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. Lessor, March 2014, Supreme Administrative Court, No. 9 Afs 87/2012 - 50

Czech Republic vs. Lessor, March 2014, Supreme Administrative Court, No. 9 Afs 87/2012 – 50

At issue was lease of real estate which was owned by the taxpayer and his wife. He was the managing director of Medinvest and, subsequently, of Long Wave, which were involved in the legal relations in question. He was active in connection with the lease of the properties in question, as managing director of Medinvest, he concluded certain sublease agreements with the final subtenants, and on 1 November 2005, as managing director of Medinvest, he concluded a sublease agreement with Long Wave. Judgement of the Court The Czech Supreme Administrative Court explained that “[t]he purpose of the provision in question is to prevent unwanted shifting of a part of the income tax base between individual income taxpayers and to enable the sanctioning of abusive price speculation in business relations. This includes the so-called “profit shifting” between persons with different tax burdens, which usually occurs when ... Continue to full case
France vs. Nestlé water, Feb. 2014, CAA no 11VE03460

France vs. Nestlé water, Feb. 2014, CAA no 11VE03460

In the French Nestlé water case, the following arguments were made by the company: The administration, which bears the burden of proof under the provisions of Article 57 of the General Tax Code, of paragraphs 38, 39 and 42 of the Instruction 13 l-7-98 of 23 July 199 8 and case law, does not establish the presumption of indirect transfer of profits abroad that would constitute the payment of a fee to the Swiss companies A … SA, company products A … SA and Nestec SA. The mere fact that the association of the mark A … with the mark Aquarel also benefits company A … SA, owner of the mark A …, does not allow to prove the absence of profit and thus of consideration for NWE. The latter company also benefited from the combination of the two brands. Advertising alone are not enough ... Continue to full case
Switzerland vs. X, Oct. 2013, Federal Supreme Court, Case No. 2C_644-2013

Switzerland vs. X, Oct. 2013, Federal Supreme Court, Case No. 2C_644-2013

X was the principal shareholder and Chairman in the Insurance Agency, Y AG. In 2003, the company went bankrupt, with the bankruptcy proceedings suspended for lack of assets and the company was removed from the commercial register in September 2003. On 12 March 2007, the tax administration initiated a subsequent taxation proceedings against X concerning monetary benefits which it was supposed to have received from Y AG in the years 1997 to 2000. On 2 May 2012, the tax administration imposed an additional tax in the amount of CHF 39’056.20 including default interest. The appeal against this decision was rejected by the Tax Appeals Commission. Before the Federal Supreme Court, X appealed the decision. Excerp from the Federal Supreme Court ruling: “3.1 According to Art. 20 para. 1 lit.c DBG Income from movable assets, in particular dividends, profit shares, liquidation surpluses and non-cash benefits arising ... Continue to full case
Denmark vs. Bombardier, October 2013, Administrative Tax Court, SKM2014.53.LSR

Denmark vs. Bombardier, October 2013, Administrative Tax Court, SKM2014.53.LSR

The issue in the case was whether the applicable rates under the cash pool arrangement were on arm’s length, i.e. in accordance with the transfer pricing requirements. The Administrative Tax Court upheld most of the conclusions of the tax authorities. First, the Court found that the tax authorities were allowed to assess an arm’s length rate due to the lack of transfer pricing documentation. Second, the financial service fee of 0.25% was upheld. Third, the Court concluded that the rate on the short-term deposits and the corresponding loans (borrowed due to insufficient liquidity management) should be the same. The Administrative Tax Court observed that there was very little or no creditor risk on these gross corresponding loans/deposits because of the possibility of offsetting the balance. Hence, according to the Court, there was no basis for a spread on the gross balance. However, the rate spread ... Continue to full case
Sweden vs Cambrex, April 2013, Administrative Court, Case No. 456-11

Sweden vs Cambrex, April 2013, Administrative Court, Case No. 456-11

In the Cambrix case the issue was whether the interest rate on an shareholder loan had been at arm’s length. The court concluded that the burden of proof was on the Swedish tax authorities and that sufficient evidence had not been provided to support the claim that the interest rate had not been at arm’s length. Click here for translation Sweden vs Cambrex AB 2013-04-26 ... Continue to full case
Japan vs Manufacturing Co. March 2013, Tokyo High Court, No 19

