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.

Italy vs Vincenzo Zucchi Spa, May 2022, Supreme Court, Cases No 13718/2022

Italy vs Vincenzo Zucchi Spa, May 2022, Supreme Court, Cases No 13718/2022

Vincenzo Zucchi spa is an Italian company that operates in the textile sector. Following an audit an assessment was issued related to various controlled transaktions – deductions for bad debt, deductions for costs, lack of income on a loan, income from sale of goods to foreign subsidiaries, cost of goods and services purchased from subsidiaries in non EU countries, costs of employees VAT etc. The adjustment was partially upheld and partially dismissed by the Court of Appeal. An appeal and cross appeal was then filed with the Supreme Court by the tax authorities and Vincenzo Zucchi. Among the objections in the cross appeal filed by Vincenzo Zucchi was a claim stating that transfer pricing rules were not applicable in the case since the group was using global tax consolidation. Judgement of the Supreme Court The Supreme Court upheld the second plea in the main appeal ... Continue to full case
Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

By judgment of 13 March 2020, the Provincial Administrative Court upheld the complaint filed by K.O. and revoked a decision issued by the tax authorities on the determination of the amount of the tax liability resulting from a transfer of shares between K.O. and a related party in 2016. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that Provincial Administrative Court incorrectly had concluded that the nominal value of shares taken up by a taxpayer is not subject to market mechanisms and, therefore, the authority should not question the revenue thus generated. According to the tax authorities the taxpayer effected a transaction with a related entity of which it was the owner and determined without justification a contribution in-kind disproportionately high in relation to the shares acquired in the related entity, while the authority, taking ... Continue to full case
Poland vs A. Sp. z o. o., February 2022, Supreme Administrative Court, Case No II FSK 1475/19

Poland vs A. Sp. z o. o., February 2022, Supreme Administrative Court, Case No II FSK 1475/19

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp ... Continue to full case
Belgium, December 2021, Constitutional Court, Case No 184/2021

Belgium, December 2021, Constitutional Court, Case No 184/2021

By a notice of December 2020, the Court of Appeal of Brussels referred the following question for a preliminary ruling by the Constitutional Court : “ Does article 207, second paragraph, ITC (1992), as it applies, read together with article 79 ITC (1992), in the interpretation that it also applies to abnormal or gratuitous advantages obtained by a Belgian company from a foreign company, violate articles 10, 11 and 172 of the Constitution? “. The Belgian company “D.W.B.”, of which Y.S. and R.W. were the managers, was set up on 4 October 2006 by the Dutch company “W.”. On 25 October 2006, the latter also set up the Dutch company “D.W.” On 9 November 2006, bv “W.” sold its shareholdings in a number of subsidiaries of the D.W. group to its subsidiary nv ” D.W. “. It was agreed that 20 % of the selling ... Continue to full case
Poland vs R.B.P. (P.) Sp. z o.o.., August 2021, Supreme Administrative Court, Case No II FSK 3830/18

Poland vs R.B.P. (P.) Sp. z o.o.., August 2021, Supreme Administrative Court, Case No II FSK 3830/18

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 ... Continue to full case
France vs SA Compagnie Gervais Danone, June 2021, CAA, Case No. 19VE03151

France vs SA Compagnie Gervais Danone, June 2021, CAA, Case No. 19VE03151

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 ... Continue to full case
Uganda vs Bondo Tea Estates Ltd. March 2021, Tax Appeals Tribunal, Case no. 65 of 2018

Uganda vs Bondo Tea Estates Ltd. March 2021, Tax Appeals Tribunal, Case no. 65 of 2018

In this ruling Bondo Tea Estates Ltd. challenged an adjustment made by the tax authorities to the price at which green leaf tea was supplied by the applicant to Kijura Tea Company Limited, a related party. The ruling also concerns disallowance of an assessed loss of Shs. 220,985,115. Bondo Tea Estates Ltd. is an out grower of tea which it supplies to an associated company, Kijura Tea Company Limited. In 2018, the tax authorities conducted an audit for FY 2016/2017 which purportedly revealed that the company had under declared its sales (price of 320 compared to range of 500-700) and that it had unreconciled retained earnings and current liabilities. On that basis the tax authorities adjusted the price of the related party transactions and issued an assessment of Shs. 544,409,110 of which Shs. 174,409,650 was principal income tax, Shs. 348,819,302 penalty and Shs. 20,929,158 interest ... Continue to full case
Norway vs New Wave Norway AS, March 2021, Court of Appeal, Case No LB-2020-10664

