Tag: Business restructuring

In a transfer pricing context these transactions are defined as the cross-border redeployment of functions, assets (tangible and/or intangible) and risks to which a profit/loss potential may be attached. It is often the case that intangibles are transferred in connection to business restructurings leading to significant audit risk.

OECD COVID-19 TPG paragraph 41

When considering the risks assumed by a party to a controlled transaction, tax administrations should carefully consider the commercial rationale for any purported change in the risks assumed by a party before and after the outbreak of COVID-19 (and taking into consideration the accurate delineation of such purported change). In particular, concerns may arise where before the outbreak of COVID-19 a taxpayer argues that a “limited-risk” distributor did not assume any marketplace risk and hence was only entitled to a low return, but after the outbreak argues that the same distributor assumes some marketplace risk (for example, due to changes in risk management functions) and hence should be allocated In this scenario, consideration should be given to re-examining whether prior to the outbreak of COVID-19 the “limited-risk” distributor genuinely did not assume any marketplace risk, whether after the outbreak the “limited risk” distributor did not actually assume any marketplace risk, and/or whether the assumption of this risk following the outbreak ... Continue to full case
Netherlands vs Zinc Smelter B.V., March 2020, Court of Appeal, Case No ECLI:NL:GHSHE:2020:968

Netherlands vs Zinc Smelter B.V., March 2020, Court of Appeal, Case No ECLI:NL:GHSHE:2020:968

A Dutch company, Zinc Smelter B.V., transferred part of it’s business to a Swiss group company in 2010. In dispute was whether the payment for the transferred activities had been set at arm’s length, and whether the cost-plus remuneration applied to the Dutch company after the business restructuring constituted an arm’s length remuneration for the remaining activities in the company. The case had previously been presented before the lower court where a decision had been issued in October 2017. After hearings in the Court of Appeal, Zinc Smelter B.V. and the Dutch tax authorities reached a settlement which was laid down in the decision. According to the agreement the profit split method was the correct method for determining the arm’s length remuneration of the Dutch company after the restructuring. Click here for English translation ECLI_NL_GHSHE_2020_968 ... Continue to full case
Denmark vs Engine branch, January 2020, Tax Tribunal, Case No SKM2020.30.LSR

Denmark vs Engine branch, January 2020, Tax Tribunal, Case No SKM2020.30.LSR

The main activity in a Danish branch of a German group was development, licensing and services related to engines that were being produced by external licensees. Under a restructuring of the group, it was decided that royalty income for a particular engine type previously received by the Danish branch should be transferred to the German company. The Danish branch received a compensation corresponding to the net earnings for a two-year notice period. The tax administration increased the taxable income of the branch claiming that the branch had made valuable contributions to the development of the type of engine in question and thereby obtained co-ownership. The Tax Tribunal found that valuable intangible assets had been transferred, The decision was based on prior contractual arrangements and conduct of the parties.  Click here for English translation Click here for other translation SKM 2020-30 ... Continue to full case
Israel vs Broadcom, December 2019, Lod District Court, Case No 26342-01-16

Israel vs Broadcom, December 2019, Lod District Court, Case No 26342-01-16

Broadcom Semiconductors Ltd is an Israeli company established in 2001 under the name Dune Semiconductors Ltd. The Company is engaged in development, production, and sale of components to routers, switches etc. The shares in Dune Semiconductors were acquired by the Broadcom Corporation (a US group) in 2009 and following the acquisition intellectual property was transferred to the new Parent for a sum of USD 17 million. The company also entered into tree agreements to provide marketing and support services to a related Broadcom affiliate under a cost+10%, to provide development services to a related Broadcom affiliate for cost+8%, and a license agreement to use Broadcom Israel’s intellectual property for royalties of approximately 14% of the affiliate’s turnover. The tax authorities argued that functions, assets, and risks had been transferred leaving only an empty shell in Israel and a tax assessment was issued based on the purchase price for the shares resulting in additional taxes of USD 29 millions. According to the ... Continue to full case
Sweden vs Branch of Technology Partners International Europe Ltd, October 2019, Court of Appeal, Case No 3701-18

Sweden vs Branch of Technology Partners International Europe Ltd, October 2019, Court of Appeal, Case No 3701-18

