The tax authorities imputed additional commission income to Macquarie Securities Inc. for 1996 and 1997, based on the assumption that the 0.03 percent commission charged to its affiliate, ING Hong Kong, should have been aligned with the 0.05 percent rate charged to other foreign clients under a CUP analysis.
Following an appeal to the tax commission, the assessment was cancelled, after which the tax authorities filed an appeal with the tax court.
Judgment
The court upheld the previous decision to cancel the assessment of additional income tax attributable to the imputed commissions, rejecting the tax authorities’ transfer pricing adjustment for both 1996 and 1997.
The court held that the tax authorities’ CUP method comparison had failed because, once the firm centralised foreign trades through ING Hong Kong from November 1996 and faced intense competition, the transactions were no longer comparable. The affiliate performed additional marketing, research, execution and administrative functions, including the rollout of a trading system that reduced Manila’s workload. As these commercial differences affected price and were not adjusted for, the tax authorities lacked a factual basis to impute ‘imaginary’ income.
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