Tag: Comparability factors

Factors taken into account in determining the level of comparability of the controlled and comparable transactions. These are attributes of the transactions or parties that could materially affect prices or profits, including the characteristics of the property or services; functional analysis; contractual terms; economic circumstances and business strategies pursued.

Latvia vs „RĪGAS DZIRNAVNIEKS”, December 2021, Court of Appeals, Case No A420275316, SKA-103/2021

Latvia vs „RĪGAS DZIRNAVNIEKS”, December 2021, Court of Appeals, Case No A420275316, SKA-103/2021

At issue in the case of „RĪGAS DZIRNAVNIEKS” was if the interest rates charged on loans between related parties were at arm’s length. Judgement of the Court of Appeals The Court remanded the case to the Regional Court for a new hearing. Excerpts “As already indicated above, paragraphs 84, 91 and 92.3.1 and 92.3.2 of Regulation No 556 deal with the need for adjustments and mathematical calculations when significant differences in the comparable data and their material effects are established. The need for adjustments is also underlined in point 1.35 of the Guidelines. Guidance on how differences between comparables are to be addressed is provided, inter alia, in paragraph 3.57 of the Guidelines. It may be the case that, although every effort is made to exclude items with a lower level of comparability, the result is a series of figures for which it is considered that, given the process used to select the comparables and the information available on the ... Read more
Spain vs MAHOU (SAN MIGUEL) S.A., December 2021, Audiencia Nacional, Case No SAN 5537/2021 - ECLI:ES:AN:2021:5537

Spain vs MAHOU (SAN MIGUEL) S.A., December 2021, Audiencia Nacional, Case No SAN 5537/2021 – ECLI:ES:AN:2021:5537

The Mahou (SAN MIGUEL) S.A Group is active in brewing and sale of beers. Penibética de cervezas y bebidas SL and Andaluza de cervezas y bebidas SL are wholly owned by Cervezas Alhambra SL, which again is owned by MAHOU (SAN MIGUEL) S.A. The main activity of Cervezas Alhambra SL is the distribution and marketing under its own brands of the beer produced by its subsidiaries; that of Penibética de Cervezas y Bebidas SL is the production of beers which, without its own brand, are mainly distributed and marketed by Alhambra and the core activity of Andaluza de Cervezas y Bebidas S.L. is the manufacture of beers which, without its own brand, are distributed and marketed by Alhambra. In 2014, the tax authorities issued two tax assessments to the group: one in relation to FY 2008 and 2009, in the amount of €12,303,526.50 an another in relation to FY 2010, 2011, in the amount of €4,951,701.39. Among the issues raised ... Read more
Panama vs "Construction S.A.", December 2021, Administrative Tax Court, Case No TAT- RF-111 (112/2019)

Panama vs “Construction S.A.”, December 2021, Administrative Tax Court, Case No TAT- RF-111 (112/2019)

“Construction Service S.A.” is active in Design, Repair and Construction of buildings. During the FY 2011-2013 it paid for services – management services and construction services – rendered from related parties. Following an audit the tax authorities issued an assessment where payments for these services had been adjusted by reference to the arm’s length principle. According to the authorities the benchmark studies in the company’s transfer pricing documentation suffered from comparability defects and moreover it had not been sufficiently demonstrated that the services had been effectively provided. The tax authorities pointed out that since the company is not considered comparable to the taxpayer, the interquartile range would be from 5.15% to 8.30% with a median of 5.70%; therefore, the taxpayer’s operating margin of 4.07% is outside the interquartile range. Not satisfied with the adjustment “Construction Service S.A.” filed an appeal with the Tax Court Judgement of the Tax Court The court ruled in favour of “construction S.A” and revoked the ... Read more
Indonesia vs P.T. Sanken Indonesia Ltd., December 2021, Supreme Court, Case No. 5291/B/PK/PJK/2020

Indonesia vs P.T. Sanken Indonesia Ltd., December 2021, Supreme Court, Case No. 5291/B/PK/PJK/2020

P.T. Sanken Indonesia Ltd. – an Indonesian subsidiary of Sanken Electric Co., Ltd. Japan – paid royalties to its Japanese parent for use of IP. The royalty payment was calculated based on external sales and therefore did not include sales of products to group companies. The royalty payments were deducted for tax purposes. Following an audit, the tax authorities issued an assessment where deductions for the royalty payments were denied. According to the authorities the license agreement had not been registrered in Indonesia. Furthermore, the royalty payment was found not to have been determined in accordance with the arm’s length principle. P.T. Sanken issued a complaint over the decision with the Tax Court, where the assessment later was set aside. This decision was then appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities and upheld the decision of the Tax Court. The OECD Transfer Pricing Guidelines ... Read more
Portugal vs "FURNITURE S.A." No II, November 2021, CAAD, Case No 604/2021-T

