C. spółka z o.o. is part of a larger group and mainly (95%) sells products (boxes, metal enclosures, etc.) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. C. spółka filed an appeal with ... Read more

Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method used by the company due to differences in the treatment of cost items and thus issues of comparability at a gross margin level. Instead, the tax authorities applied the TNMM. The profit was outside the interquartile range and an adjustment to the median was made. Transalliance lodged an appeal. Judgement of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since such defects had not been established, the adjustment was reduced to the lower quartile. Excerpt “Of the points that are dealt with, the appellant focuses the discussion on the ... Read more

Sulzer Tech India Pvt Ltd (the assessee) is in the business of providing design and engineering services. To that end Sulzer Management AG, an associated enterprise provided various IT and support services to Sulzer Tech India. The payment for these services had been determined based on a benchmark study where Sulzer Management AG was chosen as the tested party. The cost plus margin for the selected comparables ranged from 4.08% to 7.08%, with a median of 5.69%, and on that basis the payment to Sulzer Management of Rs. 2,52,49,650, which was equal to cost plus 5%, was considered to be at arm’s length. The tax authorities disagreed and held that Sulzer Tech India at arm’s length would not have paid any amount toward services which are not availed to it and have not benefited its business. Accordingly, an adjustment of additional income of Rs. 2,52,49,650, was issued. Judgement of the Income Tax Appellant Tribunal The Tribunal set aside the assessment ... Read more

Following an audit, the Greek tax authorities determined that the remuneration of a Greek Clothing Distributor had not been determined in accordance with the arm’s length principle. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Clothing Distributor Ltd.” Judgement of the Court The court dismissed the appeal and upheld the assessment issued by the tax authorities. “the findings of the audit, as recorded in the partial income tax audit report of 29/12/2021 of the C.E.M.E.P., on which the contested act is based, are considered valid, acceptable and fully justified” Click here for English translation Click here for other translation ... Read more

Poltova GZK is a Ukrainian subsidiary of the Ferrexpo group – the world’s third largest exporter of iron ore pellets. In FY 2015 the iron ore mined in Ukraine by Poltava GZK was sold to other companies in the group – Ferrexpo Middle East FZE, and the transfer prices for the ore was determined by application of the CUP method using Platts quotations. However, according to the tax authorities Poltava GZK used Platts quotations for pellets with a lower iron content when pricing the higher quality pellets, resulting in non arm’s length prices for the controlled transactions and lower profits in the Ukraine subsidiary. The tax authorities also found that Poltava GZK had overestimated the cost of freight – in the case of actual transportation of pellets by ships of different classes (“Panamax”, “Capesize”), the adjustment of the delivery conditions was carried out only at the maximum rate. On that basis an assessment was issued. Not satisfied with the assessment ... Read more

A Korean subsidiary (“Semicon-sales”) of a foreign group was active in distribution and sales of semiconductors for the automotive and industrial industry. Following an audit, the tax authorities found that the subsidiary had purchased semiconductors from a foreign affiliated company at a higher price than the arm’s length price. An assessment was issued where the the sum of the difference between the arm’s length price and the reported price had been included in the taxable income for FY 2015-2018. Both “Semicon-sales” and the tax authorities had applied the TNMM to find the arm’s length price, but the tax authorities had rejected the comparables selected by “Semicon” and replaced them with others. Not satisfied with the assessment “Semicon-sales” filed an appeal. Judgement of the Court The court remanded the case with an order to exclude from the benchmark comparables where the sales volume is significantly different from that of the “Semicon-sales”. Since the proportion of the taxpayers transactions with large companies ... Read more

On 24 May 2022, the Italian Tax Agency (Agenzia delle Entrate) released CIRCULAR NO. 16/E containing operational instructions on issues relating to application of the arm’s length range. The circular – which is based on the OECD transfer Pricing Guidelines, guidance on benchmark studies issued by the Joint Transfer Pricing Forum, and relevant Italian case laws – provides operational instructions regarding the correct interpretation of the notion of “arm’s length range”, as also specified in Article 6 of the Decree of 14 May 2018, when applying the provisions set forth in Article 110, paragraph 7, of the Consolidated Income Tax Act or of the provisions contained in the Double Taxation Treaties entered into by Italy in accordance with Article 9 of the OECD Model Convention. The operational instructions concludes as follows the correct application of the most appropriate transfer pricing method may, instead of a single value, lead to a range of values all complying with the arm’s length principle; ... Read more

