Following an audit, the Spanish tax authorities issued a notice of assessment where the profit of Electrolux España had been adjusted resulting in additional taxable income. The related party transactions resulting in the adjustment were
- Manufacturing costs under a manufacturing contract
- Profit margin under a distribution contract
- Deductibility for restructuring costs
- Pricing of a warehouse rental agreement.
A complaint was filed by Electrolux España with the TEAC which upheld the part of the assessment referring to related-party transactions.
An appeal was then filed by the company with the National Court.
Judgment of the Court
The Court ruled parcially in favor of the tax authorities and parcially in favour of Electrolux España.
Excerpts
“The Inspectorate therefore concludes that “where a group, as in this case, qualifies its contract manufacturer as a low-risk manufacturer and, in turn, this low-risk manufacturer sizes its plant with appropriate investments to serve only its related principal, it cannot be assumed that the losses arising from the restructuring carried out by the group are linked solely to the manufacturer. An independent manufacturer would rarely depend exclusively on a single customer and, if it did, it would have foreseen the contingency of its disappearance without notice and thus its own disappearance as a manufacturer’.
A conclusion with which we essentially agree, and which is not undermined by contrary evidence.
And in any case, the final conclusion of the aforementioned expert report is much closer to the position of the Inspectorate than what is claimed in the complaint, since it warns that “…. from a forensic perspective, in accordance with both academic and business practice, in the event that the manufacturer were to receive some compensation, this would be equal to the loss of profit or profit lost as a result of the interrupted activity, reduced, in turn, by the alternative profits that the manufacturer could have obtained from the resources released after the period of disengagement, but in no case could it be equal to the costs of closing the factories”.
That said, the claimant is not wrong when it describes this adjustment as inconsistent because the Inspectorate has not demonstrated the hypothetical reconstruction of the relationship between the parties in accordance with the arm’s length principle.
This is indeed the case; the settlement makes this adjustment, which involves reducing the declared costs, because they do not correspond to those that would be borne in an arm’s length contractual relationship between free operators, but it does not say whether the Spanish company would eventually have to bear any part of them, as can be inferred from the settlement and the TEAC’s decision, and responds to the expert evidence already mentioned.
However, assuming the above, it is not enough to theoretically state this inconsistency in order to consider the adjustment to be not in accordance with the law.
This assertion should have been accompanied by an argumentative and evidential basis to support the specific position of the party, i.e., expressing (and accrediting) the amount or percentage by which the Spanish company should pay the expenses, in order to overturn the decision of the liquidation, and this has not taken place.
To conclude this particular debate, we consider very unfortunate the expression in the application according to which “If, despite this inefficiency and therefore the economic reason in Spain for the decision to close, this Court insists on rejecting the deductibility of the restructuring costs, in a way it is taking a position against the existence of multinational groups”.
In no way does this Court take a position either against or in favour of multinational groups: that would be quite wrong. If we were to do so, we would cease to be a Court and would become advocates for one side, as is the one who has put forward this incalificable hypothesis.
Dismissed.”
“The TEAC considers the use of the median to be appropriate because there are defects in comparability, -of which there is no doubt after cleaning-, and because it is not affected by extreme results, which could modify the average or the weighted average.
Reasoning that we appreciated at the time in our judgment of 6/3/2019 (appeal 353/2015) when we said “in short, it seems to us that, in effect, once it has been determined that the appellant’s ROS in the year under discussion is outside the lowest interquartile, it is indeed appropriate to carry out the corresponding regularisation. But the fact that this is the case does not, without more, allow the median to be applied in the terms provided for in Rule 3.62, since the application of that rule is not justified by the fact of being outside the arm’s length range, but by the existence of ‘defects in comparability’….
In short, the small number of comparables with which the result was finally obtained could constitute an obstacle to achieving an acceptable result, but the fact is that the application has highlighted this circumstance, but has not ruled on the inappropriateness with arguments and not only by rejecting it.
In our aforementioned judgment we already warned on the number and timing of comparables that “…in short, in accordance with the Directives the ideal is to look at what it calls “contemporaneous uncontrolled transactions”, given that it reflects the behaviour of independent parties in an economic environment identical to that in which the taxpayer’s controlled transaction took place”. However, diachronic, multi-year examination was also allowed in certain cases and for certain reasons, “the examination of data relating to several years is often useful for comparability analysis, although it is not a systematic requirement”. The number of years to be taken into account should be determined and justified on a case-by-case basis, “…as it would not be appropriate to set standards for the number of years to be covered by an analysis of more than one year”.
In the particular case of the 2011 financial year, the Complainant considers that no transfer pricing adjustment is appropriate because, in accordance with paragraph 3. 60 of the OECD Guidelines, in the event that the range of values used by the Inspectorate for this financial year were taken as appropriate, the Inspectorate should not have made any adjustment, insofar as the remuneration obtained by EHPE (0.90%) is higher than the lower quartile of the interquartile range of values obtained by the Inspectorate itself (0.84%) and, therefore, falls within the interquartile range of market values, which makes it possible to prove compliance of the related-party transactions tested with the arm’s length principle.
Nothing has been said about this specific request in the response to the claim, nor has the percentages or the application of the Guideline been contested, and it must therefore be upheld.
It is upheld in part.”
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