Portugal vs “FURNITURE S.A.” No II, November 2021, CAAD, Case No 604/2021-T

Furniture S.A is engaged in the production and sale of furniture and had established a US subsidiary to market and sell furniture overseas. The pricing of the controlled transactions with the US subsidiary had been based on a resale price method, which resulted in prices amounting to 70% of the list price for the products. The Portuguese tax authority issued an assessment for FY 2015 and 2016, where the pricing of the controlled transaction had been adjusted in accordance with the price list resulting in additional taxable profits. Result reached in the arbitration tribunal. The Tribunal set aside the additional assessment of income in respect of the transfer pricing adjustment. Excerpts “…In the contract concluded with E… the Claimant safeguarded direct sales to large customers (with volume to fill a given number of containers). In practice, despite this safeguard, it is apparent from the evidence produced that the only major customer in the US since then has been E… and, ... Read more
Portugal vs "FURNITURE S.A." No I, November 2021, CAAD, Case No 14/2021-T

Portugal vs “FURNITURE S.A.” No I, November 2021, CAAD, Case No 14/2021-T

Furniture S.A is engaged in the production and sale of furniture and had established a US subsidiary to market and sell furniture overseas. The pricing of the controlled transactions with the US subsidiary had been based on a resale price method, which resulted in prices amounting to 70% of the list price for the products. The Portuguese tax authority issued an assessment, where the pricing of the controlled transaction had been adjusted in accordance with the price list resulting in additional taxable profits. Result reached in the arbitration tribunal. The Tribunal set aside the additional assessment of income in respect of the transfer pricing adjustment. Excerpts “… The application of the principle of comparability must be based on an individual analysis of the transactions, with a view to comparing the conditions practiced in a transaction between related entities and those practiced between independent entities. As it results from the matter of fact given as settled, the creation by the Claimant ... Read more
Ukrain vs Totland LLC, November 2021, Supreme Court, Case No 580/2610/19

Ukrain vs Totland LLC, November 2021, Supreme Court, Case No 580/2610/19

Following a tax audit of controlled transactions in 2013 and 2015 for the sale of goods to foreign related parties, the tax authorities concluded that Totland had understated the price of the goods sold and thus its taxable income. On that basis an assessment of additional income tax was issued. Totland disagreed with the assessment and filed an appeal. Totland stated that the dates of the price information used by the tax authorities differed from the date of the controlled transactions in question, and furthermore that those uncontrolled transactions were carried out on different terms. Totland had based the pricing of the controlled transactions on stock exchange prices and noted that the tax authorities in the assessment had violated the requirements of the Tax Code of Ukraine by applying stock exchange prices established a decade before the controlled transactions were carried out. The District Court dismissed Totland’s claim and upheld the assessment. Later the Court of Appeal overturned the decision ... Read more
Austria vs. "Yogo Food-Distributor", August 2021, Bundesfinanzgericht, Case No RV/3100163/2018

Austria vs. “Yogo Food-Distributor”, August 2021, Bundesfinanzgericht, Case No RV/3100163/2018

“Yogo Food-Distributor” is a subsidiary in the “Yogo Group” and trades in spices and canned meat and vegetables from the territory of the former Yugoslavia. The main sales markets are Austria and Germany (90%), the remainder being distributed among France, Scandinavia, Great Britain and the Benelux countries. Following an audit the tax authorities issued an assessment of additional taxable income determined by way of a benchmark study into comparable businesses. Yogo Food Distributor was of the opinion that the benchmark-study did not comply with the OECD guidelines in regards of comparability factors and filed a complaint with the Court. Judgement of the Court The contested notices (corporate income tax notices for the years 2010, 2011 and 2012, each dated 13 October 2014) and the preliminary appeal decision (dated 22 September 2017) are annulled pursuant to section 278(1) BAO and the matter is referred back to the tax authority. Excerpt “In order to be able to assess the arm’s length nature ... Read more
Indonesia vs PT Hino Motors Manufacturing Indonesia, July 2021, Supreme Court, Case No. 1806 B/PK/PJK/2021

Indonesia vs PT Hino Motors Manufacturing Indonesia, July 2021, Supreme Court, Case No. 1806 B/PK/PJK/2021

PT Hino Motors Manufacturing Indonesia is a subsidiary of a Chinese Group in the automotive industry. Following an audit, the tax authorities issued an assessment for FY 2015 where the benchmark that had been used to determine the income of PT Hino Motors was dismissed and replaced with another. According to the tax authorities Hino Motors had not been subjected to the same economic conditions as the comparables in benchmark provided by the company The Company disagreed and brought the case to the Tax Court where, in a decision issued 11 November 2020, the court set aside the assessment. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favor of PT Hino Motors and upheld the decision of the Tax Court to set aside the assessment. Excerpts “(…) – That the correction of Corporate Income Tax for Fiscal Year 2015 with a positive correction on the ... Read more
Peru vs. Perupetro, June 2021, Tax Court, Case No 05562-1-2021

