Tag: Arm’s Length Principle

The international standard which states that, where conditions between related enterprises are different from those between independent enterprises, profits which have accrued by reason of those conditions may be included in the profits of that enterprise and taxed accordingly

§ 1.482-1(b)(1) In general.

In determining the true taxable income of a controlled taxpayer, the standard to be applied in every case is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer. A controlled transaction meets the arm’s length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances (arm’s length result). However, because identical transactions can rarely be located, whether a transaction produces an arm’s length result generally will be determined by reference to the results of comparable transactions under comparable circumstances. See § 1.482-1(d)(2) (Standard of comparability). Evaluation of whether a controlled transaction produces an arm’s length result is made pursuant to a method selected under the best method rule described in § 1.482-1(c) ... Read more

TPG2022 Chapter I paragraph 1.3

When transfer pricing does not reflect market forces and the arm’s length principle, the tax liabilities of the associated enterprises and the tax revenues of the host countries could be distorted. Therefore, OECD member countries have agreed that for tax purposes the profits of associated enterprises may be adjusted as necessary to correct any such distortions and thereby ensure that the arm’s length principle is satisfied. OECD member countries consider that an appropriate adjustment is achieved by establishing the conditions of the commercial and financial relations that they would expect to find between independent enterprises in comparable transactions under comparable circumstances ... Read more

TPG2022 Chapter I paragraph 1.1

This Chapter provides a background discussion of the arm’s length principle, which is the international transfer pricing standard that OECD member countries have agreed should be used for tax purposes by MNE groups and tax administrations. The Chapter discusses the arm’s length principle, reaffirms its status as the international standard, and sets forth guidelines for its application ... Read more
The European Commission vs. Ireland, December 2021, European Court of Justice Case, AG Opinion, No C-898/19 P (ECLI:EU:C:2021:1029)

The European Commission vs. Ireland, December 2021, European Court of Justice Case, AG Opinion, No C-898/19 P (ECLI:EU:C:2021:1029)

At issue in this case is whether the arm’s length principle as described in the OECD Transfer Pricing Guidelines can be applied by the EU in determining if state aid had been granted. In 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. FFT brought an action ... Read more
The European Commission vs. Fiat Chrysler Finance Europe, December 2021, European Court of Justice Case, AG Opinion, No C-885/19 P (ECLI:EU:C:2021:1028)

The European Commission vs. Fiat Chrysler Finance Europe, December 2021, European Court of Justice Case, AG Opinion, No C-885/19 P (ECLI:EU:C:2021:1028)

In 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. FFT brought an action before the General Court for annulment of the Commission’s decision. In it’s Judgement of September 2019 Union , the General Court dismissed the actions brought by FFT and confirmed the validity of the ... Read more
Switzerland vs R&D Pharma, December 2018, Tribunal fédéral suisse, 2C_11/2018

Switzerland vs R&D Pharma, December 2018, Tribunal fédéral suisse, 2C_11/2018

The Swiss company X SA (hereinafter: the Company or the Appellant), is part of the multinational pharmaceutical group X, whose parent holding is X BV (hereinafter referred to as the parent company) in Netherlands, which company owns ten subsidiaries, including the Company and company X France SAS (hereinafter: the French company). According to the appendices to the accounts, the parent company did not employ any employees in 2006 or in 2007, on the basis of a full-time employment contract. In 2010 and 2011, an average of three employees worked for this company. By agreement of July 5, 2006, the French company undertook to carry out all the works and studies requested by the parent company for a fee calculated on the basis of their cost, plus a margin of 15%. The French company had to communicate to the parent company any discoveries or results relating to the work entrusted to it. It should also keep the parent company informed of ... Read more
Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi. The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length. However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines. Eastern Produce Limited complained to the High Court and argued that: “The decision and proceeding by MRA to use OECD (Organisation for Economic Cooperation and Development) guidelines whilst performing transfer pricing analysis and as a basis for effecting amendments to tax assessments was illegal. CONSIDERATIONS OF THE COURT, EXCERPS “With regard to transfer pricing in 2014, the law was contained in Section 127A. Section 127A provides as follows: “where a person who is not resident in Malawi carries on business with a person resident in Malawi and the course of such business is ... Read more
Costa Rica vs Corrugados del Guarco S.A., March 2018, Supreme Court, Case No 13-002632-1027-CA

