Tag: Business strategy

Business strategy is a comparability factor in setting transfer prices

§ 1.482-1(d)(4)(i) Market share strategy.

In certain circumstances, taxpayers may adopt strategies to enter new markets or to increase a product’s share of an existing market (market share strategy). Such a strategy would be reflected by temporarily increased market development expenses or resale prices that are temporarily lower than the prices charged for comparable products in the same market. Whether or not the strategy is reflected in the transfer price depends on which party to the controlled transaction bears the costs of the pricing strategy. In any case, the effect of a market share strategy on a controlled transaction will be taken into account only if it can be shown that an uncontrolled taxpayer engaged in a comparable strategy under comparable circumstances for a comparable period of time, and the taxpayer provides documentation that substantiates the following – (A) The costs incurred to implement the market share strategy are borne by the controlled taxpayer that would obtain the future profits that result from the strategy, and ... Read more
Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Italy vs SKECHERS USA ITALIA SRL, January 2022, Supreme Court, Case No 02908/2022

Skechers USA ITALIA SRL – a company operating in the sector of the marketing of footwear and accessories – challenged a notice of assessment, relating to FY 2004, by which, at the outcome of a tax audit, its business income was adjusted as a result of the ascertained inconsistency of the transfer prices relating to purchases of goods from the parent company (and sole shareholder) resident in Switzerland. The tax authorities had contested the uneconomic nature of the taxpayer company’s operations, given the losses recognised in various financial years, attributing the uneconomic nature to the artificial manipulation of the transfer prices of the purchases of goods and recalculating, consequently, the negative income component constituted by the aforesaid costs pursuant to Article 110, paragraph 7 of the TUIR, with the consequent non-deductibility of the same to the extent exceeding the normal value of the price of the goods in question. Skechers held that the losses did not derive from the costs ... Read more

TPG2022 Chapter X paragraph 10.38

In any case, the reliability of results is generally improved to the extent comparable borrowers pursue similar business strategies to the tested borrower involved in an intra-group transaction ... Read more

TPG2022 Chapter X paragraph 10.37

For example, consider that Company A, a member of AB Group, advances funds with a term of 10 years to an associated enterprise, Company B, which will use the funding for short-term working capital purposes. This advance is the only loan in Company B’s balance sheet. AB Group’s policy and practices demonstrate that the MNE group uses a one-year revolving loan to manage short-term working capital. In this scenario, under the prevailing facts and circumstances, the accurate delineation of the actual transaction may conclude that an unrelated borrower under the same conditions of Company B would not enter into a 10-year loan agreement to manage its short-term working capital needs and the transaction would be accurately delineated as a one-year revolving loan rather than a 10-year loan. The consequences of this delineation would be that assuming the working capital requirements continue to exist, the pricing approach would be to price a series of refreshed one-year revolver loans ... Read more

TPG2022 Chapter X paragraph 10.36

The analysis of the business strategies will also include consideration of the MNE group’s global financing policy, and the identification of existing relationships between the associated enterprises such as pre-existing loans and shareholder interests (see Annex I to Chapter V of these Guidelines about the information to be included in the master file) ... Read more

TPG2022 Chapter X paragraph 10.35

For example, independent lenders may be prepared to lend on terms and conditions to an enterprise undertaking a merger or acquisition which might otherwise not be acceptable to the lender for the same business if it were in a steady state. In this kind of scenario, the lender may take a view over the term of the loan and consider the borrower’s business plans and forecasts, effectively acknowledging that there will be temporary changes in the financial metrics of the business for a period as it undergoes changes. Section D.1.5 of Chapter I gives other examples of business strategies that must be examined in accurately delineating the actual transaction and determining comparability ... Read more

TPG2022 Chapter X paragraph 10.34

Business strategies must also be examined in accurately delineating the actual financial transaction and in determining comparability for transfer pricing purposes since different business strategies can have a significant effect on the terms and conditions which would be agreed between independent enterprises ... Read more

