Category: Delineation – Substance over Form

Delineation – determening the actual substance of deals – is the framework for analysing controlled transactions. Guidance for identifying the commercial or financial relations is provided in TPG Ch I:

  1. Identify the assets used and the significant risks associated with the transaction.
  2. Identify the contractual arrangements , including contractual assumption of risks;
  3. Identify the parties performing functions, using assets, and managing risks in a functional analysis.
  4. Confirm the consistency between contractual arrangements and the conduct of the parties, and determine whether the party assuming risks also controls risks and has financial capacity.
  5. Delineate the actual controlled transaction.
  6. Determine arm’s length prices for these transactions consistent with each party’s contributions of functions performed, assets used, and risks assumed, unless non-recognition guidance applies.

Finland vs Borealis OY, March 2019, Administrative Court, Decisions not yet published

On 19 March 2019, the Helsinki Administrative Court issued two decisions in a tax dispute between the Finnish tax authorities and Borealis Polymers Oy and Borealis Technology Oy. The decisions have not yet been published. Borealis Polymers Oy and Borealis Technology Oy are subsidiaries of Borealis AG. The Austrian Group is a leading provider of polyolefin compounds for the global wire and cable industry, plastic materials for the automotive industry and for used in consumer products. The group also produces a wide range of base chemicals such as melamine, phenol, acetone, ethylene and propylene, as well as fertilizers and technical nitrogen products. The decisions cover fiscal years 2008, 2009 and 2010 and – according to Borealis’ public statement – relates to re-characterisation of intra group licence agreements. Additional information is providedIn Borealis’ Annual report for 2018: Borealis Technology OY, Finland, for 2008 and 2010: The ... Continue to full case
India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

Aegis Ltd had advanced money to an assosiated enterprice (AE)  and recived preference shares carrying no dividend in return. The Indian Transfer Pricing Officer (TPO) held that the “acqusition of preference shares” were in fact equivalent to an interest free loan advanced by Aegis Ltd to the assosiated enterprice and accordingly re-characterised the transaction and issued an assessment for 2009 and 2010 where interest was charged on notional basis. Aegis Ltd disagreed with the assessment of the TPO and brought the case before the Tax Tribunal. The Tribunal did not accept the conclusions of the TPO. “The TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the ... 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
Canada vs Cameco Corp., October 2018, Tax Court of Canada, Case No 2018 TCC 195

Canada vs Cameco Corp., October 2018, Tax Court of Canada, Case No 2018 TCC 195

Canadian mining company, Cameco Corp., sells uranium to a wholly owned trading hub, Cameco Europe Ltd., registred in low tax jurisdiction, Switzerland, which then re-sells the uranium to independent buyers. The parties had entered into a series of controlled transactions related to this activity and as a result the Swiss trading hub, Cameco Europe Ltd., was highly profitable. Following an audit, the Canadian tax authorities issued a transfer pricing tax assessment covering years 2003, 2005, 2006, and later tax assessments for subsequent tax years, adding up to a total of approximately US 1.5 bn in taxes, interest and penalties. The tax authorities first position was that the controlled purchase and sale agreements should be disregarded as a sham as all important functions and decisions were in fact made by Cameco Corp. in Canada. As a second and third position the tax authorities held that the Canadian transfer ... Continue to full case
India vs. Vodafone India Services Pvt Ltd, Jan 2018, ITA No.565 Ahd 2017

India vs. Vodafone India Services Pvt Ltd, Jan 2018, ITA No.565 Ahd 2017

The 2018 Vodafone case from India – whether termination of option rights under an agreement can be treated as a “deemed international transaction” under section 92B(2) of the Income Tax Act. Vodafone India Services had a call option to buy shares in SMMS Investment Pvt Ltd — which held 5.11% equity capital of the Vodafone India through a web of holdings for 2.78 crore if the fair market value of these shares was less than 1,500 crore. If the fair market value was higher, it had to pay a little more. Under the same agreement, if Vodafone India Services terminated its right to acquire the share, the company would have to pay Rs 21.25 crore. Instead of exercising the call option and acquiring the valuable shares at a very low price, Vodafone India Service terminated the option and paid 21.25 crore. The tax administration held ... Continue to full case
UK vs. BNP PARIBAS, September 2017, FIRST-TIER TRIBUNAL TAX CHAMBER, TC05941

