ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the ... Read more

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same ... Read more

One question that arises in cases where the net profit indicator is weighted against sales is how to account for rebates and discounts that may be granted to customers by the taxpayer or the comparables. Depending on the accounting standards, rebates and discounts may be treated as a reduction of sales revenue or as an expense. Similar difficulties can arise in relation to foreign exchange gains or losses. Where such items materially affect the comparison, the key is to compare like with like and follow the same accounting principles for the taxpayer and for the comparables ... Read more

Under these circumstances, Country B would be entitled to make a transfer pricing adjustment reducing the expenses of the Country B manufacturing affiliate by USD 2 500. The transfer pricing adjustment is appropriate because the pricing arrangements misallocate the benefit of the group synergy associated with volume purchasing of the widgets. The adjustment is appropriate notwithstanding the fact that the Country B manufacturing affiliate acting alone could not purchase widgets for a price less than the USD 50 000 it paid. The deliberate concerted group action in arranging the purchase discount provides a basis for the allocation of part of the discount to the Country B manufacturing affiliate notwithstanding the fact that there is no explicit transaction between the Country B and Country C manufacturing affiliates ... Read more

The purchasing employee at the shared services centre then places orders for the required widgets and requests that the supplier invoice the Country B manufacturing affiliate for 5 000 widgets at a total price of USD 50 000 and invoice the Country C manufacturing affiliate for 5 000 widgets at a total price of USD 45 000. The supplier complies with this request as it will result in the supplier being paid the agreed price of USD 95 000 for the total of the 10 000 widgets supplied ... Read more

The independent supplier sells widgets for USD 10 apiece and follows a policy of providing a 5% price discount for bulk purchases of widgets in excess of 7 500 units. A purchasing employee in the Country D shared services centre approaches the independent supplier and confirms that if the Country B and Country C manufacturing affiliates simultaneously purchase 5 000 widgets each, a total group purchase of 10 000 widgets, the purchase discount will be available with respect to all of the group purchases. The independent supplier confirms that it will sell an aggregate of 10 000 widgets to the MNE group at a total price of USD 95 000, a discount of 5% from the price at which either of the two manufacturing affiliates could purchase independently from the supplier ... Read more

Assume a multinational group based in Country A, has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30% and Country C has a tax rate of 10%. The group also maintains a shared services centre in Country D. Assume that the manufacturing subsidiaries in Country B and Country C each have need of 5 000 widgets produced by an independent supplier as an input to their manufacturing processes. Assume further that the Country D shared services company is consistently compensated for its aggregate activities by other group members, including the Country B and Country C manufacturing affiliates, on a cost plus basis, which, for purposes of this example, is assumed to be arm’s length compensation for the level and nature of services it provides ... Read more

A Portuguese subsidiary – A SA – had received intra group loans in foreign currency and had various other transactions with foreign group companies. The tax authorities claimed that the pricing of the transactions had not been at arm’s length and that the interest payment and exchange losses on the loans were not tax deductible. Decision of CAAD The CAAD set aside the assessment and decided in favour of “Welding Mesh SA” Click here for English translation Portugal - P194_2021-T - 2021-12-07 ... Read more

PT Tech Data Advanced Solutions Indonesia (formerly PT AVnet Datamation Solutions) had paid service fees to a related party in FY 2014. Following an audit, the tax authorities issued an assessment where these service fees, among other issues, was found to be unsubstantiated by the evidence provided by the company. The Company disagreed and brought the case to court. Judgement of the Supreme Court The Supreme Court upheld the assessment of the tax authorities. Excerpts “That the reasons for the Appellant’s request for reconsideration cannot be justified, because the decision of the Tax Court which states that it partially grants the Appellant’s appeal against the Decision of the Director General of Taxes Number KEP-01460/KEB/WPJ.07/2017, dated 5 September 2017, concerning the Taxpayer’s Objection to the Income Tax Underpayment Assessment Letter for Tax Year 2014 Number 00013/206/14/056/16, dated 8 June 2016, in the name of the Appellant, TIN 21,120,445,8-056,000, is appropriate and correct …” “The Appellant only provided evidence of the Service ... Read more

Transactions had taken place between E.I. S.r.l. and a related Spanish company, S. SA, where the pricing had been determined based on the cost plus method. An assessment was issued by the tax authorities on the basis of a “comparable” transactions (internal CUP) between the E.I. S.r.l. and an independent third company where the price had been higher. An appeal was filed by E.I. S.r.l. with the Provincial Tax Commission where E.I S.r.l. argued that the price difference was due to volume discounts. The Provincial Tax Commission held in favour of E.I S.r.l. An appeal was then filed by the tax authorities with the Regional Tax Commission. Judgement of the Regional Tax Commission The Regional Commission dismissed the appeal of the tax authorities and decided in favour of E.I. S.r.l. Excerpts: “The Commission observes that the judges at first instance correctly and in detail reasoned their decisions, with a wealth of detail and a careful examination of all the circumstances ... Read more

