“Drilling LDA” had paid approximately €3.95 million in management fees to a related Maltese group company in 2014, under a management services agreement covering administrative, financial, legal and operational support connected with an offshore drilling platform. Following a tax audit, the Tax Authority disallowed tax deductions for the management fees, citing the Portugeese indispensability test for tax deduction of costs, an alleged lack of substance and simulation, and references to transfer pricing. “Drilling LDA” challenged the assessment in the Administrative Court, which overturned the decision. The Tax Authority appealed against this decision to the Central Administrative Court. Judgment The Central Administrative Court dismissed the appeal and confirmed the annulment. The Court held that, once a related-party relationship had been acknowledged, the Tax Authority could not deny deductibility under the indispensability test without properly applying the transfer pricing rules or the anti-abuse regime. As the Administration failed to prove simulation or deviation from the arm’s length principle, the assessment was unlawful ... Read more

SC (Pty) Ltd (SCL), was part of a supermarket group with a Mauritian subsidiary, SIL, that held trademarks and managed treasury functions for non RSA operations. Under franchise agreements, non RSA subsidiaries paid royalties of 1 percent of gross sales to SIL for use of the group’s intellectual property and know how. SCL received a rutine remuneration for the services performed for SIL. Following a transfer pricing audit, the South African Revenue Service (SARS) concluded that it was evident from the conduct of both SIL and SCL, their respective employees and boards, and the general correspondence provided to SARS, that SCL had in fact determined the strategies with respect to the group’s expansion into the African market. SCL set the standard with regard to the development of marketing intangibles in non-RSA jurisdictions. SIL was only responsible for entering into the franchise agreements after they had been drafted and vetted by SCL employees. SARS therefore concluded that the real development, enhancement, ... Read more

In 2013 L S.A. transferred its trademarks to a related party, L. TM sp. z oo, financing this transfer with a cash contribution in the amount of PLN 123,945.00. Then L S.A. paid license fees for the benefit of L. TM sp. z oo, which it reported as costs of obtaining revenues. According to the tax authority, L S.A. had overestimated the costs of obtaining revenues in connection with including in the costs the license fees paid to L. TM sp. z o. o. concerning trademarks. The only function performed by L. TM sp. z o. o. was legal protection of trademarks. The tax authority issued an assessment of additional taxable income in the amount of PLN 14,524,158.50, being the difference between the value of PLN 34,559.19 of the remuneration due to L. TM sp. z oo for the services provided and the value of PLN 14,558,717.73 of the license fees due determined by related entities. A complaint was filed by ... Read more

Sofia Med AD is a manufacturer of a wide range of rolled and pressed copper and copper alloy products. It was subject to a tax audit in which the tax authorities challenged several aspects of its tax reporting, including transfer pricing adjustments on intercompany transactions. The dispute concerned the deductibility of intermediary fees, the application of the arm’s length principle, and the classification of certain payments as taxable under withholding tax rules. Intercompany Transactions and Transfer Pricing Adjustments The tax authorities audited Sofia Med’s pricing methods for transactions involving related entities. The company had used different pricing approaches over the years — first linking intermediary service fees to tonnes of production sold, then shifting to a percentage of net sales revenue. The authorities found that this methodology failed to ensure a reliable comparability analysis, as required under both Bulgarian regulations and OECD transfer pricing guidelines. Applying the CUP method, the tax authorities adjusted the company’s financial results, arguing that the ... Read more

A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft. The PE concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees in Germany and was to receive a fee calculated as a percentage of net sales in return. Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. In the assessment the service fee was instead determined using the cost plus method. Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected all of the PE’s sales in Germany without a corresponding legal basis. Contrary to the ... Read more