By judgment of 22 May 2020, the Administrative Court upheld the complaint filed by “Rubbertek Bulgaria” and set aside an assessment for FY 2015-2016 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. According to the Administrative court, the tax assessment was unfounded and unsubstantiated. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that the decision of the Administrative Court was incorrect. The court erred in finding that the decision of the tax authorities referred to other comparable companies than those in Rubbertek Bulgaria’s documentation. Furthermore, the court uncritically accepted Rubbertek Bulgaria’s claim that the reason for the deviation of the declared income from the median for 2015 and 2016 was a relocation of assets from the German company to the Bulgarian company. Judgement of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities and ... Read more

Adidas India Marketing Pvt. Ltd. is engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Following an audit for FY 2016-2017, an assessment had been issued by the tax authorities where adjustments had been made to (1) advertising, promotion and marketing activities in Adidas India which was considered to have benefitted related parties in the Adidas group, (2) royalty/license payments to the group which was considered excessive and (3) fees paid by Adidas India to related parties which was considered “fees for technical services” (FTS) subjekt to Indian withholding tax. Following an unfavorable decision on the first complaint, an appeal was filed by Adidas with the Income Tax Appellate Tribunal. Judgement of the ITAT The Tribunal decided predominantly in favor of Adidas. Issues 1 and 2 was restored back to the tax authorities for a new decision in accordance with the directions given by the Tribunal, and issue 3 was set ... Read more

DELSEY España distributes and sells suitcases and other travel accessories of the DESLEY brand on the Spanish market and belongs to the French multinational group of the same name. The Spanish distributor had declared losses for FY 2005-2010 and was subject to a transfer pricing audit for FY 2011 to 2014. Based on the audit, the tax authorities concluded that the losses in FY 2005-2010 was a result of controlled transactions not being priced at arm’s length. The same was concluded for FY 2011 and 2012. The CUP method and RPM method applied by the taxpayer was found to be inappropriate and was replaced with the TNMM by the tax authorities. An appeal was filed by Delsey España S.A. Judgement of the Court The Court dismissed the appeal and upheld the assessment. Click here for English translation Click here for other translation ... Read more

Example of a Working Capital Adjustment See Chapter III, Section A.6 of these Guidelines for general guidance on comparability adjustments. The assumptions about arm’s length arrangements in the following examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements in actual cases of particular industries. While they seek to demonstrate the principles of the sections of the Guidelines to which they refer, those principles must be applied in each case according to the specific facts and circumstances of that case. This example is provided for illustration purposes as it represents one way, but not necessarily the only way, in which such an adjustment can be calculated. Furthermore, the comments below relate to the application of a transactional net margin method in the situations where, given the facts and circumstances of the case and in particular the comparability (including functional) analysis of the transaction and the review of the information available on ... Read more

In the search for comparability data, a comparable is not necessarily restricted to a stand-alone entity. In examining commercial loans, where the potentially comparable borrower is a member of an MNE group and has borrowed from an independent lender, provided all other economically relevant conditions are sufficiently similar, a loan to a member of a different MNE group or between members of different MNE groups could be a valid comparable ... Read more

The arm’s length interest rate for a tested loan can be benchmarked against publicly available data for other borrowers with the same credit rating for loans with sufficiently similar terms and conditions and other comparability factors. With the extent of competition often present within lending markets, it might be expected that, given the characteristics of the loan (amount, maturity, currency, etc.) and the credit rating of the borrower or the rating of the specific issuance (see Section C.1.1.2.), there would be a single rate at which the borrower could obtain funds and a single rate at which a lender could invest funds to obtain an appropriate reward. In practice, however, there is unlikely to be a single “market rate” but a range of rates although competition between lenders and the availability of pricing information will tend to narrow the range ... Read more