Peru vs. Perupetro, June 2021, Tax Court, Case No 05562-1-2021

A foreign group had transferred funds to one of its branches, Perupetro, in Peru and claimed that the transfer was a capital contribution – and not a loan. Following an audit the tax authorities issued an assessment, where the funds transferred were considered a loan and withholding taxes on the interest payments had been lifted. An appeal was filed by Perupetro. Perupetro held that the transfers of funds made by its non-domiciled parent company in its favour in the financial year 2014 constitute assigned capital (capital contributions) and not loans as considered by the Administration. It pointed out that the tax authorities has not followed the procedure established by the Income Tax Law and the OECD Guidelines to delineate the operation observed, a situation that would have allowed it to note that it does not qualify as a loan. Perupetro further claimed that the tax authorities had not carried out a correct comparability analysis for the transaction subject to assessment, ... Read more
Kenya vs Oracle Technology Systems (Kenya) Limited, December 2021, Tax Appeals Tribunal, Appeals No 149 of 2019

Kenya vs Oracle Technology Systems (Kenya) Limited, December 2021, Tax Appeals Tribunal, Appeals No 149 of 2019

Following an audit of Oracle Technology Systems (Kenya) Limited, a distributor of Oracle products in Kenya, the tax authority issued an assessment for FY2015-2017 relating to controlled transactions. In assessing the income, the tax authority had used a CUP method instead of the TNMM. Dissatisfied with the assessment, Oracle Technology Systems (Kenya) Limited appealed to the Tax Appeals Tribunal on the basis that the return on its related party transactions was at arm’s length and did not require adjustment. Judgement of Tax Appeals Tribunal The Tribunal referred the case back to the tax authority for an appropriate reassessment. Excerpts “The question that arises is which method was the most suitable one. The OECD TP Guidelines state that the preferred method is CUP. But this only applies where there are appropriate comparables. Internal comparables are of course always preferred where they are reliable or can be reliably adjusted. From our understanding, the TP Policy implied that the reason internal comparables could ... Read more
France vs SARL Elie Saab France, June 2021, Conseil d'État, Case No 433985

France vs SARL Elie Saab France, June 2021, Conseil d’État, Case No 433985

The French tax authorities had issued an assessment to SARL Elie Saab France in which they asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the SARL Elie Saab trademark. The Supreme Administrative Court upheld the decision of the tax authorities. “It is clear from the statements in the judgment under appeal that the company Elie Saab France is responsible for the management, manufacture and distribution for the Elie Saab group of the top-of-the-range daywear line, distributes “Elie Saab” brand accessories for all the group’s entities, as well as the distribution in France and for European customers of the haute couture line, and sells, in its Paris boutique and to boutiques distributing the brand worldwide, a line of evening wear and accessories developed by the group’s Lebanese subsidiary. In addition, Elie Saab France has a showroom in the Paris boutique to present the brand’s haute couture creations, for which it ... Read more
Korea vs "Semicon-Distributor", May 2021, Seoul High Court, Case No  2020누61166

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

A Korean subsidiary in the “Semiconductor-group” was active in distribution and sales services. At issue was which transfer pricing method was the most appropriate for determining the arm’s length remuneration for these activities in FY 2013. Judgement of the Court The Court dismissed the claims of the company and upheld the decision of the tax authorities. Excerpt “However, the following circumstances that can be comprehensively acknowledged in the foregoing evidence and description in Evidence A No. 21, namely, (1) OECD Transfer Price Taxation Guidelines 2.101 stipulate that in order for a Gross Margin Ratio to be applied, a taxpayer shall not perform other important functions (manufacturing functions, etc.) that must be compensated using other transfer price methods or financial indicators in a related transaction, which are very sensitive to cost classification, such as operating expenses and other expenses, and thus may cause problems of comparability and irrelevant costs; and (2) Charles H. Berry, which devised the Gross Margin Method of ... Read more
Poland issues Tax clarifications on transfer pricing - No. 3: CUP method

Poland issues Tax clarifications on transfer pricing – No. 3: CUP method

31 March 2021 the Polish Ministry of Finance published tax explanations on transfer pricing No. 3 regarding the CUP method The explanations covers: the rationale for using the comparable uncontrolled price method, variants of the comparable uncontrolled price method, comparison of the comparable uncontrolled price method with other methods, typical areas of application of the comparable uncontrolled price method, difficulties in applying the comparable uncontrolled price method, example of using the comparable uncontrolled price method. Click here for unofficial English translation Poland Tax Exp 3 CUP objasnienia-podatkowe-w-zakresie-cen-transferowych-z-31-marca-2021-r-nr-3-mpcn ... Read more
Uganda vs Bondo Tea Estates Ltd. March 2021, Tax Appeals Tribunal, Case no. 65 of 2018

Uganda vs Bondo Tea Estates Ltd. March 2021, Tax Appeals Tribunal, Case no. 65 of 2018

