Tag: Contract manufacturing

A manufacturer, in most cases, located in a low-cost jurisdiction, which has a license to use an intangible property developed by its parent company. The manufacturer uses the intangible property to produce tangible property which is then resold to the parent for distribution to ultimate customers.

Italy vs Tiger Flex s.r.l., August 2023, Supreme Court, Sez. 5 Num. 25517/2023, 25524/2023 and 25528/2023

Italy vs Tiger Flex s.r.l., August 2023, Supreme Court, Sez. 5 Num. 25517/2023, 25524/2023 and 25528/2023

Tiger Flex was a fully fledged footwear manufacturer that was later restructured as a contract manufacturer for the Gucci Group. It had acquired goodwill which was written off for tax purposes, resulting in zero taxable income. The tax authorities disallowed the depreciation deduction. It found that the acquired goodwill had benefited the group as a whole and not just Tiger Flex. Tiger Flex filed an appeal with the Regional Tax Commission. The Regional Tax Commission decided in favour of Tiger Flex. The tax authorities then filed an appeal with the Supreme Court. Judgement of the Supreme Court The Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission in a different composition. Excerpt “It is not disputed that the Tiger and Bartoli factories were profitable assets, endowed with productive and earning capacity. What is disputed, however, is the recorded purchase value which, legally spread over the decade, anaesthetises any contributory ... Read more
Germany vs "Cutting Tech GMBH", August 2023, Bundesfinanzhof, Case No I R 54/19 (ECLI:DE:BFH:2023:U.090823.IR54.19.0)

Germany vs “Cutting Tech GMBH”, August 2023, Bundesfinanzhof, Case No I R 54/19 (ECLI:DE:BFH:2023:U.090823.IR54.19.0)

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been a great danger that a third company would have siphoned off “Cutting Tech GMBH”‘s know-how ... Read more
Czech Republic vs ERT Automotive Bohemia s.r.o., June 2023, Supreme Administrative Court, Case No 10 Afs 257/2022

Czech Republic vs ERT Automotive Bohemia s.r.o., June 2023, Supreme Administrative Court, Case No 10 Afs 257/2022

ERT Automotive Bohemia s.r.o. is active in the automotive industry. From 1 January 2013 to 30 November 2013, it provided the manufacture and repair of upholstery products for the automotive industry for its ‘sister’ company, Reiner Lasertec GmbH, established in Germany (both companies were owned at the time by the parent company Notos Beteiligungen GmbH, also established in Germany). ERT Automotive Bohemia s.r.o. provided ‘wage labour’ for Reiner Lasertec at a price of EUR 0,15 per minute of work. In December 2013, ERT Automotive Bohemia s.r.o. changed this business model. It no longer simply processed materials for Reiner Lasertec, but instead took over its former role. It was thus responsible for the production of the entire specific automotive part, which it then supplied as an independent manufacturer and final supplier. The Tax Office suspected that ERT Automotive Bohemia s.r.o. had supplied services to a related party from January to November 2013 at a lower price than would have been agreed ... Read more
Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 - 99

Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 – 99

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does not relate to the applicant’s contract manufacturing and has not demonstrated that it relates to ... Read more
Hungary vs "IPC manufacturing KtF", November 2022, Supreme Court, Case No Kfv.VI.35.316/2022/8

Hungary vs “IPC manufacturing KtF”, November 2022, Supreme Court, Case No Kfv.VI.35.316/2022/8

The transfer pricing setup of a group was changed following a business restructuring, and “IPC manufacturing KtF” had deducted 4 invoices issued as a transfer pricing adjustment. The tax authorities disallowed the deduction, since the invoices did not cover any actual costs of materials for the year in question. An appeal was filed by “IPC manufacturing KtF” with the Court, where the assessment of the tax authorities was upheld. An appeal was then filed with the Supreme Court based on formalities of the decision issued by the Court of first instance. Judgement of the Supreme Court The Supreme Court upheld the decision of the Court of first instance and the assessment issued by the tax authorities. Excerpt “The Court of First Instance correctly ruled that the tax authority was correct in its finding that the value of the invoices could not be deducted as material costs, since there was no purchase of materials behind them which corresponded to the actual ... Read more
Amgen in Billion Dollar Transfer Pricing Dispute with the IRS