In order to simplify compliance burdens on taxpayers, tax administrations may determine, as long as the operating conditions remain unchanged, that the searches in databases for comparables supporting part of the local file be updated every three years rather than annually. Financial data for the comparables should nonetheless be updated every year in order to apply the arm’s length principle reliably ... Read more

The use of multiple year data does not necessarily imply the use of multiple year averages. Multiple year data and averages can however be used in some circumstances to improve reliability of the range. See paragraphs 3.57-3.62 for a discussion of statistical tools ... Read more

It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting comparables and limitations in information available on comparables, that some comparability defects remain that cannot be identified and/or quantified, and are therefore not adjusted. In such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis ... Read more

The process followed to identify potential comparables is one of the most critical aspects of the comparability analysis and it should be transparent, systematic and verifiable. In particular, the choice of selection criteria has a significant influence on the outcome of the analysis and should reflect the most meaningful economic characteristics of the transactions compared. Complete elimination of subjective judgments from the selection of comparables would not be feasible, but much can be done to increase objectivity and ensure transparency in the application of subjective judgments. Ensuring transparency of the process may depend on the extent to which the criteria used to select potential comparables are able to be disclosed and the reasons for excluding some of the potential comparables are able to be explained. Increasing objectivity and ensuring transparency of the process may also depend on the extent to which the person reviewing the process (whether taxpayer or tax administration) has access to information regarding the process followed and ... Read more

In practice, both quantitative and qualitative criteria are used to include or reject potential comparables. Examples of qualitative criteria are found in product portfolios and business strategies. The most commonly observed quantitative criteria are: Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. Intangible-related criteria such as ratio of Net Value of Intangibles/Total Net Assets Value, or ratio of Research and Development (R&D)/Sales where available: they may be used for instance to exclude companies with valuable intangibles or significant R&D activities when the tested party does not use valuable intangible assets nor participate in significant R&D activities. Criteria related to the importance of export sales (Foreign Sales/Total Sales), where relevant. Criteria related to inventories in absolute or relative value, where relevant. Other criteria to exclude third parties ... Read more

The second possibility, the “deductive” approach, starts with a wide set of companies that operate in the same sector of activity, perform similar broad functions and do not present economic characteristics that are obviously different. The list is then refined using selection criteria and publicly available information (e.g. from databases, Internet sites, information on known competitors of the taxpayer). In practice, the “deductive” approach typically starts with a search on a database. It is therefore important to follow the guidance on internal comparables and on the sources of information on external comparables, see paragraphs 3.24-3.39. In addition, the “deductive” approach is not appropriate to all cases and all methods and the discussion in this section should not be interpreted as affecting the criteria for selecting a transfer pricing method set out in paragraphs 2.1-2.12 ... Read more

Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group. Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions. The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability analysis (aimed at identifying the net remuneration margin obtained by independent third parties in similar ... Read more

“Marine Fuel Ltd” was audited for FY 2015 and an assessment was issued by the tax authorities, where the taxable income had been increased due to a transfer pricing adjustment. The tax authorities had dismissed the CUP method chosen by the group and instead applied the transactional net margin method (TNMM). Not satisfied with the adjustment, a complaint was filed by “Marine Fuel Ltd” with the Dispute Settlement Board. Judgement of the Board The Board dismissed the complaint of “Marine Fuel Ltd” and upheld the assessment issued by the tax authorities. Excerpts “As some separate transactions carried out between associated enterprises may need to be assessed as a single transaction in order to determine whether the arm’s length principle is respected, other transactions between these enterprises that were invoiced as a package may need to be assessed separately. A group may combine a package of transactions and set a price for a set of transactions, such as intangible assets for ... Read more

