SNA Europe France was a French distributor within the SNA group. It bought DIY, tools and gardening products from a Swedish related company, SNA Europe Services AB, which sourced the goods from manufacturers. The goods were stored in Spain and the Netherlands and shipped directly to customers of SNA Europe France in France. The French company invoiced French retailers and earned a margin as a reseller. Its internal transfer pricing policy was designed to give it a profit margin of about 3 percent of turnover. To support the pricing of the controlled transactions, it relied on a set of 22 external comparable companies and used a gross margin based approach. The tax administration challenged the pricing. It accepted the external comparables from 2010 onwards but argued that the way SNA Europe France calculated its gross margin was incorrect because it excluded large discounts it granted to customers. Once those discounts were taken into account, the administration found that the French ... Read more

A Korean subsidiary of a Dutch multinational electronics group imported medical equipment, small household appliances, and lighting products from related parties and sold them in Korea. The company also provided after-sales maintenance services for medical equipment. For FY 2012 to 2015, the company applied the transactional net margin method separately to each business division and reported its corporate tax accordingly, using operating profit margin as the profit level indicator. Following an audit the tax authorities reclassified the company’s activities into four segments. They concluded that in the medical equipment, small household appliances, and automotive lighting segments, the transfer prices paid to foreign related parties exceeded arm’s length levels, while no upward adjustment was needed for the general lighting segment. On that basis, they issued a tax assessment. The authorities treated maintenance service activities in the medical equipment segment as closely linked to product sales and selected comparable companies largely based on similarity to domestic maintenance service businesses. The taxpayer challenged ... Read more

“TNMM S.r.l.” belongs to an international group that was audited for the 2017–21 tax years in relation to intra-group services received from foreign affiliates. The Italian tax authorities made transfer pricing adjustments under Article 110(7) of the Italian Income Tax Code. They applied the transactional net margin method, benchmarking the company’s profitability against a selected set of comparable European companies. Based on this analysis, the authorities determined the arm’s length profitability to be at the third quartile and issued an assessment of additional taxable income. The taxpayer appealed, arguing that the benchmarking analysis was fundamentally flawed. They maintained that the selected companies operated in different economic and organisational contexts, including different markets and business models. Some of the selected companies also owned their own vehicle fleets, whereas the taxpayer did not own a fleet and outsourced most operational activities. While the taxpayer did not dispute the use of the TNMM method, they challenged the comparability of the selected companies and ... Read more

The case concerning Sony India Pvt Ltd involved multiple assessment years and numerous transfer pricing issues. Most of the issues were decided in Sony’s favour. Certain matters were remanded. The only substantive issue decided against Sony concerned the lower Dividend Distribution Tax rate claim. First, the Tribunal addressed the adjustments made by the tax authorities for alleged advertisement, marketing and promotion (AMP) expenses, considering both the Bright Line Test (BLT) and the so-called ‘intensity adjustment’. The Tribunal held that neither the BLT nor the intensity adjustment is a permissible method under the Income Tax Act for benchmarking AMP expenses. Both the substantive and protective AMP adjustments were deleted. Regarding the royalty payment, the tax authorities had determined the arm’s length price as zero under the CUP method, on the basis that the manufacturing subcontractors, rather than Sony India, should have paid the royalty. However, the Tribunal rejected this approach, relying on its own earlier decision in Sony’s AY 2016-17 case ... Read more

The tax authority claimed that F. S.A. had underestimated its income from logistics services provided to a related party. They applied the transactional net margin method and issued an assessment for additional taxable income. However, upon appeal, the Tax Administration Chamber ruled that the comparables used by the tax authorities were inappropriate. F. S.A. specialises in e-grocery logistics, including the distribution, storage, and transport of perishable goods. However, the chosen comparables performed materially different functions involving different assets and risks. The case was sent back to the tax authorities for a new comparability analysis. The Administrative Court later upheld the annulment and the decision to refer the case back to the tax authorities for a new assessment. F. S.A. then appealed to the Supreme Administrative Court, arguing that the assessment was time-barred and that the lower court had failed to address the transfer pricing methodology. The company therefore requested that the assessment be annulled in its entirety. Judgment The Supreme ... Read more

