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.

Czech Republic vs HPI - CZ spol. s r.o., November 2022, Supreme Administrative Court, Case No 9 Afs 37/2022 - 37

Czech Republic vs HPI – CZ spol. s r.o., November 2022, Supreme Administrative Court, Case No 9 Afs 37/2022 – 37

HPI – CZ spol. s r.o. is a subsidiary in the Monier group which is active in the production, sales and services of roofing and insulation products. In June 2012 the Monier group replaced an existing cash pool arrangement with a new cash pool arrangement. The documents submitted show that on 1 April 2009 HPI concluded a cash pool agreement with Monier Group Services GmbH , which consisted in HPI sending the balance of its bank account once a week to the group’s cash pooling account – thus making those funds available to the other members of the group, who could use them to ‘cover’ the negative balances in their accounts. The companies that deposited funds into the cash pooling account received interest on these deposits at 1M PRIBOR + 3%; loans from the shared account bore interest at 1M PRIBOR + 3.75%. With effect ... Continue to full case
Denmark vs. "C-Advisory Business ApS", November 2022, Supreme Court, Case No BS-22176/2021-HJR (SKM2023.8.HR)

Denmark vs. “C-Advisory Business ApS”, November 2022, Supreme Court, Case No BS-22176/2021-HJR (SKM2023.8.HR)

A was the sole owner of “C-Advisory Business ApS” established in Denmark in 2003. The company advised and represented taxpayers in cases related to tax deductions for land improvements to immovable property. A was also the sole owner of a company established in Dubai in 2006. The Dubai company provided services for “C-Advisory Business ApS” in Denmark and a total of DKK 78,785,549 was expensed in FY 2006-2010 relating to the purchase of these services. The Danish tax authorities considered that the payments had not been at arm’s length and reduced the service fees to the Dubai company to DKK 20 million for the income years in question. This resulted in additional taxable income of “C-Advisory Business ApS” in a total amount of DKK 58,5 million. Following an unsuccessful complaint to the Tax Tribunal, “C-Advisory Business ApS” filed an appeal with the regional court where ... Continue to full case
Czech Republic vs HPI - CZ spol. s r.o., October 2022, Supreme Administrative Court, Case No 5 Afs 141/2021 - 37

Czech Republic vs HPI – CZ spol. s r.o., October 2022, Supreme Administrative Court, Case No 5 Afs 141/2021 – 37

HPI – CZ spol. s r.o. is a subsidiary in the Monier group. In June 2012 the group replaced an existing cash pool arrangement with a new cash pool arrangement. Following an audit of HPI the tax authorities issued an assessment of additional income for FY 2012 resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool (1M PRIBOR + 0.17%) had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied in the previously cash pool arrangement (1M PRIBOR + 3%) from 1 January 2012 to 31 May 2012. HPI filed an appeal and in January 2019 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the ... Continue to full case
Netherlands vs "Tobacco B.V.", October 2022, Rechtbank Noord-Holland, Case No ECLI:NL:RBNHO:2022:8936

Netherlands vs “Tobacco B.V.”, October 2022, Rechtbank Noord-Holland, Case No ECLI:NL:RBNHO:2022:8936

“Tobacco B.V.” is a Dutch company belonging to an international tobacco group. Following an audit an assessment of additional taxable income of €196,001,385, €220,624,304 and €179,896,349 for FY 2008-2010 was issued to “Tobacco B.V.”, and a penalty for non-compliance for FY 2010 of €477,624 was imposed. The dispute focused on whether the fees charged by various group companies for supplies and services had been at arm’s length. To finance their activities, the group companies issued listed bonds under the tobacco group’s so-called EMTN Programme, guaranteed by the parent company in the UK. For this, the claimant paid an annual guarantee fee to the parent company of approximately €35,000,000. Judgement of the court – the guarantee fees are not expenses originating from the “Tobacco B.V.”‘s acceptance of liability for debts of an affiliated company; – the EMTN Programme is not a credit arrangement within the meaning ... Continue to full case
Italy vs Ferrari SpA, September 2022, Supreme Court, Case No 26695/2022