TPG2022 Chapter X paragraph 10.20

In an ideal scenario, a comparability analysis would enable the identification of financial transactions between independent parties which match the tested transaction in all respects. With the many variables involved, it is more likely that potential comparables will differ from the tested transaction. Where differences exist between the tested transaction and any proposed comparable, it will be necessary to consider whether such differences will have a material impact on the price. If so, it may be possible, where appropriate, to make comparability adjustments to improve the reliability of a comparable. This is more likely to be achievable where the adjustment is based on a quantitative factor and there is good quality data easily available (e.g. on currency differences) than, for instance, in trying to compare loans to borrowers with qualitative differences or where data is not so readily available (e.g. borrowers with different business strategies) ... Read more

TPG2022 Chapter IX paragraph 9.122

For example, an MNE manufactures and distributes products the value of which is not determined by the technical features of the products, but rather by consumer recognition of the brand. The MNE wants to differentiate itself from its competitors through the development of brands with great value, by implementing a carefully developed and expensive marketing strategy. The trademarks, trade names and other intangibles represented by the brand are owned by Company A in Country A and Company A assumes the risks associated with the ownership, development and exploitation of those intangibles. The development, maintenance and execution of a worldwide marketing strategy are the main value drivers of the MNE, performed by 125 employees at Company A’s head office. The value of the intangibles results in a high consumer price for the products. Company A’s head office also provides central services for the group affiliates (e.g. human resource management, legal, tax). The products are manufactured by affiliates under contract manufacturing arrangements ... Read more

TPG2022 Chapter VI paragraph 6.208

It should also be recognised that comparability adjustments for factors other than differences in the nature of the intangibles used may be required in matters involving the use of intangibles in connection with a controlled sale of goods or services. In particular, comparability adjustments may be required for matters such as differences in markets, locational advantages, business strategies, assembled workforce, corporate synergies and other similar factors. While such factors may not be intangibles as that term is described in Section A. 1 of this chapter, they can nevertheless have important effects on arm’s length prices in matters involving the use of intangibles ... Read more

TPG2022 Chapter III paragraph 3.10

Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables. See paragraphs 1.134-1.138 on business strategies. However, as discussed in paragraphs 1.149-1.151, these considerations ... Read more

TPG2022 Chapter I paragraph 1.151

A factor to consider in analysing losses is that business strategies may differ from MNE group to MNE group due to a variety of historic, economic, and cultural reasons. Recurring losses for a reasonable period may be justified in some cases by a business strategy to set especially low prices to achieve market penetration. For example, a producer may lower the prices of its goods, even to the extent of temporarily incurring losses, in order to enter new markets, to increase its share of an existing market, to introduce new products or services, or to discourage potential competitors. However, especially low prices should be expected for a limited period only, with the specific object of improving profits in the longer term. If the pricing strategy continues beyond a reasonable period, a transfer pricing adjustment may be appropriate, particularly where comparable data over several years show that the losses have been incurred for a period longer than that affecting comparable independent ... Read more

TPG2022 Chapter I paragraph 1.138

An additional consideration is whether there is a plausible expectation that following the business strategy will produce a return sufficient to justify its costs within a period of time that would be acceptable in an arm’s length arrangement. It is recognised that a business strategy such as market penetration may fail, and the failure does not of itself allow the strategy to be ignored for transfer pricing purposes. However, if such an expected outcome was implausible at the time of the transaction, or if the business strategy is unsuccessful but nonetheless is continued beyond what an independent enterprise would accept, the arm’s length nature of the business strategy may be doubtful and may warrant a transfer pricing adjustment. In determining what period of time an independent enterprise would accept, tax administrations may wish to consider evidence of the commercial strategies evident in the country in which the business strategy is being pursued. In the end, however, the most important consideration ... Read more

TPG2022 Chapter I paragraph 1.137

When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the purported business strategy. For example, if a manufacturer charges its associated distributor a below-market price as part of a market penetration strategy, the cost savings to the distributor may be reflected in the price charged to the distributor’s customers or in greater market penetration expenses incurred by the distributor. A market penetration strategy of an MNE group could be put in place either by the manufacturer or by the distributor acting separately from the manufacturer (and the resulting cost borne by either of them), or by both of them acting in a co-ordinated manner. Furthermore, unusually intensive marketing and advertising efforts would often accompany a market penetration or market share expansion strategy. Another factor to consider is whether ... Read more