“Construction Service S.A.” is active in Design, Repair and Construction of buildings. During the FY 2011-2013 it paid for services – management services and construction services – rendered from related parties. Following an audit the tax authorities issued an assessment where payments for these services had been adjusted by reference to the arm’s length principle. According to the authorities the benchmark studies in the company’s transfer pricing documentation suffered from comparability defects and moreover it had not been sufficiently demonstrated that the services had been effectively provided. The tax authorities pointed out that since the company is not considered comparable to the taxpayer, the interquartile range would be from 5.15% to 8.30% with a median of 5.70%; therefore, the taxpayer’s operating margin of 4.07% is outside the interquartile range. Not satisfied with the adjustment “Construction Service S.A.” filed an appeal with the Tax Court Judgement of the Tax Court The court ruled in favour of “construction S.A” and revoked the ... Read more

The tax authorities excluded some of the entities selected by the taxpayer in a benchmark study, as it considered that they did not meet the necessary comparability requirements, and also included some of the excluded entities, as it considered that they were comparable. These modifications to the benchmark resulted in a variation of the arm’s length range, with the margin earned by the taxpayer falling outside the range. The taxpayer argued that the recalculation of market value should be based on a complete new analysis to replace the one provided by the entity. In relation to the rejection of certain comparables, the taxpayer argued that the information used by the tax authorities and consulted on the internet was not available at the time the transfer pricing documentation was prepared. Judgement of the TEAC The TEAC rejected the claim filed by the taxpayer and upheld the assessment of the tax authorities. It is not necessary to carry out a new economic analysis ... Read more

This case deals with arm’s length remuneration of a Greek Diary Distributor. Following an audit of “Diary Distributor Ltd.”, the Greek tax authorities determined that the prices paid to related parties for FY 2017 had been above the arm’s length price. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Diary Distributor Ltd.” Judgement of the Court The court dismissed the appeal of “Diary Distributor Ltd.” and upheld the assessment of the tax authorities Click here for English translation Click here for other translation ... Read more

At issue is the selection of the most appropriate transfer pricing method for sale of coal mined by Carbones El Tesoro S.A. in Colombia to its related party abroad, Glencore International AG. Carbones El Tesoro S.A. had determined the transfer price by application of the TNMM method. The tax authorities found that the most appropriate method for pricing the transactions was the CUP method. To that end, the tax authorities applied a database (McCloskey price list) in which the price, was determined by referring to a good similar to that traded (thermal coal) and to the Btus (British Thermal Unit) thereof. On 29 April 2011, the Settlement Management Division of the Barranquilla Regional Tax Directorate issued an assessment by which it modified the income tax return for the taxable year 2007, in the sense of disregarding as a net loss for the year the amount of $30. 509.961.000 and imposed a penalty for inaccuracy of $16.597.418.784, based on the questioning ... Read more

“Yogo Food-Distributor” is a subsidiary in the “Yogo Group” and trades in spices and canned meat and vegetables from the territory of the former Yugoslavia. The main sales markets are Austria and Germany (90%), the remainder being distributed among France, Scandinavia, Great Britain and the Benelux countries. Following an audit the tax authorities issued an assessment of additional taxable income determined by way of a benchmark study into comparable businesses. Yogo Food Distributor was of the opinion that the benchmark-study did not comply with the OECD guidelines in regards of comparability factors and filed a complaint with the Court. Judgement of the Court The contested notices (corporate income tax notices for the years 2010, 2011 and 2012, each dated 13 October 2014) and the preliminary appeal decision (dated 22 September 2017) are annulled pursuant to section 278(1) BAO and the matter is referred back to the tax authority. Excerpt “In order to be able to assess the arm’s length nature ... Read more

An adjustment for FY 2013 and 2014 had been issued to a pharmaceutical company in Panama “Pharma Distributor S.A” that resulted in an income adjustment of 19.5 million dollars, which in turn resulted in additional taxes of 2.4 million dollars. The resale price method had been used by Pharma Distributor S.A. to determine the market value of an asset acquired from a related entity that was sold to an independent entity. This method was rejected by the tax authorities based on the fact that the analysis presented by the taxpayer did not meet the requirements for application of the method. The tax authorities instead applied a TNMM. The tax authorities also rejected tax deductions for expenses purportedly paid for administrative services due to the absence of supporting documentation. Provisions of article 762-G “Administrative services received” in the Tax Code in Panama contemplates tax deductibility for such expenses exclusively when services have actually been rendered to the benefit of the recipient ... Read more