Japan vs Manufacturing Co. March 2013, Tokyo High Court, No 19

A Japanese manufacturing company was issued an estimated tax assessment due to lack of transfer pricing documentation. The District Court ruled in favor of the tax authorities. The Court decided that accounts and documents necessary for calculating arms’s length prices should be presented or submitted to the tax authorities without delay. If sufficient documentation is not submitted, the requirement for an estimated taxation is satisfied. Furthermore, in such cases the burden of proof shifts to the taxpayer side. See the transcripts from the district Court below. The case was then appealed by the company to Tokyo High Court, which also ruled in favor of the tax authorities. Click here for English Translation Click here for other translation Japan-vs-Manufacturing-Co.083647_hanrei See transcripts from the district Court below. Click here for translation – Part 1 Click here for translation – Part 2 Click here for translation – Part ... Continue to full case
Czech Republic vs. Goldfein, March 2013, Supreme Administrative Court, No. 1 Afs 99/2012-52

Czech Republic vs. Goldfein, March 2013, Supreme Administrative Court, No. 1 Afs 99/2012-52

The Czech company, Goldfine, submitted a revised tax return lowering the taxable income for the year. The reason being that the German Parent had losses for the year. The Supreme Administrative Court found that the burden of proof related to arm’s length transfer prices, under those circumstances rests with the taxpayer. Losses at the German parent company was not sufficient proof that transfer prices had been incorrect in the original tax return. The Court ruled i favor of the tax administration. Click here for translation Czech vs Corp, 13 March 2013, Supreme Adm. Court, No. 1 Afs 99-2012 ... Continue to full case
Italy vs Computer Associates SPA, February 2013, Supreme Court no 4927

Italy vs Computer Associates SPA, February 2013, Supreme Court no 4927

The Italian tax authorities had challenged the inter-company royalty paid by Computer Associates SPA, 30% as per contract, to it’s American parent company, registered in Delaware. According to the authorities a royalty of 7% percentage was determined to be at arm’s length and an assessment for FY 1999 was issued, where deduction of the difference in royalty payments was disallowed. The tax authorities noted the advantage for group to reduce the income of Computer Associates SPA, increasing, as a result, that of the parent company, due to the much lower taxation to which the income is subject in the US state of Delaware, where the latter operates (taxation at 36% in Italy, and 8.7% in the State of Delaware). The Supreme Court dismissed the appeal of Computer Associates SPA and concluded that the assessment was in compliance with the law. Click here for English translation ... Continue to full case
Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

In this case the Italien company, T. S.r.l. is entirely controlled by H. S.A., registered in Switzerland, and is part of the American multinational group T., being its only branch in Italy for the exclusive marketing of its software products (games for personal computers, play station, etc.). T. S.r.l. imports these products through T. Ltd (which is also part of the same multinational group and controlled by the same parent company), which is registered in the United Kingdom and is the sole supplier of the products that are marketed by the Italian branch. On 31st October 2004 (the last day of the financial year), T. S.r.l. posted an invoice that the British company T. Ltd had issued on that date for £ 947,456. This accounts document referred to “Price adjustment to product sold during FY 2003/2004”, and charges the Italian company with adjustment increases to ... Continue to full case
Switzerland vs. Corp, Juli 2012, Federal Supreme Court, Case No. 2C_834-2011, 2C_836-2011

Switzerland vs. Corp, Juli 2012, Federal Supreme Court, Case No. 2C_834-2011, 2C_836-2011

In this ruling, the Swiss Federal Supreme Court comments on the application of the arm’s length principel and the burden of proff in Switzerland. “Services, which have their legal basis in the investment relationship, are to be offset against the taxable income of the company to the extent that they would otherwise not be granted to a third party under the same circumstances or not to the same extent and would not constitute a capital repayment. This rule of the so-called third-party comparison (or the principle of “dealing at arm’s length”) therefore requires that even legal transactions with equity holders or between Group companies be conducted on the same terms as would be agreed with external third parties on competitive and market conditions.” “Swiss Law – with the exception of individual provisions – does not have any actual group law and treats each company as ... Continue to full case
France vs. Microsoft, Feb 2012, CCA, No 10VE00752

