22-2016-United-State-Tax-Court-147-TC-no-15

US-vs-Analog-Devices-Subsidiaries-Nov-22-2016-United-State-Tax-Court-147-TC-no-15

The US Tax Court held that a closing agreement did not result in retroactive indebtedness. Analog Devices Corp. repatriated cash dividends from a foreign subsidiary and claimed an 85% dividends received deduction for FY 2005, cf. US regs § 965. No related party indebtedness was reported by the company which would have limited the deduction available. During the audit of Analog Devises Corp. the IRS claimed that a 2 pct. royalty from the subsidiary should be increased to 6% for FY 2001-2005. This was accepted and Analog Devises Corp. entered into a closing agreement with the IRS. The US Tax Court held that the closing agreement concerning accounts receivable, cf. the increased royalty, was not related party indebtedness for the purposes of § 965. US vs Analog Devices & Subsidiaries, Nov 22 2016, United State Tax Court 147 TC no 15 ... Continue to full case
Australia vs. Tech Mahindra Limited, September 2016, Federal Court, Case no. 2016 ATC 20-582

Australia vs. Tech Mahindra Limited, September 2016, Federal Court, Case no. 2016 ATC 20-582

This case is about the interpretation of Article 7 (the business profits rule) and Article 12 (the royalties provision) of the Agreement between the Government of Australia and the Government of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. The issue was misuse of the provision in article 12 about cross-border royalties and article 7 about business profits. The case was brought before the Supreme Court, where special leave to appeal was refused 10 March 2017. Australia-vs-TECH-MAHINDRA-LIMITED-September-2016-Federal-Court-case-no-2016-ATC-20-582 ... Continue to full case
US vs. Boston Scientific Corporation, July 2016

US vs. Boston Scientific Corporation, July 2016

Boston Scientific Corporation entered into a Stipulation of Settled Issues with the IRS that is intended to resolve all disputes related to transfer pricing issues for Guidant Corporation’s 2001 through 2006 tax years and Boston Scientific’s 2006 and 2007 tax years. The Stipulation of Settled Issues is contingent upon the IRS Office of Appeals applying the same basis of settlement to all transfer pricing issues for Boston Scientific’s 2008 through 2010 tax years. If finalized, the settlement would resolve substantially all aspects of the controversy, and Boston Scientific would make net tax payments to the IRS of approximately $275 million. US-vs.-Boston-Scientific-Corp ... Continue to full case
Sweden vs. Nobel Biocare Holding AB, HFD 2016 ref. 45

Sweden vs. Nobel Biocare Holding AB, HFD 2016 ref. 45

In January 2003, a Swedish company, Nobel Biocare Holding AB, entered into three loan agreements with its Swiss parent company. The loans had 15, 25 and 30 maturity respectively, with terms of amortization and with a variable interest rate corresponding to Stibor plus an interest rate margin of 1.75 percent points for one of the loans and 1.5 percent points for the other two loans. The same day the parent company transfered the loans to a sister company domiciled in the Netherlands Antilles. In June 2008 new loan agreements was signed. The new agreements lacked maturity and amortization and interest rates were stated in accordance with the Group’s monthly fixed interest rates. Amortization continued to take place in accordance with the provisions of the 2003 agreement, and the only actual change in relation to those agreements consisted in raising the interest rates by 2.5 percent points. These loans were transferred ... Continue to full case
Netherlands vs X BV, June 2016, Supreme Court, Case No 2016:1031 (14/05100)

Netherlands vs X BV, June 2016, Supreme Court, Case No 2016:1031 (14/05100)

In 1996, X BV acquired the right to commercially exploit an intangible asset (Z) for a period of 15 years for $ 63.5 million. X BV then entered a franchise agreements with group companies for the use of Z, including a Spanish PE of Y BV. According to the franchise agreement Y BV paid X BV a fee. According to X, in the calculation of the loss carry forward in Spain the franchise fee should not be fully attributed to the PE in Spain due to existing rules on internal roaylties. X states that the loss carry forward amounts to € 13.1 million. The tax authorities increases the loss carry forward with the fee paid to X, for the use of Z by the Spanish PE. According to the tax authorities, the loss carry forward is € 16.1 million. The District Court finds that no ... Continue to full case
Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

The Italien company had qualified a funding arrangement in an amount of Lira 500 billion classified by the parties as a non-interest-bearing contribution reserved for a future capital increase. Judgement of the Supreme Court The Italian Supreme Court found that intra-group financing agreements are subject to transfer pricing legislation and that non-interest-bearing financing is generally not consistent with the arm’s-length principle. The court remanded the case to the lower court for further consideration. “”In conclusion, with regard to appeal r.g. no. 12882/2008, the first plea should be upheld, the second absorbed, and the third and fourth declared inadmissible; the judgment under appeal should be set aside in relation to the upheld plea and the case referred to another section of the Regional Tax Commission of Lombardy, which will comply with the principle of law set out in paragraph 3.5…” In regards to the non-interest-bearing financing ... Continue to full case
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