In this ruling Bondo Tea Estates Ltd. challenged an adjustment made by the tax authorities to the price at which green leaf tea was supplied by the applicant to Kijura Tea Company Limited, a related party. The ruling also concerns disallowance of an assessed loss of Shs. 220,985,115. Bondo Tea Estates Ltd. is an out grower of tea which it supplies to an associated company, Kijura Tea Company Limited. In 2018, the tax authorities conducted an audit for FY 2016/2017 which purportedly revealed that the company had under declared its sales (price of 320 compared to range of 500-700) and that it had unreconciled retained earnings and current liabilities. On that basis the tax authorities adjusted the price of the related party transactions and issued an assessment of Shs. 544,409,110 of which Shs. 174,409,650 was principal income tax, Shs. 348,819,302 penalty and Shs. 20,929,158 interest. Bondo Tea Estates Ltd. did not agree with the assessment and filed an appeal with ... 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

OECD COVID-19 TPG paragraph 74

The economically relevant characteristics of the accurately delineated controlled transaction will help in determining the potential effect of the receipt of government assistance on the pricing of the controlled transaction, if any. For instance, some of the aspects to consider in analysing the impact, if any, of the receipt of government assistance on the price of a controlled transaction include the availability, purpose, duration and other conditions imposed by the government in granting the assistance; the allocation of the economically significant risks; and the level of competition and demand within the relevant markets. In addition, as indicated in paragraph 1.34 of the OECD TPG, the identification of these economically relevant characteristics would require a broad evaluation of how the MNE group responds to the receipt of government assistance ... Read more

OECD COVID-19 TPG paragraph 32

For example, assume that geographic comparability is deemed as the most relevant comparability factor given the nature of the effects of COVID-19 in a particular market. In these circumstances, in order to obtain reliable data from a particular market it may potentially be necessary to relax other comparability criteria, and then refine the sample ... Read more
France vs Sté Paule Ka Holding, December 2020, Paris Administrative Court of Appeal, Case No 18PA02715

France vs Sté Paule Ka Holding, December 2020, Paris Administrative Court of Appeal, Case No 18PA02715

Sté Paule Ka Holding, was set up as part of a leveraged buy-out (LBO) operation to finance the acquisition of the Paule Ka group, and in 2011 it acquired the entire capital of the group a price of 42 million euros. The acquisition was financed by issuing convertible bonds carrying an interest rate of 8%. The French tax authorities issued an assessment where deductions for certain payments related to the acquisition and part of the interest payments on the bonds were disallowed. Decision from the Administrative court of appeal The Court found in favor of the company in regards to the payment related to the acquisition and in favor of the tax administration in regards to the partially disallowed deduction of interest payments. “It follows from the foregoing that the elements invoked by the administration do not provide proof that the expenditure of EUR 390,227 correctly entered in the accounts was not incurred in the interest of the company Paule Ka Holding. The ... Read more
Japan vs "NGK-Insulators", November 2020, Tokyo District Court, Case No 平成28年(行ウ)第586号  - 586 of 2016

Japan vs “NGK-Insulators”, November 2020, Tokyo District Court, Case No 平成28年(行ウ)第586号 – 586 of 2016

“NGK-Insulators” is engaged in manufacturing and selling parts to the automotive industry (Diesel Particulate Filters or DPF’s) and had entered into an agreement with a group company in Poland where it granted the Polish company a licenses to use intangibles (know-how and technology) in return for license/royalty payments. The tax authorities found that the amount of the consideration paid to “DPF Corp” for the licenses had not been at arm’s length and issued an assessment of additional taxes. “NGK-Insulators” filed a complaint which the district court. Judgement of the Court The Court ruled in favour of “NGK-Insulators” and set aside the assessment issued by the tax authorities. Click here for English Translation Click here for other translation Japan Tokyo District Court 091910_hanrei ... Read more
France vs Ferragamo France, November 2020, Conseil d'Etat, Case No 425577

France vs Ferragamo France, November 2020, Conseil d’Etat, Case No 425577

Ferragamo France, which was set up in 1992 and is wholly owned by the Dutch company Ferragamo International BV, which in turn is owned by the Italian company Salvatore Ferragamo Spa, carries on the business of retailing shoes, leather goods and luxury accessories and distributes, in shops in France, products under the ‘Salvatore Ferragamo’ brand, which is owned by the Italian parent company. An assessment had been issued to Ferragamo France in which the French tax authorities asserted that the French subsidiary had not been sufficiently remunerated for additional expenses and contributions to the value of the Ferragamo trademark. The French subsidiary had been remunerated on a gross margin basis, but had incurred losses in previous years and had indirect cost exceeding those of the selected comparable companies. The Administrative Court decided in favour of Ferragamo and dismissed the assessment. According to the Court the tax administration has not demonstrated the existence of an advantage granted by Ferragamo France to ... Read more
India vs ST Microelectronics Pvt. Ltd., September 2020, Income Tax Tribunal, ITA No.6169/Del./2012

India vs ST Microelectronics Pvt. Ltd., September 2020, Income Tax Tribunal, ITA No.6169/Del./2012