This case deals with arm’s length pricing of limited risk manufacturing services. Following an audit of the X Ltd, the prices paid to a foreign manufacturer in the group was determined by the Grees tax authorities to have been above the arm’s length price. On that basis an upwards adjustment of the taxable income of X Ltd. was issued. Judgement of the Court The court dismissed the appeal of the X Ltd. Since the audit findings as recorded in the partial income tax audit report of the Head of the C.E.M.E.P. dated 08/07/2020 are found to be valid, thorough and fully substantiated, the present appeal must be dismissed. Click here for English translation Click here for other translation ... Read more

Following an audit the tax administration had adjusted the margin obtained by the taxpayer to the median, as it was below the interquartile range of the benchmark analysis. An appeal was filed by the taxpayer with the TEAC. Judgement of the TEAC The TEAC upheld the taxpayer’s appeal and annulled the decision of the tax authorities. Excerpt “… In the present case, the inspectorate has accepted the comparability study of the company without noting any shortcomings in the study. It only notes, perhaps as a justification for the unreliability of the company’s information, that: It should be clear, therefore, that, according to the background information in the file, at no time has group X commissioned or agreed to have its costs and other elements determining the group’s internal data, including its own costs, verified by an independent third party, prior to their provision to the entity responsible (…) for preparing the documentation on related-party transactions, provided in the course of ... Read more

On 25 February 2021, a note was released by the Spanish Tax Agency on number of practical issues relating to application of the arm’s-length range. The note – which is based on the OECD transfer Pricing Guidelines, guidance on benchmark studies issued by the Joint Transfer Pricing Forum, and relevant Spanish case laws – answers the following questions: – How is the range of values determined? – Is it possible to determine a range of values in which the figures are relatively equally reliable? – How to proceed if a range is determined in which all figures are not relatively equally reliable? – When should statistical tools be used to narrow the range? – What should be done if there is a wide dispersion in the range? – Where in the range should the value of the linked transactions be selected? – When can the administration adjust the values used by the taxpayer in its controlled transactions covered by a ... Read more

BIOMERIEUX ESPAÑA SA is active in the business of clinical and biological analysis, production, distribution, training and technical assistance. Likewise, the provision of computer services and, in particular, the computer management of laboratories. Following an audit the tax authorities found that the controlled prices agreed for the acquisition of instruments and consumables between bioMérieux España and its related entities, bioMérieux SA and bioMérieux Inc, did not provided bioMérieux España with an arm’s length return on is controlled activities. A tax assessment was issued for FY 2008 on the basis af a thorough critical analysis of the benchmark study provided by the BIOMERIEUX, and detailed reasoning and analysis in regards to comparability and market developments. Judgement of the National Court The Audiencia Nacional dismissed the appeal of Biomerieux España SA and decided in favour of the tax authorities. Excerpts “As we already reasoned in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ), it is legitimate to resort to what ... Read more

ABC Ltd is in the business of manufacturing, importing, and selling chemical products. It has a catalyst division that is focused on manufacturing and selling catalytic converters (catalysts) which is used in the abatement of harmful exhaust emissions from motor vehicles. To produce the catalysts, applicant requires, inter alia, some metals known as the Precious Group of Metals (PGMs). It purchases the PGMs from a Swiss entity (“the Swiss Entity”). The PGMs are liquified and mixed with other chemicals to create coating for substrates, all being part of the manufacturing process. Once the manufacturing is complete, the catalysts are sold to customers in South Africa known as the original equipment manufacturers (OEMs). ABC Ltd and the Swiss Entity are connected parties as defined in section 1 of the ITA. Following an audit carried out in 2014 the revenue service issued an assessment for FY 2011 by an amount of R114 157 077. According to the revenue service the prices paid ... Read more