The Italien tax authorities had issued an assessment against Fashion box s.p.a., adjusting revenues for FY 2004 with the sum of EUR 988,888.27, related to transfer pricing transactions between the taxpayer and foreign subsidiaries of Fashion Box Group s.p.a. located in various European countries. In particular, the tax authorities pointed out that sales to the European subsidiaries accounted for 95 % of total sales and that the discounts applied to subsidiaries were 31 % while those offered to Italian shops were between 2 and 2,5 %. The products were sold in Italy for slightly lower prices than those applied to European subsidiaries. Therefore, the subsidiaries could enjoy a much higher profits. An Italian shop had a theoretical mark-up of 138% while the foreign distributor had a mark-up of 233 %. Hence, profits had been transferred to the foreign entities of the group. The Regional Tax Tribunal rejected the assessment. In its judgement the Tribunal stated that it was necessary to ... Read more

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the ... 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

The reason for the adjustment of the tax base was, among other things, the finding that M.V.sold on 4 January 2010 all the stock of goods of the range of garden supplies to AGROTECHNIKA Vaněk s.r.o. (“Agrotechnika”) at an 80% discount on the sales price (i.e. purchase price + margin). M.V. and Agrotechnika were related persons within the meaning of Article 23(7) of Act No 586/1992 Coll., on Income Taxes, as M.V. is the managing director and sole shareholder of Agrotechnika. The sale price after the discount corresponded to approximately 40 % of the purchase price, which, according to the tax administrator, did not correspond to the price that would have been agreed between independent persons in normal commercial relations under the same or similar conditions. The prices established with comparable operators showed that the normal price corresponded to the purchase price of the goods. M.V. did not provide satisfactory evidence of the difference of CZK 1 557 720. The ... Read more

Burdinsky A.V. sold building products to both related and unrelated parties. Following an audit of FY 2012-2014, the tax authorities concluded that Burdinsky had understated the price of goods in transactions with related parties in order to save on taxes and obtain unjustified tax benefits. Price discrepancies were in the range of 11% to 52%. Due to lack of information the tax authorities did not apply the CUP method method. Instead prices ware determined based on the gross markup. The Courts of first and second instances found the assessment of the tax authorities lawful and reasonable. The application of the inspection’s own method of determining whether prices had been at arm’s length (which implies the determination of the minimum trade mark-up at the subsequent sale) was not in conflict with the tax legislation, did not violate the rights of IEs. The Supreme Court cancelled the decision of the lower courts and ruled in favor of Burdinsky A.V. The difference between ... Read more

Recordati Industria Chimica e Farmaceutica S.p.A had been issued an assessment by the tax authorities for FY 2003 on various issues related to transfer pricing. Recordati Industria Chimica e Farmaceutica S.p.A. disagreed with the assessment and brought the case to court. The Regional Tax Commission of Lombardy (Ctr) issued a decision where it partially annulled the assessment. This decision was challenged both by the tax authorities and Recordati Industria Chimica e Farmaceutica S.p.A. Judgement of the Supreme Court Before the Supreme Court there were 29 issues to be resolved. The Supreme Court predominantly ruled in favour of the tax authorities. The court confirms that transfer pricing adjustments are applicable even in the absence of proof by the administration of a concrete tax advantage by the taxpayer. The shift of taxable income following transactions between companies belonging to the same group and subject to different national regulations, does not require the administration to prove the elusive function, but only the existence ... Read more

One question that arises in cases where the net profit indicator is weighted against sales is how to account for rebates and discounts that may be granted to customers by the taxpayer or the comparables. Depending on the accounting standards, rebates and discounts may be treated as a reduction of sales revenue or as an expense. Similar difficulties can arise in relation to foreign exchange gains or losses. Where such items materially affect the comparison, the key is to compare like with like and follow the same accounting principles for the taxpayer and for the comparables ... Read more

Under these circumstances, Country B would be entitled to make a transfer pricing adjustment reducing the expenses of the Country B manufacturing affiliate by USD 2 500. The transfer pricing adjustment is appropriate because the pricing arrangements misallocate the benefit of the group synergy associated with volume purchasing of the widgets. The adjustment is appropriate notwithstanding the fact that the Country B manufacturing affiliate acting alone could not purchase widgets for a price less than the USD 50 000 it paid. The deliberate concerted group action in arranging the purchase discount provides a basis for the allocation of part of the discount to the Country B manufacturing affiliate notwithstanding the fact that there is no explicit transaction between the Country B and Country C manufacturing affiliates ... Read more