Amgen in Billion Dollar Transfer Pricing Dispute with the IRS

Amgen, in its quarterly report for the period ended March 31, 2022, disclosed that, not only has the group been issued a notice of assessments from the IRS for FY 2010-2012 resulting in additional taxes of approximately $3.6 billion plus interest – as previously reported – it has also received a Revenue Agent Reports (RAR) for 2013-2015 resulting in additional taxes of approximately $5.1 billion, plus interest and penalties of approximately $2.0 billion. Furthermore, it is disclosed that Amgen is currently under examination by the IRS for the years 2016, 2017 and 2018 and by a number of state and foreign tax jurisdictions The main dispute relates to the allocation of profits between Amgen group entities in the United States and the U.S. territory of Puerto Rico. Excerpt from Amgen’s quarterly report for the period ended March 31, 2022 4. Income taxes The effective tax rates for the three months ended March 31, 2022 and 2021, were 11.9% and 11.4%, ... Read more
Czech Republic vs Aisan Industry Czech, s.r.o., April 2022, Supreme Administrative Court, Case No 7 Afs 398/2019 - 49

Czech Republic vs Aisan Industry Czech, s.r.o., April 2022, Supreme Administrative Court, Case No 7 Afs 398/2019 – 49

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o. with the Regional Court which – by judgment of 30 October 2019 – dismissed the ... Read more
TPG2022 Chapter II Annex II example 8

TPG2022 Chapter II Annex II example 8

38. Company A is the parent company of M Group, an MNE group engaged in the manufacturing and distribution of electronic devices. Company A has the exclusive right to sell the devices in all territories. 39. Company A decides to subcontract the manufacturing of the electronic devices to Company B, another member of M Group. Under the terms of the contract, Company B will follow the directions of Company A to produce the devices. Company B will source and supply the materials necessary to produce the different parts of the final products. A key component in the manufacturing process is sourced from Company A. Company B sells the finished goods to Company A, which in turn will market and distribute the product to unrelated customers. 40. To perform the manufacturing activities, Company B has invested in machinery and tooling that is specifically adapted to the production of the electronic devices sold by M Group. Company B has no other customer ... Read more

TPG2022 Chapter IX paragraph 9.129

In such an example, given that the relocated activity is a highly competitive one, it is likely that the enterprise in Country A has the option realistically available to it to use either the affiliate in Country B or a third party manufacturer. As a consequence, it should be possible to find comparables data to determine the conditions in which a third party would be willing at arm’s length to manufacture the clothes for the enterprise. In such a situation, a contract manufacturer at arm’s length would generally be attributed very little, if any, part of the location savings. Doing otherwise would put the associated manufacturer in a situation different from the situation of an independent manufacturer, and would be contrary to the arm’s length principle ... Read more

TPG2022 Chapter VII paragraph 7.40

Another example of an activity that may involve intra-group services is manufacturing or assembly operations. The activities can take a variety of forms including what is commonly referred to as contract manufacturing. In some cases of contract manufacturing the producer may operate under extensive instruction from the counterparty about what to produce, in what quantity and of what quality. In some cases, raw materials or components may be made available to the producer by the counterparty. The production company may be assured that its entire output will be purchased, assuming quality requirements are met. In such a case the production company could be considered as performing a low-risk service to the counterparty, and the cost plus method could be the most appropriate transfer pricing method, subject to the principles in Chapter II ... Read more

TPG2022 Chapter VI paragraph 6.85

It may also be the case that the acquiring business will leverage the existing position of the acquired business to expand the business of the acquirer in the territory of operation of the acquired business by causing the acquired business to use the acquirer’s branding. In that case, consideration should be given to whether the acquirer should make a payment to or otherwise compensate the acquired business for the functions performed, risks assumed, and assets used (including its market position) in connection with expanded use of the acquirer’s name ... Read more

TPG2022 Chapter VI paragraph 6.84

Where an existing successful business is acquired by another successful business and the acquired business begins to use a name, trademark or other branding indicative of the acquiring business, there should be no automatic assumption that a payment should be made in respect of such use. If there is a reasonable expectation of financial benefit to the acquired company from using the acquiring company’s branding, then the amount of any payment should be informed by the level of that anticipated benefit ... Read more

TPG2022 Chapter VI paragraph 6.83

In determining the amount of payment with respect to a group name, it is important to consider the amount of the financial benefit to the user of the name attributable to use of that name, the costs and benefits associated with other alternatives, and the relative contributions to the value of the name made by the legal owner, and the entity using the name in the form of functions performed, assets used and risks assumed. Careful consideration should be given to the functions performed, assets used, and risks assumed by the user of the name in creating or enhancing the value of the name in its jurisdiction. Factors that would be important in a licence of the name to an independent enterprise under comparable circumstances applying the principles of Chapters I – III should be taken into account ... Read more

