This case concerns allocation of profits resulting from centralizing procurement functions within a group.
The tax authorities took the position that the profit claimed by a centralized purchasing office was not aligned with the functions performed and the risks assumed by the office. According to the tax authorities profits derived from the realized discounts should be distributed to the members of the group (including a Dutch member) in proportion to their contribution of purchasing volume.
Judgement of the Court
The Supreme Court ruled in favor of the tax authorities. Profits in excess of the costs of the centralized purchase office with a markup of 5%, should at arm’s length be distributed to the members of the group in proportion to their contribution of purchasing volume.
“5.14. Notwithstanding the fact that [A-2 NV]’s profit was not so much caused by its own efforts but by the group’s policy of concentrating the price negotiations in [A-2 NV], and the extremely limited risk run by [A-2 NV], it was left with an advantage that exceeded the costs it had incurred many times over (see 3.14). This was foreseeable in advance since – as the inspector argued in his defence, undisputedly – the approximate costs associated with the purchasing activity were known to all the companies involved, and it is implausible that this would not apply to the level of purchases at gross prices.
5.15. The foregoing justifies the presumption that the services provided by [A-2 NV] to the interested party took place under conditions that would not have been agreed upon between independent parties in economic transactions and that the circumstance that [A-2 NV] was enabled to achieve such a high profit in relation to its costs arises from the (indirect) shareholder relations existing between the companies concerned. In fairness, the interested party has the burden of rebutting this presumption.
5.17. It is also incorrect – as the interested party argues – that in the search for the price that the interested party would be prepared to pay in an independent relationship, it should be abstracted from the fact that the production companies belong to one group. On the contrary, acting at arm’s length, the affiliated operating companies would approach a third party jointly if this resulted in more favourable conditions for those operating companies.”