“Poly Corp”, a manufacturer of polypropylene products, had an export marketing contract with an group company for overseas sales. The products were sold to unrelated third parties or foreign group companies through this arrangement. Following an audit, the tax authority claimed that “Poly Corp” sold its products to foreign group companies below the arm’s length price. An assessment of additional taxable income was issued and the amount was treated as dividends to the foreign group companies. “Poly Corp” appealed and the Administrative Court determined that even though the transfer prices were agreed upon by shareholders without special relationships, they did not automatically qualify as arm’s length prices. For transactions with certain group companies, the tax authority failed to account for sales volume in their comparability analysis, rendering the assessments invalid. However, for transactions with another related companies, the criteria applied were deemed reasonable, and using a single comparable transaction to determine the arm’s length price was sufficient. The court concluded that the ... Read more

Hitachi Solutions India had excluded the amortization of goodwill from operating costs when conducting its comparability study, claiming it was an extraordinary, non-operating item unrelated to its normal service functions. The tax authorities disagreed, arguing that since the goodwill arose from the acquisition of the taxpayer’s business, the related amortization was a recurring cost reflected in the profit and loss account and should be considered part of the operating expenses. They included it in the operating cost base, which reduced the taxpayer’s profit level indicator and affected the arm’s length analysis. An appeal was then filed by Hitachi with the Income Tax Appellate Tribunal. Decision The Income Tax Appellate Tribunal held that amortization of goodwill stems from a capital transaction, not routine operations, and including it would distort comparability with independent companies performing similar services. It concluded that such costs must be excluded from operating expenses and treated as non-operating for transfer pricing purposes. Click here for other translation ... Read more

The case concerned the income tax return of Monómeros Colombo Venezolanos, a company based in Colombia. Following an audit the tax authorities had increased its reported income and disallowed deductions for interest on loans from its related company, Monómeros International Ltd., located in the British Virgin Islands. The authorities argued that Monómeros’ transfer pricing documentation was deficient because it relied exclusively on foreign comparables and disregarded domestic comparables, which they considered more appropriate. They also rejected the comparables used to support the intercompany financing, which had been based on United States corporate bonds, finding them not sufficiently similar to the actual transactions. In an appeal Monómeros argued that the adjustments ignored OECD guidelines, did not include proper comparability adjustments, and failed to account for market conditions and risks. The company maintained that its documentation proved that the transactions were consistent with the arm’s length principle, and that it had neither omitted income nor claimed improper deductions. Judgment The Supreme Administrative ... Read more

Following an audit, the tax authorities assessed an additional tax liability against Coca-Cola HBC Česko a Slovensko s.r.o., a decision that was upheld by the Financial Directorate on 4 August 2020 following an appeal. Coca-Cola HBC Česko challenged this decision, arguing that Article 9 of the double taxation treaties with the Czech Republic, Austria and the Netherlands could not be applied directly without implementing legislation, and that the tax authority had wrongly invoked it. They also claimed that Slovak income tax law did not permit the disputed transfer pricing adjustments since foreign affiliates could not be considered “foreign dependent persons” under the law. The company also claimed that the tax authority had improperly reclassified intra-group loans as equity contributions, had wrongly denied interest deductibility and had misapplied allocation keys for management service costs. Coca-Cola also objected to procedural defects, including the use of new economic analyses introduced at the appeal stage without prior notification, which it claimed violated the principle ... Read more

“Car Lrd Corp” operated as a limited risk distributor, importing and selling finished vehicles and auto parts from related parties. It applied the TNMM with operating profit margin as the profit level indicator, but incurred substantial losses between 2017 and 2021, largely because regulatory issues led to a temporary suspension of sales. To address the downturn, the subsidiary undertook market penetration measures and recorded high selling, general and administrative expenses and promotional costs, which reduced its margins. The foreign parent also provided financial support in the form of loss compensation and reimbursements for certain expenses, which the subsidiary initially treated as non-operating income. The tax authorities disputed this treatment of the compensations and reimbursements, arguing that as a limited risk distributor the company was not entitled to bear the costs of a market penetration strategy. The taxpayer countered that these measures were a legitimate response to the sales crisis. Judgment The National Tax Tribunal upheld the tax authority’s position. It ... Read more

