Category: Burden of Proof

The legal issue of whether the burden of proof for arm’s length pricing of controlled transactions rests with the tax authorities or the taxpayer.

In most jurisdictions, the tax administration bears the burden of proof both in its own internal dealings with the taxpayer (e.g. assessment and appeals) and in litigation. In some of these countries, the burden of proof can be reversed, allowing the tax administration to estimate taxable income, if the taxpayer is found not to have acted in good faith, for example, by not cooperating or complying with reasonable documentation requests or by filing false or misleading returns. In other countries, the burden of proof rests on the taxpayer.

Australia vs Glencore, November 2020, Full Federal Court of Australia, Case No FCAFC 187

Australia vs Glencore, November 2020, Full Federal Court of Australia, Case No FCAFC 187

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the ... Continue to full case
Denmark vs. Shoe Group A/S , October 2020, High Court, Case No SKM2020.397.VLR

Denmark vs. Shoe Group A/S , October 2020, High Court, Case No SKM2020.397.VLR

Shoe Group A/S is the parent company of a multinational group, whose main activity is the design, development, production and sale of shoes. The group was founded in 1963, and has since gone from being a small Danish shoe manufacturer to being a global player with about 20,000 employees and with sales and production subsidiaries in a large number of countries. Shoe Group A/S purchased goods from both internal and external producers, and the case concerned whether transactions with it’s foreign subsidiaries had been conducted at arm’s length terms. Shoe Group A/S had prepared two sets of two transfer pricing documentation, both of which were available when the tax authorities issued its assessment. The transfer pricing documentation contained a review of the parent company’s pricing and terms in relation to both internal and external production companies, and in addition, the transfer pricing documentation contained a ... Continue to full case
Denmark vs. Adecco A/S, June 2020, Supreme Court, Case no BS-42036/2019-HJR

Denmark vs. Adecco A/S, June 2020, Supreme Court, Case no BS-42036/2019-HJR

The question in this case was whether royalty payments from a loss making Danish subsidiary Adecco A/S (H1 A/S in the decision) to its Swiss parent company Adecco SA (G1 SA in the decision – an international provider of temporary and permanent employment services active throughout the entire range of sectors in Europe, the Americas, the Middle East and Asia – for use of trademarks and trade names, knowhow, international network intangibles, and business concept were deductible expenses for tax purposes or not. In  2013, the Danish tax authorities (SKAT) had amended Adecco A/S’s taxable income for the years 2006-2009 by a total of DKK 82 million. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover ... Continue to full case
France vs SAS Groupe Lagasse Europe, January 2020, CCA de VERSAILLES, Case No. 18VE00059 18VE02329

France vs SAS Groupe Lagasse Europe, January 2020, CCA de VERSAILLES, Case No. 18VE00059 18VE02329

A French subsidiary, SAS Groupe Lagasse Europe, of the Canadian Legasse Group had paid service fees to another Canadian group company, Gestion Portland Vimy. The French tax authorities held that the basis for the payments of service fees had not been established, and that there was no benefit to the French subsidiary. The payments constituted an indirect transfer of profits within the meaning of the ‘article 57 of the general tax code; Excerps from the judgement of the Court: “11. Under the terms of article 57 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “For the establishment of income tax due by the companies which are dependent or have control of companies located outside of France, the profits indirectly transferred to the latter, either by increasing or decreasing the purchase or sale prices, or by ... Continue to full case
Australia vs Glencore, September 2019, Federal Court of Australia, Case No FCA 1432

Australia vs Glencore, September 2019, Federal Court of Australia, Case No FCA 1432

Glencore Australia (CMPL) sold copper concentrate produced in Australia to its Swiss parent, Glencore International AG (GIAG). The tax administration found, that the price paid by Glencore International AG to Glencore Australia for the copper concentrate in the relevant years according to a price sharing agreement was less than the price that might reasonably be expected to have been paid in an arm’s length dealing between independent parties. ‘The amended assessments included in the taxpayer’s assessable income additional amounts of $49,156,382 (2007), $83,228,784 (2008) and $108,675,756 (2009) referrable to the consideration which the Commissioner considered would constitute an arm’s length payment for the copper concentrate sold to Glencore International AG in each of the relevant years. The Federal Court of Australia found in favor of Glencore. “Accordingly I find that the taxpayer has established that the prices that CMPL was paid by GIAG for the ... Continue to full case

Israel vs Broadcom, Aug 2019, Israeli Supreme Court, Case No 2454/19

In 2012 Broadcom Corporation acquired all the shares of Broadlight Inc, another US corporation which owned a subsidiary in Israel, for around $200 million. Three months later, the subsidiary in Israel sold its IP to a group company for $59.5m and then an agreement was entered according to which the subsidiary would supply R&D, marketing and support services to the other group companies for a cost plus fee. Based on these facts the Israeli tax Authorities issued an assessment equivalent to $168.5m. The tax authorities found that the full value of the company in Israel had been transferred. The tax assessment was brought to court where Broadcom claimed that the tax authorities had re-characterised the transaction and that the onus of proof was on the tax authorities to justify the value of $168.5m. First the District Court held that all the values in the Israeli ... Continue to full case
Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18

Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18

The Absolut Company AB had been issued an assessment of additional taxable income of SEK 247 mio. The assessment was based on the position that (1) The Absolut Company AB had been selling below the arm’s length price to an US group company – The Absolut Spirit Company Inc. (ASCI), and (2) that acquired distribution services from ASCI that had been priced above the arm’s length price. In 2018 the Swedish Administrative Court of Appeal ruled in favor of the tax administration. The Swedish Supreme Administrative Court has now ruled in favor of The Absolute Company AB. According to the Supreme Administrative Court the Swedish Tax Agency did not fulfill the burden of proof. The Supreme Administrative Court further states that the full range of results in the benchmark study could be applied and that a multiple year analysis of the tested party data can be used ... Continue to full case
France vs SAP Laps SAS, February 2019, Administrative Tribunal of Montreuil, Case No. 1801945

France vs SAP Laps SAS, February 2019, Administrative Tribunal of Montreuil, Case No. 1801945

SAP Labs France SAS provided IT-related services to its German parent company, SAP AG, and received a cost-plus 6 % remuneration. According to the R&D agreement all income taxes, including withholding tax, applied on the amount paid by the parent company pursuant to the agreement would be paid for by the French company. However, the French tax administration held that the French company should have included the CVAE tax in the cost base on which it was remunerated, and by not doing so SAP Laps France had indirectly transferred profit to SAP AG. A tax reassessments under the French arm’s length provisions was then issued. SAP disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal issued a decision in favor of the tax administration. “6. The contribution on the added value of companies is a burden on the company ... Continue to full case
Denmark vs Microsoft Denmark, January 2019, Danish Supreme Court

Denmark vs Microsoft Denmark, January 2019, Danish Supreme Court

The Danish tax authorities were of the opinion that Microsoft Denmark had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. According to the Market Development Agreement (MDA agreement) concluded between Microsoft Denmark and MIOL with effect from 1 July 2003, Microsoft Denmark received the largest amount of either a commission based on sales invoiced in Denmark or a markup on it’s costs. Microsoft Denmark’s commission did not take into account the sale of Microsoft products that occurred through the sale of computers by multinational computer manufacturers with pre-installed Microsoft software to end users in Denmark – (OEM sales). In court, Microsoft required a dismissal. In a narrow 3:2 decision the Danish Supreme Court found in favor of Microsoft. “…Microsoft Denmark’s marketing may ... Continue to full case

France vs GE Medical Systems, November 2018, Supreme Court – Conseil d’État n° 410779

Following an audit of GE Medical Systems Limited Partnership (SCS), which is engaged in the manufacturing and marketing of medical equipment and software, the French tax authorities issued an assessment related to the “value added amount” produced by the company, which serves as the basis for calculating the French minimum contribution of business tax provided for in Article 1647 E of the General Tax Code. The tax authorities was of the view that (1) prices charged for goods and services provided to foreign-affiliated companies had been lower than arm’s length prices and that (2) part of deducted factoring costs were not deductible in the basis for calculating the minimum business tax. On that basis an assessment of additional minimum business tax was issued. GE Medical Systems appealed the assessment to the Administrative Court of  Appeal. The Court of Appeal came to the conclusion that the ... Continue to full case
South Africa vs Crookes Brothers LTD, May 2018, High Court, Case no 14179/2017

South Africa vs Crookes Brothers LTD, May 2018, High Court, Case no 14179/2017

Agricultural group Crookes Brothers Ltd issued loans to its Mozambican subsidiary and in accordance with the terms of the loan, the group made transfer pricing adjustments to its taxable income. Later on, Crookes Brothers Ltd requested the tax administration to issue a reduced assessments, claiming that the adjustments were made in error. They argued, that the terms of the loan were aligned with the requirements of section 31(7) of the Income Tax Act No. 58 of 1962 (the Act), which would exempt the loan from application of transfer pricing rules. To support the claim, Crookes Brothers Ltd provided the tax administration with the loan agreements. The tax administrations  concluded that the terms of the loan agreements were not aligned with the requirements of section 31(7) of the Income Tax Act No. 58 of 1962 (the Act). The loan agreement had a clause that accelerated the debt in ... Continue to full case
Israel vs Kontera and Finisar, April 2018, Supreme Court, Case No. 943/16

Israel vs Kontera and Finisar, April 2018, Supreme Court, Case No. 943/16

In these two cases from Israel the Supreme Court rules on the issue of whether or not companies using the cost plus method must include stock-based compensation in the cost base. The Court concludes that stock-based compensation is an integral part of the compensation package of the Israeli subsidiaries’ employees with the objective of improving the quality of services rendered and strengthening the bond between the companies’ and employees’ cohesive goals. Therefore, such compensation should be included in the cost base. The Court also addressed the burden of proof in relation to transfer pricing disputes in Israel. Section 85 A (c) (2) provides that the burden of proof is with the tax authority if the taxpayer have submitted all required documentation, including a transfer pricing study, that “adequately substantiate” intercompany prices to be in accordance with arm’s length principle ... Continue to full case
Denmark vs Microsoft Denmark, March 2018, Danish National Court, SKM2018.416.ØLR

