Category: Disallowed Deduction

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV. The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto. However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007. As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors ... Continue to full case
France vs. SMAP, March 2021, Administrative Court of Appeal, Case No. 19VE01161

France vs. SMAP, March 2021, Administrative Court of Appeal, Case No. 19VE01161

The French company SMAP carries out activities in the area of advertising management and organisation of trade fairs. Following an audit of the company for FY 2008 to 2011 and assessment was issued where deduction of costs for certain intra group “services” had been denied, resulting in additional value added tax, corporate income tax surcharges, apprenticeship tax and business value added tax. The company held that the tax administration had disregarded fiscal procedures, and that the reality of the services – and deductibility of the costs – cannot be disregarded on mere presumptions. Decision of the Court The Appeal of SARL SMAP was rejected by the Court. “Firstly, the administration notes that by virtue of a Lebanese legislative decree n° 46 of 24th June 1983, companies governed by Lebanese law … carrying out their essential activities outside the national territory are considered as offshore companies ... Continue to full case
Spain vs DIGITEX INFORMÁTICA S.L., February 2021, National Court, Case No 2021:629

Spain vs DIGITEX INFORMÁTICA S.L., February 2021, National Court, Case No 2021:629

DIGITEX INFORMATICA S.L. had entered into a substantial service contract with an unrelated party in Latin America, Telefonica, according to which the DIGITEX group would provide certain services for Telefonica. The contract originally entered by DIGITEX INFORMATICA S.L. was later transferred to DIGITEX’s Latin American subsidiaries. But after the transfer, cost and amortizations related to the contract were still paid – and deducted for tax purposes – by DIGITEX in Spain. The tax authorities found that costs (amortizations, interest payments etc.) related to the Telefonica contract – after the contract had been transferred to the subsidiaries – should have been reinvoiced to the subsidiaries, and an assessment was issued to DIGITEX for FY 2010 and 2011 where these deductions had been disallowed. DIGITEX on its side argued that by not re-invoicing the costs to the subsidiaries the income received from the subsidiaries increased. According to ... Continue to full case
Italy vs "Plastic Pipes s.p.a.", January 2021, Supreme Court, Case 230-2021

Italy vs “Plastic Pipes s.p.a.”, January 2021, Supreme Court, Case 230-2021

Plastic Pipes s.p.a. produces and sells flexible plastic pipes, via foreign subsidiaries, to which it supplies the product to be resold to foreign customers and it operates abroad, selling the product directly to customers, also in foreign countries where it has a subsidiary. The tax authorities had issued a notice of assessment for FY 2006 claiming that Plastic Pipes s.p.a. had incurred (and deducted) marketing costs in the interest of its subsidiaries, without recharging their share of the expenses. The Court of first instance set aside the assessment of the tax authorities. Judgement of the Supreme Court. The supreme Court dismissed the appeal of the tax authorities. Excerps “…the burden of proof on the tax authorities is limited to providing evidence of the existence of the intra-group transaction and of the agreement of a consideration lower than the normal market value; the taxpayer who intends ... Continue to full case
Chile vs Wallmart Chile S.A, October 2020, Tax Court, Case N° RUC N° 76.042.014K

Chile vs Wallmart Chile S.A, October 2020, Tax Court, Case N° RUC N° 76.042.014K

In 2009, Walmart acquired a majority in Distribución y Servicio D&S S.A., Chile’s leading food retailer. With headquarters in Santiago, Walmart Chile operates several formats including hypermarkets, supermarkets and discount stores. Following an audit by the tax authorities related to FY 2015, deduction of interest payments in the amount of CH$8.958,304,857.- on an “intra-group loan” was denied resulting in a tax payable of Ch$1,786,488,290. According to Wallmart, the interest payments related to debt in the form of future dividend payments/profit distributions. Decision of the Tax court “…this Court concludes that the claimant has not been able to prove the existence of a current account between Inversiones Walmart and Walmart Chile, nor has it been able to prove the appropriateness of the reduction in expenses in the amount of CH$8.958,304,857.- for interest paid to its related company, because it did not justify the need for such ... 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
Denmark vs Adecco A/S, Oct 2019, High Court, Case No SKM2019.537.OLR

Denmark vs Adecco A/S, Oct 2019, High Court, Case No SKM2019.537.OLR

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. “Section 2 of the Tax Assessment Act. Paragraph 1 states that, when calculating the taxable income, group affiliates must apply prices and terms for commercial or economic transactions in accordance with what could have been agreed if the transactions ... Continue to full case
Zimbabwe vs Delta Beverages LTD, Court Case No HH664-19

Zimbabwe vs Delta Beverages LTD, Court Case No HH664-19

Delta Beverages LTD had been issued a tax assessment where various fees for service, technology license of trademarks, technology and know-how had been disallowed by the tax authorities (Zimra) of Zimbabwe. Among the issues contented by the tax authorities were technical service fees calculated as 1.5 %  of turnover. “The sole witness confirmed the advice proffered to the holding company’s board of directors in the minutes of 17 May 2002 that such an approach was common place across the world. This was confirmed by the approvals granted by exchange control authority to these charges. It was further confirmed by the very detailed 19 page Internal Comparable Analysis Report dated 5 October 2010 conducted by a reputable international firm of chartered  accountants, which was commissioned by the Dutch Company to assess internal compliance with the arm’s length principles in its transfer pricing policy for trademark royalties ... Continue to full case
Spain vs ARW Enterprise Computin Solution SA, September 2019, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 - ECLI: ES:TSJM:2019:7038

