Futaba Czech s.r.o. is a Czech company that has been operating since 2005 as a manufacturer and supplier of components for the automotive industry and is part of the Japanese Futaba group. Futaba had been loss making in FY 2016-2017.
Following a transfer pricing audit, the tax authorities found that Futaba had provided “comprehensive production service”, which should have compensated by the group. An assessment was issued based on the TNMM with NCP as Profit Level Indicator.
Futaba Czech contested the assessment on several grounds. It argued that no instructions or pricing directives from the parent had been proven; that it in fact bore most business functions, risks and financing decisions; that the tax authorities had wrongly reallocated the functional‐and‐risk profile in a value‐chain analysis (for example assigning research and development 50 percent weight versus only 15 percent to production); that the choice of the transaction‐net‐margin method and aggregation over individual‐transaction methods was unjustified; that the reference period (2014–16) and use of the interquartile range to narrow the sample of twelve comparables lacked reviewable statistical reasoning; and that various “extraordinary” cost factors (long‐term contracts, wage and scrap costs) were improperly disregarded or only proportionally recognized.
Judgement
The Regional Court upheld the tax assessment issued by the tax authorities.
The court found that the parties were unquestionably related, that the parent’s seconded managers exercised strategic control, and that the tax authorities had applied the agreed TNMM methodology using Futaba Czech as the tested party. It held that the three‐year reference period and interquartile range-approach fell within both accepted OECD‐and‐domestic guidelines, that the value‐chain weight adjustments reflected the parent’s contribution of know‐how and strategic functions, and that only those extraordinary cost items supported by evidence could be recognized when comparing profitability.
Because the tax authority had met its burden of proof at each step;identifying a controlled transaction, establishing arm’s‐length comparables and showing the subsidiary could not satisfactorily explain the deviation, the court dismissed Futaba’s appeal.
Click here for English Translation
Click here for other translation