“Poly Corp”, a manufacturer of polypropylene products, had an export marketing contract with an group company for overseas sales. The products were sold to unrelated third parties or foreign group companies through this arrangement. Following an audit, the tax authority claimed that “Poly Corp” sold its products to foreign group companies below the arm’s length price. An assessment of additional taxable income was issued and the amount was treated as dividends to the foreign group companies. “Poly Corp” appealed and the Administrative Court determined that even though the transfer prices were agreed upon by shareholders without special relationships, they did not automatically qualify as arm’s length prices. For transactions with certain group companies, the tax authority failed to account for sales volume in their comparability analysis, rendering the assessments invalid. However, for transactions with another related companies, the criteria applied were deemed reasonable, and using a single comparable transaction to determine the arm’s length price was sufficient. The court concluded that the ... Read more

Viva Decor TOV, is part of the Sintra Group, which manufactures and sells wallpaper. Viva Decor challenged two tax assessments issued by the tax authorities in February 2020, which assessed additional corporate income tax and reduced VAT refunds, due to mispricing of controlled transactions in FY 2013–2015. The dispute focused on the correct period to use for calculating profit level indicators under the TNMM. The tax authority claimed Viva Decor improperly calculated its profitability for the relevant periods—using full-year figures (2013, 2015)while the tax authorities insisted only data from the months when the transactions were officially recognized as “controlled” (September–December 2013 and January–May 2015) should be used. The tax authorities also alleged flaws in Viva Decor’s transfer pricing documentation and accounting errors, including the treatment of exchange rate differences and the valuation of inventories. Viva Decor argued that full-year financial data should be used because the wallpaper market is seasonal, and that the databases used for comparables only offer annual ... Read more

SAS Roger Vivier Paris operates a store in Paris that sells shoes and luxury goods under the Roger Vivier brand. Since its inception in 2003, it had systematically generated negative net margins. Following an audit for the financial years 2012 to 2014, the tax authorities considered that SAS Roger Vivier Paris had indirectly transferred profits to foreign related parties due to non-arm’s length pricing of controlled transactions – low prices for returned unsold products and excessive costs related to the promotion and marketing of the Roger Vivier brand, which it did not own. In order to determine the arm’s length results of SAS Roger Vivier Paris, the tax authorities carried out a benchmark study and applied an operating margin of 6.76%, corresponding to the average operating margin of the study. This average operating margin was determined on the basis of the margins corresponding to the operating results reported by the companies included in the study for the financial years 2005 ... Read more

Sabic India is a subsidiary of the Sabic group and provided marketing services to other companies in the group. For purposes of pricing the controlled transactions, the TNMM had been chosen with a cost based PLI as well as a Berry ratio. Following an audit for FY 2015 and 2016, the tax authorities (the TPO) rejected the method and issued an assessment based on an “other method”. A complaint was filed Sabic India and the assessment was later overturned by the Income Tax Appellate Tribunal. An appeal was then filed by the tax authorities with the High Court. Judgment The High Court upheld the judgment of the Tribunal and found in favour of Sabic India. Excerpts “Undeniably, Rule 10AB of the Rules does permit determination of the ALP by simulating the price that would have been charged in similar uncontrolled transactions under similar circumstances having regard to all relevant facts. However, the recourse to this method would be available only ... Read more

Sony India Private Limited is a wholly owned subsidiary of Sony Corporation, Japan. During the years under consideration, 2010-11, Sony India was engaged primarily in import and distribution of Sony products in the Indian market. Following an audit, an assessment was issued by the tax authorities where the taxable income of Sony India was adjusted upwards. The tax authorities considered and benchmarked the distribution activities and found that the margin declared by the Sony India was below the average margin of 27,8% determined by applying the TNMM. They further proceeded to benchmark advertising, markeing and promotion (APM) expenses separately by adopting bright line test. An appeal was filed by Sony India Private Limited with the Income Tax Appellate Tribunal. Judgment of the Income Tax Appellate Tribunal The Tribunal ruled mostly in favor of Sony India. Excerpt “24. Next coming to the issue of benchmarking the ALP relating to software division of the assessee, we heard both sides and considered each ... Read more