ST Microelectronics Pvt. Ltd. is a subsidiary of ST Microelectronics Pte. Ltd. which in turn is a wholly owned subsidiary of ST Microelectronics NV, Netherlands. ST Microelectronics Pvt. Ltd. is into the business of Integrated Circuit Design, CAD Tools and software development for its overseas group concerns. It also provides marketing support services to a group company and software development services related to design implementation and maintenance with respect to Integrated Circuits as required by guidelines/instructions. During the year under assessment, the taxpayer entered into various transactions with its Associated Enterprises. In order to benchmark its international transactions qua provision of software development services and qua provision of marketing support services ST Microelectronics used Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost as the Profit Level Indicator (PLI) being the Most Appropriate Method (MAM), computed its own margin at 11.11% as against weighted average arithmetic mean margin of 19 comparables at 11.31% and found its international transactions at arm’s ... 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
Poland vs "Fish Factory" sp. z o.o., July 2020, Administrative Court, I SA/Gd 184/20 - Wyrok

Poland vs “Fish Factory” sp. z o.o., July 2020, Administrative Court, I SA/Gd 184/20 – Wyrok

The activity of Spółka A sp. z o.o. included salmon breeding, processing, smoking and sale and distribution of the finished products. The company operated within Group A with head quarter in the Netherlands. By decision of 27 May 2019, the tax authorities determined that the operating expenses determined by transactions with related parties were inflated by PLN 29,613,156.00. The authorities did not accept calculations presented by the Company, as there were no reliable accounting records regarding the amount of costs incurred. Furthermore, the authorities held that the cost plus method, which should guarantee profit on the transaction in the Company, had been applied incorrect. The dispute before the administrative Court boils down to assessing whether the court of first instance, in compliance with the provisions in force, reversed the decision of the authorities in its entirety and referred the case back for reconsideration due to the deficiencies found in the evidentiary proceedings, making it necessary to conduct the proceedings in ... 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
Uganda vs East African Breweries International Ltd. July 2020, Tax Appeals Tribunal, Case no. 14 of 2017

Uganda vs East African Breweries International Ltd. July 2020, Tax Appeals Tribunal, Case no. 14 of 2017

East African Breweries International Ltd (applicant) is a wholly owned subsidiary of East African Breweries Limited, and is incorporated in Kenya. East African Breweries International Ltd was involved in developing the markets of the companies in countries that did not have manufacturing operations. The company did not carry out marketing services in Uganda but was marketing Ugandan products outside Uganda. After sourcing customers, they pay to the applicant. A portion is remitted to Uganda Breweries Limited and East African Breweries International Ltd then adds a markup on the products obtained from Uganda Breweries Limited sold to customers in other countries. East African Breweries International Ltd would pay a markup of 7.5 % to Uganda Breweries and then sell the items at a markup of 70 to 90%. In July 2015 the tax authorities (respondent) audited Uganda Breweries Limited, also a subsidiary of East African Breweries Limited, and found information relating to transactions with the East African Breweries International Ltd for ... Read more
France vs Apex Tool Group SAS, March 2020, Administrative Court of Appeal, Case No 18PA00608

France vs Apex Tool Group SAS, March 2020, Administrative Court of Appeal, Case No 18PA00608

A intercompany loan had been granted within the Apex Tool group at an interest rate of 6 percent and to demonstrate the arm’s length nature of the interest rate the borrowing company provided a comparability analyses. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex then filed an appeal with the Administrative Court of Appeal. Judgement of the Court The Court dismissed the analyses provided by Apex and upheld the assessment of the tax authorities. Excerpts (Unofficial English translation) “9. The investigation shows that the credit rating assigned to the loan in question by Baker and McKenzie, after several adjustments, was not based on the intrinsic situation of ATHF1, particularly with regard to its lending activity and its development prospects. On the contrary, it was allocated on the basis of the aggregate financial statements of the sub-group it formed with four of its subsidiaries and sub-subsidiaries, ... Read more
Ukrain vs Ajalyk Trade LLC, February 2020, Supreme Court, Case No 804/5360/17

Ukrain vs Ajalyk Trade LLC, February 2020, Supreme Court, Case No 804/5360/17

In the case of Ajalyk Trade LLC, the Supreme Court ruled in favour of the tax authorities, confirming the legality of the tax adjustment. The court held, that if the quantity and price of goods are determined in the specifications of the contract and/or in additional agreements, the contract cannot be considered a forward contract for tax purposes. As a result, the taxpayer cannot compare prices in controlled transactions with prices in comparable uncontrolled transactions at the time where such an agreement is concluded. Click here for English translation Click here for other translation Ukrain 804-5360-17 ... Read more
Ukrain vs Sumykhimprom, December 2019, Supreme Court, Case No 818/1786/17

Ukrain vs Sumykhimprom, December 2019, Supreme Court, Case No 818/1786/17

The “Sumykhimprom” case concerned export transactions of fertilizers to a related party in Switzerland and import transactions of natural gas from a related party in Cyprus. According to the tax authorities, the pricing of the controlled export transactions of fertilizers had been below arm’s length and the pricing of the controlled import transactions of natural gas had been above arm’s length. Judgement of the Supreme Court The Supreme Court confirmed the position of the tax authorities, determined based on the results of the audit of controlled transactions of a producer of mineral fertilizers, and the legality of additional corporate income tax in the amount of UAH 43 million and a reduction of losses carried forward by UAH 195 million. If the company carried out potentially comparable with controlled uncontrolled operations, it can use them, including for the application of the net profit method. However, the delivery conditions must be comparable, since they affect the functionality of the company, the price ... 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
Poland vs L S.A, June 2019, Supreme Administrative Court, Case No. II FSK 1808/17 - Wyrok NSA