TPG2022 Chapter I paragraph 1.136

Timing issues can pose particular problems for tax administrations when evaluating whether a taxpayer is following a business strategy that distinguishes it from potential comparables. Some business strategies, such as those involving market penetration or expansion of market share, involve reductions in the taxpayer’s current profits in anticipation of increased future profits. If in the future those increased profits fail to materialise because the purported business strategy was not actually followed by the taxpayer, the appropriate transfer pricing outcome would likely require a transfer pricing adjustment. However legal constraints may prevent re-examination of earlier tax years by the tax administrations. At least in part for this reason, tax administrations may wish to subject the issue of business strategies to particular scrutiny ... Read more

TPG2022 Chapter I paragraph 1.135

Business strategies also could include market penetration schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market ... Read more

TPG2022 Chapter I paragraph 1.134

Business strategies must also be examined in delineating the transaction and in determining comparability for transfer pricing purposes. Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labour laws, duration of arrangements, and other factors bearing upon the daily conduct of business. Such business strategies may need to be taken into account when determining the comparability of controlled and uncontrolled transactions and enterprises ... Read more
France vs. SARL SRN Métal, May 2021, CAA, Case No. 19NC03729

France vs. SARL SRN Métal, May 2021, CAA, Case No. 19NC03729

SARL SRN Métal’s business is trading in industrial metal and steel products. Following an audit of the company for FY 2011 to 2012 and assessment was issued related to VAT, Transfer Pricing and Withholding Tax. In regards to transfer pricing, the administration considered that (1) the sales of goods made by SRN Métal to B-Lux Steel, established in Luxembourg, were invoiced at a lower price than that charged to the company’s other customers and (2) that commissions paid to Costa Rica – a privileged tax regime – were not deductible as SRN Metal did not provided proof that the expenses corresponded to real operations and that they are not abnormal or exaggerated. The company requested the administrative court of Strasbourg to discharge the assessments. This request was rejected by the court in a judgement issued 29 October 2019. This decision of the administrative court was appealed by the company to the Supreme Administrative Court Judgement of the Supreme Administrative Court ... Read more
Italy vs "Fruit old s.a.s", March 2021, Supreme Court, Case No 8176 - R.G.N. 8952/2013, 2021-25

Italy vs “Fruit old s.a.s”, March 2021, Supreme Court, Case No 8176 – R.G.N. 8952/2013, 2021-25

Fruit old s.a.s was active in wholesale of fruit and vegetables. In 2003 it purchased products at a price higher than the market price from another company owned by the same partners, Fruit new s.r.l., and resold them at a price lower than the purchase price. Both companies were domiciled in Italy. Following these transactions the entire business of Fruit old s.a.s (premises, employees and customers) was transferred to Fruit new s.r.l. The tax authorities issued an assessment where the price of the transactions had been adjusted, since it was in the taxpayer’s interest to transfer income from the Fruit old s.a.s to Fruit new s.r.l. The company argued that the transactions in question only took place over a short period of three months. It also stated that the pricing of the transactions were motivated by an “intra-group strategy”. Lower courts had ruled in favour of the company and set aside the assessment of the tax authorities. Judgement of the ... Read more
Italy vs Vibac S.p.A., January 2021, Corte di Cassazione, Case No 1232/2021

Italy vs Vibac S.p.A., January 2021, Corte di Cassazione, Case No 1232/2021

Transactions had taken place between Vibac S.p.A. and related foreign group companies related to use of trademarks and royalty/license payments. It was up to the Vibac S.p.A. to demonstrate that the remuneration received from related companies for use of the trademark of the products had been at arm’s length. According to the company the royalty had been set at a low price to ensure that the foreign subsidiaries were more competitive. An upward adjustment was issued by the tax authorities rejecting the taxpayer’s argument that the below market royalty was explained by the need to enable its foreign subsidiary to penetrate more effectively the US market. The tax authorities argued that such a strategy could only be justifiable in a limited period. The tax authorities determined the arm’s length royalty payment by application of the Resale Price Method (RPM). However, due to the uniqueness of the asset transferred, which hardly allows the identification of comparable transactions, the same circular, while ... Read more

TPG2020 Chapter X paragraph 10.38

In any case, the reliability of results is generally improved to the extent comparable borrowers pursue similar business strategies to the tested borrower involved in an intra-group transaction ... Read more