A Korean subsidiary of a multinational electronics group imported medical equipment, small household appliances and lighting products from related parties abroad and sold them in Korea. It also provided after-sales maintenance services for medical equipment. The taxpayer segmented its activities by business line, applying the transactional net margin method separately to each segment and using operating profit margin as the profit level indicator. Maintenance services relating to medical equipment were treated either as a distinct activity or as a routine function with limited profitability. Following an audit, the tax authorities rejected the taxpayer’s segmentation and functional analysis. They reclassified the taxpayer’s activities into four segments, treating the maintenance services for medical equipment as economically integrated with the sale of medical equipment. Based on this, they concluded that the prices paid to foreign related parties for medical equipment, small household appliances and automotive lighting products exceeded arm’s length price, while no adjustment was required for the general lighting segment. The authorities ... Read more

“Poly Corp”, a manufacturer of polypropylene products, had an export marketing contract with an group company for overseas sales. The products were sold to unrelated third parties or foreign group companies through this arrangement. Following an audit, the tax authority claimed that “Poly Corp” sold its products to foreign group companies below the arm’s length price. An assessment of additional taxable income was issued and the amount was treated as dividends to the foreign group companies. “Poly Corp” appealed. Judgment The Administrative Court determined that even though the transfer prices were agreed upon by shareholders without special relationships, they did not automatically qualify as arm’s length prices. For transactions with certain group companies, the tax authority failed to account for sales volume in their comparability analysis, rendering the assessments invalid. However, for transactions with another related companies, the criteria applied were deemed reasonable, and using a single comparable transaction to determine the arm’s length price was sufficient. The court concluded ... Read more

Honda Motor de Argentina S.A. is an Argentine company that distributes motor vehicles and motorcycles and imports products and some production inputs from related Honda entities abroad. For the 2009 fiscal year it prepared a transfer pricing study using the TNMM, with Honda Argentina as the tested party and several foreign wholesale distributors as external comparables, including the Canadian company Commercial Solutions Inc. Following an income tax audit for 2009, the tax authorities issued an assessment of additional income taxes in the amount of ARS 9,703,569.88 plus interest and a penalty equal to twice the omitted tax. The adjustment rested solely on rejecting Commercial Solutions Inc. as a comparable, on the grounds that it had a negative operating margin in 2009, traded in different products, was a “public company” which the authorities treated as state owned, and had recorded a goodwill impairment that, in their view, made it atypical. Honda appealed to the National Tax Court. It argued that “public ... Read more

Following a tax audit, the tax authorities concluded that the most appropriate method for determining Olympex’s income was the Transactional Net Margin Method (TNMM). However, in addition to the search criteria used by Olympex, the tax authorities added geographical and company size criteria. This resulted in higher margins for the comparables in the benchmark and an assessment of additional taxable income was made on this basis. Olympex disagreed with the assessment and appealed. The District Court upheld the appeal and quashed the assessment. The tax authorities appealed to the Court of Appeal, which in part overturned the decision of the District Court. Both parties then appealed to the Supreme Court, which remitted the case to the Court of Appeal for reconsideration. After re-examining the case, the Court of Appeal found largely in favour of Olympex, and the tax authorities then appealed to the Supreme Court. Final Judgment The Supreme Court upheld the decision of the Court of Appeal and dismissed ... Read more

Following a tax audit, the tax authorities concluded that the most appropriate method for determining Olympex’s income was the Transactional Net Margin Method (TNMM). However, in addition to the search criteria used by Olympex, the tax authorities added geographical and company size criteria. This resulted in higher margins for the comparables in the benchmark and an assessment of additional taxable income was made on this basis. Olympex disagreed with the assessment and appealed. The District Court upheld the appeal and quashed the assessment. The tax authorities appealed to the Court of Appeal, which in part overturned the decision of the District Court. Both parties then appealed to the Supreme Court, which remitted the case to the Court of Appeal for reconsideration. Judgment of the Court After re-examining the case, the Court found largely in favour of Olympex. Click here for English translation Click here for other translation ... Read more

The tax authorities disagreed with the comparables selected by Consorcio Minero Sociedad Anónima under the transactional net margin method and rejected some of the comparables and applied comparability adjustments (hedging losses and functional currency) to the remaining comparables. Consorcio Minero Sociedad Anónima was not satisfied with the resulting assessment of additional taxable income and filed an appeal with the Tax Court, which was subsequently dismissed. An appeal was then made to the Court of Appeal and later to the Supreme Court. Judgment The Supreme Court overturned the decision of the Tax Court and ruled largely in favour of Consorcio Minero Sociedad Anónima. This discretionary power should not be arbitrary, so it is unreasonable and unconscionable for the tax authority to try to compare the operating profit of Consorcio Minero Sociedad Anónima, which includes losses from commodity derivative financial instruments, with the operating profit of those companies that do not record such losses from commodity derivative financial instruments (for hedging purposes) ... Read more

