Category: Commercially Irrational Transactions

In transfer pricing transactions may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to each of them at the time of entering into the transaction.
It is also a relevant pointer to consider whether the MNE group as a whole is left worse off on a pre-tax basis sincethis may be an indicator that the transaction viewed in its entirety lacks the commercial rationality of arrangements between unrelated parties.
The key question in the analysis is whether the actual transaction possesses the commercial rationality of arrangements that would be agreed
between unrelated parties under comparable economic circumstances, not
whether the same transaction can be observed between independent parties.

Spain vs SGL Carbon Holding, September 2021, Tribunal Supremo, Case No 1151/2021 ECLI:EN:TS:2021:3572

Spain vs SGL Carbon Holding, September 2021, Tribunal Supremo, Case No 1151/2021 ECLI:EN:TS:2021:3572

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court of appeal upheld the decision of the tax authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: The decision was appealed by SGL Carbon to the Supreme Court. Judgement of ... Continue to full case
UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn . The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has ... Continue to full case
UK vs Total E&P North Sea UK Ltd, October 2020, Court of Appeal, Case No A3/2019/1656

UK vs Total E&P North Sea UK Ltd, October 2020, Court of Appeal, Case No A3/2019/1656

Companies carrying on “oil-related activities” are subject to both corporation tax and a “supplementary charge”. “Oil-related activities” are treated as a separate trade and the income from them represents “ring fence profits” on which corporation tax is charged. The “supplementary charge” is levied on “adjusted” ring fence profits, in calculating which financing costs are left out of account. Between 2006 and 2011, the supplementary charge amounted to 20% of adjusted ring fence profits. On 23 March 2011, however, it was announced that the supplementary charge would be increased to 32% from midnight. The change in rate was subsequently carried into effect by section 7 of the Finance Act 2011, which received the royal assent on 19 July 2011. Total E&P, previously Maersk Oil North Sea UK Limited and Maersk Oil UK Limited, carried on “oil-related activities” and so were subject to the supplementary charge. The ... Continue to full case
Canada vs AgraCity Ltd. and Saskatchewan Ltd. August 2020, Tax Court, 2020 TCC 91

Canada vs AgraCity Ltd. and Saskatchewan Ltd. August 2020, Tax Court, 2020 TCC 91

AgraCity Canada had entered into a Services Agreement with a group company, NewAgco Barbados, in connection with the sale by NewAgco Barbados directly to Canadian farmer-users of a glyphosate-based herbicide (“ClearOut”) a generic version of Bayer-Monsanto’s RoundUp. In reassessing the taxable income of AgraCity for 2007 and 2008 the Canada Revenue Agency relied upon the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Income Tax Act (the “Act”) and re-allocated an amount equal to all of NewAgco Barbados’ profits from these sales activities to the income of AgraCity. According to the Canadian Revenue Agency the value created by the parties to the transactions did not align with what was credited to AgraCity and NewAgco Barbados. Hence, 100% of the net sales profits realized from the ClearOut sales by NewAgco Barbados to FNA members – according to the Revenue Agency – should have been ... Continue to full case
UK vs GE Capital, July 2020, High Court, Case No RL-2018-000005

UK vs GE Capital, July 2020, High Court, Case No RL-2018-000005

GE Capital (GE) have been routing financial transactions (AUS $ 5 billion) related to GE companies in Australia via the UK in order to gain a tax advantage – by “triple dipping” in regards to interest deductions, thus saving billions of dollars in tax in Australia, the UK and the US. Before entering into these transactions, GE obtained clearance from HMRC that UK tax rules were met, in particular new “Anti-Arbitrage Rules” introduced in the UK in 2005, specifically designed to prevent tax avoidance through the exploitation of the tax treatment of ‘hybrid’ entities in different jurisdictions. The clearance was granted by the tax authorities in 2005 based on the understanding that the funds would be used to invest in businesses operating in Australia. In total, GE’s clearance application concerned 107 cross-border loans amounting to debt financing of approximately £21.2 billion. The Australian Transaction was ... Continue to full case
UK vs Bluecrest Capital Management, July 2020, First-Tier Tribunal - Tax Chamber, Case No TC07782