The Swedish branch of Technology Partners International Europe Ltd. was loss-making. The branch had no significant people functions but only two employees performing low value-added services. From the Judgement of the Court of Appeal “The distribution of revenue and costs between a British company and its Swedish branch is regulated for the current tax years in Article 7 of the 1983 double taxation agreement with the United Kingdom. Further guidance on the application of this issue can be obtained in the 2008 OECD report on profit allocation. A two-step test according to the so-called functional separate entity approach, as described in the administrative law, must be done. The Court of Appeal agrees, in light of the information provided by the branch during the Swedish Tax Agency’s investigation and because the Nordic manager cannot be linked to the branch, in the administrative court’s assessment that the branch has in the current years lacked so-called significant people functions. Nor has the branch ... Continue to full case
Denmark vs H Group, April 2019, Tax Tribunal, Case No. SKM2019.207.LSR

Denmark vs H Group, April 2019, Tax Tribunal, Case No. SKM2019.207.LSR

Intangibles had been transferred from a Danish subsidiary to a US parent under a written agreement. According to the agreement the Danish subsidiary – which had developed and used it’s own intangibles – would now have to pay royalties for the use of trademarks, know-how and patents owned by the US parent. The tax authorities had issued an assesment on the grounds that the majority of the Danish company’s intangibles had been transferred to the US parent. In the assesment the value of the intangibles had been calculated based on the price paid when the US group acquired the shares in the Danish company. H Group argued that the transferred intangibles no longer carried any value and that the Danish company now used intangibles owned by the US group. The Tax Tribunal found that tax authorities had been entitled to make an assessment as the transaction had not been described in the Transfer pricing documentation. However, the Tribunal considered that the valuation ... Continue to full case
Flir Systems Inc in SEK 2.8 billion transfer pricing dispute with Swedish Tax Authorities.

Flir Systems Inc in SEK 2.8 billion transfer pricing dispute with Swedish Tax Authorities.

Flir Systems Inc, a global leader in infrared Cameras, is involved in a SEK 2.8 billion transfer pricing dispute with the Swedish Tax Authorities. In a recent 10Q filings Flir Systems Inc. provides information on the dispute: “…the United States Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns. Our financial condition and results of operations could be adversely impacted if any assessments resulting from the examination of our income tax returns by the IRS or other taxing authorities are not resolved in our favor. For example, during the quarter ending September 30, 2018, the Swedish Tax Authority (“STA”) issued a proposed tax assessment for the tax year ending December 31, 2012 to one of the Company’s non-operating subsidiaries in Sweden. The proposed assessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and indicates a suggested decision to ... Continue to full case
Spain vs COLGATE PALMOLIVE HOLDING SCPA, February 2018, High Court, Case No 568/2014

Spain vs COLGATE PALMOLIVE HOLDING SCPA, February 2018, High Court, Case No 568/2014

According to Colgate Palmolive, following a restructuring, the local group company in Spain was changed from being a “fully fledged distributor” responsible for all areas of the distribution process to being a “limited risk distributor” (it only performs certain functions). A newly established Swiss company, Colgate Palmolive Europe, instead became the principal entrepreneur in Europe. The changed TP setup had a significant impact on the earnings in the Spanish group company. Net margins was reduced from around 16% before the restructuring, to 3.5% after the restructuring. Following a thorough examination of the functions, assets and risks before and after application of the new setup, the Tax administration held that Colgate Palmolive Europe could not be qualified as the “principal entrepreneur” in Europe. The swiss company was in substance a service provider for which the remuneration should be determined based on the cost plus method. Judgement of the Court The High Court held in favour of the tax administration and dismissed ... Continue to full case
Netherland vs. A BV, October 2017, Lower Court, case no 2017: 5965