In 2016, Weatherford Atlas Gip acquired Foserco SA, a Romanian company. Foserco’s business was to provide ancillary services for oil and gas production. In the years following the acquisition, Foserco SA paid for administrative services (IT, HR, marketing, etc.) to other companies within the Weatherford group. The Romanian tax authorities disallowed VAT deductions on the payments for these services because, in their view, there was no evidence that the services were used for taxable transactions. The case was brought before the Romanian Regional Court, which decided to stay proceedings and refer the following questions to the EU Court of Justice for a preliminary ruling ‘(1) Must Article 168 of [the VAT Directive], read in the light of the principle of fiscal neutrality, be interpreted as precluding, in circumstances such as those in the main proceedings, the tax authority from refusing a taxable person the right to deduct the [VAT] paid in respect of administrative services acquired, where it is established ... Read more

9 September 2024, the Peruvian tax authority – SUNAT – issued guidance on the qualification of services, transfer pricing methods for services and the application of the “benefit test”. Click here for English translation ... Read more

A Czech real estate company, AHI Oscar, had deducted the cost of intra-group services received from a related foreign service company. The price of the services had been calculated at a flat rate of 75% of the wages of the employees providing the support services, plus overhead costs. The tax authority found that the overhead costs included in the calculation did not correspond to the actual costs and excluded these costs from the calculation. According to the tax authority, it was irrelevant to consider the arm’s length principle under Section 23(7) of the ITA. AHI Oscar appealed to the Municipal Court, which upheld the tax authority’s assessment. AHI Oscar then appealed to the Supreme Administrative Court. Judgment of the Court. The Supreme Administrative Court overturned the decision of the Municipal Court. It was undisputed that AHI Oscar had actually incurred the declared costs and received the services from the related foreign service company. According to the court, the tax authority’s ... Read more

The tax authorities had disallowed deductions for administrative services paid by Mercer Consulting to a related party. However, Mercer Consulting was remunerated on a cost plus basis for providing intra-group IT-services and payments for the administrative services were included in the cost basis on which the cost plus remuneration was determined. The Income Tax Appellate Tribunal set aside the assessment in a Judgment issued 25 July 2016. “As a corollary to the ALP of the intra group services received by the assessee being treated as NIL, the price paid for these intra group services is required to be taken out from the computation of remuneration receivable in respect of IT enabled services rendered by the assessee. This is so for the reason that the pricing of IT enabled services is on the cost plus 20% basis, which. has been upheld to be at arm’s length price by the DRP, and, therefore, anything removed from the cost will also have to ... Read more

Bavaria S.A. is part of the SABMiller group – a multinational brewing and beverage group – and in FY2013 the company had deducted costs related to various intra-group transactions – licences, cost of sales, procurement services, administrative services, technical support, other expenses (reimbursements to related parties), etc. Following an audit, the Colombian tax authorities disallowed the deduction of some of these costs. Deductions for investments in productive assets were also disallowed. This resulted in additional taxable income and an assessment was issued together with a substantial penalty. Judgment of the Supreme Administrative Court The Court partially upheld the assessment and partially annulled it. Excerpts “At this point it is necessary to clarify that, although the Administration alleges the violation of the arm’s length principle, insofar as it considers that no independent third party, in a comparable situation, would have paid the commission under the conditions carried out by Bavaria, the truth is that this assertion is only supported by the ... Read more

STOCK Plzeň-Božkov, s. r. o. had deducted costs for production consultancy services, financial services and internal support services allegedly received from related parties. The tax authorities disallowed deduction of the costs for tax purposes on the basis that the evidence provided by STOCK regarding the nature and pricing of the services was insufficient. Judgment of the Supreme Administrative Court The Court ruled in favour of STOCK in relation to the production consultancy services. The tax authority’s requirement that the company document each individual ‘piece of advice’ and quantify the benefits in minute detail was unreasonable. According to the Court, it is sufficient to explain how the production services were provided and what benefits the company derived from them. The Court agreed with the tax authority’s conclusions regarding the financial services. STOCK did not document the conditions of withdrawal or the amount of credit granted to group companies. Furthermore, it did not prove that the part of the consultancy price allocated ... Read more