Norway vs New Wave Norway AS, March 2021, Court of Appeal, Case No LB-2020-10664

New Wave Norway AS is a wholly owned subsidiary of the Swedish New Wave Group AB. The group operates in the wholesale market for sports and workwear and gift and promotional items. It owns trademark rights to several well-known brands. The sales companies – including New Wave Norway AS – pay a concept fee to New Wave Group AB, which passes on the fee to the concept-owning companies in the Group. All trademark rights owned by the group are located in a separate company, New Wave Group Licensing SA, domiciled in Switzerland. For the use of the trademarks, the sales companies pay royalties to this company. There is also a separate company that handles purchasing and negotiations with the Asian producers, New Wave Group SA, also based in Switzerland. For the purchasing services from this company, the sales companies pay a purchasing fee (“sourcing fee”) ... Continue to full case
Indonesia vs PT Nanindah Mutiara Shipyard Ltd, December 2020 Supreme Court, Case No. 4446/B/PK/Pjk/2020

Indonesia vs PT Nanindah Mutiara Shipyard Ltd, December 2020 Supreme Court, Case No. 4446/B/PK/Pjk/2020

PT Nanindah Mutiara Shipyard Ltd reported losses for FY 2013. The tax authorities issued an assessment where the income of the company was increased by a substantial amount referring to applicable transfer pricing regulations. Nanindah Mutiara Shipyard Ltd filed a complaint with the Tax Court, but the Tax Court upheld the assessment. An application for judicial review was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favor of Nanindah Mutiara Shipyard Ltd. The Tax Court had erred in assessing facts, data, evidence and application of the law. The decision of the Tax Court was canceled and the petition for judicial review was granted. Losses reported by Nanindah Mutiara Shipyard Ltd were not due to non-arm’s length pricing, but rather exceptional circumstances that occurred at the local company in the years following 2010. Excerpts: ” … a. that the reasons ... Continue to full case
Spain vs JACOBS DOUWE EGBERTS ES, SLU., November 2020, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 - ECLI:EN:TS:2020:3730

Spain vs JACOBS DOUWE EGBERTS ES, SLU., November 2020, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 – ECLI:EN:TS:2020:3730

At issue in this case was whether or not it is possible to regularize transactions between companies by directly applying art. 9.1 of DTA between Spain and French, without resorting to the transfer pricing methods provided for in local Spanish TP legislation. Application of article 9 and taxing according to local tax legislation is often a question of determining the arm’s length price. But sometimes other rules will apply regardless of the value – for instance anti avoidance legislation where the question is not the price but rather the justification and substance of the transaction. In the present case the arm’s length price of the relevant transaction was not discussed, but rather whether or not transaction of shares had sufficient economic substance to qualify for application of Spanish provisions for tax depreciation of the shares in question. The National Court understood that the share acquisition ... Continue to full case
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
Bulgaria vs "Beltart Manufacturing", May 2020, Supreme Administrative Court, Case No 5756

Bulgaria vs “Beltart Manufacturing”, May 2020, Supreme Administrative Court, Case No 5756

“Beltart Manufacturing” is a Bulgarian toll-manufacturer of of clothing accessories – trouser belts etc. – and is a member of the German Beltart Group. The remuneration for the manufactoring services provided to the group for 2013 and 2014 had been lower than for previous years. According to the company this was due to changes to the contractual and economic conditions and discounts. Following an audit the tax authorities came to the conclusion that the remuneration for 2013 and 2014 should be increased to the same level as for the previous years.  According to the tax authorities, the additional income had been determined by application of the CUP method. An appeal was filed by Beltart Manufacturing with the Administrative court, where the assessment was set aside. According to the court the tax authority had  not analyzed the economic situation for the period 2011 and 2012, and then for ... Continue to full case
India vs Gulbrandsen Chemicals Ltd., February 2020, High Court, Case No 751 of 2019

India vs Gulbrandsen Chemicals Ltd., February 2020, High Court, Case No 751 of 2019

Gulbrandsen Chemicals manufactures chemicals for industrial customers in the petrochemical and pharmaceutical industry. The Indian Subsidiary, Gulbrandsen India also sold these products to its affiliated enterprises, namely Gulbrandsen Chemicals Inc, USA, and Gulbrandsen EU Limited. In regards of the controlled transactions, the tax authorities noticed that Gulbrandsen India had shifted from use of the internal CUP method to pricing based on the Transactional Net Margin Method (TNMM). The tax authorities were of the view that, given the facts of the case, the internal CUP was the most appropriate method. It was noted that Gulbrandsen India had sold 40% of its products to the associated enterprises, and earned a margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the prior year and earning margin of PBIT/Cost at 3.26%. Following a decision of the Tax Tribunal, where the assessment of the ... Continue to full case
Poland vs A. Sp. z o.o., March 2019, Administrative Court, Case No I SA/Rz 1178/18

Poland vs A. Sp. z o.o., March 2019, Administrative Court, Case No I SA/Rz 1178/18

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp ... 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