Tag: Choice of tested party

Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

Promgas s.p.a. is 50% owned by the Italian company Eni s.p.a. and 50% owned by the Russian company Gazprom Export. It deals with the purchase and sale of natural gas of Russian origin destined for the Italian market. It sells the gas to a single Italian entity not belonging to the group, Edison spa, on the basis of a contract signed on 24 January 2000. In essence, Promgas s.p.a. performes intermediary function between the Russian company, Gazprom Export (exporter of the gas), and the Italian company, Edison s.p.a. (final purchaser of the gas). Following an audit for FY 2005/06, the tax authorities – based on the Transaction Net Margin Method – held that the operating margin obtained by Promgas s.p.a. (0.23% in 2025 and 0.06% in 2006) were not in line with the results that the company could have achieved at arm’s length. Applying an operating margin of l.39% resulted in a arm’s length profit of €4,227,438.07, for the year ... Read more
India vs Kellogg India Private Limited, February 2022, Income Tax Appellate Tribunal - Mumbai, Case NoITA No. 7342/Mum/2018

India vs Kellogg India Private Limited, February 2022, Income Tax Appellate Tribunal – Mumbai, Case NoITA No. 7342/Mum/2018

Kellogg India Private Limited is engaged in manufacturing and sales of breakfast cereals and convenience foods and it operates as a licensed manufacturer under the Kellogg brand. During the year under consideration, Kellogg India had commenced business of distributing Pringles products in the Indian markets. Kellogg India purchases the pringles product from its AE Pringles International Operations SARL, based in Singapore. Singapore AE does not manufacture pringles, but in turn gets it manufactured from a third party contract manufacturer. Thereafter, the goods are supplied at a cost plus mark up of 5% on third party manufacturer’s cost. These Pringles are later imported by Kellogg India from its AE and distributed in the Indian market. Kellogg India characterised itself as a distributor of Pringles products and is responsible for the strategic and overall management of Pringles business in India. Singapore AE, being the least complex entity, was selected as the tested party for benchmarking the international transaction of import of finished ... Read more
TPG2022 Chapter VI Annex I example 15

TPG2022 Chapter VI Annex I example 15

49. Shuyona is the parent company of an MNE group. Shuyona is organised in and operates exclusively in country X. The Shuyona group is involved in the production and sale of consumer goods. In order to maintain and, if possible, improve its market position, ongoing research is carried out by the Shuyona group to improve existing products and develop new products. The Shuyona group maintains two R&D centres, one operated by Shuyona in country X, and the other operated by Company S, a subsidiary of Shuyona, operating in country Y. 50. The Shuyona group sells two lines of products. All R&D with respect to product line A is conducted by Shuyona. All R&D with respect to product line B is conducted by the R&D centre operated by Company S. Company S also functions as the regional headquarters of the Shuyona group in North America and has global responsibility for the operation of the business relating to product line B. However, ... Read more
TPG2022 Chapter VI Annex I example 6

TPG2022 Chapter VI Annex I example 6

14. In Year 1, a multinational group comprised of Company A (a country A corporation) and Company B (a country B corporation) decides to develop an intangible, which is anticipated to be highly profitable based on Company B’s existing intangibles, its track record and its experienced research and development staff. The intangible is expected to take five years to develop before possible commercial exploitation. If successfully developed, the intangible is anticipated to have value for ten years after initial exploitation. Under the development agreement between Company A and Company B, Company B will perform and control all activities related to the development, enhancement, maintenance, protection and exploitation of the intangible. Company A will provide all funding associated with the development of the intangible (the development costs are anticipated to be USD 100 million per year for five years), and will become the legal owner of the intangible. Once developed, the intangible is anticipated to result in profits of USD 550 ... Read more

TPG2022 Chapter IX paragraph 9.53

The choice of the appropriate transfer pricing method depends in part on which part of the transaction is the less complex and can be evaluated with the greater certainty (the functions performed, assets used and risks assumed by the manufacturer, or the marketing and sales functions that remain to be performed taking account of the assets to be used and risks to be assumed to perform these functions). See paragraphs 3.18-3.19 on the choice of the tested party ... Read more
Italy vs Burckert Contromatic Italiana S.p.A., November 2021, Corte di Cassazione, Sez. 5 Num. 1417 Anno 2022