In determining whether or not a “limited-risk” entity may incur losses, the risks assumed by an entity will be particularly important. This reflects the fact that at arm’s length, the allocation of risks between the parties to an arrangement affects how profits or losses resulting from the transaction are allocated.23 For example, where there is a significant decline in demand due to COVID-19, a “limited-risk” distributor (classified as such, for example, based on limited inventory ownership – such as through the use of “flash title” and drop-shipping – and therefore limited risk of inventory obsolescence) that assumes some marketplace risk (based on the accurate delineation of the transaction) may at arm’s length earn a loss associated with the playing out of this risk. The extent of the loss that may be earned at arm’s length will be determined by the conditions and the economically relevant characteristics of the accurately delineated transaction compared to those of comparable uncontrolled transactions, including application ... Read more

In all circumstances it will be necessary to consider the specific facts and circumstances when determining whether a so-called “limited-risk” entity could incur losses at arm’s length. This is reflected in the OECD TPG which states that “simple or low risk functions in particular are not expected to generate losses for a long period of time”,22 and therefore holds open the possibility that simple or low risk functions may incur losses in the short-run. In particular, when examining the specific facts and circumstances, the analysis should be informed by the accurate delineation of the transaction and the performance of a robust comparability analysis. For example, where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transaction then such a comparable should be excluded from the list of comparables (see paragraph 3.65 of the OECD TPG). 22  Paragraph 3.64 of Chapter III of the OECD ... Read more

Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.19 These costs should be allocated based on an assessment of how independent enterprises under comparable circumstances operate. Separately, as extraordinary costs may be recognised as either operating or non-operating items, comparability adjustments may be necessary to improve the reliability of a comparability analysis. It is important to keep in mind that the treatment in a transfer pricing analysis of “exceptional,” “non-recurring,” or “extraordinary” costs incurred as a result of the pandemic will not be dictated by the label applied to such costs, but by an accurate delineation of the transaction, an analysis of the risks assumed by the parties to the intercompany transaction, an understanding of how independent enterprises may reflect such costs in arm’s length prices, and ultimately how such costs may impact prices charged in transactions between the associated enterprises (see OECD TPG paragraph ... Read more

In general, there is no overriding rule on the inclusion or exclusion of loss making comparables in the OECD TPG.15 Accordingly, loss-making comparables that satisfy the comparability criteria in a particular case should not be rejected on the sole basis that they suffer losses in periods affected by the COVID-19 pandemic.16 Consequently, when performing a comparability analysis for FY 2020, it may be appropriate to include loss-making comparables when the accurate delineation of the transaction indicates that those comparables are reliable (e.g. the comparables assume similar levels of risk and that have been similarly impacted by the pandemic). 15 Paragraph 3.64 of Chapter III of the OECD TPG. 16 Paragraph 3.65 of Chapter III of the OECD TPG ... Read more

For example, assume that geographic comparability is deemed as the most relevant comparability factor given the nature of the effects of COVID-19 in a particular market. In these circumstances, in order to obtain reliable data from a particular market it may potentially be necessary to relax other comparability criteria, and then refine the sample ... Read more

The COVID-19 pandemic has created economic conditions that often differ from those of previous years. In these circumstances, where a taxpayer rolls forward an existing set of comparables to cover FY2020, it may be necessary to review the suitability of these existing comparables and potentially in some cases, it may be useful to revise the set, based on updated search criteria ... Read more

This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar restrictions or conditions. Otherwise, it might be necessary to adjust the period over which the comparison is performed (e.g. excluding the economic data corresponding to the three months where the taxpayer was unable to operate). Taxpayers and tax administrations should determine on a case-by-case basis the extent to which these adjustments are necessary in circumstances where the potential differences may not have a material impact on the comparability. In this respect, the guidance in paragraphs 3.50 to 3.52 of the OECD TPG is relevant ... Read more

