Tag: Berry Ratio

Ratio used to establish an arm’s length profit. The Berry ratio is the ratio of a business’ gross income to operating costs. Interest and extraneous income are generally excluded from the gross profit determination; depreciation and amortisation may or may not be included in the operating expenses, depending in particular on the possible uncertainties they can create in relation to valuation and comparability. See TPG 2.106

US vs Eaton Corp., August 2022, Sixth Circuit, Nos. 21-1569/2674

US vs Eaton Corp., August 2022, Sixth Circuit, Nos. 21-1569/2674

Eaton is an Ohio corporation with a global presence. It manufactures a wide range of electrical and industrial products. During the relevant period—2005 and 2006—Eaton had its foreign subsidiaries in Puerto Rico and the Dominican Republic manufacture certain products which Eaton then sold to its other affiliates and third-party customers. In 2002, Eaton applied for an APA related to these transactions. In 2004 the IRS and Eaton entered into the first APA which covered tax years 2001 through 2005. And in 2006 a second APA was entered which covered tax years 2006 through 2010. A few years after entering in to the APAs, Eaton reviewed its records and caught some inadvertent calculation errors. After letting the IRS know, Eaton corrected the mistakes. But the IRS thought that Eaton’s mistakes were serious enough to warrant its unilateral cancellation of the APAs for tax years 2005 and 2006. And after cancelling the APAs, the IRS handed Eaton a notice claiming a deficiency of ... Read more
Greece vs "Clothing Distributor Ltd.", June 2022, Tax Court, Case No 2400/2022

Greece vs “Clothing Distributor Ltd.”, June 2022, Tax Court, Case No 2400/2022

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 gr-ded-2022-2400_en_ath-2400_2022 ... Read more

TPG2022 Chapter II paragraph 2.108

A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of uncontrolled sales, and a cost plus method that would provide for a mark-up on the cost of goods sold might not be applicable either where the cost of goods sold consists in controlled purchases. By contrast, operating expenses in the case of an intermediary may be reasonably independent from transfer pricing formulation, unless they are materially affected by controlled transaction costs such as head office charges, rental fees or royalties paid to an associated enterprise, so that, depending on the facts and circumstances of the case, a Berry ratio may be an appropriate indicator, subject to the comments above ... Read more

TPG2022 Chapter II paragraph 2.107

The selection of the appropriate financial indicator depends on the facts and circumstances of the case, see paragraph 2.82. Concerns have been expressed that Berry ratios are sometimes used in cases where they are not appropriate without the caution that is necessary in the selection and determination of any transfer pricing method and financial indicator. See paragraph 2.98 in relation to the use of cost-based indicators in general. One common difficulty in the determination of Berry ratios is that they are very sensitive to classification of costs as operating expenses or not, and therefore can pose comparability issues. In addition, the issues raised at paragraphs 2.99-2.100 above in relation to pass-through costs equally arise in the application of Berry ratios. In order for a Berry ratio to be appropriate to test the remuneration of a controlled transaction (e.g. consisting in the distribution of products), it is necessary that: The value of the functions performed in the controlled transaction (taking account ... Read more

TPG2022 Chapter II paragraph 2.106

“Berry ratios” are defined as ratios of gross profit to operating expenses. Interest and extraneous income are generally excluded from the gross profit determination; depreciation and amortisation may or may not be included in the operating expenses, depending in particular on the possible uncertainties they can create in relation to valuation and comparability ... Read more
Greece vs "Marine Fuel Ltd", January 2022, Dispute Settlement Board, Case No 36/2022

Greece vs “Marine Fuel Ltd”, January 2022, Dispute Settlement Board, Case No 36/2022

“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
India vs Sabic India Pvt Ltd, June 2021, Income Tax Appellate Tribunal - Delhi, ITA No.454/Del/2021

India vs Sabic India Pvt Ltd, June 2021, Income Tax Appellate Tribunal – Delhi, ITA No.454/Del/2021

Sabic India Pvt Ltd was primarily engaged in providing marketing support services to facilitate the selling of fertilizers and chemicals in India on behalf of the Sabic Group holding company. The Indian company did not hold any title to inventories and all products sold were directly invoiced to the holding companies of the taxpayer. To determine the arm’s length remuneration for marketing support services Sabic India Pvt Ltd found that the TNMM was the most appropriate method The tax authorities disagreed and instead held that the CUP method was more appropriate. On that basis an assessment was issued. Judgement of the Tax Appellate Tribunal The Tribunal decided in favor of Sabic India Pvt Ltd and set aside the tax assessment. The Tribunal held that the TNMM cannot be discarded without any valid justification as the method was widely accepted by the Indian revenue since 2009. The Tribunal concluded that the tax authorities were not able to provide any justification for ... Read more
Korea vs "Semicon-Distributor", May 2021, Seoul High Court, Case No 2020누61166

Korea vs “Semicon-Distributor”, May 2021, Seoul High Court, Case No 2020누61166

A Korean subsidiary in the “Semiconductor-group” was active in distribution and sales services. At issue was which transfer pricing method was the most appropriate for determining the arm’s length remuneration for these activities in FY 2013. Judgement of the Court The Court dismissed the claims of the company and upheld the decision of the tax authorities. Excerpt “However, the following circumstances that can be comprehensively acknowledged in the foregoing evidence and description in Evidence A No. 21, namely, (1) OECD Transfer Price Taxation Guidelines 2.101 stipulate that in order for a Gross Margin Ratio to be applied, a taxpayer shall not perform other important functions (manufacturing functions, etc.) that must be compensated using other transfer price methods or financial indicators in a related transaction, which are very sensitive to cost classification, such as operating expenses and other expenses, and thus may cause problems of comparability and irrelevant costs; and (2) Charles H. Berry, which devised the Gross Margin Method of ... Read more

TPG2017 Chapter II paragraph 2.108

A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of uncontrolled sales, and a cost plus method that would provide for a mark-up on the cost of goods sold might not be applicable either where the cost of goods sold consists in controlled purchases. By contrast, operating expenses in the case of an intermediary may be reasonably independent from transfer pricing formulation, unless they are materially affected by controlled transaction costs such as head office charges, rental fees or royalties paid to an associated enterprise, so that, depending on the facts and circumstances of the case, a Berry ratio may be an appropriate indicator, subject to the comments above ... Read more

TPG2017 Chapter II paragraph 2.107

The selection of the appropriate financial indicator depends on the facts and circumstances of the case, see paragraph 2.82. Concerns have been expressed that Berry ratios are sometimes used in cases where they are not appropriate without the caution that is necessary in the selection and determination of any transfer pricing method and financial indicator. See paragraph 2.98 in relation to the use of cost-based indicators in general. One common difficulty in the determination of Berry ratios is that they are very sensitive to classification of costs as operating expenses or not, and therefore can pose comparability issues. In addition, the issues raised at paragraphs 2.99-2.100 above in relation to pass-through costs equally arise in the application of Berry ratios. In order for a Berry ratio to be appropriate to test the remuneration of a controlled transaction (e.g. consisting in the distribution of products), it is necessary that: The value of the functions performed in the controlled transaction (taking account ... Read more

TPG2017 Chapter II paragraph 2.106

“Berry ratios” are defined as ratios of gross profit to operating expenses. Interest and extraneous income are generally excluded from the gross profit determination; depreciation and amortisation may or may not be included in the operating expenses, depending in particular on the possible uncertainties they can create in relation to valuation and comparability ... Read more