Spain vs ARW Enterprise Computin Solution SA, September 2019, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 – ECLI: ES:TSJM:2019:7038

A Spanish subsidiary, ARW Enterprise Computin Solution SA, had deducted intra-group management fees paid according to two service contracts with two french group companies – Distrilogie SA and DCC France Holding SAS. For an expense to be deductible it is required not only that invoice, account, payments have been imputed correctly, but also that the expense have been held for obtaining income and to the direct benefit of the subsidiary. The Spanish tax authorities found, that these requirements had not been sufficiently proved by Computin Solution SA and issued a tax assessment. Click here for translation Spain vs Computin STSJ_M_7038_2019 ... Continue to full case
Norway vs A/S Norske Shell, September 2019, Borgarting lagmannsrett, Case No LB-2018-79168 – UTV-2019-807

Norway vs A/S Norske Shell, September 2019, Borgarting lagmannsrett, Case No LB-2018-79168 – UTV-2019-807

A/S Norske Shell – an entity within the Dutch Shell group – had operations on the Norwegian continental shelf and conducted research and development (R&D) through a subsidiary. All R&D costs were deducted in Norway. The Norwegian tax authority applied the arms length principle and issued a tax assessment. It was assumed that the R&D expense was due to a joint interest with the other upstream companies in the Shell group. The Court of Appeal found that the R&D conducted in Norway also constituted an advantage for the foreign companies within the group for which an independent company would demand compensation. The resulting reduction in revenue provided the basis for determining the company’s income on a discretionary basis in accordance with section 13-1 of the Tax Act. The tax authorities determination of the amount of the income reduction had not based on an incorrect or ... Continue to full case
Brazil vs "CCA group", September 2019, COSIT, SC No. 276-2019

Brazil vs “CCA group”, September 2019, COSIT, SC No. 276-2019

In a public ruling, the General Tax Coordination Office in Brazil (COSIT) found that a transaction labled as a “cost sharing agreement” between a foreign group and its Brazilian subsidiary, was in fact a mere agreement for provision of services. COSIT pointed to the key characteristics of cost sharing agreements. These had been listed in a prior ruling from 2012: Segregation of costs and risks inherent in the development, production or acquisition of goods, services or rights; Consistent contribution by each entity with expected and effectively-received benefits by each entity; Identification of the benefit to each participant entity; Mandatory reimbursement of costs incurred with no mark-up; Advantages offered to all participating group entities; and Payments for support activities whether such activities were actually used. < COSIT also pointed to the guidance provided in the 2017 Transfer Pricing Guidelines, Chapter VIII. Click here for translation SC_Cosit_n_276-2019 ... Continue to full case
Tanzania vs Alliance One Tobacco T. Ltd, August 2019, Court of Appeal, Case No.118 of 2018, TZCA 208

Tanzania vs Alliance One Tobacco T. Ltd, August 2019, Court of Appeal, Case No.118 of 2018, TZCA 208

In 2005 the tax authorities conducted an audit of Alliance One Tobacco T. Ltd and on that basis issued a notices of assessment for FY 2003 and 2004. In 2011 the tax authorities conducted another audit for the years of income 2009 and 2010 and issued an additional assessment. In the assessments, the tax authorities disallowed several corporate tax items relating to capital expenditure, inventory costs, loss of input stock and bad debt written off. Moreover, a significant transfer pricing adjustment was made on the price from Alliance One Tobacco to its sister company Alliance One International AGA. Judgement of the Court of Appeal The court ruled in favour of the tax authorities. “...in view of the reasons we have stated above with respect to the sole ground of appeal, we have to conclude that this appeal is bound to fail.” The court observed that: “In ... Continue to full case
Peru vs. Telefonica, July 2019, Supreme Court, Case No 11111-2016, Lima

Peru vs. Telefonica, July 2019, Supreme Court, Case No 11111-2016, Lima

Telefónica brought before the Supreme Court of Peru the following issues related to a long lasting dispute with SUNAT – the Peruvian tax authorities: 1: Financial Charges – Carve Out 2: Withdrawal of assets of majority shareholder Telefónica del Perú S.A.A. 3: Depreciation of fixed assets transferred 4: Tax deduction for “Overhead” 5: Provision for doubtful debt collection The Supreme Court agreed with the tax authorities on issues 1 and 4 (carve out financial charges, related to the way in which they were financed; and the overhead tax deduction, which the tax authorities considered to be an incorrect application of accounting standards). The remaining three issues are still awaiting final determination. Click here for English Translation Click here for other Translations New1 Corte Suprema de Justicia de la República ... Continue to full case
Japan vs. Universal Music Corp, June 2019, Tokyo District Court, Case No 平成27(行ウ)468