Netherland vs. A BV, October 2017, Lower Court, case no 2017: 5965

A Dutch parent company was providing support services to its foreign subsidiary on a cost-plus basis and received a compensation fee following a business restructuring where headquarter and strategic functions was transferred from the Dutch parent company to Switzerland. The Dutch tax authorities took the view that the compensation paid was insufficient, and that the Dutch parent company was still performing strategic functions for the group. The Court ruled that the taxpayer had fulfilled its legal obligations by preparing thorough transfer pricing documentation and that the burden of proof was on the Dutch tax authorities. The Court ruled that the tax authorities did not provide sufficient arguments to support the adjustment. The original assessment of € 188.342.906 was reduced to a calculated taxable profit of € 42,641,089 and a taxable amount of € 32,067,270. Click here for translation Netherland vs X BV 19 november 2017 Lower Court ... Continue to full case
Netherlands vs Restructuring BV, September 2017, Rechtbank ZWB, No BRE 15/5683

Netherlands vs Restructuring BV, September 2017, Rechtbank ZWB, No BRE 15/5683

A Dutch company was engaged in smelting of zinc. The business was then restructured, for which the company received a small compensation payment. Dutch tax authorities disagreed with both the amount of compensation payment and the arm’s-length remuneration of the post restructuring manufacturing activities. Until 2003 the Dutch Company was a fully fledged business. The company owned the assets and controlled the risks relating to the activities. In the years after 2003, the company was involved in several business restructurings: Activities other than the actual production activities were gradually transferred to other group companies, among others the global marketing and services team (GMS), took over purchasing, sales and deployment of personnel. After becoming part of another group in 2007, the company entered a consultancy agreement with another group company under witch strategic and business development, marketing, sales, finance, legal support, IT, staffing and environmental services was now provided on a cost plus 7.5% basis. Under ‘Project X’, a Belgian company was established in April 2009, which concluded both a business transfer agreement and a cooperation agreement with related smelting companies ... Continue to full case
TPG2017 Chapter VI Annex example 23

TPG2017 Chapter VI Annex example 23

83. Birincil acquires 100% of the equity interests in an independent enterprise, Company T for 100. Company T is a company that engages in research and development and has partially developed several promising technologies but has only minimal sales. The purchase price is justified primarily by the value of the promising, but only partly developed, technologies and by the potential of Company T personnel to develop further new technologies in the future. Birincil’s purchase price allocation performed for accounting purposes with respect to the acquisition attributes 20 of the purchase price to tangible property and identified intangibles, including patents, and 80 to goodwill. 84. Immediately following the acquisition, Birincil causes Company T to transfer all of its rights in developed and partially developed technologies, including patents, trade secrets and technical know-how to Company S, a subsidiary of Birincil. Company S simultaneously enters into a contract research agreement with Company T, pursuant to which the Company T workforce will continue to ... Continue to full case
TPG2017 Chapter VI Annex example 22

TPG2017 Chapter VI Annex example 22

78. Company A owns a government licence for a mining activity and a government licence for the exploitation of a railway. The mining licence has a standalone market value of 20. The railway licence has a standalone market value of 10. Company A has no other net assets. 79. Birincil, an entity which is independent of Company A, acquires 100% of the equity interests in Company A for 100. Birincil’s purchase price allocation performed for accounting purposes with respect to the acquisition attributes 20 of the purchase price to the mining licence; 10 to the railway licence; and 70 to goodwill based on the synergies created between the mining and railway licences. 80. Immediately following the acquisition, Birincil causes Company A to transfer its mining and railway licences to Company S, a subsidiary of Birincil. 81. In conducting a transfer pricing analysis of the arm’s length price to be paid by Company S for the transaction with Company A, it ... Continue to full case

TPG2017 Chapter IX paragraph 9.131

In determining which party(ies) should be attributed the location savings at arm’s length, it will be important to consider the functions, risks and assets of the parties, as well as the options realistically available to each of them. In this example, assume that there is a high demand for the type of engineering services that the company in Country X sells. Assume also that the subsidiary in Country Y is the only company operating in a lower-cost location that is able to provide such services with the required quality standard, and Company Y is able to withstand competitive pricing pressures because the technical know-how it has established acts as a barrier to competition. Furthermore, the company in Country X does not have the option of engaging qualified engineers in Country X to provide these services, as the cost of their wages would be too high compared to the hourly rate charged to clients. Considering this, the enterprise in Country X ... Continue to full case