In its application for an individual interpretation, R. S.A. stated that it distributes fast moving goods in Poland, Lithuania, Latvia and Estonia. It purchases these goods from the company E. based in H. and sells them to independent wholesale distributors and retailers. At the applicant’s request, the Minister of Finance in 2015 issued a decision on a advance price agreement, recognising the correctness of the selection and application of the transactional net margin method in the applicant’s purchase of goods from a related party for further distribution in the Baltic States. In the activities covered by the decision, R. S.A. performs the functions of a distributor with limited risk and limited marketing functions and incurs the associated operating costs, which consist of both its own costs (purchase from group entities of, inter alia, advisory, legal, technical, organisational, financial and marketing/sales services) and external costs (including the costs of services purchased from other entities, also related parties, subsequently re-invoiced to the ... Read more

The tax authorities had disallowed deductions for purported administrative services paid for by Akzo Nobel India to a group company in Singapore. The Income Tax Appellate Tribunal upheld the assessment in a Judgment issued in February 2022. An appeal was then filed by Akzo Nobel India with the High Court. Judgment of the High Court The High Court dismissed the Appeal of Akzo Nobel India and upheld the judgment of the Income Tax Appellate Tribunal. Excerpt “…this Court finds that all the three authorities below have given concurrent findings of fact that the Appellant had failed to furnish evidence to demonstrate that administrative services were actually rendered by the AE and the assessee had received such services. In fact, the ITAT has noted in the impugned order “….On a specific query made by the Bench to demonstrate the receipt of services from AE through cogent evidence, including, any communication with the AE, learned counsel for the assessee expressed his inability ... Read more

In 2009-2011 Fortis Petroleum Norway AS (FPN) bought seismic data related to oil exploration in the North Sea from a related party, Petroleum GeoServices AS (PGS), for NKR 95.000.000. FBN paid the amount by way of a convertible intra-group loan from PGS in the same amount. FPN also purchased administrative services from another related party, Consema, and later paid a substantial termination fee when the service contract was terminated. The acquisition costs, interest on the loan, costs for services and termination fees had all been deducted in the taxable income of the company for the years in question. Central to this case is the exploration refund scheme on the Norwegian shelf. This essentially means that exploration companies can demand cash payment of the tax value of exploration costs, cf. the Petroleum Tax Act § 3 letter c) fifth paragraph. If the taxpayer does not have income to cover an exploration cost, the company receives payment / refund of the tax ... Read more

A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D. The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for. A complaint was filed by A S.A. with the Administrative Tribunal (CAAD). Judgment of the CAAD The complaint of A S.A was dismissed and the assessment upheld. Excerpts regarding the interest rate “Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this effort was unsuccessful. On the contrary, it seems to result from the request for arbitration ... Read more

A SGPS S.A. is the parent company of Group A. In 2016, a subsidiary, B S.A., took a loan in a bank, amounting to 1,950,000.00 Euros, and incurred interest costs and Stamp Tax. However, the majority of the loan, an amount of €1,716,256.60, was transferred as an interest free loan to A SGPS S.A. The tax authorities issued an assessment related to costs incurred on the loan and deducted by B S.A. The tax authorities disallowed B S.A.’s deduction of the costs as they were not intended to protect or obtain income, and therefore did not meet the requirements for deductibility under the general provisions of the Tax Code; A complaint was filed by A SGPS S.A. with the Administrative Tribunal. According to A SGPS SA the tax authorities did not justify why it considered that the expenses incurred by B S.A. to an independent bank for a loan that was passed on to the parent company were not deductible ... Read more