UK vs Bluecrest Capital Management, July 2020, First-Tier Tribunal – Tax Chamber, Case No TC07782

In the case of BlueCrest Capital Management Cayman Limited (& others), the key issues involved partnership profit/loss allocations for mixed member partnerships and the associated anti-avoidance legislation – limitation on tax relief for interest on unallowable purpose loans and the sale of occupational income provisions. Judgement The Tribunal found that the sale of occupational income rules could apply to charge Income tax on partnership capital contributions. Although the arrangements  did have a commercial purpose (retention and incentivization of partners), they also had as a main object the avoidance or reduction of liability to pay income tax. The test for application of the occupational income rules was therefore met. UK-vs-Bluecrest-Capital-Management-TC07782-1 ... Continue to full case
Russia vs ViciunaiRus LLC, April 2020, Supreme Court, Case No. A21-133/2018

Russia vs ViciunaiRus LLC, April 2020, Supreme Court, Case No. A21-133/2018

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled ... Continue to full case
Greece vs "VSR Inc", December 2019, Court, Case No A 2631/2019

Greece vs “VSR Inc”, December 2019, Court, Case No A 2631/2019

At issue was the transfer of taxable assets from a shareholder to a 100% owned company, “VSR Inc”. This transfer of resulted in an understatement of profits in a controlled sale of vehicle scrapping rights. Following an audit, the tax authority concluded that the rights had been acquired in the previous quarter from the one transferred and that a sale value below cost could not be justified. According to the tax authorities the arrangement lacked economic or commercial substance. The sole purpose had been to lower the overall taxation. An revised tax assessment – and a substantial fine – was issued by the tax authorities. VSR filed an appeal. Judgement of the Court The court dismissed the appeal and decided in favor of the tax authorities. “Since it is apparent from the above that the above transactions were intended to transfer taxable material from the ... Continue to full case
Greece vs "SH Loan Ltd", May 2019, Court, Case No A 1780/2019

Greece vs “SH Loan Ltd”, May 2019, Court, Case No A 1780/2019

“SH Loan Ltd” had provided a loan to its shareholder/manager and claimed that it did not expect any profit (interest) from this transaction, since it was not a bank. The tax authorities issued an assessment where additional interest income was added to the income of the company due to a loan granted to its sole shareholder. The additional interest income for the company was determined based on the relevant interest rates from the Bank of Greece’s Financial Situation Statistics. SH Loan Ltd filed an appeal. Judgement of the Court The court dismissed the appeal and upheld the decision of the tax authorities. “Because Mr. , is a person related to the applicant, in accordance with the provisions of Article 2(g) of Law No. 4172/2013, since he is a shareholder (100%), legal representative and member of the Board of Directors. (Chairman and Managing Director), and the ... Continue to full case
Spain vs SGL Carbon Holding, April 2019, Audiencia Nacional, Case No ES:AN:2019:1885

Spain vs SGL Carbon Holding, April 2019, Audiencia Nacional, Case No ES:AN:2019:1885

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court held in favor of the authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: Article 8 Reglamento MAP: Mutual agreement procedure may be denied, amongst other, in the following cases: ... Continue to full case
Russia vs ViciunaiRus LLC, December 2018, Court of Appeal, Case No. A21-133/2018

Russia vs ViciunaiRus LLC, December 2018, Court of Appeal, Case No. A21-133/2018

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled ... Continue to full case
South Africa vs Sasol Oil, November 2018, Supreme Court of Appeal, Case No 923/2017

South Africa vs Sasol Oil, November 2018, Supreme Court of Appeal, Case No 923/2017

