Portugal vs “FURNITURE S.A.” No I, November 2021, CAAD, Case No 14/2021-T

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Furniture S.A is engaged in the production and sale of furniture and had established a US subsidiary to market and sell furniture overseas. The pricing of the controlled transactions with the US subsidiary had been based on a resale price method, which resulted in prices amounting to 70% of the list price for the products.

The Portuguese tax authority issued an assessment, where the pricing of the controlled transaction had been adjusted in accordance with the price list resulting in additional taxable profits.

Result reached in the arbitration tribunal.

The Tribunal set aside the additional assessment of income in respect of the transfer pricing adjustment.

The application of the principle of comparability must be based on an individual analysis of the transactions, with a view to comparing the conditions practiced in a transaction between related entities and those practiced between independent entities.

As it results from the matter of fact given as settled, the creation by the Claimant of a subsidiary based in the United States of America was determined by the bankruptcy of its main US customer and had the purpose of maintaining and boosting the commercial relationship with that market and minimizing the costs of local transportation, storage and packaging of the products sold to retailers and the agency of local intermediaries. The contract for the supply of products and goods entered into between the Claimant and the subsidiary sets out precise rules regarding the commercial relationship established between the parties and the charges that each of the contracting parties assumes in relation to the marketing of the furniture manufactured by the Claimant (clauses five and six).

The same contract expressly contemplates the possibility of the direct sale of the products and goods to other customers residing in the United States of America without prior authorisation of the subsidiary (clause four).

In this context, the invoicing of the supplies made to the subsidiary for 70% of the price list practiced in the sales directly made by the Applicant in the North American market constitutes a reasonable profit margin, which is intended not only to remunerate the activity of reselling the products, but also to compensate the marketing costs incurred by the counterparty and to which it is contractually bound.

It is not possible to consider, under this condition, that the Claimant violates the arm’s length by stipulating, in relation to its subsidiary, a lower price than that practiced in direct sales, when it is certain that the comparison established by the Tax Authority is made with the direct clients of the Claimant without considering the comparability factors between the tied and the non-tied operations, namely with regard to the contractual terms and conditions that define how responsibilities, risks, and profits are shared between the parties involved in any of those operations.

Therefore, regardless of the most appropriate method for determining transfer prices, the tax correction, in this regard, proves to be illegal due to the incorrect interpretation and application of the transfer pricing regime by the Claimant.”

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P14_2021-T - 2021-11-23


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