Japan vs. Universal Music Corp, June 2019, Tokyo District Court, Case No 平成27(行ウ)468

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. Decision of the Court The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. The case is now pending at the Tokyo High Court awaiting a final decision. Click ... Continue to full case
Italy vs Christian Fishbacher S.p.A, May 2019, Corte di Cassazione No 9615 Anno 2019

Italy vs Christian Fishbacher S.p.A, May 2019, Corte di Cassazione No 9615 Anno 2019

According to the Tax Authorities, the content of Christian Fishbacher S.p.A’s contract with the Swiss parent of the Group, granting limited right of use of the trademark, did not justify a royalty of 3.5%, to which an additional 1.6% was added as a contribution to the investments for the promotion and development of the brand. The appellate judge held that exceeding the values taken as “normal” by the circular 32 of 09/22/1980 not it were justified in the light of the concrete elements of the case is that correctly the Office had re-determined the value of the services within 2%, following the aforementioned Circular, which incorporated the indications of the report drawn up by the OECD in 1979. The circular identifies three levels for assessing the normal value of royalties: the first, not suspected, up to 2%; the second from 2% to 5%, determined on ... Continue to full case
Indonesia vs PK manufacturing Ltd, January 2019 Court of Appeal, Case No. PUT-115599.15/2014/PP/M.XIIIB Tahun 2019

Indonesia vs PK manufacturing Ltd, January 2019 Court of Appeal, Case No. PUT-115599.15/2014/PP/M.XIIIB Tahun 2019

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. Part 1 – Click here for translation Part 2 – Click here for translation Putusan Nomor ... Continue to full case
Taiwan vs Intracom, November 2018, Supreme Administrative Court, Case No 691 of 107

Taiwan vs Intracom, November 2018, Supreme Administrative Court, Case No 691 of 107

Intracom Taiwan had deducted losses on intra-group receivables and management fees in its taxable income. These deductions had been partially denied by the Taiwanese tax administration due to lack of documentation and economic substance. Intracom brought the case to court. The Supreme Administrative court dismissed Intracom’s appeal and upheld the assessment. On the issue of deduction for bad debt the court states: “The Appellee’s request for such documents was in accordance with the law. However, the Appellant was unable to produce documents that met the statutory requirements, and from this point of view, the Appellee’s refusal to allow the recognition of the doubtful accounts could not be considered an error. (3) The appellant’s argument that the tax authorities should accept the recognition of doubtful debts as long as the appellant obtains the documentary evidence of the “foreign office certification” which proves the objective fact that ... Continue to full case
Taiwan vs Jat Health Corporation , November 2018, Supreme Administrative Court, Case No 612 of 106

Taiwan vs Jat Health Corporation , November 2018, Supreme Administrative Court, Case No 612 of 106

A Taiwanese distributor in the Jat Health Corporation group had deducted amortizations and royalty payments related to distribution rights. These deductions had been partially denied by the Taiwanese tax administration. The case was brought to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The Appellant’s business turnover has increased from $868,217 in FY07 to $1,002,570,293 in FY12, with such a high growth rate, and the Appellant has to bear the increase in business tax, which is not an objective comparative analysis and is not sufficient to conclude that the purchase of the disputed supply rights was necessary or reasonable for the operation of the business.” Click here for English Translation 最高行政法院106年判字第612號判決 ... Continue to full case
Russia vs Suzuki Motors, August 2016, Arbitration Court, Case No. А40-50654/13

Russia vs Suzuki Motors, August 2016, Arbitration Court, Case No. А40-50654/13

A Russian subsidiary of the Suzuki/Itochu group had been loss making in 2009. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were due to non-arm’s length transfer pricing within the group and excessive deduction of costs. Decision of the Court The Court decided in favor of the tax authorities and upheld the assessment. “In view of the above, the appeal court considers that the courts’ conclusions that the Inspectorate had not proved that it was impossible to apply the first method for determining the market price and that the Inspectorate had incorrectly applied the resale price method were unfounded.” “In this light, the courts’ conclusions that the Inspectorate incorrectly applied the second method of determining the market price are unfounded.” “In such circumstances, the Inspectorate’s conclusion on the overstatement of the purchase price of vehicles is based on ... Continue to full case
Ecuador vs Cartorama C.A., May 2016, National Court, Case No. 0119-2015

Ecuador vs Cartorama C.A., May 2016, National Court, Case No. 0119-2015

Cartorama C.A. had been granted extensive credits by a related party Universal Paper S.A. The tax administration (SRI) claimed that no supplier would grant such credits to Cartorama given the company’s financial situation. Hence the loan was instead considered a equity contribution from Universal Paper S.A. and tax deductions claimed by Cartorama C.A. for interest payments for fiscal years 2005 and 2006 were disallowed. The Company disagreed with the assessment at brought the case to the court. The regional court held in favor of Cartorama C.A. and annulled the assessment, but this decision was then appealed by the tax authorities before the National Court. Judgment of the Court The National Court dismissed the decision of the regional court and confirmed the validity and legitimacy of the assessments issued by the Regional Director of the Internal Revenue Service. Click here for English Translation Click here for ... Continue to full case