TPG2020 Chapter X paragraph 10.37

For example, consider that Company A, a member of AB Group, advances funds with a term of 10 years to an associated enterprise, Company B, which will use the funding for short-term working capital purposes. This advance is the only loan in Company B’s balance sheet. AB Group’s policy and practices demonstrate that the MNE group uses a one-year revolving loan to manage short-term working capital. In this scenario, under the prevailing facts and circumstances, the accurate delineation of the actual transaction may conclude that an unrelated borrower under the same conditions of Company B would not enter into a 10-year loan agreement to manage its short-term working capital needs and the transaction would be accurately delineated as a one-year revolving loan rather than a 10-year loan. The consequences of this delineation would be that assuming the working capital requirements continue to exist, the pricing approach would be to price a series of refreshed one-year revolver loans ... Read more

TPG2020 Chapter X paragraph 10.36

The analysis of the business strategies will also include consideration of the MNE group’s global financing policy, and the identification of existing relationships between the associated enterprises such as pre-existing loans and shareholder interests (see Annex I to Chapter V of these Guidelines about the information to be included in the master file) ... Read more

TPG2020 Chapter X paragraph 10.35

For example, independent lenders may be prepared to lend on terms and conditions to an enterprise undertaking a merger or acquisition which might otherwise not be acceptable to the lender for the same business if it were in a steady state. In this kind of scenario, the lender may take a view over the term of the loan and consider the borrower’s business plans and forecasts, effectively acknowledging that there will be temporary changes in the financial metrics of the business for a period as it undergoes changes. Section D.1.5 of Chapter I gives other examples of business strategies that must be examined in accurately delineating the actual transaction and determining comparability ... Read more

TPG2020 Chapter X paragraph 10.34

Business strategies must also be examined in accurately delineating the actual financial transaction and in determining comparability for transfer pricing purposes since different business strategies can have a significant effect on the terms and conditions which would be agreed between independent enterprises ... Read more
Czech Republic vs. AZETKO s.r.o., September 2019, Supreme Court, No. 5 Afs 341/2017 - 47

Czech Republic vs. AZETKO s.r.o., September 2019, Supreme Court, No. 5 Afs 341/2017 – 47

The tax authorities of the Czech Republic issued an assessment of additional income taxes and penalties for FY 2010 and 2011, because AZETKO s.r.o. according to the tax authorities did not receive an arm’s length remuneration for administration and operation of a website and e-shop on behalf on a related party, Quantus Consulting s.r.o. AZETKO disagreed with the assessment and brought the case to court. The regional court ruled in favor of AZETKO, but the tax administration appealed the decision to the Supreme Administrative Court. Judgement of the Supreme Court The Supreme Court found the tax administrations change in pricing method under the appeal of the case unsubstantiated. The tax administration had originally applied the CUP method, but in the appeal proceedings instead used the net margin transaction method (TNMM). On that basis, the appeal was dismissed by the Court. The conditions for application of the transfer pricing provisions in Section 23(7) of the Czech Income Tax Act was summarised ... Read more
Italy vs J.T.G.P. spa, September 2019, Lombardi Regional Tribunal, Case No 928/20/2019

Italy vs J.T.G.P. spa, September 2019, Lombardi Regional Tribunal, Case No 928/20/2019

The Italian company J.T.G.P spa, a subsidiary in a multinational pharma group ALPHA J, had recorded operating losses for fiscal years 1997 to 2013, where, at a consolidated level, the group had showed positive results. According to the Italian tax authorities, the reason why the Italian company was still in operation was due to the fact that the group had an interest in keeping an international profile, and to that end the Italian company performed marketing activities benefiting the Group. An assessment was issued where the taxable income of the Italian company was added compensation for inter-company marketing services carried out by the Italian company on behalf of the group. The company argued that the pharmaceutical market and the governmental policy on the prices of medicines in Italy was the reason for the losses. In support of this claim the company submitted broad documentary evidence during the audit. Judgement of the regional Court The Court held in favor of the ... 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
Italy vs Recordati Industria Chimica e Farmaceutica S.p.A, September 2017, Supreme Court, Case No 20805

Italy vs Recordati Industria Chimica e Farmaceutica S.p.A, September 2017, Supreme Court, Case No 20805