UK vs. BNP PARIBAS, September 2017, FIRST-TIER TRIBUNAL TAX CHAMBER, TC05941

The issues in this case was: Whether the price of purchase of right to dividends were deductible. Whether the purchase and sale of right to dividends was trading transaction in course of Appellant’s trade. Whether the purchase price expenditure incurred wholly and exclusively for purposes of the trade. Whether HMRC were permitted to argue point in relation to section 730 ICTA that was not raised in closure notice and which they stated they were not pursuing Whether the price of sale of right to dividends should be disregarded for the purposes of calculating Appellant’s trading profits under section 730(3) ICTA BNP-vs-HMRC Share: ... Continue to full case
US vs. Exelon Corp, September 2016, US Tax Court

US vs. Exelon Corp, September 2016, US Tax Court

The case was about a sale and lease back arrangement characterizised as a loan by the US tax authorities referring to “substance over form”. The Court agreed with the tax authorities. “We have held that all of the test transactions failed the substance over form inquiry because petitioner did not acquire the benefits and burdens of ownership in the assets involved in the test transactions. We have also concluded that the test transactions are more similar to loans made by petitioner to CPS and MEAG because petitioner’s return on its investment was predetermined at the time petitioner entered into the test transactions. Accordingly, in 1999 petitioner exchanged the Powerton and Collins power plants for an interest in financial instruments. Such an exchange fails to meet the “like kind” requirement outlined in the Code and the regulations. Thus, petitioner must recognize the gain it received in 1999 on ... Continue to full case
India vs. Li & Fung (Trading) Ltd. March 2016, ITTA

India vs. Li & Fung (Trading) Ltd. March 2016, ITTA

Li & Fung (Trading) Ltd., Hong Kong, entered into contracts with its global third party customers for provision of sourcing services with respect to products to be sourced by such global customers directly from third party vendors in India. For the sourcing services, the Hong Kong company received a 5% commission of the FOB value of goods sourced. The company in India was providing sourcing support services to the Hong Kong group company, and remunerated at cost plus 5 percent mark-up for provision of these services. The tax administration found that the the company in India should get the 5% commission on the free on board (FOB) value of the goods sourced from India as the Hong Kong company contributed no value. The Tribunal held that the compensation received by the company in Hong Kong – 5% of the FOB value – should be distributed between the company in India and the company in Hong Kong in the ... Continue to full case
Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

A Ab had in 2009 from its majority shareholder B, based in Luxembourg, received a EUR 15 million inter-company loan. A Ab had in 2009 deducted 1,337,500 euros in interest on the loan. The loan had been granted on the basis that the banks financing A’s operations had demanded that the company acquire additional financing, which in the payment scheme would be a subordinated claim in relation to bank loans, and by its nature a so-called IFRS hybrid, which the IFRS financial statements were treated as equity. The loan was guaranteed. The fixed annual interest rate on the loan was 30 percent. The loan could be paid only on demand by A Ab. The Finnish tax authorities argued that the legal form of the inter-company loan agreed between related parties should be disregarded, and the loan reclassified as equity. Interest on the loan would therefore not be deductible for A Ab ... Continue to full case
France vs SARL Garnier Choiseul Holding, 17 July 2013, CE No 352989

France vs SARL Garnier Choiseul Holding, 17 July 2013, CE No 352989

This case is about the importance of proving that the transaction has a real economic purpose, and that it does not artificially seek to achieve tax benefits. The courts also consider the spirit of the law, for example, the purpose of the tax exemptions relating to parent-subsidiary distributions is to involve the parent company in the business of the subsidiary. Click here for translation France vs SARL Garnier Choiseul Holding Conseil_d_État_9ème___10ème_SSR_17_07_2013_352989 Share: ... Continue to full case
US vs Container Corp., May 2011, US COURT OF APPEALS, No. 10-60515