Poland vs L S.A, June 2019, Supreme Administrative Court, Case No. II FSK 1808/17 – Wyrok NSA

A Polish subsidiary in a German Group had taken out a significant inter-company loan resulting in a significantly reduced income due to interest deductions. At issue was application of the Polish arm’s length provisions and the arm’s length nature of the interest rate on the loan. The tax authorities had issued an assessment where the interest rate on the loans had been adjusted and the taxable income increased. On that basis, a complaint was filed by the company to the Administrative Court. The administrative court rejected the complaint and ruled in favor of the tax authorities. An appeal was then brought before the Supreme Administrative Court. The Supreme Administrative Court rejected the appeal, although it did not share some of the conclusions and statements of the Court of first instance. The key issue in the case was to determine is whether the provisions of Art. 11 (Containing the Polish arm’s length provisions), allowing the authority to determine the income of ... Read more
Poland vs "Shopping Centre Developer sp.k.", May 2019, Administrative Court, Case No III SA/Wa 1777/18

Poland vs “Shopping Centre Developer sp.k.”, May 2019, Administrative Court, Case No III SA/Wa 1777/18

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate and carried out its own analysis on the basis of the comparative data from 66 transactions. In addition, data posted on the internet on the website of the National Bank of Poland was consulted. The summary showed that in the aforementioned period, the average interest rates applied by Polish financial institutions for loans granted to enterprises in EUR ranged from 2.4% to 3.6%. Furthermore, by letters in April 2017 the tax authorities requested information from domestic financial institutions regarding the interest rates and commission rates for loans granted to commercial companies in the period from June 2013 to September 2014. The information received showed that ... Read more
India vs Amphenol Interconnect India Pvt. Ltd., May 2019, Income Tax Appellate Tribunal, Case No ITA No.641/PUN/2017

India vs Amphenol Interconnect India Pvt. Ltd., May 2019, Income Tax Appellate Tribunal, Case No ITA No.641/PUN/2017

According to Amphenol Interconnect the TNMM was the most appropriate method for determining the arm’s length price in respect of exports and import of goods from the related parties. And since the net profit margin of Amphenol was comparable to the net profit margin of the comparable companies, the transactions were at arm’s length. The tax authorities disagreed and issued an assessment for FY 2012-2013 where the controlled transactions had instead been priced using the CUP method. Judgement of the Tribunal The Tribunal decided in favor of Amphenol. Excerpt “The Hon’ble High Court after analyzing the issues at length has held that CUP method would not be the most appropriate method in view of various adjustments, which would have to be made due to differences in FAR, in order to arrive at the arm’s length price of finished goods. The Hon’ble High Court notes that the Tribunal had taken into account the fact that for overwhelming majority of exports to ... Read more
Switzerland vs "A.", March 2019, Court of Justice, Case No ATA/222/2019

Switzerland vs “A.”, March 2019, Court of Justice, Case No ATA/222/2019

CCompany A was active in the management and administration of trusts and companies; related advice and services. A held 99% of the shares in E, a Seychelles-based company. This subsidiary acted as a sub-contractor for company registrations and corporate affairs in the Seychelles. A and E had entered into a service contract dated 6 February 2009 under which the subsidiary provided these services to A. Following an audit, tax assessments were issued for the tax years 2009 – 2012, in which the tax authorities (AFC-GE) had attributed a percentage of 5% of E’s expenses as the maximum allowable remuneration for the activities of the subsidiary. The remainder was added back to A’s taxable income. An administrative appeal was lodged against these tax assessments, but the appeal was later dismissed in 2016. A then appealed to the Administrative Court (TPAI), which, by judgment of 18 December 2017, upheld A’s appeal and annulled the assessments and fines. The tax authorities appealed to ... Read more
Poland vs "Blueberry Factory" Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16

In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid by the Blueberry Farm benefited the shareholders (suppliers), who thus generated higher income from their agricultural activities, not subject to income tax. The company generated only losses in the years 2011 – 2013. According to the Polish tax authorities, the Blueberry Farm purchased blueberry fruit at excessive prices and thus overstated its tax-deductible expenses by PLN 347,845.48. The excessive prices (relative to market prices) increased the income of its shareholders (agricultural producers), whose income was not subject to personal income tax as being derived from agricultural activities. The tax authorities applied the provisions of Art. 11.1, Par. 2.2 of the Corporate Income Tax Act of February 15th 1992, as the gross margin earned by the Blueberry Factory ... Read more