TPG2022 Chapter VI paragraph 6.82

Where one member of the group is the owner of a trademark or other intangible for the group name, and where use of the name provides a financial benefit to members of the group other than the member legally owning such intangible, it is reasonable to conclude that a payment for use would have been made in arm’s length transactions. Similarly, such payments may be appropriate where a group member owns goodwill in respect of the business represented by an unregistered trademark, use of that trademark by another party would constitute misrepresentation, and the use of the trademark provides a clear financial benefit to a group member other than that owning the goodwill and unregistered trademark ... Read more

TPG2022 Chapter VI paragraph 6.81

Questions often arise regarding the arm’s length compensation for the use of group names, trade names and similar intangibles. Resolution of such questions should be based on the principles of this Section B and on the commercial and legal factors involved. As a general rule, no payment should be recognised for transfer pricing purposes for simple recognition of group membership or the use of the group name merely to reflect the fact of group membership. See paragraph 7.12 ... Read more

TPG2022 Chapter VI paragraph 6.80

The principles set out in this section similarly apply in situations where a member of an MNE group provides manufacturing services that may lead to process or product improvements on behalf of an associated enterprise that will assume legal ownership of such process or product improvements. Examples 14 to 17 in the Annex I to Chapter VI illustrate in greater detail the application of this Section B in the context of research and development arrangements ... Read more

TPG2022 Chapter II paragraph 2.60

Company C in country D is a 100% subsidiary of company E, located in country F. In comparison with country F, wages are very low in country D. At the expense and risk of company E, television sets are assembled by company C. All the necessary components, know-how, etc. are provided by company E. The purchase of the assembled product is guaranteed by company E in case the television sets fail to meet a certain quality standard. After the quality check, the television sets are brought – at the expense and risk of company E – to distribution centres company E has in several countries. The function of company C can be described as a purely contract manufacturing function. The risks company C could bear are eventual differences in the agreed quality and quantity. The basis for applying the cost plus method will be formed by all the costs connected to the assembling activities ... Read more

TPG2022 Chapter I paragraph 1.102

In the circumstances of Example 2 in paragraph 1.84, the significant risks associated with generating a return from the manufacturing activities are controlled by Company A, and the upside and downside consequences of those risks should therefore be allocated to Company A. Company B controls the risk that it fails to competently deliver services, and its remuneration should take into account that risk, as well as its funding costs for the acquisition of the manufacturing plant. Since the risks in relation to the capacity utilisation of the asset are controlled by Company A, Company A should be allocated the risk of under-utilisation. This means that the financial consequences related to the materialisation of that risk including failure to cover fixed costs, write-downs, or closure costs should be allocated to Company A ... Read more

TPG2022 Chapter I paragraph 1.84 (Example 2)

Company B manufactures products for Company A. Under step 1 capacity utilisation risk and supply chain risk have been identified as economically significant in this transaction, and under step 2 it has been established that under the contract Company A assumes these risks. The functional analysis under step 3 provides evidence that Company B built and equipped its plant to Company A’s specifications, that products are manufactured to technical requirements and designs provided by Company A, that volume levels are determined by Company A, and that Company A runs the supply chain, including the procurement of components and raw materials. Company A also performs regular quality checks of the manufacturing process. Company B builds the plant, employs and trains competent manufacturing personnel, and determines production scheduling based on volume levels determined by Company A. Although Company B has incurred fixed costs, it has no ability to manage the risk associated with the recovery of those costs through determining the production ... Read more
Portugal vs "Tobacco S.A", May 2021, Supreme Administrative Court, Case No 0507/17

Portugal vs “Tobacco S.A”, May 2021, Supreme Administrative Court, Case No 0507/17

“Tobacco S.A.” is the parent company of a group active in the tobacco industry. C. SA is a subsidiary of the group and operates as a toll manufacturer (Toller) on behalf of another subsidiary, B S.A. For the manufacturing services provided C S.A receives a “toll fee” from B S.A. According to the manufacturing service agreement the toll fee is calculated, based on Toller’s production costs plus and the capital invested by Toller in the production. Following an audit the tax authorities issued an additional assessment of corporate income tax and compensatory interest, relating to FY 2009, in the amount of EUR 1,395,039.79. The tax authorities considered that i) to correct the value of the production costs of the year 2009, in the amount corresponding to the deduction of the income with the “Write Off” of several credit balances of third parties over the company, since these deductions were not provided for in the contract; ii) to correct the value ... Read more
Indonesia vs PT PK Manufacturing Indonesia, March 2021, Supreme Court, Case No. 131/B/PK/Pjk/2021

