Netherlands vs “Car B.V.”, 28 June 2002, Supreme Court, Case No 36446, ECLI:NL:HR:2002:AE4718

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In this case a Dutch subsidiary of a Japanese car group incurred losses related to import and sales of a specific car model. However in total the car importer remained profitable.

The tax authorities claimed that the purchase price of the specific car model had been too high, and on that basis an assessment of additional income was issued.

Judgement of the Supreme Court

The court set aside the assessment and decided in favour of the car importer.

According to the court the tax authorities did not make it sufficiently plausible that the price for the car model had not at arm’s length – taking into consideration the overall functions and profitability of the car importer.

Excerpt
“The following must be stated first. The at arm’s length principle, as included in Article 10(b) of the Treaty with Japan (Treaty Series 1970, 67, as amended by Treaty Series 1992, 68) empowers the Netherlands to take into account advantages that would have accrued between independent third parties but that did not accrue to a particular taxpayer because of its affiliation. The Netherlands exercises this power within the framework of Article 7 of the Law on Income Tax of 1964 (now: Article 3.8 of the Law on Income Tax of 2001), which in this context means that the profit includes all the benefits that the taxpayer has allowed to elude it because of the relationship with its shareholder. Dutch legislation and regulations do not contain any rules as to the manner in which those benefits must be determined and calculated. Accordingly, there is no rule of law which means that, in order to determine whether such an advantage exists, each individual transaction or each group of transactions relating to a particular product or group of products must be tested against the at arm’s length principle. Testing against the aforementioned principle of the totality of conditions relating to the total product range as applicable between a taxpayer and its shareholder(s) can be done without infringing any rule of law. Nor is it an infringement of the law if, in order to answer the question whether a taxpayer has allowed itself to be deprived of advantages on account of the shareholding relationship, decisive significance is attached to the answer to the question whether a non-affiliated third party would have entered into or evaded the full range of rights and obligations applicable to that taxpayer. Nor do the OECD reports ‘Transfer pricing and multinational enterprises’ of 1979 and 1984, revised and compiled in the ‘Transfer pricing guidelines for multinational enterprises and tax administrations’ of 1995, imply that the at arm’s length principle should be applied in any other way. The OECD reports recommend, on the one hand, that the comparable third-party price per individual transaction should be used as the starting point wherever possible, but, on the other hand, they recognise that only rarely does that price lead to a correct adjustment, that compensating transactions must be taken into account and that, under certain circumstances, it is not the assessment of the individual transfer prices but the profitability of the associated enterprise, particularly in relation to the capital requirement and the business risk assumed by the enterprise, that leads to an acceptable result. Thus, in the view expressed in the OECD reports, all methods, ranging from the latter “functional analysis” on the one hand to determining the correct price for a single transaction on the other, are permitted in principle, albeit with the explicit exception of the “global formulary apportionment” method. It will depend on the circumstances which method leads to the most acceptable correction in a concrete situation.”

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ECLI_NL_HR_2002_AE4718

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