Akzo Nobel India Pvt – a subsidiary of Akzo Nobel Coatings International BV – had paid for administrative services purportedly rendered form a group company in Singapore and had claimed a deduction of INR 19,465 250. The price paid for these services had been determined by the group on an aggregate basis using the transactional net margin method to establish that all controlled transactions in Akzo Nobel India had been at arm’s length. During the audit, the tax authority requested Akzo Nobel India to justify the arm’s length nature of the payment for these administrative services. To that end Akzo Nobel India submitted a copy of the agreement and the allocations keys used. Akzo Nobel India also submitted that the group company in Singapore had provided administrative support services like supply chain management support, marketing and commercial service support, commercial vehicle support, automotive after-market support, supporting R&D, human resource, finance management and general management support. However, according to the tax ... Read more

BMW India Financial Services Pvt. Ltd. had deducted costs for IT support Services it had received from its parent company – BMW AG. The price paid for the services had been determined as the costs plus a markup of 5%. The tax authorities disallowed deductions for the 5% markup, finding that no explanation or contractual basis for the markup had been provided. A written agreement was first at a later time entered between BMW India and BMW AG. In the appeal, BMW India argued that the 5% markup was compliant with the arm’s length principle and also in accordance with international guidance and industry practices. Judgment The Tribunal allowed the appeal and set aside the assessment. According to the Tribunal the 5% markup for IT Services was acceptable according to international guidelines and guidance issued on intra-group services by the EU Joint Transfer Pricing Forum. Click here for translation ... Read more

IAB Company had deducted fees paid for services to its parent, IAL. Following an audit the tax authorities denied these deductions as sufficient evidence had not been provided for provision of the services. An appeal was filed by IAB Company. Judgment of the High Court. The Court upheld the assessment of the tax authorities concerning management fees and dismissed the appeal of IAB Company in this regard. Excerpts from the judgment: “In a nutshell the issue here is whether or not the appellant received management services from IAL for the tax years 2010 to 2015. ” (…) “The authorities must not look at the matter from their own view point but that of a prudent business an – SA Builders Ltd v CIT (2006) 289 ITR 26 (SC).  Further, I agree with what was stated by Australia’s Full Federal Court on the function of the tax authorities and fiscal legislation.  In FC of T v BHP Billion Finance Ltd 2010 ... Read more

Interoil Colombia Exploration and Production S.A. paid it foreign parent for cost related to exploration and administrative services, and for tax purposes these costs had been deducted in the taxable income. In total $3,571,353,600 had been declared as operating expenses for geological and geophysical studies carried out in the exploratory phase of an oil project and $5.548.680.347 had been declared for administrative services rendered from its parent company abroad Following an audit the tax authorities issued an assessment where these deductions was denied. In regards of cost related to exploration, these should have been recorded as a deferred charge amortisable over up to five years, according to articles 142 and 143 of the Tax Statute. In accordance with Article 142, these investments are recorded as deferred assets and are also declared for tax purposes. (…) According to the general accounting regulations – Decree 2649 of 1993 – deferred assets are part of the company’s assets, and correspond to anticipated expenses ... Read more

SONY Music Entertainment Colombia S.A. had filed transfer pricing information and documentation, on the basis of which the Colombian tax authorities concluded that payments for administrative services provided by a related party in the US had not been at arm’s length. SONY Colombia then filed new transfer pricing information and documentation covering the same years, but where the tested party had been changed to the US company. Under this new approach, the remuneration of the US service provider was determined to be within the arm’s length range. The tax authorities upheld the assessment issued based on the original documentation. A complaint was filed by SONY and later an appeal. Judgment of the Administrative Court The court allowed the appeal and issued a decision in favor of SONY. Excerpts “The legal problem is to determine, for the tax return of the taxable period 2007 of the plaintiff: (i) Whether it is appropriate to take into account the correction of the transfer ... Read more