Indonesia vs PT PK Manufacturing Indonesia, March 2021, Supreme Court, Case No. 131/B/PK/Pjk/2021

PT PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent, Press Kogyo Co. Ltd. Japan, and paid royalties for “use of IP”. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to said IP. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Tax Court ruled in favor of the tax authorities. According to a decision issued 4 December 2019 the existence and ownership to the Intellectual Property in question had not been sufficiently documented. An request for review was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the request and upheld the decision of the Tax court. “(…) Therefore, the object of the dispute in the ... Read more
Portugal vs "A-Contract Manufacturer LDA", December 2020, CAAD Tax Arbitration, Case No 808/2019-T

Portugal vs “A-Contract Manufacturer LDA”, December 2020, CAAD Tax Arbitration, Case No 808/2019-T

A-Contract Manufacturer LDA is an entity residing in Portugal, whose main activity is contract manufacturing of coffee machines and irons, as well as spare parts, tools etc. on behalf of its German parent B A.G. Following an audit, the tax authorities found that the results of A-Contract Manufacturer LDA had not been at arm’s length. An assessment of additional income was issued where the adjustment had been determined based on a benchmark study and use of statistical tools – interquartile range and median. Not satisfied with the assessment A-Contract Manufacturer LDA brought the case to the CAAD, a Portuguese arbitration tribunal. Decision of CAAD The CAAD decided in favour of the tax authorities and upheld the assessment. Excerpt “In sum, regarding the first claim of the Claimant that the arm’s length principle was violated, it appears that the Defendant did nothing more than, in compliance with the duty imposed by art. In short, as to the first claim of violation ... 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
Bulgaria vs "Beltart Manufacturing", May 2020, Supreme Administrative Court, Case No 5756

Bulgaria vs “Beltart Manufacturing”, May 2020, Supreme Administrative Court, Case No 5756

“Beltart Manufacturing” is a Bulgarian toll-manufacturer of of clothing accessories – trouser belts etc. – and is a member of the German Beltart Group. The remuneration for the manufactoring services provided to the group for 2013 and 2014 had been lower than for previous years. According to the company this was due to changes to the contractual and economic conditions and discounts. Following an audit the tax authorities came to the conclusion that the remuneration for 2013 and 2014 should be increased to the same level as for the previous years.  According to the tax authorities, the additional income had been determined by application of the CUP method. An appeal was filed by Beltart Manufacturing with the Administrative court, where the assessment was set aside. According to the court the tax authority had  not analyzed the economic situation for the period 2011 and 2012, and then for 2013 and 2014 in order to determine that the company’s profits. Since the tax authority ... Read more
Finland vs A Oy, April 2020, Supreme Administrative Court, Case No. KHO:2020:34

Finland vs A Oy, April 2020, Supreme Administrative Court, Case No. KHO:2020:34

A Oy had operated as the marketing and sales company of an international group in Finland. With the exception of 2008, the company’s operations had been unprofitable in 2003-2011, while at the same time the Group’s operations had been profitable overall. A Oy had purchased the products from the contract manufacturers belonging to the group. The method used in the Group’s transfer pricing documentation for product purchases had been characterized as a modified cost-plus / profit margin method (TNMM). The tested parties were contract manufacturers belonging to the group, for whom four comparable independent companies had been found in a search of the Amadeus database. According to the documentation, the EBITDA target margin for the Group’s contract manufacturers was set at two percent. When submitting A Oy’s tax return for 2010, the tax Office had considered, on the basis of the OECD’s 2010 Transfer Pricing Guidelines (paragraphs 1.70 – 1.72), that in independent business transactions the sales company would have ... Read more
Indonesia vs PK manufacturing Ltd, March 2020 Supreme Court, Case No. 366/B/PK/Pjk/2020

Indonesia vs PK manufacturing Ltd, March 2020 Supreme Court, Case No. 366/B/PK/Pjk/2020

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. The Supreme Court dismissed the request for review filed by PK Co. Ltd. Click here for translation putusan_366_b_pk_pjk_2020_20200908cl ... Read more
Poland vs YEA s.a. z o.o., December 2019, Administrative Court, Case No SA/Po 800/19 - Wyrok

Poland vs YEA s.a. z o.o., December 2019, Administrative Court, Case No SA/Po 800/19 – Wyrok

