Tag: Choice of tested party

Kenya vs Beta Healthcare International Limited, February 2024, Tax Appeals Tribunal, Appeals No 866 of 2022 - [2024] KETAT 143 (KLR)

Kenya vs Beta Healthcare International Limited, February 2024, Tax Appeals Tribunal, Appeals No 866 of 2022 – [2024] KETAT 143 (KLR)

Following an audit of Beta Healthcare International Limited, a Kenyan subsidiary in the Aspen Healthcare Group, the tax authorities issued a notice of additional taxable income relating to controlled transactions, in which they had determined the arm’s length price for controlled transactions using the CUP method instead of the TNM-method as applied by the company. Beta Healthcare International Limited appealed to the Tax Appeals Tribunal, arguing that the tax authorities had failed in its characterisation of the company, failed to consider the comparability factors of the transactions and misapplied the transfer pricing guidelines. Decision of the Tax Appeals Tribunal The Tribunal dismissed the appeal and ruled in favour of the tax authorities. Excerpts “(…) 134. The Tribunal reviewed the parties’ pleadings and established that the Appellant attached the disputed information to its pleadings. However, the Respondent, both in its pleadings and orally at the hearing, urged that the information was never provided to it. Further, while the Appellant stated that ... Read more
European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No  C‑457/21 P

European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No C‑457/21 P

In 2017 the European Commission concluded that Luxembourg had granted undue tax benefits to Amazon of around €250 million. According to the Commission, 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 Courts by Luxembourg and Amazon, and in May 2021 the General Court found that Luxembourg’s tax treatment of Amazon was not illegal under EU State aid rules. An appeal was then filed by the European Commission with the ... Read more
Denmark vs "Soy A/S", June 2023, Eastern High Court, SKM2023.316.ØLR

Denmark vs “Soy A/S”, June 2023, Eastern High Court, SKM2023.316.ØLR

Two issues were adressed in this case – transfer pricing and withholding taxes. The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction. The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act. Judgement of the High Court In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were made in accordance with the arm’s length principle. The High Court emphasised, among other things, ... Read more
Peru vs "Soybean-oil", March 2023, Tax Court, Case No 02261-3-2023

Peru vs “Soybean-oil”, March 2023, Tax Court, Case No 02261-3-2023

“Soybean-oil” had purchased crude soybean oil from a related party and used the CUP method to price the controlled transactions. The tax authorities disagreed with the choice of method and instead applied a TNMM. On that basis an assessment of additional taxable profits was issued. Not satisfied with the assessment, “Soybean-oil” appealed to the Tax Court. Decision of the Court The Court set aside the assessment and ruled in favour of “Soybean-oil”. Click here for English Translation PERU 2023 3 0267 ... Read more
Greece vs "Pharma Distributor Ltd.", November 2022, Tax Court, Case No ΔΕΔ 3712/2022

Greece vs “Pharma Distributor Ltd.”, November 2022, Tax Court, Case No ΔΕΔ 3712/2022

Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the resale price method used by “Pharma Distributor Ltd” and instead applying the TNMM. An appeal was filed by “Pharma Distributor Ltd”. Judgement of the Tax Court The Court dismissed the appeal in part and allowed it in part. The tax authorities’ assessment was largely upheld in relation to sales activities, where it was found that the prices charged by “Pharma Distributor Ltd” were outside the interquartile range. In relation to the service activities, the Court found that the remuneration for these activities was within the arm’s length range and therefore annulled the assessment. Excerpts “In the light of the above, as regards the applicant company’s intra-group transactions Nos 1 to 4, there is a question of non-compliance ... Read more

§ 1.482-5(e) Example 4.

Transfer of intangible to offshore manufacturer. (i) DevCo is a U.S. developer, producer and marketer of widgets. DevCo develops a new “high tech widget” (htw) that is manufactured by its foreign subsidiary ManuCo located in Country H. ManuCo sells the htw to MarkCo (a U.S. subsidiary of DevCo) for distribution and marketing in the United States. The taxable year 1996 is under audit, and the district director examines whether the royalty rate of 5 percent paid by ManuCo to DevCo is an arm’s length consideration for the htw technology. (ii) Based on all the facts and circumstances, the district director determines that the comparable profits method will provide the most reliable measure of an arm’s length result. ManuCo is selected as the tested party because it engages in relatively routine manufacturing activities, while DevCo engages in a variety of complex activities using unique and valuable intangibles. Finally, because ManuCo engages in manufacturing activities, it is determined that the ratio of ... Read more

§ 1.482-5(b)(2)(i) In general.

