A Dutch company “Tobacco B.V.” belonging to an internationally operating tobacco group was subjected to (additional assessment) corporate income tax assessments according to taxable amounts of €2,850,670,712 (2013), €2,849,204,122 (2014), €2,933,077,258 (2015) and €3,067,630,743 (2016), and to penalty fines for the year 2014 of €1,614,709, for the year 2015 of €363,205 and for the year 2016 of €125,175,082. In each case, the dispute focuses on whether the fees charged by various group companies for supplies and services can be regarded as business-related. Also in dispute is whether transfer profit should have been recognised in connection with a cessation of business activities.
One of the group companies provided factoring services to “Tobacco B.V.”. The factoring fee charged annually for this includes a risk fee to cover the default risk and an annual fee for other services. The court concluded that the risk was actually significantly lower than the risk assumed in determining the risk fee, that the other services were routine in nature and that the factoring fee as a whole should be qualified as impractical. “Tobacco B.V.” has not rebutted the presumption that the disadvantage caused to it by paying the factoring fees was due to the affiliation between it and the service provider.
In 2016, a reorganisation took place within the tobacco group in which several agreements concluded between group companies were terminated. The court concluded that there had been a coherent set of legal acts, whereby a Dutch group company transferred its business activities in the field of exporting tobacco products, including the functions carried out therein, the risks assumed therein and the entire profit potential associated therewith, to a group company in the UK. For the adjustment related to the transfer profit, the court relies on the projected cash flows from the business and information known at the time the decision to transfer was taken.
The conclusions regarding factoring and the termination of business activities in the Netherlands lead to a deficiency in the tax return for each of the years 2014 to 2016. For these years, “Tobacco B.V.” filed returns to negative taxable amounts. For the years 2014 and 2016, a substantial amount of tax due arises after correction, even if the corrections established by application of reversal and aggravation are disregarded. For the year 2015, the tax due remains zero even after correction. Had the return been followed, this would have resulted in “Tobacco B.V.” being able to achieve, through loss relief, that substantially less tax would be due than the actual tax due. At the time the returns were filed, “Tobacco B.V.” knew that this would result in a substantial amount of tax due not being levied in each of these years and the court did not find a pleading position in this regard. The burden of proof is therefore reversed and aggravated. For the year 2013, this follows from the court’s decision of 17 October 2022, ECLI:NL:RBNHO:2022:8937.
To finance their activities, the group companies issued listed bonds under the tobacco group’s so-called EMTN Programme, which were guaranteed by the UK parent company. A subsidiary of “Tobacco B.V.” joined in a tax group paid an annual guarantee fee to the UK parent company for this purpose. The court ruled that:
– the guarantee fees are not expenses originating from the subsidiary’s acceptance of liability for debts of an affiliated company;
– the EMTN Programme is not a credit arrangement within the meaning of the Umbrella Credit Judgment(ECLI:NL:HR:2013:BW6520);
– “Tobacco B.V.” has made it clear that a not-for-profit fee can be determined at which an independent third party would have been willing to accept the same liability on otherwise the same terms and conditions;
– “Tobacco B.V.” failed to show that in the years in which the guarantee fees were provided, credit assessments did not have to take implied guarantee into account;
– “Tobacco B.V.” failed to show that its subsidiary was not of such strategic importance to the group that its derivative rating did not match the group rating, so that the guarantee fees paid are not at arm’s length due to the effect of implied guarantee in their entirety;
– “Tobacco B.V.” did not put forward any contentions that could rebut the objectified presumption of awareness that follows from the size of the adjustments (the entire guarantee fee), that the disadvantage suffered by the plaintiff as a result of the payment of the guarantee fees is due to its affiliation with its parent company.
A group company charges the claimant, inter alia, a fee corresponding to a percentage of “Tobacco B.V.”‘s profits (profit split) for activities on behalf of the tobacco group that result in cost savings for “Tobacco B.V.”. The court ruled that “Tobacco B.V.” failed to prove that the group company made a unique contribution to the tobacco group that could justify the agreed profit split. The group company also charges “Tobacco B.V.” a fee equivalent to a 12% mark-up on costs for services relating to the manufacture of cigarettes. The court ruled that, in the context of the reversal and aggravation of the burden of proof, it was not sufficient for “Tobacco B.V.” to refer to the functional analysis, as it was based on the incorrect premise that the group company could be compared to a manufacturer. Finally, since April 2012, “Tobacco B.V.” has been paying the group company a 10% fee on the costs excluding raw materials for the production of cigarettes as toll manufacturer, where previously the basis of this fee also included the costs of raw materials. The court noted that the flow of goods remained the same and that “Tobacco B.V.” remained operationally responsible for the production process. The court ruled that it was up to “Tobacco B.V.” to establish and prove facts from which it follows that it was businesslike to change the basis of remuneration, which it did not do sufficiently.