By judgment of 19 January 2021, the Administrative Court upheld an assessment for FY 2012-2017 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. The tax assessment resulted from disallowed deductions for Intra group services provided under a general administrative, legal and financial assistance contract of 22 October 2012 Costs invoiced for the preparation of consolidated accounts Expenses related to “Technical services” for which no explanations had been provided An appeal was filed by Central Hydroelectric de Bulgari EOOD with the Supreme Administrative Court in which the company stated that the decision of the Administrative Court was incorrect. Judgment of the Supreme Administrative Court The Supreme Administrative Court partially upheld the decision of the Administrative Court. Excerpts “The present Court of Cassation finds the judgment of the ACGC valid and admissible. The argument of the applicant that the same is inadmissible is unfounded in the part in which the RA was ... Read more

Montupet EOOD is a Bulgarian subsidiary in the French Montupet Group which specializes in the production of aluminum components for the automotive industry. In February 2016, the French Group became part of the Canadian LINAMAR Group, which specializes in the manufacture and assembly of components for the automotive industry. The French group and its production facilities (plants in France, Bulgaria, Northern Ireland, Mexico and Spain) retained their core business as part of one of LINAMAR’s five main business areas – light metal casting. Effective 01.01.2017, Montupet SAS and Montupet EOOD entered into a Services Agreement, which canceled a previous agreement of 21.12.2009 in the part concerning the corporate and management services provided. Pursuant to the new agreement, Montupet SAS undertakes to provide Montupet EOOD with business advisory services in various areas such as business strategy and development advice; financial strategy advice; legal advice; human resources strategy advice; pricing advice and price negotiations with global customers; supply chain management assistance and ... Read more

In december 2020 the tax authorities in Peru issued a new administrative ordinance related to use of the most appropriate method to determine the market value of services. Click here for English translation ... Read more

Following a restructuring in 2015, certain integration costs had been re-invoiced to Amilum Bulgaria EAD by its parent company, Archer Daniels Midland Europe B.V. The tax authorities denied tax deductions for a portion of these costs relating to implementation of a new accounting system. The payments for these costs was instead considered to be a hidden distribution of profits to the parent. An assessment was issued of additional taxable income and withholding taxes. A complaint was filed by Archer Daniels Midland Europe B.V. with the Administrative Court, which was dismissed. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court upheld the decision of the Administrative Court. Excerpts “Paragraph 7.6 of the OECD Guidelines states that, under the arm’s length principle, the question of whether an intra-group service is actually provided when an activity is carried out for one or more group members by another group member will depend on whether the activity provides the ... Read more

CCompany A was active in the management and administration of trusts and companies; related advice and services. A held 99% of the shares in E, a Seychelles-based company. This subsidiary acted as a sub-contractor for company registrations and corporate affairs in the Seychelles. A and E had entered into a service contract dated 6 February 2009 under which the subsidiary provided these services to A. Following an audit, tax assessments were issued for the tax years 2009 – 2012, in which the tax authorities (AFC-GE) had attributed a percentage of 5% of E’s expenses as the maximum allowable remuneration for the activities of the subsidiary. The remainder was added back to A’s taxable income. An administrative appeal was lodged against these tax assessments, but the appeal was later dismissed in 2016. A then appealed to the Administrative Court (TPAI), which, by judgment of 18 December 2017, upheld A’s appeal and annulled the assessments and fines. The tax authorities appealed to ... Read more

Sociedad de Ahorro Homar Ltda. is a holding company and owns shares, receive dividends, participate as a partner, shareholder or co-owner in companies of any nature, and manage the assets acquired. In 2011 Ahorro Homar entered into a written contract with a related party, Málaga Asesorías e Inversiones Ltda., by virtue of which the latter undertook to provide accounting and administrative services. Málaga Asesorías e Inversiones Limitada issued 13 invoices to Ahorro Homar between the months of January and December 2011, for administrative services totalling $150,539,129, without any invoice for the most relevant amount issued in September 2011, for $112,229,837. The tax authorities found that the actual provision of these services had not been sufficiently proven by Ahorro Homar and disallowed the deduction. An appeal filed by Ahorro Homar was dismissed by both the court of first and second instance. Judgment of the Supreme Court The Supreme Court also dismissed the appeal and upheld the assessment issued by the tax ... Read more