Denmark vs Microsoft Denmark, March 2018, Danish National Court, SKM2018.416.ØLR

The Danish Tax Ministry and Microsoft meet in Court in a case where the Danish tax authorities had issued an assessment of DKK 308 million. The Danish tax authorities were of the opinion that Microsoft had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. In court, Microsoft required a dismissal with reference to the fact that Sweden, Norway and Finland had either lost or resigned similar tax cases against Micorosoft. The National Court ruled in favor of Microsoft. The decision has now been appealed to the Supreme Court by the Danish tax ministery. Click here for translation DK vs MS Marketing-and Sales Commissioner ... Continue to full case
Denmark vs. Corp, December 2016, Tax Tribunal, SKM2017.115

Denmark vs. Corp, December 2016, Tax Tribunal, SKM2017.115

The case relates to controlled transactions between a Danish company and its permanent establishment, as well as the calculation of taxable income of the permanent establishment. The Danish Tax Administration was entitled to make tax assessment in accordance with applicable Tax Law. The transfer pricing-documentation provided by the Company lacked a comparability analysis. The assessment was in line with the OECD Transfer Pricing Guidelines, but some corrections to the tax assessment were made. (more…) ... Continue to full case
Germany vs. Corp. September 2016, Supreme Tax Court IV R 1 14

Germany vs. Corp. September 2016, Supreme Tax Court IV R 1 14

Tax depreciation for wind turbines presupposes economic ownership of the asset. A change in economic ownership requires that any risks are transferred to the purchaser/customer. The German Supreme Tax Court held that economic ownership of an asset is not transferred at the time it generates income but rather when the risk of accidental destruction and accidental deterioration of the asset passes to the buyer. The contractual agreements to that effect are crucial. A German partnership (KG) operated a wind farm consisting of five wind turbines. Each wind turbine on a farm is a separate asset which is to be depreciated, or amortised, separately. In December 2003 the KG entrusted a GmbH with the turnkey construction of the turbines. The purchase price was payable in installments. The GmbH in turn engaged another company with delivery and installation of the wind turbines and also to take them into ... Continue to full case
Italy vs Tanti Investimentos S.A, Supreme Court, June 2016, No. 13387

Italy vs Tanti Investimentos S.A, Supreme Court, June 2016, No. 13387

The Italien Supreme Court held that intra-group interest-free loans violates article 110(7); the Italien arm’s length provisions. (more…) ... 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 as a non-interest-bearing contribution for future capital increase, hence part of Net Equity. 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. (more…) ... Continue to full case
Australia vs. Chevron Australia Holdings Pty Ltd . October 2015, Federal Court of Australia, case No. 3 and 4

Australia vs. Chevron Australia Holdings Pty Ltd . October 2015, Federal Court of Australia, case No. 3 and 4

The Australien Chevron case was about a $US 2.5 billion intercompany loan between Chevron Australia and its US subsidiary, Chevron Texaco, and whether the interest paid on the loan by Chevron Australia exceeded the arm’s length price. Chevron Australia had set up a company in the US, Chevron Texaco Funding Corporation, which borrowed money in US dollars at an interest rate of 1.2% and then made an Australian dollar loan at 8.9% to the Australian parent company. This 8,9% interest increased Chevron Australia’s costs, and reduced taxable profits. These interest payments, which was not taxed in the US, came back to Australia in the form of tax free dividends. The US company was just a shell created for the sole purpose of raising funds in the commercial paper market and then lending those funds to the Australian company. Chevron argued that the 8,9% interest rate was taking into account the risk of raising loans written in US ... Continue to full case
Italy vs SAME DEUTZ FAHR ITALIA s.p.a, July 2015, Supreme Court, no 15282

Italy vs SAME DEUTZ FAHR ITALIA s.p.a, July 2015, Supreme Court, no 15282

This case is about methods applicable for determination of “normal value” in transactions between related companies; the Comparable Uncontrolled Price method (CUP). Click here for translation Italy Supreme-Court-21st-July-2015-n.-15282 ... Continue to full case
Sweden vs AB Tetra Pak, April 2015, Administrative Court of Appeal, Case No 1168-14

Sweden vs AB Tetra Pak, April 2015, Administrative Court of Appeal, Case No 1168-14

An agreement had been entered between AB Tetra Pak and Tetra Pak International, according to which AB Tetra Pak conducted research and development on behalf of Tetra Pak International and was compensated on a cost plus 3 percent basis. The Swedish Tax Agency, after examining four comparable businesses and their profit levels, concluded that the remuneration of AB Tetra Pak should have been cost plus 7 percent. The Administrative Court of Appeal ruled in favor of AB Tetra Pak. The burden of proof for transfer pricing not being at arm’s length was on the tax authorities. The Court refereed to the OECD’s TPG art. 3.38. – decisive for the selection of comparables is whether their activities are sufficiently comparable to the R&D activities conducted by AB Tetra Pak. The Court also referred to TPG art. 2.55 where it is stated that the profit margin in ... Continue to full case
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