A Polish subsidiary performed manufacturing on a limited risk basis (a so-called contract manufacturer) on behalf of the group parent and should be remunerated based on the functions performed. During the year, sales of products are made at constant registration prices based on the standard cost. It is only after the end of the year and the summary of costs and revenues of operations that the applicant is able to determine her own profit level to a fixed level at the level of operating profit. In view of the above, the parties apply a mechanism for determining profitability, including the correction of mutual settlements. The necessary adjustment of profitability to a certain level can take place only after an annual summary of costs and revenues of operations, with detailed data on the applicant’s actual profitability only available at the end of the year or even afterwards. Given that the operating result obtained by the applicant is subject to verification and ... Read more
Germany vs "Cutting Tech GMBH", November 2019, FG Munich, Case No 6 K 1918/16

Germany vs “Cutting Tech GMBH”, November 2019, FG Munich, Case No 6 K 1918/16

Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided by “Cutting Tech GMBH”. The majority of “Cutting Tech GMBH”‘s sales articles were subject to multi-stage production, which could include various combinations of production processes. In particular, “Cutting Tech GMBH” was no longer competitive in the labour-intensive manufacturing processes (cut-off grinding, turning, milling) due to the high wage level in Germany. Good contribution margins from the high-tech processes (adiabatic cutting, double face grinding) increasingly had to subsidise the losses of the labour-intensive processes. Individual production stages, however, could not be outsourced to external producers for reasons of certification and secrecy. In addition, if the production had been outsourced, there would have been a great danger that a third company would have siphoned off “Cutting Tech GMBH”‘s know-how ... Read more
Czech Republic vs Aisan Industry Czech, s.r.o., October 2019, Regional Court, Case No 15 Af 105/2015

Czech Republic vs Aisan Industry Czech, s.r.o., October 2019, Regional Court, Case No 15 Af 105/2015

Aisan Industry Czech, s.r.o. is a subsidiary within the Japanese Aisan Industry Group which manufactures various engine components – fuel-pump modules, throttle bodies, carburetors for independent car manufactures such as Renault and Toyota. According to the original transfer pricing documentation the Czech company was classified as a limited risk contract manufacturer within the group, but yet it had suffered operating losses for several years. Following a tax audit an assessment was issued resulting in additional corporate income tax for FY 2011 in the amount of CZK 11 897 090, and on top of that a penalty in the amount of CZK 2 379 418. The assessment resulted from application of arm’s length provisions where the profitability of Aisan Industry Czech, s.r.o. had been determined on the basis of the profitability of comparable companies – TNMM method. An appeal was filed by Aisan Industry Czech, s.r.o. with the Regional Court. Judgement of the Regional Court The court dismissed the appeal and ... Read more
Norway vs Cytec, March 2019, Borgarting Lagmannsrett, Case No 2017-90184

Norway vs Cytec, March 2019, Borgarting Lagmannsrett, Case No 2017-90184

The question in the case was whether Cytec Norway KS (now Allnex Norway A/S) had paid an arm’s length price for an intra-group transfer of intangible assets in 2010. Cytec Norway KS had set the price for the accquired intangibles at NOK 210 million and calculated tax depreciations on that basis. The Norwegian tax authorities found that no intangibles had actually been transferred. The tax Appeals Committee determined that intangibles had been transferred but only at a total value of NOK 45 million. The Court of appeal upheld the dicision of the Tax Appeals Committee, where the price for tax purposes was estimated at NOK 44.9 million. Click here for translation Norway vs Cytec 19 March 2019, Borgarting Lagmannsrett Case No 2017-90184 ... Read more
Indonesia vs PK manufacturing Ltd, January 2019 Court of Appeal, Case No. PUT-115599.15/2014/PP/M.XIIIB Tahun 2019

Indonesia vs PK manufacturing Ltd, January 2019 Court of Appeal, Case No. PUT-115599.15/2014/PP/M.XIIIB Tahun 2019

PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent. Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for ownership to Intellectual Property by the Japanese parent. Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making. The Company disagreed and brought the case to court. The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the Intellectual Property in question had not been sufficiently documented by the Japanese parent company. Part 1 – Click here for translation Part 2 – Click here for translation Putusan Nomor ... Read more
Taiwan vs Intracom, November 2018, Supreme Administrative Court, Case No 691 of 107

Taiwan vs Intracom, November 2018, Supreme Administrative Court, Case No 691 of 107