Ferroli España, S.L.U. is a Spanish manufacturer manufacture of cookers and heaters. In FY 2010 and 2011 the company had various transactions with other companies in the Ferroli Group and reported negative profit margins on these transactions. According to the company this was due to the financial crises in Spain. Following an audit, the tax authorities issued a notice of assessment where the profit of Ferrolia had been adjusted resulting in additional taxable income. The TNN method had been used and profits were adjusted to the median. An appeal was filed by Ferroli. Judgment of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since sufficient proof of such defects had not been established, the adjustment was reduced to the lower quartile (3 % ROS). Excerpts “We are therefore within the scope of ... Read more

Following an audit, the Spanish tax authorities issued a notice of assessment where the profit of Electrolux España had been adjusted resulting in additional taxable income. The related party transactions resulting in the adjustment were Manufacturing costs under a manufacturing contract Profit margin under a distribution contract Deductibility for restructuring costs Pricing of a warehouse rental agreement. A complaint was filed by Electrolux España with the TEAC which upheld the part of the assessment referring to related-party transactions. An appeal was then filed by the company with the National Court. Judgment of the Court The Court ruled parcially in favor of the tax authorities and parcially in favour of Electrolux España. Excerpts “The Inspectorate therefore concludes that “where a group, as in this case, qualifies its contract manufacturer as a low-risk manufacturer and, in turn, this low-risk manufacturer sizes its plant with appropriate investments to serve only its related principal, it cannot be assumed that the losses arising from the ... Read more

Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length. Following an audit, the tax authorities found that the company’s profit was outside the arm’s length range and issued an assessment of additional income for FY2014-2016. According to the tax authorities, Yazaki Bulgaria Ltd had not included all its costs when calculating its profit margin. Administrative Court Judgment The Administrative Court annulled the tax authority’s assessment and ruled in favour of Yazaki Bulgaria Ltd. Excerpt “It is undisputed in this case that the adjustments made by the appellant for comparability with the amounts of additional labour costs in individual years are as follows: For 2014, the reported operating loss of £2,192,845.67 was adjusted upwards to a net profit of £4,837,402.79 as a result of the elimination for comparability ... Read more

Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors. An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant mark-up of 11.11 per cent, while in direct sales to end customers it had applied ... Read more

Transalliance Iberica SA had priced its controlled transactions for the years 2008-2013 by comparing the gross margin achieved on an overall basis with the gross margins of comparable companies. Following an audit, the tax authorities issued a notice of assessment rejecting the method used by the company due to differences in the treatment of cost items and thus issues of comparability at a gross margin level. Instead, the tax authorities applied the TNMM. The profit was outside the interquartile range and an adjustment to the median was made. Transalliance lodged an appeal. Judgment of the Court The Court largely ruled in favor of the tax authorities, but according to the Court, an adjustment to the median could only be made where the tax authorities established the existence of comparability defects. Since such defects had not been established, the adjustment was reduced to the lower quartile. Excerpt “Of the points that are dealt with, the appellant focuses the discussion on the ... Read more

C. spółka z o.o. is part of a larger group and mainly (95%) sells products (metal containers) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products sold to related parties. The company was audited for FY 2016. According to the tax authorities, the company did not provide enough evidence to support the cost-plus method. The tax authority instead used the transactional net profit method to estimate the company’s income for the year 2016, taking into account factors such as characteristics of goods or services, functional analysis, contractual conditions, economic conditions, and economic strategy by comparing the company’s performance with similar companies over a 3 year period by using EBIT margin. As a result, the authority adjusted the company’s loss and established income based on a EBIT margin of 3.66%, resulting in additional taxable income of PLN 1,803,592.08. Judgment of the Administrative Court The Court found ... Read more