Italy vs Ferrari SpA, September 2022, Supreme Court, Case No 26695/2022

In February 2016 the Regional Tax Commission rejected an appeal filed by the Revenue Agency against the first instance judgment, which had upheld an appeal brought by Italian car manufacturer, Ferrari S.p.A. against a notice of assessment issued by the Revenue Agency in which the company was accused of having applied prices lower than the ‘normal value’ in transactions with its foreign subsidiaries, in particular with the US company Ferrari NA (North America). In determining the arm’s length price of the relevant controlled transactions Ferrari had applied the CUP method. The Revenue Agency considered the TNMM to be the most appropriate method. The Regional Tax Commission observed that “for verifying the “normal value”, the Revenue Agency itself, in Circular No. 32 of 22/09/1980, had suggested the use of the CUP method instead of the less reliable TNMM method “which is not advisable due to its ... Continue to full case
India vs Sulzer Tech India Pvt Ltd, July 2022, Income Tax Appellate Tribunal, Case No ITAT No 633-MUM-2021

India vs Sulzer Tech India Pvt Ltd, July 2022, Income Tax Appellate Tribunal, Case No ITAT No 633-MUM-2021

Sulzer Tech India Pvt Ltd (the assessee) is in the business of providing design and engineering services. To that end Sulzer Management AG, an associated enterprise provided various IT and support services to Sulzer Tech India. The payment for these services had been determined based on a benchmark study where Sulzer Management AG was chosen as the tested party. The cost plus margin for the selected comparables ranged from 4.08% to 7.08%, with a median of 5.69%, and on that basis the payment to Sulzer Management of Rs. 2,52,49,650, which was equal to cost plus 5%, was considered to be at arm’s length. The tax authorities disagreed and held that Sulzer Tech India at arm’s length would not have paid any amount toward services which are not availed to it and have not benefited its business. Accordingly, an adjustment of additional income of Rs. 2,52,49,650, ... Continue to full case
Portugal vs "L.... Engenharia e Construções, S.A.", June 2022, Tribunal Central Administrativo Sul, Case 1339/13.0BELRA

Portugal vs “L…. Engenharia e Construções, S.A.”, June 2022, Tribunal Central Administrativo Sul, Case 1339/13.0BELRA

At issue was an interest free loan granted by “L…. Engenharia e Construções, S.A.” to a related party. The loan had been granted before the parties became related following an acquisition in 2007. The tax authorities had issued an assessment where the interest had been determined to 1.4% based on the interest rate that would later apply to the loan according to the agreement. An appeal was filed by “L…. Engenharia e Construções, S.A.” with the Administrative Court, where the assessment was later set aside. An appeal was then filed by the tax authorities with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the decision of the administrative court, dismissed the appeal of the tax authorities and annulled the assessment. Excerpt “In this regard, it cannot be ignored that the contract entered into by the Claimant with the ... Continue to full case
Malaysia vs Keysight Technologies Malaysia, May 2022, High Court, Case No WA-144-03-2020

Malaysia vs Keysight Technologies Malaysia, May 2022, High Court, Case No WA-144-03-2020

Keysight Technologies Malaysia Sdn Bhd (KTM) was incorporated in 1998 and active as a full-fledged manufacturer of various microwave devices and test instruments in which capacity it had also developed valuable intangibles. In 2008, KTM was converted into a contract manufacturer under an agreement with Agilent Technologies International s.a.r.l. and at the same time KLM purportedly transferred its intangibles to Agilent Technologies. KTM received an amount of RM 821 million which it reported as non-taxable gains form sale of intangibles in its tax return. Following an audit the tax authorities issued a notice of assessment for FY 2008 where the sum of RM 821 million had been considered revenue in nature and thus taxable under Section 4(f) of the ITA. This resulted in a claim of RM 311 million together with a 45% penalty. According to the tax authorities the transfer of technical knowhow was ... Continue to full case
France vs SAS Oakley Holding, May 2022, CAA of Lyon, No 19LY03100

France vs SAS Oakley Holding, May 2022, CAA of Lyon, No 19LY03100

SNC Oakley Europe, a subsidiary of SAS Oakley Holding, which belonged to the American group Oakley Inc. until its takeover in 2007 by the Italian group Luxottica, carried on the business of distributing clothing, footwear, eyewear and accessories of the Oakley brand on European territory. Following the takeover SNC Oakley Europe in 2008 transferred its distribution activity on the French market to another French company, Luxottica France, and its distribution activity on the European market to companies incorporated in Ireland, Luxottica Trading and Finance and Oakley Icon, and deducted restructuring costs in an amount of EUR 15,544,267. The tax authorities qualified these costs as an advantage granted without consideration to its sister companies, constituting, on the one hand, an abnormal management act and, on the other hand, an indirect transfer of profits within the meaning of Article 57 of the General Tax Code on the ... Continue to full case
Czech Republic vs Aisan Industry Czech, s.r.o., April 2022, Supreme Administrative Court, Case No 7 Afs 398/2019 - 49