Intracom Taiwan had deducted losses on intra-group receivables and management fees in its taxable income. These deductions had been partially denied by the Taiwanese tax administration due to lack of documentation and economic substance. Intracom brought the case to court. The Supreme Administrative court dismissed Intracom’s appeal and upheld the assessment. On the issue of deduction for bad debt the court states: “The Appellee’s request for such documents was in accordance with the law. However, the Appellant was unable to produce documents that met the statutory requirements, and from this point of view, the Appellee’s refusal to allow the recognition of the doubtful accounts could not be considered an error. (3) The appellant’s argument that the tax authorities should accept the recognition of doubtful debts as long as the appellant obtains the documentary evidence of the “foreign office certification” which proves the objective fact that “the debtor of the receivable has gone into liquidation” is clearly inconsistent with Article 94 ... Read more
Italy vs "VAT Group X", November 2018,  Tax Ruling of the Italian Revenue Agency, Case No 60

Italy vs “VAT Group X”, November 2018, Tax Ruling of the Italian Revenue Agency, Case No 60

A ruling was issued by the Italian Revenue Service on the following question on the VAT treatment of Transfer Pricing adjustments. “Alfa represents that it is part of a multinational Group (hereinafter, the “Group”). The Group is implementing a new integrated development plan, aimed at the joint creation of products and platforms necessary for the production and marketing of goods under brand X. The legal and economic ownership of the X trademark and of the relevant know-how belongs to the non-EU company Beta, which acts as “Principal” and assumes all risks connected to the production and marketing of the goods, granting the trademark and the know-how free of charge to the subsidiaries engaged in the production and marketing of the X goods. The plaintiff entered into an intra-group agreement (the ‘Agreement’) with Beta, whereby Beta undertakes to act as contract assembler for the purpose of manufacturing X products, putting its own equipment at the disposal of Gamma (a company incorporated ... Read more
TPG2017
  Chapter II Annex II example 8

TPG2017 Chapter II Annex II example 8

38. Company A is the parent company of M Group, an MNE group engaged in the manufacturing and distribution of electronic devices. Company A has the exclusive right to sell the devices in all territories. 39. Company A decides to subcontract the manufacturing of the electronic devices to Company B, another member of M Group. Under the terms of the contract, Company B will follow the directions of Company A to produce the devices. Company B will source and supply the materials necessary to produce the different parts of the final products. A key component in the manufacturing process is sourced from Company A. Company B sells the finished goods to Company A, which in turn will market and distribute the product to unrelated customers. 40. To perform the manufacturing activities, Company B has invested in machinery and tooling that is specifically adapted to the production of the electronic devices sold by M Group. Company B has no other customer ... Read more
Denmark vs "Contract manufacturing HQ A/S", April 2018, Tax Tribunal, Case No SKM2018.173.LSR

Denmark vs “Contract manufacturing HQ A/S”, April 2018, Tax Tribunal, Case No SKM2018.173.LSR

A Danish HQ acquired goods from an affiliated contract manufacturing company. The Danish tax authorities issued an adjustment of the prices based on the Danish arm’s length provisions contained in section 2 of the Tax Assessment Act. Decision of the Tax tribunal The Tax Tribunal found that the tax authorities had proved that the company’s method for pricing the controlled transactions contained too many uncertainties. The Tax Tribunal further found that the method applied by the tax authorities was in accordance with the OECD Transfer Pricing Guidelines, as the contract manufacturing activities could be equated with a service. Finally, the Tax Tribunal did not find that the pricing of controlled transactions of goods or services could be based on a return on capital employed (ROCE). Pricing of controlled transactions of goods or services was to be based on a comparability analysis of similar transactions between independent companies, cf. OECD Transfer Pricing Guidelines 2010, p. 1.33 and 1.38. Click here for ... Read more

TPG2017 Chapter IX paragraph 9.129

In such an example, given that the relocated activity is a highly competitive one, it is likely that the enterprise in Country A has the option realistically available to it to use either the affiliate in Country B or a third party manufacturer. As a consequence, it should be possible to find comparables data to determine the conditions in which a third party would be willing at arm’s length to manufacture the clothes for the enterprise. In such a situation, a contract manufacturer at arm’s length would generally be attributed very little, if any, part of the location savings. Doing otherwise would put the associated manufacturer in a situation different from the situation of an independent manufacturer, and would be contrary to the arm’s length principle ... Read more

