Tag: Conduct of the parties

TPG2017 Chapter VI Annex example 19

TPG2017 Chapter VI Annex example 19

67. Company P, a resident of country A conducts a retailing business, operating several department stores in country A. Over the years, Company P has developed special know-how and a unique marketing concept for the operation of its department stores. It is assumed that the know-how and unique marketing concept constitute intangibles within the meaning of Section A of Chapter VI. After years of successfully conducting business in country A, Company P establishes a new subsidiary, Company S, in country B. Company S opens and operates new department stores in country B, obtaining profit margins substantially higher than those of otherwise comparable retailers in country B. 68. A detailed functional analysis reveals that Company S uses in its operations in country B, the same know-how and unique marketing concept as the ones used by Company P in its operations in country A. Under these circumstances, the conduct of the parties reveals that a transaction has taken place consisting in the ... Continue to full case

TPG2017 Chapter IX paragraph 9.17

Where the conditions of a business restructuring have been formalised by the MNE group in writing (e.g. written contractual agreements, correspondence and/or other communications), those agreements provide the starting point for delineating the transactions comprising the business restructuring between the MNEs involved. The contractual terms may describe the roles, responsibilities and rights of the restructured entity under the pre-restructuring arrangement (including in relevant circumstances those existing under contract and commercial law) and of the manner and extent to which those rights and obligations change as a result of the restructuring. However, where no written terms exist, or where the facts of the case, including the conduct of the parties, differ materially from the written terms of any agreement between them or supplement these written terms, the actual transactions comprising the business restructuring must be deduced from the facts as established, including the conduct of the parties (see Section D. 1.1 of Chapter I) ... Continue to full case

TPG2017 Chapter VI paragraph 6.97

It should be recognised that the process of identifying all of the intangibles transferred in a particular transaction is an exercise of identifying, by reference to written agreements and the actual conduct of the parties, the actual transactions that have been undertaken, applying the principles of Section D. 1 of Chapter I ... Continue to full case

TPG2017 Chapter VI paragraph 6.91

The provisions of Section D.1.1 of Chapter I apply in identifying the specific nature of a transaction involving a transfer of intangibles or rights in intangibles, in identifying the nature of any intangibles transferred, and in identifying any limitations imposed by the terms of the transfer on the use of those intangibles. For example, a written specification that a licence is non-exclusive or of limited duration need not be respected by the tax administration if such specification is not consistent with the conduct of the parties. Example 18 in the Annex to Chapter VI illustrates the provisions of this paragraph ... Continue to full case

TPG2017 Chapter VI paragraph 6.36

Where no written terms exist, or where the facts of the case, including the conduct of the parties, differ from the written terms of any agreement between them or supplement these written terms, the actual transaction must be deduced from the facts as established, including the conduct of the parties (see Section D. 1.1 of Chapter I). It is, therefore, good practice for associated enterprises to document their decisions and intentions regarding the allocation of significant rights in intangibles. Documentation of such decisions and intentions, including written agreements, should generally be in place at or before the time that associated enterprises enter into transactions leading to the development, enhancement, maintenance, protection, or exploitation of intangibles ... Continue to full case

TPG2017 Chapter I paragraph 1.117

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

TPG2017 Chapter I paragraph 1.88

In line with the discussion in relation to contractual terms (see Section D.1.1), it should be considered under step 4(i) whether the parties’ conduct conforms to the assumption of risk contained in written contracts, or whether the contractual terms have not been followed or are incomplete. Where differences exist between contractual terms related to risk and the conduct of the parties which are economically significant and would be taken into account by third parties in pricing the transaction between them, the parties’ conduct in the context of the consistent contractual terms should generally be taken as the best evidence concerning the intention of the parties in relation to the assumption of risk ... Continue to full case

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 ... Continue to full case

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 ... Continue to full case

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 ... Continue to full case
Canada vs. Avotus Corporation. November 2006

Canada vs. Avotus Corporation. November 2006

The Tax Court of Canada upheld the right of Avotus Corporation to deduct from its Canadian income losses incurred by its subsidiary in Puerto Rico. The Tax Court found that the Puerto Rican subsidiary was Avotus’s agent under a validly executed agency agreement, rejecting the CRA’s claim that the written agreement was unacceptable because the subsidiary’s conduct was inconsistent with that of an agent. Canada-Avotus-Corporation-v.-The-Queen ... Continue to full case
US vs Laidlaw Transportation, Inc., June 1998, US Tax Court, Case No 75 T.C.M. 2598 (1998)

US vs Laidlaw Transportation, Inc., June 1998, US Tax Court, Case No 75 T.C.M. 2598 (1998)

Conclusion of the Tax Court: “The substance of the transactions is revealed in the lack of arm’s-length dealing between LIIBV and petitioners, the circular flow of funds, and the conduct of the parties by changing the terms of the agreements when needed to avoid deadlines. The Laidlaw entities’ core management group designed and implemented this elaborate system to create the appearance that petitioners were paying interest, while in substance they were not. We conclude that, for Federal income tax purposes, the advances from LIIBV to petitioners for which petitioners claim to have paid the interest at issue are equity and not debt. Thus, petitioners may not deduct the interest at issue for 1986, 1987, and 1988.” NOTE: 13 October 2016 section 385 of the Internal Revenue Code was issued containing regulations for re-characterisation of Debt/Equity for US Inbound Multinationals. Further, US documentation rules in Treasury Regulation § 1.385-2 facilitate analysis of related-party debt instruments by establishing documentation and maintenance requirements, operating ... Continue to full case