Czech Republic vs Aisan Industry Czech, s.r.o., April 2022, Supreme Administrative Court, Case No 7 Afs 398/2019 – 49

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o ... Continue to full case
France vs ST Dupont , April 2022, CAA of Paris, No 19PA01644

France vs ST Dupont , April 2022, CAA of Paris, No 19PA01644

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was ... Continue to full case
Australia vs PwC, March 2022, Federal Court of Australia, Case No FCA 278

Australia vs PwC, March 2022, Federal Court of Australia, Case No FCA 278

In the course of an audit a formal request to produce certain documents was issued to the multinational meat production group JBS by the Australian tax authorities. On behalf of its client, PwC claimed that the documents requested were subject to legal professional privilege (LPP), and therefore did not need to be produced. Thus, PwC declined to provide approximately 44,000 documents. The tax authorities disputed the LPP claims over approximately 15,500 documents. However, for the purposes of the trial, only 116 sample documents were selected by the partis and considered by the court. Judgement of the Federal Court The court found that legal professional privilege claims needed to be considered on a document-by-document basis. From the sample of documents selected by the parties, the court concluded that 49 were privileged; 6 were partly privileged; and 61 were not privileged. Excerpt “It is therefore necessary to ... Continue to full case
Costa Rica vs GlaxoSmithKline Costa Rica S.A., February 2022, Supreme Court, Case No 4-001638-1027-CA

Costa Rica vs GlaxoSmithKline Costa Rica S.A., February 2022, Supreme Court, Case No 4-001638-1027-CA

GlaxoSmithKline Costa Rica S.A. manufactures pharma products which is sold to both independent customers in the region and to group companies abroad. For FY 2004 and 2005 pricing of the controlled transactions had been determined based on the TNMM method using return on total costs (ROTC) as PLI. GSK said the range of return on total costs “for the comparable independent companies ranges from 4.7 per cent to 14.5 per cent, with a median of 9.6 per cent. GSK CR obtained an average ROTC of 50.6 percent during fiscal years 2004 and 2005, which was not below the range identified for comparable independent companies. Accordingly, the transfer prices used by GSK CR in its controlled transactions did not distort GSK CR’s profitability and satisfied the arm’s length principle set out in the OECD Guidelines. In 2009 the tax authorities issued an assessment for FY 2004 ... Continue to full case
Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of ... Continue to full case
Latvia vs SIA Severstal Distribution, December 2021, Administrative Court of Appeal, Case No A420576312, SKA-314/2021

Latvia vs SIA Severstal Distribution, December 2021, Administrative Court of Appeal, Case No A420576312, SKA-314/2021

The Revenue Service had audited Severstal Distribution for FY 2008-2009 and found that the company had purchased metal products from related companies at prices above market prices. An assessment was issued where reported losses for 2009 were reduced. During the audit, Severstal Distribution indicated to the tax authorities that it had used the transactional net margin method to determine the price of its controlled transactions. However, later the company also stated that it had used the CUP method (quated steel prices from the SBB database). Severstal Distribution Ltd filed an appeal with the Administrative Regional Court. In a decision of 2019 the appeal was dismissed and the assessment of additional income upheld. An appeal was then filed by Severstal Distribution Ltd with the Administrative Court of Appeal. The issue to be examined by the Administrative Court of Appeal was whether the Revenue Service correctly determined ... Continue to full case
Australia vs CUB Australia Holding Pty Ltd, September 2021, Federal Court of Australia, Case No FCAFC 171

Australia vs CUB Australia Holding Pty Ltd, September 2021, Federal Court of Australia, Case No FCAFC 171

