The Mahou (SAN MIGUEL) S.A Group is active in brewing and sale of beers. Penibética de cervezas y bebidas SL and Andaluza de cervezas y bebidas SL are wholly owned by Cervezas Alhambra SL, which again is owned by MAHOU (SAN MIGUEL) S.A. The main activity of Cervezas Alhambra SL is the distribution and marketing under its own brands of the beer produced by its subsidiaries; that of Penibética de Cervezas y Bebidas SL is the production of beers which, without its own brand, are mainly distributed and marketed by Alhambra and the core activity of Andaluza de Cervezas y Bebidas S.L. is the manufacture of beers which, without its own brand, are distributed and marketed by Alhambra.
In 2014, the tax authorities issued two tax assessments to the group: one in relation to FY 2008 and 2009, in the amount of €12,303,526.50 an another in relation to FY 2010, 2011, in the amount of €4,951,701.39. Among the issues raised in these assessments was transfer pricing. The CUP method used by the company was rejected by the tax authorities who instead applied the TNMM method. The tax authorities considered that the pricing of the sales made by Penibética de Cervezas y Bebidas S.L and Andaluza de Cervezas y Bebidas S.L to Cervezas Alhambra SL had been below market price, which could be due to ﬁscal reasons as the higher taxable income in Cervezas Alhambra SL could be offset by losses from previous years.
Dissatisfied with the tax assessment Mahou S.A. filed a complaint which resulted in a decision in favour of the tax authorities. This decision was then appealed to the Audiencia Nacional.
Judgement of the Court
The National Court dismissed the appeal of Mahou in regards of transfer pricing and upheld the assessment of the tax authorities.
“As mentioned above, Cervezas Alhambra SL had significant BINs pending offsetting; they were generated in 1996 and subsequent years and at the start of the verification period amounted to 47,485,324.63 euros. And in the years 2010 and 2011 the declared tax bases of Cervezas Alhambra SL amounted to 8,953,184.43 euros and 8,213,717.51 euros.
Tax Group 612/09, in which the related parties are taxed, has made the following offsets of tax losses from Cervezas Alhambra SL in years prior to its inclusion in the consolidated group: 2,884,427.23 euros (year of generation: 1996) 6,068,757.20 euros (year of generation. 1997) 2011: 6,781,618.18 euros (year of generation: 1997).
Well, in the settlement, as a result of applying the TNMM to the transactions between related parties, the declared operating results are readjusted, increasing the results and bases declared by Penibética de Cervezas y Bebidas SL and Andaluza de Cervezas y Bebidas S.L in 2010 by €1,314,040 and €1,556,860 respectively, and correspondingly reducing the operating result and taxable base of Cervezas Alhambra SL in 2010 by €2,870,900.
And here the problem lies in determining which is the (most appropriate) method for establishing the price of related-party transactions. Of the methods regulated in Article 16.4 TRLIS, the dichotomous positions in conﬂict here are, on the one hand, the CUP method, maintained by the appellant, and, on the other, the TNMM method applied by the Inspectorate.
First of all, in the financial year prior to 2010, the TNMM was used to determine the transfer prices between related parties, although it is fair to recognise that in that year the transactions between Cervezas Alhambra and its subsidiaries were not included, since the ﬁscal group 612/09 had its first financial year in 2010. Be that as it may, Mahou, S.A. provided the Inspectorate with a series of transfer pricing reports of the companies of the group prior to the financial year 2010 carried out by Ernst & Young (manufacture of Cervezas Alhambra S.L. by Mahou S.A. and with San Miguel, Penibética de Cervezas y Bebidas S.L. with San Miguel, Cervezas Anaga S.A. with Mahou and San Miguel, purchase of Mahou branded beers and other brands manufactured by San Miguel and Cervezas Anaga and sale of beers manufactured by Mahou under the San Miguel brand to San Miguel and purchase of own branded beers manufactured by related entities and other brands manufactured by San Miguel and Cervezas Anaga and sale of own branded beers to related entities and sale of Mahou branded goods manufactured by Mahou S. A.) and in all of them the sale of Mahou branded goods manufactured by Mahou S. A. to San Miguel and sale of Mahou branded goods to San Miguel and sale of Mahou branded goods manufactured by San Miguel and Cervezas Anaga S.A. to San Miguel. A.) and in all of them the TNMM was used as it was considered the most appropriate to assess whether the brewing activities are in line with the arm’s length principle, using as an indicator of profitability the operating margin on total costs, selecting the brewing companies as the tested party.
As regards the comparables used, Alhambra and Penibética use the AMADEUS and SABI databases, selecting five comparable European brewing companies, using data for 2006, 2007 and 2008.
Well, even hypothetically admitting that the use of the TNMM in previous years cannot condition the valuation of the transactions between Cervezas Alhambra and its subsidiaries because in those years they were not included and therefore were not analysed in the reports, we must agree with the Inspectorate that with the information available this is the methodology that allows the transfer prices of brewing operations to be assessed, while the use of the CUP method is unacceptable. In fact, in the report A-02 (in section A.3.d) as well as in the non-conformity report (3.3 d/) and in section 4 of the pricing report of the operations of Penibética, Andaluza and Alhambra, the reasons for opting for this method are sufficiently justified, having used to select the comparable samples those that meet the requirements of activity and independence in accordance with the OECD guidelines obtained from the internationally accredited AMADEUS database.
At the same time, the Inspectorate rejects the CUP method in the case, defended by Mahou SA, for the powerful reason that there is no internal comparable for the same beer, period of time, geographic market, same market stage, etc. In particular, the comparable chosen by the appellant consists of sales made by Penibética and Andaluza to a single customer – El Corte Inglés, which sells the beer as a private label – representing 8.54% and 2.6% of the total volume of those companies’ transactions in 2010, These are very small percentages of their operations as a whole, to which must be added the fact that the contracts of the large food and beverage groups with the large superﬁcies or large purchasing centers are extraordinarily complex and incorporate a multitude of conditionalities, discounts, promotions, contributions “without consideration” for speciﬁc campaigns, anniversaries, inauguration of new centers, etc., which make it very unrepresentative to analyse the contracts with the large superﬁcies or large purchasing centers. which make it very unrepresentative to analyse the price applied to a single product without considering the general structure in which it is included and the strategy that underpins it. In addition, there is a large difference in the prices and margins applied in Penibética’s sales to El Corte Inglés compared to those applied in its sales to Alhambra for certain products. In this way, it is difficult to accept the comparability claimed by the appellant and, in fact, the application of the method it proposes.”