Costa Rica vs Corrugados del Guarco S.A., March 2018, Supreme Court, Case No 13-002632-1027-CA

Corrugados del Guarco S.A. had declared losses on controlled transactions for FY 2003, 2004 and 2005 as export prices for these transactions had been set below cost and without profit margin, and also different from the price charged for that product to other independent or unrelated companies, in favour of its related company Envases Nicaragüenses S.A. According to the Corrugados del Guarco S.A. the reason why the prices of these controlled transactions had been set low was that unfair competition had made it necessary to use a commercial strategy of selling at preferential prices to the group company in Nicaragua. The tax authorities issued an assessment whereby the prices of the controlled transactions were adjusted in accordance with the arm’s length principle. Furthermore a fine was issued to the company for gross negligence. Judgement of the Supreme Court The Court dismissed the appeal of Corrugados del Guarco S.A. Excerpts from the Judgement “…Finally, and in relation to transfer pricing, on which the ... Read more

TPG2017 Chapter I paragraph 1.3

When transfer pricing does not reflect market forces and the arm’s length principle, the tax liabilities of the associated enterprises and the tax revenues of the host countries could be distorted. Therefore, OECD member countries have agreed that for tax purposes the profits of associated enterprises may be adjusted as necessary to correct any such distortions and thereby ensure that the arm’s length principle is satisfied. OECD member countries consider that an appropriate adjustment is achieved by establishing the conditions of the commercial and financial relations that they would expect to find between independent enterprises in comparable transactions under comparable circumstances ... Read more

TPG2017 Chapter I paragraph 1.1

This Chapter provides a background discussion of the arm’s length principle, which is the international transfer pricing standard that OECD member countries have agreed should be used for tax purposes by MNE groups and tax administrations. The Chapter discusses the arm’s length principle, reaffirms its status as the international standard, and sets forth guidelines for its application ... Read more

TPG2017 Preface paragraph 15

OECD member countries continue to endorse the arm’s length principle as embodied in the OECD Model Tax Convention (and in the bilateral conventions that legally bind treaty partners in this respect) and in the 1979 Report. These Guidelines focus on the application of the arm’s length principle to evaluate the transfer pricing of associated enterprises. The Guidelines are intended to help tax administrations (of both OECD member countries and non-member countries) and MNEs by indicating ways to find mutually satisfactory solutions to transfer pricing cases, thereby minimising conflict among tax administrations and between tax administrations and MNEs and avoiding costly litigation. The Guidelines analyse the methods for evaluating whether the conditions of commercial and financial relations within an MNE satisfy the arm’s length principle and discuss the practical application of those methods. They also include a discussion of global formulary apportionment ... Read more
Switzerland vs. Corp, Jan. 2015, Case No. 2C_1082-2013, 2C_1083-2013

Switzerland vs. Corp, Jan. 2015, Case No. 2C_1082-2013, 2C_1083-2013

In this case, the Swiss Court elaborates on application of the arm’s length principle, transfer pricing methods, OECD TPG, and the burden of proof in Switzerland. Excerpt in English (unofficial translation) “5.1. The question of whether there is a disproportion between the service provided by the company and the compensation it provides is determined by comparison with what has been agreed between independent persons (“Drittvergleich”): the question is whether the benefit would have been granted, to the same extent, to a third party outside the company, or to check whether the “arm’s length” was respected. This method makes it possible to identify the market value of the property transferred or the service rendered, with which the counter-benefit actually required must be compared. 5.2. Where there is a free market, the prices charged therein are decisive and allow an effective comparison with those applied in the transaction examined. If there is no free market, but transactions with the same characteristics have ... Read more
Costa Rica vs Nestlé, October 2013, Court of Appeal, Case No Nº 01365 - 2013 Case File 09-002823-1027-CA

Costa Rica vs Nestlé, October 2013, Court of Appeal, Case No Nº 01365 – 2013 Case File 09-002823-1027-CA