However, the unique and almost unprecedented economic conditions arising from and government responses to COVID-19 have led to practical challenges for the application of the arm’s length principle. For example, the pandemic may raise novel issues or exacerbate in complexity or magnitude the occurrence of certain transfer pricing issues (e.g. effect of government assistance or the availability of reliable comparable data). For taxpayers applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic and for tax administrations that will be evaluating this application, there is a need to address these practical questions. Based on the responses to the questionnaires submitted to members of the Inclusive Framework and businesses, and conscious of the need to provide practical and timely guidance, this note addresses four priority issues: (i) comparability analysis; (ii) allocation of losses and the allocation of COVID-19 specific costs; (iii) government assistance programmes; and (iv) Advance Pricing Arrangements (“APAs”). For ease of presentation, these issues have been ... Read more

Following an audit the tax authorities issued an assessment regarding various intra group costs of sales deducted for tax purposes by “E-S. Sales Corp”. An appeal was filed by the company. Judgement of the Tax Court The court partially upheld the assessment, but in regards of application of the OECD Transfer Pricing Guidelines, the assessment was set aside. For the years in question the OECD guidelines had not yet been implemented by El Salvador. Excerpt “In this regard, it should be noted that the seventh paragraph of the aforementioned article provides that “””If, for any reason, the market price cannot be determined, the Tax Administration shall establish it by adopting the price or the amount of the consideration that the taxpayer under audit has received from purchasers of goods or providers of unrelated services other than those to whom it transferred goods or provided services at a price lower or higher than the market price”””. Therefore, if it had been ... Read more

The disputed issue concerns the purchase prices of natural gas by SC A from an affiliated company SC B. By orders of the National Energy Regulatory Authority (NERA), the prices of supply of natural gas to domestic and non-domestic consumers were regulated and fixed, but not the price at which SC A purchased it from the SC B. The tax authority issued an assessment where the price of the controlled gas transaction was determined by reference to profit level indicators of comparable businesses. SC A brought the decision to the Romanian courts. Judgement of the Court of Appeal The appeal of SC A was dismissed and the assessment of the tax authorities upheld. Excerpt “In the present case, in order to adjust the expenses for the cost of the goods purchased from SC “B.” SRL, based on the level of the central market trend, the tax body used the information provided by the ORBIS and FISCNET applications. Following the comparative ... Read more

In this case, a Romanian manufacturer and distributor (A. SA) in the Electrolux group (C) had been loss making while the group as a whole had been profitable. The tax authorities issued an assessment, where the profit of A. SA had been determined based on a comparison to the profitability of independent traders in households appliances. When calculating the profit margin of A. SA certain adjustments was made to the costs – depreciations, extraordinary costs etc. When comparing A. SA’s net profit to financial results with those of the group to which it belongs, it emerged that, during the period under review, the applicant was loss-making while C. made a profit. With reference to paragraphs 1.70 and 1.71 of the OECD Transfer Pricing Guidelines, when an affiliated company consistently makes a loss while the group as a whole is profitable, the data may call for a special analysis of the transfer pricing elements, as this loss-making company may not receive ... Read more

In regards of transfer pricing A. SA had two activities – production of dairy products and distribution of milk – that had been subject to an audit by the tax authorities which resulted in an assessment of additional taxable income. The transfer pricing assessment had been upheld by the court of first instance and A. SA then filed an appeal to the Supreme Court. In regards of production activities the main criticism by A. SA was that the tax authorities had replaced one market price with another price considered convenient by tax authorities, without legal basis, although the tax inspection accepted the list of companies and comparable transactions for all three sections of the file. The judge of the merits did not motivate his choice in law and supports the maintenance of the median according to the RIF, but does not specify how he reached this conclusion, the data for which the cost plus method is substituted and the legal ... Read more

An assessment had been issued where the pricing of intra group rental expenses for machinery had been set aside by the tax authorities for FY 2010-2013. By an application filed with the Court of Appeal S.C. A. S.R.L. requested the Court for annulment of the assessment. The Court of Appeal by judgment no. 164 of 31 October 2017, partially annulled the assessment. Unsatisfied with this decision, both parties filed an appeal to the High Court. S.C. A. S.R.L. considered that the first court misapplied the substantive rules of law applicable to the case with regard to the additional determination of a corporation tax in the amount of RON 56,715 for 2010, with reference to the interpretation of the OECD Guidelines. “Although the expert appointed by the court of first instance correctly established the adjusted margins of trade mark-up for each of the years 2010 to 2013 and the adjusted margins of operating profit for the same period, he erred in ... Read more