US vs Container Corp., May 2011, US COURT OF APPEALS, No. 10-60515

In this case a US subsidiary, Container Corp, had paid guaranty fees to its foreign parent company Vitro in Mexico. In the US tax return, the fee had been considered analogous to payments for services, and the income was sourced outside the United States and not subject to withholding tax. The IRS held that the guaranty fees were more closely analogized to interest and thus subject to withholding taxes of 30 %. The Tax Court issued an opinion siding with Container Corp. The Commissioner brought the opinion before the US Court of Appeals. The Court of Appeals also found in favor of Container Corp. “To determine what class of income guaranty fees fall within or may be analogized to, the court must look to the “substance of the transaction”. The Commissioner contends the guaranty fees are more closely analogized to interest, while Container Corporation argues ... Continue to full case
Norway vs. Telecomputing, June 2010, Supreme Court case nr. HR-2010-1072-A

Norway vs. Telecomputing, June 2010, Supreme Court case nr. HR-2010-1072-A

This case was about the qualification of capital transfers to a US subsidiary – whether the capital should be qualified as a loan (as done by the company) or as a equity contribution (as agrued by the tax administration). The Supreme Court concluded that the capital transfers to the subsidiary as a whole should be classified as loans. The form chosen by the company (loan) had an independent commercial rationale and Section 13-1 of the Tax Code did not allow for reclassification of the capital transfer The Supreme Court ruled in favor of Telecomputing AS. Click here for translation Norway rt-2010-s-790-Telecomputing-rentefritt-lån Share: ... Continue to full case
New Zealand vs Australian-owned banks – ANZ, ASB, BNZ and Westpac

New Zealand vs Australian-owned banks – ANZ, ASB, BNZ and Westpac

In 2009, New Zealand’s tax authorities made an out of court tax settlement of $2.2 billion. Australian-owned banks – ANZ, ASB, BNZ, and Westpac – agreed to recognise a extra tax bill of $2.2 billion between them, they avoided via deliberately complicated structured financial transactions. The Four banks entered the settlement after two of them had been to court and lost. Westpac Banking Corporation v Commissioner of Inland Revenue, Feb 2009 BNZ Investments Ltd v Commissioner of Inland Revenue, July 2009 Share: ... Continue to full case
New Zealand vs Westpac Banking Corporation, February 2009, High Court, Case no CA624/07

New Zealand vs Westpac Banking Corporation, February 2009, High Court, Case no CA624/07

Westpac Banking Corporation has challenged amended assessments issued by the Commissioner of Inland Revenue to its taxation liability for the years 1999 to 2005. The assessments impugn the bank’s taxation treatment of nine structured finance transactions entered into with overseas counterparties in that period. The funds invested in each transaction ranged between NZD390m and NZD1.5b. By August 2002 Westpac’s total investment in the transactions was NZD4.36b, representing 18% of its assets. The Commissioner says that the purpose or effect of the transactions or parts of them was tax avoidance. He has reassessed Westpac to liability of $586m. With the addition of use of money interest of $375m, the total amount of tax at issue is $961m (including voluntary payments of $443m made by the bank under protest). In brief summary, the transactions were structured in this way: Westpac, acting through subsidiaries, purchased preference shares issued ... Continue to full case
Netherlands vs Shoe Corp, June 2007, District Court, Case nr. 05/1352, VSN June 2, 2007

Netherlands vs Shoe Corp, June 2007, District Court, Case nr. 05/1352, VSN June 2, 2007

This case is about a IP sale-and-license-back arrangement. The taxpayer acquired the shares in BV Z (holding). BV Z owns the shares in BV A and BV B (the three BVs form a fiscal unity under the CITA). BV A produces and sells shoes. In 1993, under a self-proclaimed protection clause, BV A sells the trademark of the shoes to BV C, which is also part of the fiscal unity. The protection clause was supposedly intended to protect the trademark in case of default of BV A. Taxpayer had created BV C prior to the sale of the trademark. In 1994, the taxpayer entered into a licensing agreement with BV C: the taxpayer pays NLG 2 to BV C per pair of shoes sold. Next, BV C is then moved to the Netherlands Antilles, which results in the end of the fiscal unity as of January ... Continue to full case
Canada vs. Avotus Corporation. November 2006

Canada vs. Avotus Corporation. November 2006

The Tax Court of Canada upheld the right of Avotus Corporation to deduct from its Canadian income losses incurred by its subsidiary in Puerto Rico. The Tax Court found that the Puerto Rican subsidiary was Avotus’s agent under a validly executed agency agreement, rejecting the CRA’s claim that the written agreement was unacceptable because the subsidiary’s conduct was inconsistent with that of an agent. Canada-Avotus-Corporation-v.-The-Queen Share: ... Continue to full case
The Netherlands vs X BV, February 2004, Appellate Court of Amsterdam V-N 2004/39.9.

