“Marine Fuel Ltd” was audited for FY 2015 and an assessment was issued by the tax authorities, where the taxable income had been increased due to a transfer pricing adjustment. The tax authorities had dismissed the CUP method chosen by the group and instead applied the transactional net margin method (TNMM).
Not satisfied with the adjustment, a complaint was filed by “Marine Fuel Ltd” with the Dispute Settlement Board.
Judgment of the Board
The Board dismissed the complaint of “Marine Fuel Ltd” and upheld the assessment issued by the tax authorities.
Excerpts
“As some separate transactions carried out between associated enterprises may need to be assessed as a single transaction in order to determine whether the arm’s length principle is respected, other transactions between these enterprises that were invoiced as a package may need to be assessed separately. A group may combine a package of transactions and set a price for a set of transactions, such as intangible assets for the use of a patent, know-how, and trademarks, the provision of technical and administrative services, and the leasing of production facilities. This type of transaction is usually called a package transaction. However, such package transactions are not likely to involve the sale of goods, although the price charged for the sale of goods may cover some of the accompanying services. In some cases, it may not be possible to evaluate the entire package so that some elements of the package will need to be evaluated separately. In such cases, after establishing separate equidistance prices for each element of the package, the tax administration should nevertheless assess whether the intra-group pricing for the whole package respects the equidistance.”
Therefore, on the basis of the above, the tax authority was right to apply the transactional net margin method in order to examine whether the intra-group pricing for all transactions (examined on a single, combined basis) complied with the arm’s length principle.
Since, as regards the applicant’s claim concerning the uniform treatment of transactions and the transactional approach to documentation, the sale of marine fuels is an inextricably linked transaction with the provision of liquid residue collection and treatment services, the audit considered that these transactions should be considered as a whole for the purposes of the arm’s length principle, in accordance with paragraph 3.9 of Section A.3.1 of Chapter 3 of the OECD Guidelines (July 2010) which inter alia states:
“Ideally, in order to approximate free market conditions and equal distance, the principle of equal distance should be applied on a transaction-by-transaction (transaction-by-transaction) basis. However, there are often cases where separate transactions are so closely related or continuous that they cannot be adequately assessed for compliance or not with the principle of equal distance separately.”
For this reason, the audit established a sample of marine fuel trading companies in order to identify third independent comparable wholesale marine fuel trading companies and to add them to the final comparable sample of third independent third party collection and treatment service providers of liquid residues, and to examine the principle of equal distance as a whole for the applicant’s activities, namely the sale of marine fuels and the provision of collection and treatment services for marine fuels. Therefore, the final comparable sample of undertakings selected by the audit consists of the sum of the final individual comparable samples of the two activities.
Because, as regards the applicant company’s claim concerning the adjustments to the company’s results, according to paragraph 1.64 of Section D.2 of Chapter 1 of the OECD Guidelines (July 2010): ‘The examination of a controlled transaction by the tax administration should normally be based on the transaction actually carried out by the associated enterprises as carried out by them, using the methods applied by the taxpayer to the extent that they are in accordance with the methods used by the taxpayer’. Except in exceptional circumstances, the tax administration should not ignore the transactions carried out or substitute other transactions for them. Restructuring of business transactions would be a wholly arbitrary practice, the inequity of which may be exacerbated by the double taxation that may arise when another tax administration does not have the same view of how the transaction should have been carried out…”
In addition, according to paragraph 5.3 of Section B of Chapter 5 of the OECD Guidelines (July 2010): ‘Each taxpayer should seek to determine its intra-group pricing that complies with the arm’s length principle for tax purposes based on information reasonably available at the time of determination. Thus, a taxpayer should normally consider whether the intragroup pricing is appropriate for tax purposes before determining its intragroup pricing. For example, it would be reasonable for a taxpayer to have considered whether comparative information is available from non-controlled transactions. A taxpayer could also be expected to consider, based on information that is reasonably available, whether the circumstances it faced and used to determine intragroup pricing in prior years have changed, in case those circumstances are used to make the intragroup pricing determination for the current year.”
The audit, taking into account the above, correctly concluded that the applicant company incorrectly adjusted its results and adjusted its total income after the transactions had taken place in order to increase its net profit margin in accordance with the arm’s length principle, since the determination of prices must be made at the time the transactions take place and not ex post and must correspond to transactions that have taken place and have been recorded in the company’s books.”
…
“Since the audit findings as recorded in the relevant reports of 08/07/2021 of the partial on-site audit of income tax determination and partial audit of value added tax determination of the C.E.M.E.P. are considered to be well-founded, thorough and fully justified, the present appeal must be dismissed.
We decide
Rejection of the complaint lodged on 10/09/2021….”
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