A Czech toll manufacturer realized losses due to low capacity utilization. Transfer pricing for the manufacturing services, had been determined by applying a cost plus method based on a budget costs without a year-end true-up. In 2008, capacity utilization was low due to market conditions and the company incurred a loss.
The tax authority performed a benchmarking study using the transactional net margin method to determine the arm’s length range of net cost plus mark-ups, and issued an adjustment on that basis.
The Czech manufacturing company argued that the loss was a result of market conditions and appealed the assessment.
The Supreme Administrative court held that capacity utilization risk should be absorbed by the principal and not the low risk toll manufacturer. A low risk toll manufacturer may only end up in a loss position if extra costs result from its own risks – manufacturing inefficiencies. Hence, the appeal was dismissed.Czech vs. German Corp 2016 Supreme Administrative Court 0194_5Afs_1500034