Italy vs Burckert Contromatic Italiana S.p.A., November 2021, Corte di Cassazione, Sez. 5 Num. 1417 Anno 2022

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
Colombia vs Carbones El Tesoro S.A., September 2021, Administrative Court, Case No. 22352

Colombia vs Carbones El Tesoro S.A., September 2021, Administrative Court, Case No. 22352

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
Colombia vs SONY Music Entertainment Colombia S.A., July 2021, The Administrative Court, Case No. 20641

Colombia vs SONY Music Entertainment Colombia S.A., July 2021, The Administrative Court, Case No. 20641

SONY Music Entertainment Colombia S.A. had filed transfer pricing information and documentation, on the basis of which the Colombian tax authorities concluded that payments for administrative services provided by a related party in the US had not been at arm’s length. SONY Colombia then filed new transfer pricing information and documentation covering the same years, but where the tested party had been changed to the US company. Under this new approach, the remuneration of the US service provider was determined to be within the arm’s length range. The tax authorities upheld the assessment issued based on the original documentation. A complaint was filed by SONY and later an appeal. Judgement of the Administrative Court The court allowed the appeal and issued a decision in favor of SONY. Excerpts “The legal problem is to determine, for the tax return of the taxable period 2007 of the plaintiff: (i) Whether it is appropriate to take into account the correction of the transfer ... Read more
European Commission vs. Amazon and Luxembourg, May 2021, State Aid - European General Court, Case No T-816/17 and T-318/18

European Commission vs. Amazon and Luxembourg, May 2021, State Aid – European General Court, Case No T-816/17 and T-318/18

In 2017 the European Commission concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million.  Following an in-depth investigation the Commission concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by Amazon in Luxembourg without any valid justification. The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits. This decision was brought before the European Court of Justice by Luxembourg and Amazon. Judgement of the EU Court  The European General Court found that Luxembourg’s tax treatment of Amazon was not illegal under EU State aid rules. According to a press release ” The ... Read more
Denmark vs Tetra Pak Processing Systems A/S, April 2021, Supreme Court, Case No BS-19502/2020-HJR

Denmark vs Tetra Pak Processing Systems A/S, April 2021, Supreme Court, Case No BS-19502/2020-HJR

The Danish tax authorities had issued a discretionary assessment of the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and continuous losses. Judgement of the Supreme Court The Supreme Court found that the TP documentation provided by the company did not comply to the required standards. The TP documentation did state how prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis, as required under the current § 3 B, para. 5 of the Tax Control Act and section 6 of the Danish administrative ordinance regarding transfer pricing documentation. Against this background, the Supreme Court found that the TP documentation was deficient to such an extent that it had to be equated with missing documentation. The Supreme Court agreed that Tetra Pak’s taxable income for FY 2005-2009 could be determined on a discretionary basis. According to the Supreme Court Tetra Pak had not proved that the ... Read more
Greece vs "G Pharma Ltd", july 2020, Tax Court, Case No 1582/2020

Greece vs “G Pharma Ltd”, july 2020, Tax Court, Case No 1582/2020

“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
Greece vs "Agri Ltd", july 2020, Court, Case No A 1514/2020

Greece vs “Agri Ltd”, july 2020, Court, Case No A 1514/2020

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
Denmark vs Icemachine Manufacturer A/S, June 2020, National Court, Case No SKM2020.224.VLR

Denmark vs Icemachine Manufacturer A/S, June 2020, National Court, Case No SKM2020.224.VLR

At issue was the question of whether the Danish tax authorities had been entitled to make a discretionary assessment of the taxable income of Icemachine Manufacturer A/S due to inadequate transfer pricing documentation and continuous losses. And if such a discretionary assessment was justified, the question of whether the company had lifted the burden of proof that the tax authorities’ estimates had been clearly unreasonable. The Court ruled that the transfer pricing documentation provided by the company was so inadequate that it did not provide the tax authorities with a sufficient basis for determining whether the arm’s length principle had been followed. The tax authorities had therefore been entitled to make a discretionary assessment of the taxable income. For that purpose the Court found that the tax authorities had been justified in using the TNM method with the Danish company as the tested party, since sufficiently reliable information on the sales companies in the group had not been provided. (In April 2021 ... Read more
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 ... Read more