Adidas India Marketing Pvt. Ltd. is engaged in distribution and marketing of a range of Adidas and tailor made branded athletic and lifestyle products. Following an audit for FY 2016-2017, an assessment had been issued by the tax authorities where adjustments had been made to (1) advertising, promotion and marketing activities in Adidas India which was considered to have benefitted related parties in the Adidas group, (2) royalty/license payments to the group which was considered excessive and (3) fees paid by Adidas India to related parties which was considered “fees for technical services” (FTS) subjekt to Indian withholding tax. Following an unfavorable decision on the first complaint, an appeal was filed by Adidas with the Income Tax Appellate Tribunal. Judgment of the ITAT The Tribunal decided predominantly in favor of Adidas. Issues 1 and 2 was restored back to the tax authorities for a new decision in accordance with the directions given by the Tribunal, and issue 3 was set ... Read more

Consider the same fact pattern as described in Example 1, but in this case assume that under the guidance in Section D.2, comparable uncontrolled transactions can be identified showing that the arm’s length price of a comparable guarantee would be in the range of 1% to 1.5% ... Read more

The need to adjust comparables and the requirement for accuracy and reliability are pointed out in these Guidelines on several occasions, both for the general application of the arm’s length principle and more specifically in the context of each method. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. Whether comparability adjustments should be performed (and if so, what adjustments should be performed) in a particular case is a matter of judgment that should be evaluated in light of the discussion of costs and compliance burden at Section C ... Read more

There are various sources of information that can be used to identify potential external comparables. This sub-section discusses particular issues that arise with respect to commercial databases, foreign comparables and information undisclosed to taxpayers. Additionally, whenever reliable internal comparables exist, it may be unnecessary to search for external ones, see paragraphs 3.27-3.28 ... Read more

Neopost Italia s.r.l. had paid service fees and royalties to its French parent. Following an audit, deductions for these intra-group transactions was adjusted by the tax authorities due to non compliance with the arm’s length principle and lack of documentation. However, for the purpose of determining an arm’s length remuneration a benchmark study had been performed by the tax authorities in which one of the comparables was not independent. The Court of Appeal upheld the decision of the tax authorities. Judgment of the Supreme Court The Supreme Court set aside the decision of the Court of Appeal and remanded the case to the court of first instance. In regards to the comparable company in the benchmark that was not independent, the Supreme Court found that: “it is entirely arbitrary, in comparing the two companies, to assert that the price charged by one of the two is the market price while the other is not”; this is a ruling that affects ... Read more

BIOMERIEUX ESPAÑA SA is active in the business of clinical and biological analysis, production, distribution, training and technical assistance. Likewise, the provision of computer services and, in particular, the computer management of laboratories. Following an audit the tax authorities found that the controlled prices agreed for the acquisition of instruments and consumables between bioMérieux España and its related entities, bioMérieux SA and bioMérieux Inc, did not provided bioMérieux España with an arm’s length return on is controlled activities. A tax assessment was issued for FY 2008 on the basis af a thorough critical analysis of the benchmark study provided by the BIOMERIEUX, and detailed reasoning and analysis in regards to comparability and market developments. Judgment of the National Court The Audiencia Nacional dismissed the appeal of Biomerieux España SA and decided in favour of the tax authorities. Excerpts “As we already reasoned in our SAN (2nd) of 6 March 2019 (Rec. 353/2015 ), it is legitimate to resort to what ... Read more

The materiality of the change in economically relevant circumstances created by the impact of government assistance available in a market may impose additional challenges to the comparability analysis. It may for example render it more difficult to apply the comparability analysis through the utilisation and/or the application of a particular transfer pricing method and search for comparable transactions, on the basis that comparability differences may be exacerbated due to variations in government assistance between comparables or between jurisdictions.40 For example, an uncontrolled transaction that might otherwise have been considered comparable to a particular controlled transaction might be considered not comparable by virtue of the fact that one of the transactions is subject to government assistance while the other is not. A revised strategy, and potentially the use of a corroborating transfer pricing methodology,41 may need to be applied in such cases to take account of the differences in comparability. See Chapter II of this guidance. 40 As the guidance in ... Read more

The most reliable approach in identifying reliable comparables will be to refer, where possible, to data regarding comparable uncontrolled transactions in the same or comparable geographic market between independent enterprises performing similar functions, assuming similar risks, and using similar assets ... Read more