Recordati Industria Chimica e Farmaceutica S.p.A had been issued an assessment by the tax authorities for FY 2003 on various issues related to transfer pricing. Recordati Industria Chimica e Farmaceutica S.p.A. disagreed with the assessment and brought the case to court. The Regional Tax Commission of Lombardy (Ctr) issued a decision where it partially annulled the assessment. This decision was challenged both by the tax authorities and Recordati Industria Chimica e Farmaceutica S.p.A. Judgement of the Supreme Court Before the Supreme Court there were 29 issues to be resolved. The Supreme Court predominantly ruled in favour of the tax authorities. The court confirms that transfer pricing adjustments are applicable even in the absence of proof by the administration of a concrete tax advantage by the taxpayer. The shift of taxable income following transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence ... Read more

TPG2017 Chapter IX paragraph 9.122

For example, an MNE manufactures and distributes products the value of which is not determined by the technical features of the products, but rather by consumer recognition of the brand. The MNE wants to differentiate itself from its competitors through the development of brands with great value, by implementing a carefully developed and expensive marketing strategy. The trademarks, trade names and other intangibles represented by the brand are owned by Company A in Country A and Company A assumes the risks associated with the ownership, development and exploitation of those intangibles. The development, maintenance and execution of a worldwide marketing strategy are the main value drivers of the MNE, performed by 125 employees at Company A’s head office. The value of the intangibles results in a high consumer price for the products. Company A’s head office also provides central services for the group affiliates (e.g. human resource management, legal, tax). The products are manufactured by affiliates under contract manufacturing arrangements ... Read more

TPG2017 Chapter VI paragraph 6.208

It should also be recognised that comparability adjustments for factors other than differences in the nature of the intangibles used may be required in matters involving the use of intangibles in connection with a controlled sale of goods or services. In particular, comparability adjustments may be required for matters such as differences in markets, locational advantages, business strategies, assembled workforce, corporate synergies and other similar factors. While such factors may not be intangibles as that term is described in Section A. 1 of this chapter, they can nevertheless have important effects on arm’s length prices in matters involving the use of intangibles ... Read more

TPG2017 Chapter III paragraph 3.10

Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables. See paragraphs 1.114-1.118 on business strategies. However, as discussed in paragraphs 1.129-1.131, these considerations ... Read more

TPG2017 Chapter I paragraph 1.131

A factor to consider in analysing losses is that business strategies may differ from MNE group to MNE group due to a variety of historic, economic, and cultural reasons. Recurring losses for a reasonable period may be justified in some cases by a business strategy to set especially low prices to achieve market penetration. For example, a producer may lower the prices of its goods, even to the extent of temporarily incurring losses, in order to enter new markets, to increase its share of an existing market, to introduce new products or services, or to discourage potential competitors. However, especially low prices should be expected for a limited period only, with the specific object of improving profits in the longer term. If the pricing strategy continues beyond a reasonable period, a transfer pricing adjustment may be appropriate, particularly where comparable data over several years show that the losses have been incurred for a period longer than that affecting comparable independent ... Read more

TPG2017 Chapter I paragraph 1.118

An additional consideration is whether there is a plausible expectation that following the business strategy will produce a return sufficient to justify its costs within a period of time that would be acceptable in an arm’s length arrangement. It is recognised that a business strategy such as market penetration may fail, and the failure does not of itself allow the strategy to be ignored for transfer pricing purposes. However, if such an expected outcome was implausible at the time of the transaction, or if the business strategy is unsuccessful but nonetheless is continued beyond what an independent enterprise would accept, the arm’s length nature of the business strategy may be doubtful and may warrant a transfer pricing adjustment. In determining what period of time an independent enterprise would accept, tax administrations may wish to consider evidence of the commercial strategies evident in the country in which the business strategy is being pursued. In the end, however, the most important consideration ... Read more

TPG2017 Chapter I paragraph 1.117

When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the purported business strategy. For example, if a manufacturer charges its associated distributor a below-market price as part of a market penetration strategy, the cost savings to the distributor may be reflected in the price charged to the distributor’s customers or in greater market penetration expenses incurred by the distributor. A market penetration strategy of an MNE group could be put in place either by the manufacturer or by the distributor acting separately from the manufacturer (and the resulting cost borne by either of them), or by both of them acting in a co-ordinated manner. Furthermore, unusually intensive marketing and advertising efforts would often accompany a market penetration or market share expansion strategy. Another factor to consider is whether ... Read more