TPG2017 Chapter III paragraph 3.28

On the other hand, internal comparables are not always more reliable and it is not the case that any transaction between a taxpayer and an independent party can be regarded as a reliable comparable for controlled transactions carried on by the same taxpayer. Internal comparables where they exist must satisfy the five comparability factors in the same way as external comparables, see paragraphs 1.33-1.118. Guidance on comparability adjustments also applies to internal comparables, see paragraphs 3.47-3.54. Assume for instance that a taxpayer manufactures a particular product, sells a significant volume thereof to its foreign associated retailer and a marginal volume of the same product to an independent party. In such a case, the difference in volumes is likely to materially affect the comparability of the two transactions. If it is not possible to make a reasonably accurate adjustment to eliminate the effects of such difference, the transaction between the taxpayer and its independent customer is unlikely to be a reliable ... Read more

TPG2017 Chapter II paragraph 2.75

Prices are likely to be affected by differences in products, and gross margins are likely to be affected by differences in functions, but net profit indicators are less adversely affected by such differences. As with the resale price and cost plus methods that the transactional net margin method resembles, this does not mean that a mere similarity of functions between two enterprises will necessarily lead to reliable comparisons. Assuming similar functions can be isolated from among the wide range of functions that enterprises may exercise, in order to apply the method, the net profit indicators related to such functions may still not be automatically comparable where, for instance, the enterprises concerned carry on those functions in different economic sectors or markets with different levels of profitability. When the comparable uncontrolled transactions being used are those of an independent enterprise, a high degree of similarity is required in a number of aspects of the associated enterprise and the independent enterprise involved ... Read more

TPG2017 Chapter II paragraph 2.69

Another practical strength of the transactional net margin method is that, as with any one-sided method, it is necessary to examine a financial indicator for only one of the associated enterprises (the “tested” party). Similarly, it is often not necessary to state the books and records of all participants in the business activity on a common basis or to allocate costs for all participants as is the case with the transactional profit split method. This can be practically advantageous when one of the parties to the transaction is complex and has many interrelated activities or when it is difficult to obtain reliable information about one of the parties. However, a comparability (including functional) analysis must always be performed in order to appropriately characterise the transaction between the parties and choose the most appropriate transfer pricing method, and this analysis generally necessitates that some information on the five comparability factors in relation to the controlled transaction be collected on both the ... Read more

TPG2017 Chapter II paragraph 2.20

For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For commodities, the economically relevant characteristics include, among others, the physical features and quality of the commodity; the contractual terms of the controlled transaction, such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm’s length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions ... Read more

TPG2017 Chapter II paragraph 2.17

In considering whether controlled and uncontrolled transactions are comparable, regard should be had to the effect on price of broader business functions other than just product comparability (i.e. factors relevant to determining comparability under Chapter I). Where differences exist between the controlled and uncontrolled transactions or between the enterprises undertaking those transactions, it may be difficult to determine reasonably accurate adjustments to eliminate the effect on price. The difficulties that arise in attempting to make reasonably accurate adjustments should not routinely preclude the possible application of the CUP method. Practical considerations dictate a more flexible approach to enable the CUP method to be used and to be supplemented as necessary by other appropriate methods, all of which should be evaluated according to their relative accuracy. Every effort should be made to adjust the data so that it may be used appropriately in a CUP method. As for any method, the relative reliability of the CUP method is affected by the ... Read more

TPG2017 Chapter I paragraph 1.152

Some businesses are successful in assembling a uniquely qualified or experienced cadre of employees. The existence of such an employee group may affect the arm’s length price for services provided by the employee group or the efficiency with which services are provided or goods produced by the enterprise. Such factors should ordinarily be taken into account in a transfer pricing comparability analysis. Where it is possible to determine the benefits or detriments of a unique assembled workforce vis-à- vis the workforce of enterprises engaging in potentially comparable transactions, comparability adjustments may be made to reflect the impact of the assembled workforce on arm’s length prices for goods or services ... Read more

TPG2017 Chapter I paragraph 1.50

The following example illustrates the concept of determining the actual transaction where a transaction has not been identified by the MNE. In reviewing the commercial or financial relations between Company P and its subsidiary companies, it is observed that those subsidiaries receive services from an independent party engaged by Company P. Company P pays for the services, the subsidiaries do not reimburse Company P directly or indirectly through the pricing of another transaction and there is no service agreement in place between Company P and the subsidiaries. The conclusion is that, in addition to a provision of services by the independent party to the subsidiaries, there are commercial or financial relations between Company P and the subsidiaries, which transfer potential value from Company P to the subsidiaries. The analysis would need to determine the nature of those commercial or financial relations from the economically relevant characteristics in order to determine the terms and conditions of the identified transaction ... Read more

TPG2017 Chapter I paragraph 1.49

Where no written terms exist, the actual transaction would need to be deduced from the evidence of actual conduct provided by identifying the economically relevant characteristics of the transaction. In some circumstances the actual outcome of commercial or financial relations may not have been identified as a transaction by the MNE, but nevertheless may result in a transfer of material value, the terms of which would need to be deduced from the conduct of the parties. For example, technical assistance may have been granted, synergies may have been created through deliberate concerted action (as discussed in Section D.8), or know-how may have been provided through seconded employees or otherwise. These relations may not have been recognised by the MNE, may not be reflected in the pricing of other connected transactions, may not have been formalised in written contracts, and may not appear as entries in the accounting systems. Where the transaction has not been formalised, all aspects would need to ... Read more