The South African Supreme Court of Appeal, by a majority of the court, upheld an appeal against the decision of the Tax Court, in which it was held that contracts between companies in the Sasol Group of companies, for the supply of crude oil by a company in the Isle of Man to a group company in London, and the on sale of the same crude oil to Sasol Oil (Pty) Ltd in South Africa, were simulated transactions. As such, the Tax Court found that the transactions should be disregarded by the Commissioner for the South African Revenue Service, and that the Commissioner was entitled to issue additional assessments for the 2005, 2006 and 2007 tax years. On appeal, the Court considered all the circumstances leading to the conclusion of the impugned contracts, the terms of the contracts, the evidence of officials of Sasol Oil, ... Continue to full case
Netherlands vs B.V, July 2018, Hoge Raad Case No 17/04930 17/05713 17/05714

Netherlands vs B.V, July 2018, Hoge Raad Case No 17/04930 17/05713 17/05714

It follows from various Supreme Court judgments in the Netherlands that a loan is commercially irrational if no interest can be determined under which an independent third party would have been willing to grant the same loan. The consequence of a loan beeing deemed commercially irrational is that a loss is not deductible. This case addresses the implications of the Umbrella Judgement, in particular the question of how that judgment relates to case laws on unsecured loans and guarantees. The Advocate General concludes that the Umbrella Judgment is not applicable in this case and that the tax authorities has failed to demonstrate that an independent third party would not have been willing to enter a similar loan agreement. Click here for translation Nederland July 2018 ECLI NL PHR 2018 737 ... Continue to full case
US vs Reserve Mechanical Corp, June 2018, US Tax Court, Case No. T.C. Memo 2018-86

US vs Reserve Mechanical Corp, June 2018, US Tax Court, Case No. T.C. Memo 2018-86

The issues were whether transactions executed by the company constituted insurance contracts for Federal income tax purposes and therefore, whether Reserve Mechanical Corp was exempt from tax as an “insurance company”. For that purpose the relevant factors for a captive insurance to exist was described by the court. According to the court in determining whether an entity is a bona fide insurance company a number of factors must be considered, including: (1) whether it was created for legitimate nontax reasons; (2) whether there was a circular flow of funds; (3) whether the entity faced actual and insurable risk; (4) whether the policies were arm’s-length contracts; (5) whether the entity charged actuarially determined premiums; (6) whether comparable coverage was more expensive or even available; (7) whether it was subject to regulatory control and met minimum statutory requirements; (8) whether it was adequately capitalized; and (9) whether ... Continue to full case
Germany vs Hornbach-Baumarkt, May 2018, European Court of Justice, C-382/16

Germany vs Hornbach-Baumarkt, May 2018, European Court of Justice, C-382/16

In the Hornbach-Baumarkt case, a German parent company guaranteed loans of two related companies for no remuneration. The German tax authorities made an assessment of the amount of income allocated to the parent company as a result of the guarantee, based on the fact that unrelated third parties, under the same or similar circumstances, would have agreed on a remuneration for the guarantees. Hornbach-Baumarkt argued that German legislation was in conflict with the EU freedom of establishment and lead to an unequal treatment of domestic and foreign transactions since, in a case involving german domestic transactions, no corrections to the income would have been made for guarantees granted to subsidiaries. The company further argued that the legislation is disproportionate to achieving the objectives as it provides no opportunity for the company to present commercial justification for the non-arm’s-length transaction. The German Court requested a preliminary ... Continue to full case
Norway vs Hess Norge AS, May 2017, Court of Appeal

Norway vs Hess Norge AS, May 2017, Court of Appeal

A Norwegian subsidiary of an international group (Hess Oil), refinanced an intra-group USD loan two years prior to the loans maturity date. The new loan was denominated in Norwegian kroner and had a significantly higher interest rate. The tax authorities reduced the interest payments of the Norwegian subsidiary pursuant to section 13-1 of the Tax Act for fiscal years 2009 – 2011, thereby increasing taxable income for years in question with a total of kroner 262 million. The Court of Appeal found for the most part in favor of the tax administraion. Under the circumstances of the case, neither the claimed refinancing risk nor the currency risk could sufficiently support it being commercially rational for the subsidiary to enter into the new loan agreement two years prior to the maturity date of the original USD loan. When applying the arm’s length principle, the company’s refinancing ... Continue to full case
Norway vs. IKEA Handel og Ejendom, October 2016, Supreme Court HRD 2016-722