Nestlé de Costa Rica S.A. had been issued a tax assessment in which the taxable income for FY 2005 and 2006 was adjusted with an additional amount of ¢60,609,096.00 and ¢75,663,084.00. According to the tax authorities, the sales made by Nestlé to its related companies located in Chile, Switzerland and Puerto Rico had a profit margin different from those made to third parties. The margin on the unrelated transactions was 88% whereas the margins on comparable related party transactions was only 7%. The adjustments was determined based on internal CUPs. Judgement of the Court The Court dismissed the appeal of Nestlé. Excerpts “This Chamber agrees with the Tribunal, in the sense that the expert witness Luna Ramírez, during her testimony, does not manage to disprove the system applied by the Tax Administration, since she rejects the method used, however, she also states that it is difficult to resort to any other method. What is clear from this testimony is that ... Read more
Costa Rica vs Polymer S. A., June 2012, Supreme Court, Case No 11-010227-0007-CO

Costa Rica vs Polymer S. A., June 2012, Supreme Court, Case No 11-010227-0007-CO

Polymer S.A. had been issued an assessment of taxable income based on the arm’s length principle. In the assessment the tax authorities had based the adjustment on the guidance provided in the OECD TPG. Polymer S.A. was of the opinion that this was unconstitutional since the OECD TPG had not been implemented by law and Costa Rica was not an OECD member country. Judgement of the Supreme Court The Court dismissed the appeal of Polymer S.A. Excerpts from the Judgement “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility that other – better – techniques may be admitted. What is important is that the contested Interpretative Guideline does not aim ... Read more
Costa Rica vs Nestlé, April 2012, Supreme Court, Case No 10-017768-0007-CO Res. Nº 2012004940

Costa Rica vs Nestlé, April 2012, Supreme Court, Case No 10-017768-0007-CO Res. Nº 2012004940

In an appeal to the Supreme Court in Costa Rica, Nestlé claimed that the basis for an arm’s length adjustment was unconstitutional, since the arms length principle as described in the OECD transfer pricing guidelines had not been incorporated into the laws of Costa Rica. Judgement of the Supreme Court The Court dismissed the appeal of Nestlé. “The contested Guideline does not establish or impose a single method of transfer pricing analysis, so that, in the absence of a law, the autonomy of tax law allows for the determination of the tax payable to resort to the provisions of Articles 8 and 12 of the Code of Tax Rules and Procedures, without prejudice to the possibility of admitting “other -better- techniques”. What is important is that the contested Interpretative Guideline does not aim to eliminate other multiple scenarios arising from different forms of company organisation, but is directed at transfer pricing between related companies. Even if the legislator may adopt ... Read more
Portugal vs "A Const S.A.", May 2005, CONSTITUTIONAL COURT, Case No 271/05

Portugal vs “A Const S.A.”, May 2005, CONSTITUTIONAL COURT, Case No 271/05

A Const S.A. filed an appeal with the Central Administrative Court against a corrections made by the Tax Administration for FY 1990 under application of the arm’s length principle (contained in article 57 of the CIRC in Portugal). The Central Administrative Court dismissed the appeal. An appeal was then filed against this decision to the Supreme Administrative Court. By Judgment of 4 February 2004, the appeal was also dismissed at this instance. Dissatisfied with that decision A Const S.A. filed an appeal with the Constitutional Court. Grounds for the appeal was stated as follows “In compliance with the provisions of nº 2 of art. 75-A of the LTC it is moreover expressly stated that the present appeal is based on the concrete review of the constitutionality of art. 57 of the CIRC (in the wording in force on the date of the facts of the case, applicable in casu) taking into account its applicability in the contested decision: a. either ... Read more
Portugal vs "ALP S.A.", May 2005, CONSTITUTIONAL COURT, Case No 252/2005

Portugal vs “ALP S.A.”, May 2005, CONSTITUTIONAL COURT, Case No 252/2005

ALP S.A. filed an appeal with the Central Administrative Court against a corrections made by the Tax Administration for FY 1992 under application of the arm’s length principle (contained in article 57 of the CIRC in Portugal). The Central Administrative Court dismissed the appeal. An appeal was then filed against this decision to the Supreme Administrative Court. By Judgment of 6 June 2001, the appeal was also dismissed at this instance. Dissatisfied with that decision ALP S.A. filed an appeal with the Constitutional Court. ALP S.A grounds for the appeal was: By virtue of the Principle of Tax Legality, the rules of incidence must be predetermined in their content, and the elements that comprise it must be formulated in a precise and determined manner. Determining the content of the levy tax rule excludes the use of undetermined concepts, as well as certain normative concepts, whose application to the specific case is based on subjective or personal assessment of the enforcement ... Read more