In this case CUB Australia Holding Pty Ltd appeals a judicial review decision by a judge of the Federal Court. The tax authorities had issued a Notice on 4 March 2020 requesting CUB to provide certain details about documents over which CUB had claimed legal professional privilege (LPP). CUB declined to provide the requested details about the documents in full. The tax authorities then issued a “formal notice” to the taxpayer demanding (under threat of prosecution for non-compliance) the information. CUB argued that the notice was issued (at least partly) for an “improper purpose” and was therefore invalid. According to CUB, evidence showed that the authorities did not seek the information to decide whether to challenge the taxpayer’s claim of legal professional privilege, but instead to determine the claim. Judgement of the Federal Court The court upheld the previous judicial review-decision. The officer that had ... Continue to full case
Italy vs INTERVET PRODUCTIONS SRL, January 2021, Corte di Cassazione, Case No 22539/2021

Italy vs INTERVET PRODUCTIONS SRL, January 2021, Corte di Cassazione, Case No 22539/2021

Intervet Productions SRL, a company resident in Italy, manufactures veterinary medicines and supplements. The Italian tax authorities issued a notice of assessment, relating to the 2004 tax year. In that notice, the tax authorities ascertained the inconsistency of the transfer prices concerning the sale of certain goods to a related party in Germany. For the determination of the transfer prices, the taxpayer had used two methods: the resale price method, for products subject to mere marketing, and the cost-plus method, for products subject to further processing by Intervet. The tax authorities had used the CUP method for the purpose of the adjustment. Intervet appealed against the assessment, contesting the comparability of the products compared by the tax authorities but lost in the proceedings on the merits An appeal was then filed with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court set ... Continue to full case
Malaysia vs Ensco Gerudi Malaysia SDN. BHD., July 2021, Juridical Review, High Court, Case No. WA-25-233-08-2020

Malaysia vs Ensco Gerudi Malaysia SDN. BHD., July 2021, Juridical Review, High Court, Case No. WA-25-233-08-2020

Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia, including leasing drilling rigs, to oil and gas operators in Malaysia. In order to provide these services, the Ensco entered into a Master Charter Agreement dated 21.9.2006 (amended on 17.8.2011) (“Master Charter Agreement”) with Ensco Labuan Limited (“ELL”), a third-party contractor, to lease drilling rigs from ELL. Ensco then rents out the drilling rigs to its own customers. As part of the Master Charter Agreement, Ensco agreed to pay ELL a percentage of the applicable day rate that Ensco earns from its drilling contracts with its customers for the drilling rigs. By way of a letter dated 12.10.2018, the tax authorities initiated its audit for FY 2015 to 2017. The tax authorities issued its first audit findings letter on 23.10.2019 where it took the position that the pricing of the leasing transactions between ... Continue to full case
Italy vs TMC Italia SpA, June 2021, Supreme Court, Case No 18436/2021

Italy vs TMC Italia SpA, June 2021, Supreme Court, Case No 18436/2021

TMC Italy SpA is a parent company which provides services and support to the commercial production activities of its affiliated companies based in foreign countries (Spain, Czech Republic, Germany, France, Israel, Brazil, United Kingdom). The costs of providing these intra-group services had been allocated between the related parties based on the number and salary of employees in FY 2008 and 2009. The tax administration issued an assessment where the allocation was instead be based on turnover – due to data supporting better correlation. The Court of first instance held in favour of the tax authorities. This decision was appealed by TMC to the Supreme Court. Judgement of the Court The Court dismissed the appeal of TMC in its entirety and decided in favour of the tax authorities. Excerpts: “CTR considered legitimate and correct the use of the method of allocation of the profits of the ... Continue to full case
Denmark vs. "Advisory business ApS", June 2021, High Court, Case No SKM2021.335.OLR

Denmark vs. “Advisory business ApS”, June 2021, High Court, Case No SKM2021.335.OLR

The case concerned a Danish company that provided legal services regarding tax deductions for improvements to real estate, etc. In 2006, the owner of the Danish company moved to Y2 city and in the process established a company in Y2 city, which would then provide services to the Danish sister company, including legal advice. The tax authorities had increased the Danish company’s taxable income by an estimated total of approximately DKK 58.4 million, as the tax authorities considered that the company’s transfer pricing documentation was sufficiently deficient, in accordance with Section 3 B(8) of the Tax Control Act, cf. Section 5(3), and that the service agreements were not concluded at arm’s length in breach Danish arm’s length provisions. Judgement of the High Court The tax authorities were entitled to exercise discretion over pricing of the controlled transactions as the transactions had not been priced at ... Continue to full case