For purposes of this section, the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables ... 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
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 1.39% resulted in a arm’s length profit of €4,227,438.07, for the year ... Read more
Sweden vs Pandox AB, February 2022, Administrative Court, Case No 12512-20, 12520–12523- 20 and 13265-20

Sweden vs Pandox AB, February 2022, Administrative Court, Case No 12512-20, 12520–12523- 20 and 13265-20

Pandox AB is the parent company of a hotel group active in northern Europe. Pandox AB’s business concept is to acquire hotel property companies with associated external operators running hotel operations. Pandox AB acquires both individual companies and larger portfolios, both in Sweden and abroad. Within the group, the segment is called Property Management. Pandox AB’s main income consists of dividends from the Property Management companies (PM companies), interest income from intra-group loans and compensation for various types of administrative services that Pandox AB provides to the Swedish and foreign PM companies. These services include strategic management, communication, general back-office functions and treasury. The PM companies’ income consists of rental income from the external hotel operators. Following an audit for FY 2013-2017 the Swedish tax authorities found that the affiliated property management entities were only entitled to a risk-free return and that the residual profit should be allocated to the Swedish parent. The tax authorities argued that Pandox AB had ... 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
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
Poland issues tax clarifications on transfer pricing - No. 4: Transactional Net Margin Method (TNMM)

Poland issues tax clarifications on transfer pricing – No. 4: Transactional Net Margin Method (TNMM)

1 December 2021 the Polish Ministry of Finance issued Tax clarifications on transfer pricing No. 4: Transactional Net Margin Method (TNMM) Clarification on application of the TNMM is provided in these areas: A. Principles of TNMM use A.1. Scope of application of the method A.2. Tested party A.3. Determination of net profit margin A.4. Definition of the base A.5. Choice of profitability indicator A.6. Profitability comparison B. Criteria for comparability of transactions and entities C. Difficulties in applying TNMM D. Comparison with other methods E. Practical application of TNMM Click here for unofficial English translation Objaśnienia_nr_4_Metoda_marży_transakcyjnej_netto_1122021 (1) ... 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, European General Court, Case No T-816/17 and T-318/18

European Commission vs. Amazon and Luxembourg, May 2021, 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 European General Court  The 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 made a discretionary assessment on the taxable income of Tetra Pak Processing Systems A/S due to inadequate transfer pricing documentation and ongoing losses. The Supreme Court’s ruling. The Supreme Court found that the TP documentation provided by the company did not meet the required standards. The TP documentation did not show how the prices between Tetra Pak and the sales companies had been determined and did not contain a comparability analysis as required by the current § 3 B, para. 5 of the Tax Control Act and Section 6 of the Danish administrative regulation on 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 a lack of documentation. The Supreme Court agreed that Tetra Pak’s taxable income for the years 2005-2009 could be determined on a discretionary basis. According to the Supreme Court, Tetra Pak had not ... 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 Tetra Pak Processing Systems A/S, June 2020, National Court, Case No SKM2020.224.VLR

Denmark vs Tetra Pak Processing Systems A/S, June 2020, National Court, Case No SKM2020.224.VLR

At issue was whether the Danish tax authorities had been entitled to make a discretionary assessment of the taxable income of Tetra Pak on the basis of inadequate transfer pricing documentation and continuous losses. And, if such a discretionary assessment was justified, whether the company had satisfied the burden of proving that the tax authorities’ assessments were manifestly unreasonable. The Court held 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 observed. The tax authorities were therefore entitled to make a discretionary assessment of the taxable income. To this end, the Court held that the tax authorities were entitled to use the TNM method with the Danish company as the test person, since sufficiently reliable information on the group’s sales companies had not been provided. (In April 2021 a final decision (Tetra Pak) was issued by ... 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