TPG2017 Chapter VII paragraph 7.40

Another example of an activity that may involve intra-group services is manufacturing or assembly operations. The activities can take a variety of forms including what is commonly referred to as contract manufacturing. In some cases of contract manufacturing the producer may operate under extensive instruction from the counterparty about what to produce, in what quantity and of what quality. In some cases, raw materials or components may be made available to the producer by the counterparty. The production company may be assured that its entire output will be purchased, assuming quality requirements are met. In such a case the production company could be considered as performing a low-risk service to the counterparty, and the cost plus method could be the most appropriate transfer pricing method, subject to the principles in Chapter II ... Read more

TPG2017 Chapter VI paragraph 6.85

It may also be the case that the acquiring business will leverage the existing position of the acquired business to expand the business of the acquirer in the territory of operation of the acquired business by causing the acquired business to use the acquirer’s branding. In that case, consideration should be given to whether the acquirer should make a payment to or otherwise compensate the acquired business for the functions performed, risks assumed, and assets used (including its market position) in connection with expanded use of the acquirer’s name ... Read more

TPG2017 Chapter VI paragraph 6.84

Where an existing successful business is acquired by another successful business and the acquired business begins to use a name, trademark or other branding indicative of the acquiring business, there should be no automatic assumption that a payment should be made in respect of such use. If there is a reasonable expectation of financial benefit to the acquired company from using the acquiring company’s branding, then the amount of any payment should be informed by the level of that anticipated benefit ... Read more

TPG2017 Chapter VI paragraph 6.83

In determining the amount of payment with respect to a group name, it is important to consider the amount of the financial benefit to the user of the name attributable to use of that name, the costs and benefits associated with other alternatives, and the relative contributions to the value of the name made by the legal owner, and the entity using the name in the form of functions performed, assets used and risks assumed. Careful consideration should be given to the functions performed, assets used, and risks assumed by the user of the name in creating or enhancing the value of the name in its jurisdiction. Factors that would be important in a licence of the name to an independent enterprise under comparable circumstances applying the principles of Chapters I – III should be taken into account ... Read more

TPG2017 Chapter VI paragraph 6.82

Where one member of the group is the owner of a trademark or other intangible for the group name, and where use of the name provides a financial benefit to members of the group other than the member legally owning such intangible, it is reasonable to conclude that a payment for use would have been made in arm’s length transactions. Similarly, such payments may be appropriate where a group member owns goodwill in respect of the business represented by an unregistered trademark, use of that trademark by another party would constitute misrepresentation, and the use of the trademark provides a clear financial benefit to a group member other than that owning the goodwill and unregistered trademark ... Read more

TPG2017 Chapter VI paragraph 6.81

Questions often arise regarding the arm’s length compensation for the use of group names, trade names and similar intangibles. Resolution of such questions should be based on the principles of this Section B and on the commercial and legal factors involved. As a general rule, no payment should be recognised for transfer pricing purposes for simple recognition of group membership or the use of the group name merely to reflect the fact of group membership. See paragraph 7.12 ... Read more

TPG2017 Chapter VI paragraph 6.80

The principles set out in this section similarly apply in situations where a member of an MNE group provides manufacturing services that may lead to process or product improvements on behalf of an associated enterprise that will assume legal ownership of such process or product improvements. Examples 14 to 17 in the Annex to Chapter VI illustrate in greater detail the application of this Section B in the context of research and development arrangements ... Read more

TPG2017 Chapter II paragraph 2.60

Company C in country D is a 100% subsidiary of company E, located in country F. In comparison with country F, wages are very low in country D. At the expense and risk of company E, television sets are assembled by company C. All the necessary components, know-how, etc. are provided by company E. The purchase of the assembled product is guaranteed by company E in case the television sets fail to meet a certain quality standard. After the quality check, the television sets are brought – at the expense and risk of company E – to distribution centres company E has in several countries. The function of company C can be described as a purely contract manufacturing function. The risks company C could bear are eventual differences in the agreed quality and quantity. The basis for applying the cost plus method will be formed by all the costs connected to the assembling activities ... Read more

TPG2017 Chapter I paragraph 1.102

In the circumstances of Example 2 in paragraph 1.84, the significant risks associated with generating a return from the manufacturing activities are controlled by Company A, and the upside and downside consequences of those risks should therefore be allocated to Company A. Company B controls the risk that it fails to competently deliver services, and its remuneration should take into account that risk, as well as its funding costs for the acquisition of the manufacturing plant. Since the risks in relation to the capacity utilisation of the asset are controlled by Company A, Company A should be allocated the risk of under-utilisation. This means that the financial consequences related to the materialisation of that risk including failure to cover fixed costs, write-downs, or closure costs should be allocated to Company A ... Read more