TPG2017 Chapter I paragraph 1.48

The following example illustrates the concept of differences between written contractual terms and conduct of the parties, with the result that the actual conduct of the parties delineates the transaction. Company S is a wholly-owned subsidiary of Company P. The parties have entered into a written contract pursuant to which Company P licenses intellectual property to Company S for use in Company S’s business; Company S agrees to compensate Company P for the licence with a royalty. Evidence provided by other economically relevant characteristics, and in particular the functions performed, establishes that Company P performs negotiations with third-party customers to achieve sales for Company S, provides regular technical services support to Company S so that Company S can deliver contracted sales to its customers, and regularly provides staff to enable Company S to fulfil customer contracts. A majority of customers insist on including Company P as joint contracting party along with Company S, although fee income under the contract is ... Read more

TPG2017 Chapter I paragraph 1.47

Where there is doubt as to what transaction was agreed between the associated enterprises, it is necessary to take into account all the relevant evidence from the economically relevant characteristics of the transaction. In doing so one must bear in mind that the terms of the transaction between the enterprises may change over time. Where there has been a change in the terms of a transaction, the circumstances surrounding the change should be examined to determine whether the change indicates that the original transaction has been replaced through a new transaction with effect from the date of the change, or whether the change reflects the intentions of the parties in the original transaction. Particular care should be exercised where it appears that any changes may have been triggered by knowledge of emerging outcomes from the transaction. Changes made in the purported assumption of a risk when risk outcomes are known do not involve an assumption of risk since there is ... Read more

TPG2017 Chapter I paragraph 1.46

In transactions between independent enterprises, the divergence of interests between the parties ensures (i) that contractual terms are concluded that reflect the interests of both of the parties, (ii) that the parties will ordinarily seek to hold each other to the terms of the contract, and (iii) that contractual terms will be ignored or modified after the fact generally only if it is in the interests of both parties. The same divergence of interests may not exist in the case of associated enterprises or any such divergences may be managed in ways facilitated by the control relationship and not solely or mainly through contractual agreements. It is, therefore, particularly important in considering the commercial or financial relations between associated enterprises to examine whether the arrangements reflected in the actual conduct of the parties substantially conform to the terms of any written contract, or whether the associated enterprises’ actual conduct indicates that the contractual terms have not been followed, do not ... Read more

TPG2017 Chapter I paragraph 1.45

If the characteristics of the transaction that are economically relevant are inconsistent with the written contract between the associated enterprises, the actual transaction should generally be delineated for purposes of the transfer pricing analysis in accordance with the characteristics of the transaction reflected in the conduct of the parties ... Read more

TPG2017 Chapter I paragraph 1.44

The following example illustrates the concept of clarifying and supplementing the written contractual terms based on the identification of the actual commercial or financial relations. Company P is the parent company of an MNE group situated in Country P. Company S, situated in Country S, is a wholly-owned subsidiary of Company P and acts as an agent for Company P’s branded products in the Country S market. The agency contract between Company P and Company S is silent about any marketing and advertising activities in Country S that the parties should perform. Analysis of other economically relevant characteristics and in particular the functions performed, determines that Company S launched an intensive media campaign in Country S in order to develop brand awareness. This campaign represents a significant investment for Company S. Based on evidence provided by the conduct of the parties, it could be concluded that the written contract may not reflect the full extent of the commercial or financial ... Read more

TPG2017 Chapter I paragraph 1.43

However, the written contracts alone are unlikely to provide all the information necessary to perform a transfer pricing analysis, or to provide information regarding the relevant contractual terms in sufficient detail. Further information will be required by taking into consideration evidence of the commercial or financial relations provided by the economically relevant characteristics in the other four categories (see paragraph 1.36): the functions performed by each of the parties to the transaction, taking into account assets used and risks assumed, together with the characteristics of property transferred or services provided, the economic circumstances of the parties and of the market in which the parties operate, and the business strategies pursued by the parties. Taken together, the analysis of economically relevant characteristics in all five categories provides evidence of the actual conduct of the associated enterprises. The evidence may clarify aspects of the written contractual arrangements by providing useful and consistent information. If the contract neither explicitly nor implicitly (taking into ... Read more

TPG2017 Chapter I paragraph 1.42

A transaction is the consequence or expression of the commercial or financial relations between the parties. The controlled transactions may have been formalised in written contracts which may reflect the intention of the parties at the time the contract was concluded in relation to aspects of the transaction covered by the contract, including in typical cases the division of responsibilities, obligations and rights, assumption of identified risks, and pricing arrangements. Where a transaction has been formalised by the associated enterprises through written contractual agreements, those agreements provide the starting point for delineating the transaction between them and how the responsibilities, risks, and anticipated outcomes arising from their interaction were intended to be divided at the time of entering into the contract. The terms of a transaction may also be found in communications between the parties other than a written contract ... Read more