The purchasing employee at the shared services centre then places orders for the required widgets and requests that the supplier invoice the Country B manufacturing affiliate for 5 000 widgets at a total price of USD 50 000 and invoice the Country C manufacturing affiliate for 5 000 widgets at a total price of USD 45 000. The supplier complies with this request as it will result in the supplier being paid the agreed price of USD 95 000 for the total of the 10 000 widgets supplied ... Read more

The independent supplier sells widgets for USD 10 apiece and follows a policy of providing a 5% price discount for bulk purchases of widgets in excess of 7 500 units. A purchasing employee in the Country D shared services centre approaches the independent supplier and confirms that if the Country B and Country C manufacturing affiliates simultaneously purchase 5 000 widgets each, a total group purchase of 10 000 widgets, the purchase discount will be available with respect to all of the group purchases. The independent supplier confirms that it will sell an aggregate of 10 000 widgets to the MNE group at a total price of USD 95 000, a discount of 5% from the price at which either of the two manufacturing affiliates could purchase independently from the supplier ... Read more

Assume a multinational group based in Country A, has manufacturing subsidiaries in Country B and Country C. Country B has a tax rate of 30% and Country C has a tax rate of 10%. The group also maintains a shared services centre in Country D. Assume that the manufacturing subsidiaries in Country B and Country C each have need of 5 000 widgets produced by an independent supplier as an input to their manufacturing processes. Assume further that the Country D shared services company is consistently compensated for its aggregate activities by other group members, including the Country B and Country C manufacturing affiliates, on a cost plus basis, which, for purposes of this example, is assumed to be arm’s length compensation for the level and nature of services it provides ... Read more

FISH MARKET a.s. was engaged, among other things, in the sale of live freshwater fish and that the margin on sales to a related party (KOLTER, a.s.) was much lower than on sales to other independent companies. The tax authorities therefore began to examine the reasonableness of the difference in the agreed selling prices of the fish. During the audit, the tax administrator found that the quantity of fish purchased from the selected distributors did not affect the price of the goods (e.g. the customer Human purchased 4.8 tonnes of live scaled carp at CZK 45.23 per 1 kg, the trading company Schultheiss GmbH purchased 27 tonnes in the period in question at CZK 46.1 per 1 kg. The claim that KOLTER had taken surplus fish and was therefore charged a lower price was not substantiated by the applicant and no evidence of discounted sales was produced or appears in the administrative file. The Regional Court agreed with that assessment. An ... 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

This case concerns allocation of profits resulting from centralizing procurement functions within a group. The tax authorities took the position that the profit claimed by a centralized purchasing office was not aligned with the functions performed and the risks assumed by the office. According to the tax authorities profits derived from the realized discounts should be distributed to the members of the group (including a Dutch member) in proportion to their contribution of purchasing volume. Judgement of the Court The Supreme Court ruled in favor of the tax authorities. Profits in excess of the costs of the centralized purchase office with a markup of 5%, should at arm’s length be distributed to the members of the group in proportion to their contribution of purchasing volume. Excerpts “5.14. Notwithstanding the fact that [A-2 NV]’s profit was not so much caused by its own efforts but by the group’s policy of concentrating the price negotiations in [A-2 NV], and the extremely limited ... Read more

Indalex Limited, a Canadian company, purchased its aluminum needs from an associated Bermuda company, Pillar International. Both were subsidiaries of a British parent, which had agreed with Alcan for the supply of aluminum to its subsidiaries by Alcan. Purchases were made from Alcan by Pillar International for Indalex. When Indalex paid Pillar International, Pillar International paid the same price to Alcan, which immediately paid a discount to Pillar International. Pillar International then paid Indalex part of the discount and kept the balance. The tax authorities treated the discount as income to Indalex for income tax purposes and claimed that Indalex should have paid withholding tax on the balance retained by Pillar International in Bermuda. The Federal Court of Canada upheld the decision of the tax authorities. Indalex appealed. Judgement of the Federal Court of Appeal The Federal Court of Appeal dismissed the appeal and affirmed that the arrangement between Indalex and Pillar International was a non-arm’s length, artificial transaction, which ... Read more

The sales company … – (GmbH) was the managing general partner of the plaintiff and defendant, a limited partnership – “Sales KG” – in the years in dispute. The GmbH had a 10/11 share in the capital of “Sales KG”. The limited partner was the Dutchman G. Shareholders of the GmbH with a share of 99% were the … NV (NV) and the … in The Hague (NV L-V). “Sales KG” engaged in wholesale trade in …, which it purchased almost exclusively from NV. It granted its customers rebates, bonuses and discounts in the years in dispute (1962 – 1964). According to the findings of the tax authorities (FA), “Sales KG” had to pay interest on its goods liabilities after 90 days from 1963. It did not charge its customers corresponding interest. The tax authorities increased the profit of “Sales KG” mainly by adding profits allegedly transferred to the Netherlands. In the absence of suitable documentation, the profit shifting was ... Read more