TPG2017 Chapter I paragraph 1.84 (Example 2)

Company B manufactures products for Company A. Under step 1 capacity utilisation risk and supply chain risk have been identified as economically significant in this transaction, and under step 2 it has been established that under the contract Company A assumes these risks. The functional analysis under step 3 provides evidence that Company B built and equipped its plant to Company A’s specifications, that products are manufactured to technical requirements and designs provided by Company A, that volume levels are determined by Company A, and that Company A runs the supply chain, including the procurement of components and raw materials. Company A also performs regular quality checks of the manufacturing process. Company B builds the plant, employs and trains competent manufacturing personnel, and determines production scheduling based on volume levels determined by Company A. Although Company B has incurred fixed costs, it has no ability to manage the risk associated with the recovery of those costs through determining the production ... Read more
Spain vs. Schwepps (Citresa), February 2017, Spanish Supreme Court, case nr. 293/2017

Spain vs. Schwepps (Citresa), February 2017, Spanish Supreme Court, case nr. 293/2017

The Spanish Tax administration made an income adjustment of Citresa (a Spanish subsidiary of the Schweeps Group) Corporate Income Tax for FY 2003, 2004, 2005 and 2006, resulting in a tax liability of €38.6 millon. Citresa entered into a franchise agreement and a contract manufacturing agreement with Schweppes International Limited (a related party resident in the Netherlands). The transactions between the related parties were not found to be in accordance with the arm’s length principle. In the parent company, CITRESA, the taxable income declared for the years 2003 to 2005 was increased as a result of an adjustment of market prices relating to the supply of certain fruit and other components by Citresa to Schweppes International Limited. In the subsidiary, SCHWEPPES, S.A. (SSA), the taxable income declared for the years 2003 to 2006 was increased as a result of adjustment of market prices relating to the supply of concentrates and extracts by the entity Schweppes International Limited, resident in Holland, to SSA. The taxpayer ... Read more
Indonesia vs "Indonesia Ltd", April 2016 Supreme Court, Case No. Put-70118/PP/M.IA/15/2016

Indonesia vs “Indonesia Ltd”, April 2016 Supreme Court, Case No. Put-70118/PP/M.IA/15/2016

In this case “Indonesia Ltd” paid royalties for use of IP owned by the Japanese parent. Following an audit, the tax authorities issued an assessment where the royalty payments were disallowed. Judgement of the Court The Court ruled in favour of the taxpayer. According to the court “Indonesia Ltd” had been able to prove that services had actually been rendered. Click here for translation Putusan Pengadilan Pajak Nomor Put70118-PP-M-IA-15-2016y ... Read more
Italy vs GE TRANSPORTATION SYSTEMS SPA, December 2014, Supreme Court 27296

Italy vs GE TRANSPORTATION SYSTEMS SPA, December 2014, Supreme Court 27296

In this case the Italien tax administration concluded that transactions between an Italien company an a German sister company had been priced lower than the “normal value” of similar transactions. Judgement of the Supreme Court The Supreme Court ruled partly in favor of the GE Transportation Systems S.p.A. and partly in favour of the tax authorities. The case was remanded to the lower court for further considerations. In relation to intercompany transactions the court found that GE Transportation Systems S.p.A. had only limited risk and that the German company owned the intellectual property. In relation to transactions with independent companies, GE Transportation Systems S.p.A. assumed the risks of the transaction and had the rights to manufacture and sell the products. These differences justified different price and led to the transactions not being comparable. The Court concluded that the limited risk – contract manufacturing – transactions with the German parent could not be compared with the full-fledged manufacturing activities. In regards ... Read more
Indonesia vs Panasonic Indonesia, May 2013, Tax Court, Put.45162/2013

Indonesia vs Panasonic Indonesia, May 2013, Tax Court, Put.45162/2013

In the case of Panasonic Indonesia the tax authorities had disallowed deductions for services and royalties paid for by the local company to the Panasonic Corporation Japan. The tax authorities held that Panasonic Indonesia did not received the purported services and that the company should not pay royalty due to its status as a contracting manufacturer. Judgement of the Tax Court The Court decided predominantly in favour of the tax authorities. The court found that Panasonic Indonesia had been unable to prove that actual ‘services’ had been received for an amount equal to 3% of net sales of all product manufactured and 1% of net sales for technical assistance and brand fees. Furthermore it was notet that Panasonic Indonesia reported consistent losses. Click here for translation putusan_put.45162_pp_m.xv_15_2013_20210530 ... Read more