This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar restrictions or conditions. Otherwise, it might be necessary to adjust the period over which the comparison is performed (e.g. excluding the economic data corresponding to the three months where the taxpayer was unable to operate). Taxpayers and tax administrations should determine on a case-by-case basis the extent to which these adjustments are necessary in circumstances where the potential differences may not have a material impact on the comparability. In this respect, the guidance in paragraphs 3.50 to 3.52 of the OECD TPG is relevant ... Read more

As a result of a tax audit initiated against “Pharma-Distributor”, the Peruvian tax authority, SUNAT, issued an assessment where an adjustment of transfer prices in the amount of S/. 5,720,692.00 was added to the taxable income for FY 2009. SUNAT had applied the transactional net margin method, instead of the resale price method, used by “Pharma-Distributor”. SUNAT found that the resale price method used by “Pharma-Distributor” was not the most appropriate method, since it does not include other functions directly related to its business activity such as sales force, advertising, marketing, reflected in the expenses assumed in medical visitors, promotions, medical samples, merchandising, promoters, events and conferences for doctors, among others, which are accounted for at the operating profit level. Comparability adjustments were made by the tax authorities considering certain exceptional events that affected the normal operations of “Pharma-Distributor”, such as: i) issuance of credit notes in excess for extraordinary discounts, ii) problems with inventory management and iii) payment of ... Read more

It is up to the Tax Administration to prove the existence of transactions between related companies with clear discrepancies compared to transactions of the same kind on an independent market, while the taxpayer bears the burden of proving that the transactions took place for market values to be considered normal. This is the division of the burden of proof at the basis of the decision of the Milan Regional Tax Commission (CTR) rejecting the appeal lodged by the Tax Revenue Office. The taxpayer, in the case in question, has in fact fulfilled its burden by describing and documenting in the records that the functions and organization chart of the German subsidiary were such as to give an exhaustive account of the peculiarities of the latter and of the reliability of the CUP method (Comparable Uncontrolled Price Method) used. On the contrary, however, the comparables used by the Revenue Office to prove the validity of its assessment were incorrect because they ... Read more

Monsanto Chile – since 2018 a subsidiary of Bayer – is engaged in production of vegetable seeds and Row Crop seeds. The company uses its own local farmers and contractors, employs some 250 people and hires a maximum of 2,000 temporary workers in the summer months. It receives parental seed from global planners in the US and other countries and then multiplies these seeds in Chile on its own or third-party farms. The seeds are then harvested, processed and shipped to locations specified by global planners. Following an audit of FY 2009-2010 an adjustment was issued related to the profitability obtained in the operations of the “Production” segment (sale of semi-finished products to related parties) and “Research and Development” carried out on behalf of related parties abroad. The adjustment was determined by the tax authorities using the a Net Margin method. The tax authorities found that the income obtained under the production segment and in the research and development business ... Read more

The need to adjust comparables and the requirement for accuracy and reliability are pointed out in these Guidelines on several occasions, both for the general application of the arm’s length principle and more specifically in the context of each method. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. Whether comparability adjustments should be performed (and if so, what adjustments should be performed) in a particular case is a matter of judgment that should be evaluated in light of the discussion of costs and compliance burden at Section C ... Read more

There are various sources of information that can be used to identify potential external comparables. This sub-section discusses particular issues that arise with respect to commercial databases, foreign comparables and information undisclosed to taxpayers. Additionally, whenever reliable internal comparables exist, it may be unnecessary to search for external ones, see paragraphs 3.27-3.28 ... Read more

A Investment GmbH, acquired all shares of B in May 2012. To finance the acquisition, A Investment GmbH took up a bank loan (term: 5 years; interest rate: 4.78%; secured; senior), a vendor loan (term: 6 years; interest rate: 10%; unsecured; subordinated) and a shareholder loan (term: 9 to 10 years; interest rate: 8%; unsecured; subordinated). The 8 % interest rate on the shareholder loan was determined by A Investment GmbH by applying the CUP method based on external comparables. The German tax authority, found that the interest rate of 8 % did not comply with the arm’s length principle. An assessment was issued where the interest rate was set to 5% based on the interest rate on the bank loan (internal CUP). A Investment GmbH filed an appeal to Cologne Tax Court. The court ruled that the interest rate of the bank loan, 4.78%, was a reliable CUP for setting the arm’s length interest rate of the controlled loan. The ... Read more