Norway vs. IKEA Handel og Ejendom, October 2016, Supreme Court HRD 2016-722

In 2007, IKEA reorganised its property portfolio in Norway so that the properties were demerged from the Norwegian parent company and placed in new, separate companies. The shares in these companies were placed in a newly established property company, and the shares in this company were in turn sold to the original parent company, which then became an indirect owner of the same properties. The last acquisition was funded through an inter-company loan. Based on the non-statutory anti-avoidance rule in Norwegian Tax Law, the Supreme Court concluded that the parent company could not be allowed to deduct the interest on the inter-company loan, as the main purpose of the reorganisation was considered to be to save tax. The anti-avoidance rule in section 13-1 of the Tax Act did not apply in this circumstance. Click here for translation Norway vs IKEA-Handel-og-Ejendom-HRD-2016-722 ... Continue to full case
Malaysia vs Ensco Gerudi, June 2016, High Court, Case No. 14-11-08-2014

Malaysia vs Ensco Gerudi, June 2016, High Court, Case No. 14-11-08-2014

Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia. The company did not own any drilling rigs, but entered into leasing agreements with a rig owner within the Ensco Group. One of the rig owners in the group incorporated a Labuan company to facilitate easier business dealings for the taxpayer. Ensco Gerudi entered into a leasing agreement with the Labuan company for the rigs. Unlike previous transactions, the leasing payments made to the Labuan company did not attract withholding tax. The tax authorities found the Labuan company had no economic or commercial substance and that the purpose of the transaction had only been to benefit from the tax reduction. The High Court decided in favour of the taxpayer. The Court held that there was nothing artificial about the payments and that the transactions were within the meaning and scope of the arrangements ... Continue to full case
Brazil vs Macopolo, July 2014, Supreme Tax Appeal Court, Case no 9101-001.954

Brazil vs Macopolo, July 2014, Supreme Tax Appeal Court, Case no 9101-001.954

The case involved export transactions carried out by a company domiciled in Brazil, Marcopolo, manufacturing bus bodies (shells) which were sold to subsidiary trading companies domiciled in low tax jurisdictions (Jurisdição com Tributação Favorecida). The trading companies would then resell the bus bodies (shells) to unrelated companies in different countries. The tax authorities argued that the sale of the bus bodies to the intermediary trading companies carried out prior to the sale to the final customers lacked business purpose and economic substance and were therefore a form of abusive tax planning. The Court reached the decision that the transactions had a business purpose and were therefore legally acceptable. Click here for translation Brazil vs M 2014 ... Continue to full case
Nederlands vs. Corp, January 2014, Lower Court, Case nr. AWB11/3717, 11/3718, 11/3719, 11/3720, 11/3721

Nederlands vs. Corp, January 2014, Lower Court, Case nr. AWB11/3717, 11/3718, 11/3719, 11/3720, 11/3721

The case involved a Dutch mutual insurance company, DutchCo, which paid surpluses from the insurance activity back to the participating members in the form of premium restitution. Prior to 2002, DutchCo reinsured the majority of its risks with external reinsurers via an external reinsurance broker. DutchCo kept a small part of the risks for its own account. In 2001, DutchCo established a subsidiary in Switzerland, Captive, to act as a captive reinsurance provider. DutchCo stated that the business rationale to establish Captive goes back to “9/11.” The resulting worldwide turmoil significantly impacted the reinsurance market. In an extremely nervous market, premiums increased and conditions were sharpened. From 2002 onward, all the reinsurance contracts of DutchCo were concluded with Captive (in exchange for payment of premiums), whereby Captive reinsured a vast majority of these risks with external reinsurers and kept a limited part of the risk ... Continue to full case