TPG2017 Chapter I paragraph 1.116

Timing issues can pose particular problems for tax administrations when evaluating whether a taxpayer is following a business strategy that distinguishes it from potential comparables. Some business strategies, such as those involving market penetration or expansion of market share, involve reductions in the taxpayer’s current profits in anticipation of increased future profits. If in the future those increased profits fail to materialise because the purported business strategy was not actually followed by the taxpayer, the appropriate transfer pricing outcome would likely require a transfer pricing adjustment. However legal constraints may prevent re-examination of earlier tax years by the tax administrations. At least in part for this reason, tax administrations may wish to subject the issue of business strategies to particular scrutiny ... Read more

TPG2017 Chapter I paragraph 1.115

Business strategies also could include market penetration schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market ... Read more

TPG2017 Chapter I paragraph 1.114

Business strategies must also be examined in delineating the transaction and in determining comparability for transfer pricing purposes. Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labour laws, duration of arrangements, and other factors bearing upon the daily conduct of business. Such business strategies may need to be taken into account when determining the comparability of controlled and uncontrolled transactions and enterprises ... Read more
Russia vs Suzuki Motors, August 2016, Arbitration Court, Case No. А40-50654/13

Russia vs Suzuki Motors, August 2016, Arbitration Court, Case No. А40-50654/13

A Russian subsidiary of the Suzuki/Itochu group had been loss making in 2009. Following an audit the tax authority concluded, that the losses incurred by the Russian distributor were due to non-arm’s length transfer pricing within the group and excessive deduction of costs. Decision of the Court The Court decided in favor of the tax authorities and upheld the assessment. “In view of the above, the appeal court considers that the courts’ conclusions that the Inspectorate had not proved that it was impossible to apply the first method for determining the market price and that the Inspectorate had incorrectly applied the resale price method were unfounded.” “In this light, the courts’ conclusions that the Inspectorate incorrectly applied the second method of determining the market price are unfounded.” “In such circumstances, the Inspectorate’s conclusion on the overstatement of the purchase price of vehicles is based on the application of market data and made in compliance with Article 40 of the Tax ... Read more
India vs. L’oreal India Pvt. Ltd. May 2016, Income Tax Appellate Tribunal

India vs. L’oreal India Pvt. Ltd. May 2016, Income Tax Appellate Tribunal

L’oreal in India is engaged in manufacturing and distribution of cosmetics and beauty products. In respect of the distribution L’oreal had applied the RPM by benchmarking the gross margin of at 4o.80% against that of comparables at 14.85%. The tax administration rejected the RPM method on the basis that the L’oreal India was consistently incurring losses and the gross margins cannot be relied upon because of product differences in comparables. Accordingly, the tax administration applied Transactional Net Margin Method. L’oreal argued that the years of losses was due to a market penetration strategy in India – not non-arm’s-length pricing of transactions. The comparables had been on the Indian market much longer than L’oreal and had established themselves firmly in the Indian market. The Appellate Tribunal observed that L’oreal India buys products from its parent and sells to unrelated parties without any further processing. According to the OECD TPG, in such a situation, RPM is the most appropriate transfer pricing method. L’oreal India had also produced evidence from its parent that margin earned by the ... Read more
Austria vs. Wx-Distributor, July 2012, Unabhängiger Finanzsenat, Case No RV/2516-W/09

Austria vs. Wx-Distributor, July 2012, Unabhängiger Finanzsenat, Case No RV/2516-W/09

Wx-Distributor (a subsidiary of the Wx-group i.d.F. Bw.) is responsible for the distribution of Household appliances in Austria. It is wholly owned by Z. Deliveries to Wx-Distributor are made by production companies of the Group located in Germany, Italy, France, Slovakia, Poland and Sweden with which it has concluded distribution agreements to determine transfer prices. On average Wx-Distributor had been loss-making in FY 2001-2005. Following an tax audit, the intra-group transfer prices were re-determined for the years 2001 to 2004 by the tax authorities. It was determined that the transfer prices in two years were not within the arm’s length range. The review of the tax authorities had revealed a median EBIT margin of 1.53% and on that basis the operating margin for 2001 were set at 1.5%. For the following years the margin was set at 0.9% due to changed functions (outsourcing of accounts receivable, closure of half the IT department). The resulting adjustments were treated as hidden distribution ... Read more