France vs. Microsoft, Feb 2012, CCA, No 10VE00752

In the Microsoft case, the distribution activity of a French subsidiary of an American group was transferred to its Irish sister company. The French subsidiary was then converted into a sales agent of the Irish subsidiary. The Commission rate earned by the French subsidiary was reduced from 25% to 18%. The French tax authorities, taking into account the previous 25% commission rate, considered that it should not have been reduced and reinstated the corresponding income into the French company’s taxable income. To support their position, the French tax authorities conducted a benchmarking study. However, the Court of Appeals ruled that the mere fact that the commission rate has been reduced does not demonstrate the transfer of profits abroad. Moreover, the Court confirmed that the transfer of profits abroad was not proved due to the irrelevance of the methods used and of the comparables found by ... Continue to full case
Sweden vs Ferring AB, June 2011, Swedish Court, Case no 2627-09

Sweden vs Ferring AB, June 2011, Swedish Court, Case no 2627-09

In connection with a restructuring, Ferring Sweden (a Scandinavian pharmaceutical) had transferred intangible assets to a group company in Switzerland. Among the assets transferred was an exclusive worldwide license to manufacture and sell a drug and a number of ongoing R&D projects. The question in the case was whether the price agreed between the Group companies was consistent with the arm’s length principle. The Ferring’s position was that the price was consistent with the arm’s length principle, while the Swedish Tax Agency believed that an arm’s-length price was significantly higher. In support of its pricing, the company had submitted a valuation made by the audit company A, where the value of Ferring after the transfer (the residual company) was compared with the value of the company if it had continued to operate as a full-fledged company (the original company). These values ​​were determined through a ... Continue to full case
Australia vs SNF, June 2011

Australia vs SNF, June 2011

SNF was a member of a global group with headquarters in France. SNF bought polyacrylamides from group companies overseas, and sold them to unrelated end-users in various industries in Australia. From its incorporation in 1990 until 2004, SNF consistently returned tax losses. SNF was subject to a transfer pricing audit. Determinations were made under Division 13 of Part III of the Income Tax Assessment Act 1936 to adjust the consideration for the company’s international related party transactions to reflect an arm’s length amount. For the income years from 1997 to 2003, the Commissioner made determinations under ss136AD(3) and (4) of the Act as to the arm’s length price of the chemicals. The tax authorities issued notices of assessment in 2007, and subsequently disallowed the taxpayer’s objections to those assessments. Before the Court the commissioner submitted that the taxpayer was able to continue to trade, not ... Continue to full case
France vs. SOCIETE SOUTIRAN ET COMPAGNIE, March 2011, Supreme Tax Court, Case nr. 342099

France vs. SOCIETE SOUTIRAN ET COMPAGNIE, March 2011, Supreme Tax Court, Case nr. 342099

The French Supreme Tax Court has ruled on 2 March 2011 that the transfer pricing legislation is in conformity with the French Constitution. “The plea of SOCIÉTÉ SOUTIRAN ET COMPAGNIE, that the article 57 of code general of the taxes infringing the rights and freedoms guaranteed by the Constitution must be regarded as not serious” Click here for translation 20110302 Conseil d_+ëtat N-¦ 342099 ... Continue to full case
Czech Republic vs. Corp. February 2011, Supreme Administrative Court, Afs 19/2010-125

Czech Republic vs. Corp. February 2011, Supreme Administrative Court, Afs 19/2010-125

A Czech company (the lessor) owned real estate and rented it to independent parties. An Austrian related company provided management and consulting services to the lessor The service fees significantly increased each year, although the income of the Czech company and the number of lease contracts were constant in the examined years The tax authorities required that the taxpayer prove the actual provision of the services and their relationship to taxable income. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period. The legal question was: the scope of the burden of proof that rests with the taxpayer with respect to services received from related party The court ruled that: the taxpayer was obliged to prove the relationship of the expensed service fees to its taxable income. Tangible evidence of ... Continue to full case
Czech Republic vs. Českolipská, a. s. January 2011, Supreme Administrative Court 7 Afs 74-2010-81