TPG2017 Chapter IX paragraph 9.130

As another example, assume now that an enterprise in Country X provides highly specialised and quality engineering services to independent clients. It charges a fee to its independent clients based on a fixed hourly rate that compares with the hourly rate charged by competitors for similar services in the same market. Suppose that the wages for qualified engineers in Country X are high. The enterprise subsequently subcontracts a large part of its engineering work to a new subsidiary in Country Y. The subsidiary in Country Y hires equally qualified engineers to those in Country X for substantially lower wages, thus deriving significant location savings for the group formed by the enterprise and its subsidiary Clients continue to deal directly with the enterprise in Country X and are not necessarily aware of the sub-contracting arrangement. For some period of time, the well-known enterprise in Country X can continue to charge its services at the original hourly rate despite the significantly reduced ... Continue to full case

TPG2017 Chapter IX paragraph 9.129

In such an example, given that the relocated activity is a highly competitive one, it is likely that the enterprise in Country A has the option realistically available to it to use either the affiliate in Country B or a third party manufacturer. As a consequence, it should be possible to find comparables data to determine the conditions in which a third party would be willing at arm’s length to manufacture the clothes for the enterprise. In such a situation, a contract manufacturer at arm’s length would generally be attributed very little, if any, part of the location savings. Doing otherwise would put the associated manufacturer in a situation different from the situation of an independent manufacturer, and would be contrary to the arm’s length principle ... Continue to full case

TPG2017 Chapter IX paragraph 9.128

Take the example of an enterprise that designs, manufactures and sells brand name clothes. Assume that the manufacturing process is basic and that the brand name is famous and represents a highly valuable intangible. Assume that the enterprise is established in Country A where the labour costs are high and that it decides to close down its manufacturing activities in Country A and to relocate them in an affiliate company in Country B where labour costs are significantly lower. The enterprise in Country A retains the rights on the brand name and continues designing the clothes. Further to this restructuring, the clothes will be manufactured by the affiliate in Country B under a contract manufacturing arrangement. The arrangement does not involve the use of any significant intangible owned by or licensed to the affiliate or the assumption of any significant risks by the affiliate in Country B. Once manufactured by the affiliate in Country B, the clothes will be sold ... Continue to full case

TPG2017 Chapter IX paragraph 9.127

Where significant location savings are derived further to a business restructuring, the question arises of whether and if so how the location savings should be shared among the parties. In addressing this matter, the guidance in Section D.6 of Chapter I is relevant ... Continue to full case

TPG2017 Chapter IX paragraph 9.126

Location savings can be derived by an MNE group that relocates some of its activities to a place where costs (such as labour costs, real estate costs, etc.) are lower than in the location where the activities were initially performed, account being taken of the possible costs involved in the relocation (such as termination costs for the existing operation, possibly higher infrastructure costs in the new location, possibly higher transportation costs if the new operation is more distant from the market, training costs of local employees, etc.). Where a business strategy aimed at deriving location savings is put forward as a business reason for restructuring, the discussion in Section D. 1.5 of Chapter I is relevant ... Continue to full case

TPG2017 Chapter IX paragraph 9.125

There will also be cases where before-and-after comparisons can be made because the transactions prior to the restructuring were not controlled, for instance where the restructuring follows an acquisition, and where adjustments can reliably be made to account for the differences between the pre-restructuring uncontrolled transactions and the post-restructuring controlled transactions. See example at paragraph 9.110. Whether such uncontrolled transactions provide reliable comparables would have to be evaluated in light of the guidance at paragraph 3.2 ... Continue to full case

TPG2017 Chapter IX paragraph 9.124

Based on these findings, it can be concluded that Company A continues to perform the same functions and assume the same risks as before the restructuring took place. In particular, Company A continues to have the capability and actually performs control functions in relation to the risk of exploitation of the intangibles. It also carries on the functions related to the development, maintenance and execution of the worldwide marketing strategy. Company Z has no capability to perform control functions, and does not in fact perform the control functions needed to assume the intangible related risks. Accordingly, the accurate delineation of the transaction after the restructuring may lead to the conclusion that this is in substance a funding arrangement between Company A and Company Z, rather than a restructuring for the centralisation of intangible management. An assessment may be necessary of the commercial rationality of the transaction based on the guidance in Section D.2 of Chapter I taking into account the ... Continue to full case