The Platform for Collaboration on Tax (IMF, OECD, UN and the WBG) has published a toolkit for addressing difficulties in accessing comparables Data for Transfer Pricing Analyses. The Toolkit Includes a supplementary report on addressing the information gaps on prices of Minerals Sold in an intermediate form ... Read more

A Japanese company entered into a transaction with a foreing group company to import English-language learning materials into Japan. The learning materials were then resold to Japanese customers. The Japanese tax authority found that the resale price method should be used for setting the arm’s-length price for the transaction. The arm’s-length price for the controlled transaction was the price at which the Japanese company resold the English-language learning materials to customers, minus a normal profit margin multiplied by the price. The “normal profit margin” in this case was found to be the weighted average ratio of gross margin to the total revenue for multiple transactions, where unrelated parties imported the same as the English-language learning materials, or goods of a similar sort, and then resold them to customers. The tax authority held that unrelated parties importing and selling learning materials should be considered comparable transactions, and appropriate adjustments could be made to account for difference. However, an important difference between ... Read more

A Japanese distributor “Banana Corp” imported Ecuadorian bananas from a group company for wholesale in Japan. The Japanese tax administration ruled that the amount of consideration paid by Japanese distributor had exceeded the arm’s length price and issued an assessment of additional tax and penalties for FY 1999 – 2004. At first Banana Corp brought the case before the regional court who decision in favour of the tax administration. Banana Corp appealed this decision to Tokyo High Court. Tokyo High Court dismissed the appeal and upheld the decision of the regional court. Click here for English Translation Click here for other translation ... Read more

The tax authorities had not contested the method (TNMM) used by the company to assess their transactions with related or affiliated parties. The dispute was therefore limited to certain aspects of the application of the methodology. Boehringer had used ROS indicator (operating profit margin) which the tax authorities accepted for the resale function. But for the manufacturing function the tax authorities applied the ROTC indicator (profit margin on costs and expenses). On the use of foreign comparables the tax court held in favor of the company and remanded the case back to the authorities for a revised assessment. Click here for English Translation ... Read more

In the Novartis Groupe France SA case, the court stated that if the tax administration intends to base the transfer pricing approach on prices used between other companies or a profit split, it must first demonstrate that the price used by the related companies does not comply with the arm’s-length principle. A search for comparable transactions must be performed. Click here for translation Se also the later decision of October 2010. Click here for translation ... Read more

The principal activity of Aventis Pharma is manufacturing of pharmaceutical products and the secondary activity is the wholesale of pharmaceutical products; In FY 2000 the company carried out various transactions with related companies and based on a transfer pricing study the company concluded that profits were consistent with those obtained by comparable independent parties. Following an audit the tax authorities issued an assessment of additional income. In dispute were: Granting of extraordinary discounts, Reclassification of operating expenses together with related and non-operating expenses, Use of loss making comparables. The Court decided in favour of Aventis “From the above, it appears that the challenges made by the tax authority to the choice of the firm Bentley Pharmaceutical Inc, are unsubstantiated because they are based on the accusation of other manufacturing activities that were not carried out by the aforementioned company but by related companies, at a time when the rule regarding the selection of comparable companies is Article 4(1) of the ... Read more

The “Banana Group” is based in Ecuador and is engaged in the business of exporting Ecuadorian bananas. The Japanese distributor was part of the Banana Group. An Ecuadorian group company purchases bananas produced on plantations in Ecuador, exports and sells them to another intermediate group company, who in turn sells them to the Japanese distributor for wholesale in Japan. At issue was the arms length price of the bananas imported by the Japanese distributor. The tax administration held that the price paid for the bananas had been to high and issued an assessment for FY 1999-2004. The Japanese company disagreed and brought the case to court. Decision of the Court The Tokyo District court decided in favour of the tax administration and upheld the tax assessment. Click here for English translation Click here for other translation ... Read more

In the case of Laboratorios Bagó S.A. the National Tax Court, rejected an appeal raised on the grounds that the use of information from third party companies by the tax administration violated the tax secrecy enshrined in Article 101 of Law No. 11,683. Decision of the Tax Court The Court stated that the information used by the tax administration to determine the market price was not covered by tax secrecy. The Court also considered that it was correct to have informed the company of the aforementioned information so that it could exercise its right to defense. Click here for English translation ... Read more