Czech Republic vs. Českolipská, a. s. January 2011, Supreme Administrative Court 7 Afs 74-2010-81

A lessor rented real estate for a low price to related parties.  The tax authorities claimed that the price was too low and required additional income to be taxed with the lessor. The lessor explained that the low rental fees were due to the poor condition of the real estate that was leased to related parties. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period. Judgement of the Court The court ruled that: the burden of proof was on the tax authorities and the authorities had to prove all significant parameters of the controlled transaction. The tax authorities must establish the arm’s length price (called the “reference price” in the decision) in order to be able to require that the taxpayer explain the difference between the arm’s length price ... Continue to full case
France vs. Novartis Groupe France SA, June 2008 and October 2010, CAA no No 06PA02841 and No 09LY02084

France vs. Novartis Groupe France SA, June 2008 and October 2010, CAA no No 06PA02841 and No 09LY02084

In the Novartis Groupe France SA case, the court stated that if the tax administration intends to base the transfer pricing approach on prices used between other companies or a profit split, it must first demonstrate that the price used by the related companies does not comply with the arm’s-length principle. A search for comparable transactions must be performed. Click here for translation Novataris Groupe France 2008 Se also the later decision of October 2010. Click here for translation Novataris 2010 ... Continue to full case
Argentina vs Aventis Pharma SA, February 2010, Tribunal Fiscal de la Nación, Case No 29,083-I

Argentina vs Aventis Pharma SA, February 2010, Tribunal Fiscal de la Nación, Case No 29,083-I

The principal activity of Aventis Pharma is manufacturing of pharmaceutical products and the secondary activity is the wholesale of pharmaceutical products; In FY 2000 the company carried out various transactions with related companies and based on a transfer pricing study the company concluded that profits were consistent with those obtained by comparable independent parties. Following an audit the tax authorities issued an assessment of additional income. In dispute were: Granting of extraordinary discounts, Reclassification of operating expenses together with related and non-operating expenses, Use of loss making comparables. The Court decided in favour of Aventis “From the above, it appears that the challenges made by the tax authority to the choice of the firm Bentley Pharmaceutical Inc, are unsubstantiated because they are based on the accusation of other manufacturing activities that were not carried out by the aforementioned company but by related companies, at a ... Continue to full case
Japan vs Adobe Systems Co., October 2008, Tokyo High Court

Japan vs Adobe Systems Co., October 2008, Tokyo High Court

Adobe Systems Co., a Japanese subsidiary of Adobe Systems Inc., received remuneration from Dutch and Irish group companies for promotion and marketing of Adobe software sold in Japan The remuneration of Adobe Systems Co. was determined as general administrative expenses plus 1.5% of net sales in Japan. A transfer pricing assessment was issued by the Japanese tax authorities where transfer prices were instead based profit margins derived in comparable transactions. Adobe Systems filed an appeal seeking revokal of the assessment. Tokyo High Court held that the tax assessment should be revoked. The burden of proof in relation to the legitimacy of the transfer pricing method applied was on the tax administration. The transfer pricing method used by the tax authority was not consistent with the resale price method. The method applied by the tax authorities “…cannot be said to be “a method equivalent to the ... Continue to full case
Argentina vs Laboratorios Bagó S.A. , November 2006, Tribunal Fiscal de la Nación, Case No 16/11/06

Argentina vs Laboratorios Bagó S.A. , November 2006, Tribunal Fiscal de la Nación, Case No 16/11/06

In the case of Laboratorios Bagó S.A. the National Tax Court, rejected an appeal raised on the grounds that the use of information from third party companies by the tax administration violated the tax secrecy enshrined in Article 101 of Law No. 11,683. Decision of the Tax Court The Court stated that the information used by the tax administration to determine the market price was not covered by tax secrecy. The Court also considered that it was correct to have informed the company of the aforementioned information so that it could exercise its right to defense. Click here for English translation AG vs Bago 2006 ... Continue to full case