The Netherlands vs X BV, February 2004, Appellate Court of Amsterdam V-N 2004/39.9.

X BV, is member of the English XX-group. One of X’s parents is XX Ltd., based in the United Kingdom. In 1992, X BV acquired licensing rights relating to the trade name J from J Ltd. Their value was determined to be GBP 19.2 million. According to the agreement, X BV paid GBP 19 million for the ten-year economic ownership of the licensing rights. J Ltd. sold the legal ownership to W BV for GBP 200,000 in which X BV owned all shares. In 1996, X BV sells the ten-year economic ownership to W BV for GBP 2 million. To support the GBP 19 million price for the economic ownership, a valuation report is drawn up in 1992. The valuation is based on “projected royalty streams” which showed increasing royalty streams over the ten-year period 1992-2002. The tax authorities disagrees with the price of GBP ... Continue to full case
US vs Eli Lilly & Co, October 1998, United States Court of Appeals

US vs Eli Lilly & Co, October 1998, United States Court of Appeals

In this case a pharmaceutical company in the US, Eli Lilly & Co, transferred valuable pharmaceutical patents and manufacturing know-how to its subsidiary in Puerto Rico. The IRS argued that the transaction should be disregarded (substance over form) and claimed that all of the income from the transferred intangibles should be allocated to the U.S. parent. The Judgment from the Tax Court: “Respondent’s argument, that petitioner, having originally developed the patents and know-how, is forever required to report the income from those intangibles, is without merit. Respondent ignores the fact that petitioner, as developer and owner of the intangible property, was free to and did transfer the property to the Puerto Ricanaffiliate in 1966.” The Court of Appeals altered the judgement from the Tax Court. According to the Court of Appeals, the parent company had received an arm’s length consideration for the transfer of intangibles ... Continue to full case
US vs Laidlaw Transportation, Inc., June 1998, US Tax Court, Case No 75 T.C.M. 2598 (1998)

US vs Laidlaw Transportation, Inc., June 1998, US Tax Court, Case No 75 T.C.M. 2598 (1998)

Conclusion of the Tax Court: “The substance of the transactions is revealed in the lack of arm’s-length dealing between LIIBV and petitioners, the circular flow of funds, and the conduct of the parties by changing the terms of the agreements when needed to avoid deadlines. The Laidlaw entities’ core management group designed and implemented this elaborate system to create the appearance that petitioners were paying interest, while in substance they were not. We conclude that, for Federal income tax purposes, the advances from LIIBV to petitioners for which petitioners claim to have paid the interest at issue are equity and not debt. Thus, petitioners may not deduct the interest at issue for 1986, 1987, and 1988.” NOTE: 13 October 2016 section 385 of the Internal Revenue Code was issued containing regulations for re-characterisation of Debt/Equity for US Inbound Multinationals. Further, US documentation rules in Treasury Regulation ... Continue to full case
US vs Estate of Mixon, July 1972, United States Court of Appeals, Fifth Circuit, 464 F.2d 394

US vs Estate of Mixon, July 1972, United States Court of Appeals, Fifth Circuit, 464 F.2d 394

In this case the court had to decide whether advances made by a shareholder to a corporation constituted loans or capital contributions. For that purpose a list of 13 factors was established by the court. (1) the names given to the certificates evidencing the indebtedness; (2) The presence or absence of a fixed maturity date; (3) The source of payments; (4) The right to enforce payment of principal and interest; (5) participation in management flowing as a result; (6) the status of the contribution in relation to regular corporate creditors; (7) the intent of the parties; (8) “thin” or adequate capitalization; (9) identity of interest between creditor and stockholder; (10) source of interest payments; (11) the ability of the corporation to obtain loans from outside lending institutions; (12) the extent to which the advance was used to acquire capital assets; and (13) the failure of ... Continue to full case