“Petroleum Wholesale Corp” is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation and financial reports and other publicly available information, an assessment was issued for FY 2013 and 2014 resulting in additional taxes and surcharges of approximately $ 14 millions. Petroleum Wholesale Corp disagreed with the assessment and brought the case before the Administrative Tribunal. The Administrative Tribunal decided in favor of the tax authorities with a minor adjustment in the calculations for 2014. “…we consider that the Tax Administration adhered, in this case, to the powers conferred by law, and that there is no defenselessness, since it was verified that, in the course of the audit, several requests for information were made (as evidenced in the minutes of the proceedings in the background file), and then, in the ... Read more

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal lids for jars etc. The Polish tax authorities had issued an tax assessment for FY 2009 – 2012 based on a TNMM benchmark study where financial results of comparable independent manufactures operating in the packaging industry showed that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities The Court of first instance held in favor of the tax authorities. The case was then brought before the Administrative Court of Appeal. In the Court’s view, the authorities did not subject the case to thorough verification in accordance with the legal standards on which the decision was based – including, in particular, the analysis of comparable transactions (CUP’s). In the Court’s opinion, the authorities have illegally ... Read more

“G Pharma Ltd” is a distributor of generic and specialised pharmaceutical products purchased exclusively from affiliated suppliers. It has no significant intangible assets nor does it assume any significant risks. However for 17 consecutive years it has had losses. Following an audit, the tax authorities issued an assessment, where the income of G Pharma Ltd was determined by application of the Transactional Net Margin Method (TNMM). According to the tax authorities a limited risk distributor such as G Pharma Ltd would be expected to be compensated with a small, guaranteed, positive profitability. G Pharma Ltd disagreed with the assessment and filed an appeal. Judgement of the Court The court dismissed the appeal of G Pharma Ltd and upheld the assessment issued by the tax authorities. Excerpts “First, the reasons for the rejection of the final comparable sample of two companies were set out in detail and then the reasons for using the net profit margin as an appropriate indicator of ... Read more

A Greek MNE Group, “Agri Ltd”, was active and specialised in wholesale trade of agricultural machinery, parts and tools. In 2012 a German company was established by the group to distribute products in the Central European region. The pricing of the goods sold by Agri Ltd. to the German distributor was determined by testing the income of Agri Ltd using a TNMM. Following an audit the tax authorities issued a revised tax assessment, where the pricing of the inter-company transactions had instead been determined by applying a traditional cost plus method where the German subsidiary was the tested party. The resulting assessment was appealed by Agri Ltd. Judgement of the Court The court dismissed the appeal of Argri Ltd. “Since the tax audit, documented and clearly concluded that the cost plus margin method should have been chosen for the sales of the applicant to its subsidiary, the findings of the audit, as recorded in the 18.12.2019 Partial Income Tax Audit ... Read more

Prime Plastichem Nigeria Limited is a private limited company which engages in the business of trading in imported plastics and petrochemicals. Prime Plastichem Nigeria Limited had applied an internal CUP in determining the arm’s length price of its purchase of petrochemical products from its offshore related party, Vinmar Overseas Limited by comparing the controlled prices of products with the prices whereby the products were sold to third party customers. However, in 2014, Vinmar Overseas Limited did not sell to third party customers in Nigeria and there was no basis for applying the internal CUP. Prime Plastichem Nigeria Limited instead applied the TNMM. In 2016, the Nigerian Tax Authorities reviewed the transfer pricing and disregarded the CUP analysis applied in the 2013 TP documentation, applied TNMM to both 2013 and 2014 transactions, and issued an assessment of ₦1.74 billion. Both parties disagreed on the applicable profit level indicator (PLI) to be adopted in applying the TNMM and the comparables selected in ... Read more