Regarding an adjustment made by the tax authorities in relation to reorganisation costs, the court finds that the adjustment was made in error.
“Tobacco B.V.” paid Innovations and Technology (I&T) royalties of 2% (later 3%) of net sales made using a licence provided by a group company. It also paid 5% trade mark royalties which are not in dispute. The court considered that in a transfer pricing dispute, the royalties are allowed to be within a certain range, so “Tobacco B.V.” succeeded in its burden of proof under the reversal and aggravation test if it makes it appear that the total royalty of 7% or the separate 2% I&T royalty is at arm’s length. However, “Tobacco B.V.” fails to meet its burden of proof.
“Tobacco B.V.” financed participations with long-term bond loans. Referring to the Triple Dip judgment(ECLI:NL:HR:2021:1102), the court rejected the tax authorities’ argument that it was impractical to link the maturity of these loans not to the “Tobacco B.V.”‘s operating results but to the participations. The loans were agreed with unrelated parties and the funds were used to purchase the participations. The loan terms can be considered arm’s length.
“Tobacco B.V.” and the tax authorities entered into a settlement agreement at the end of 2011 whereby they agreed that a dispute over corrections related to the termination of Russian and Turkish licence rights in the period 2004 – 2009 would remain dormant as long as “Tobacco B.V.” obtained some form of compensation in the form of levy rights on profits from Italian, Slovenian, Croatian and Austrian licences. The discussion would not resume if certain conditions were met. The court concludes that “Tobacco B.V.” failed to prove the relevant facts for this purpose. The court further concludes that, as regards the adjustments applied by the tax authorities, “Tobacco B.V.” did not state sufficient facts and circumstances and, in the event of a dispute, did not make it clear that and to what extent the values underlying these adjustments were incorrect.
The court ruled that the adjustment of transfer prices did not violate European law. It follows from the Hornbach judgment (ECLI:EU:C:2018:366) that the TFEU does not, in principle, preclude a regulation such as that contained in Section 8b of the Vpb Act. “Tobacco B.V.” could have made it plausible without undue administrative effort that the transactions were agreed for commercial reasons arising from the shareholder link with the group companies involved, but it did not put forward such reasons. Nor is there any violation of freedom of establishment.
With regard to the penalty related to the factoring fees, the court ruled that “Tobacco B.V.” must have known that the actual collection risk run was significantly lower than the collection risk on which the risk fee was based and that the factoring work was administrative in nature. The court finds that it cannot be otherwise than that by deducting the factoring fees paid in its returns, “Tobacco B.V.” knew that this would result in an underpayment of corporate income tax, or at least knowingly accepted the substantial likelihood of this. The court ruled that there was no pleading and considered the fine appropriate and necessary in principle, albeit reduced for exceeding the reasonable period. With regard to the fines in connection with the profit split and the provision of services as toll manufacturer, the court ruled that it did not follow from the fact that the awareness requirement for reversal and aggravation had been met that the requirements for assuming intent had also been met, and that the tax authorities had not sufficiently substantiated intent, so that these fines should be cancelled.
With regard to the penalty related to the transfer of business activities, the court found that it was convincingly demonstrated that “Tobacco B.V.” was aware of this transfer and that it was aware that the transfer represented a very substantial value. In the court’s view, it is beyond reasonable doubt that it was a conscious decision not to include any gain in the taxable amount declared by “Tobacco B.V.” itself. The court concludes that “Tobacco B.V.” intentionally filed a false tax return and that the intention was to underpay tax. There is no pleading position. The court concludes that in connection with the transfer of the business activities, “Tobacco B.V.” intentionally withheld a profit of almost €1.7 billion from its corporate income tax return. The court charges “Tobacco B.V.” with this seriously, as tax evasion seriously infringes community interests and the individual interests of honest taxpayers. Acts such as those of “Tobacco B.V.” also contribute to undermining tax morale. A hefty fine is therefore appropriate. It will still be reduced for exceeding the reasonable time limit.
The court upheld the appeals, annulled the 2013 additional assessment, reduced the assessments to taxable amounts of €84,786,447 (2014), €96,347,089 (2015 and €1,646,235,599 (2016) and reduced the penalty assessments to €278,592 (2014), €282,564 (2015) and €106,382,065 (2016).
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