For the years 2008 to 2016, Tobacco BV was issued multiple tax assessments with significant corrections to the taxable amounts it had declared. In addition, the tax authorities had imposed penalties for misconduct for the years 2010 and 2012 to 2016.
For all years, it was disputed whether various fees charged by other group companies for supplies and services to Tobacco BV had been at arm’s length.
For 2016, an additional issue arose as to whether the termination of licence rights operated by a subsidiary should be regarded as an unbusinesslike withdrawal from the company’s assets.
One of the transfer pricing adjustments concerned the factoring costs charged to Tobacco BV by a group company. The Court ruled that these costs were largely unbusinesslike and that the company had not refuted the presumption under Section 8b of the 1969 Corporation Tax Act, namely that the disadvantage it suffered was caused by its affiliation with the group company.
Tobacco BV also paid guarantee fees to its parent company for guarantees related to listed bonds it had issued. The Court accepted the tax authorities’ argument, based on criteria developed by S&P, that Tobacco BV should be regarded as a “core company” of the group. Its credit rating, if that position is taken into account (“derived rating”), corresponds to the credit rating of the group as a whole. Because of this, the company could raise bond loans on more favourable terms, as the market would assume that it could rely on support (“implicit support”) from the group if necessary. In that situation there is no separate intra-group service requiring compensation. The guarantee fees deducted by Tobacco BV therefore did not comply with the arm’s length principle, and it failed to rebut the presumption that its unbusinesslike conduct stemmed from its affiliation with the parent company.
With regard to the licence rights that expired in 2016, which had entered Tobacco BV’s assets in 2008 at a value of €1 billion, the Court found it unbusinesslike that no compensation was received when the rights expired, while the exploitation of those rights continued within the group in the United Kingdom. This was treated as an unreasonable withdrawal from the company’s assets amounting to more than €1.3 billion.
For the years 2011 to 2016, the Court considered that the tax authorities had demonstrated, on the basis of the corrections to factoring fees, guarantee fees (2013) and termination of licence rights (2016), which were partly upheld by the Court, that Tobacco BV had not filed the required tax returns as referred to in Section 27e of the General Tax Act. As a result, the burden of proof was reversed and increased for the entire decision on the objection. The company’s position that this evidentiary sanction could not be applied in transfer pricing disputes was rejected. With regard to the adjustments to guarantee fees, the Court held that it was at least arguable, given the past uncertainties surrounding the doctrine of “implicit support,” that Tobacco BV had not taken this into account for some years. However, from the publication of the Transfer Pricing Decree 2013 on 26 November 2013, it was required to do so.
The Court assessed a number of other transfer pricing adjustments that were in dispute. These included:
• fees charged by a group company to Tobacco BV for activities aimed at cost savings, partly in the form of a percentage of its profit (profit split) and partly as a cost-plus surcharge. The adjustments taken into account by the tax authorities were largely upheld, except for the cost-plus percentage;
• royalties paid for “Innovations and Technology” of 2% (later 3%) of the net turnover achieved using a licence made available by a group company, which were upheld as corrections;
• interest deducted in connection with long-term bond loans agreed with unrelated parties, the funds of which were used to purchase participating interests. The corrections were reversed;
• a correction relating to deductible reorganisation costs, which the Court found to have been wrongly applied;
• deductible costs linked to the unsuccessful introduction of a product on a foreign market. Tobacco BV convincingly demonstrated that it did not act unprofessionally, and the correction was withdrawn.
The Court ruled that taking into account corrections to transfer prices charged by foreign group companies is not contrary to European law. It follows from the Hornbach judgment (ECLI:EU:C:2018:366) that the TFEU does not in principle preclude a provision such as that contained in Section 8b of the Corporate Income Tax Act. Nor is there any conflict with the freedom of establishment or the principle of legal certainty under EU law.
In the Court’s view, the penalties imposed by the tax authorities in respect of the correction of factoring fees were rightly imposed. They convincingly demonstrated that the assessment was set too low or that incorrect returns were filed (2012 to 2016) as a result of Tobacco BV’s conditional intent.
The Court ruled that there was no defensible position and considered the fines imposed, totalling more than €2.2 million, to be appropriate and necessary, although reduced because the reasonable time limit had been exceeded. The argument that in transfer pricing disputes penalties can only be imposed in cases of pure intent was dismissed.
By contrast, the penalties linked to the profit split and cost-plus corrections were annulled, as the tax authorities had not convincingly demonstrated that the company had intentionally submitted incorrect tax returns in these respects.
The penalty of €125 million imposed in connection with the termination of the licence rights (reduced by the court to €106,382,065) was also overturned by the Court of Appeal. Before submitting the 2016 corporation tax return, Tobacco BV had sent a letter to the tax authorities informing them of the position it would take in the return regarding the tax consequences of the termination of the licence rights, with references to earlier correspondence and consultations on the issue. In this letter it also offered to provide further information if requested. In light of these specific facts and circumstances, the Court held that the tax authorities had not demonstrated that, at the time of filing the 2016 corporation tax return, Tobacco BV was aware of the significant risk that too little tax would be levied and had consciously accepted that risk.
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