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

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

TRMSB is a company incorporated in Malaysia and part of the Thomson Reuters Group. Thomson Reuters Global Resources (“TRGR”) entered into the Local Distribution Agreement with TRMSB. Pursuant to the agreements, TRMSB was appointed to market and sell TRGR’s products in the form of “Information Services” and “Dealing Services” in Malaysia. The arm’s length remuneration for its distribution activities was determined to an operating margin of 2% by applying the TNMM where nine companies had been selected as comparables. Following an audit, the tax authorities (DGIR) rejected five of the nine selected companies and replaced them with three new comparables. The tax authorities also rejected TRMSB’s target operating margin of 2% by including SG&A costs in the calculation of TRMSB’s margin. Not satisfied with the assessments, TRMSB appealed to the Special Commissioner of Income Tax (SCIT). It argued that paragraph 2.80 of the OECD Guidelines provides that non-operating income and expenses should be considered as “exceptional and extraordinary” and should ... Read more

SAS Arrow Génériques is in the business of distributing generic medicinal products mainly to the pharmacy market, but also to the hospital market in France. It is 82.22% owned by its Danish parent company, Arrow Groupe ApS, which is itself a wholly-owned subsidiary of the Maltese company Arrow International Limited. In 2010 and 2011, SAS Arrow Génériques paid royalties to its Danish parent, Arrow Group ApS, and to a related party in the UK, Breath Ltd. According to the French tax authorities, the royalties constituted a benefit in kind granted to Arrow Group ApS and Breath Ltd, since SAS Arrow Génériques had not demonstrated the reality and nature of the services rendered and had therefore failed to justify the existence and value of the consideration that it would have received from the payment of these royalties, which constitutes an indirect transfer of profits to related companies. On appeal, the Administrative Court decided in favour of SAS Arrow Génériques. The tax ... Read more

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from ... Read more

“Spare Parts S.A. had transactions with related parties abroad for the purchase of inventory, administrative services, technical services, commissions, purchase of fixed assets, royalties and provision of administrative services. “Spare Parts S.A.” had used the Transaction Net Margin Method (TNMM) to determine the transfer prices for these transactions. Following an audit, the tax authorities found inconsistencies between the income tax returns and the transfer pricing reports. The tax authorities found that “Spare Parts S.A.” had excluded USD 6 million 956 thousand 967 from its general and administrative expenses in the calculation of the profit margin, by classifying these ordinary costs as extraordinary expenses. When the costs were included in the calculation, the profit of “Spare Parts S.A.” was below the range established in its transfer pricing study. The tax authorities therefore adjusted its operating margin to the median of 4.39%. Not satisfied with the adjustment, Spare Parts S.A. filed a complaint. Decision of the Court The Tax Court ruled in ... Read more

Following an audit, the tax authorities found that “Metal S.A.” had not been remunerated at arm’s length for its distribution activities. In addition, the intra-group services received by “Metal S.A.” were considered to be low value-added services for which the margin could not exceed 5% under local Peruvian TP rules. The price paid for these services was therefore adjusted. An appeal was lodged with the Tax Court. Decision The Tax Court overturned the tax authorities’ assessment of the remuneration for distribution activities, but upheld the assessment of the intra-group services. Click here for English Translation Click here for other translation ... Read more

The tax authorities issued a transfer pricing adjustment of USD 1.4 million for FY2013, claiming that the remuneration of “Tech Distributor S.A.” had not been determined in accordance with the arm’s length principle. According to the tax authorities, there were inconsistencies between the amounts of controlled transactions reported in the transfer pricing documentation and the income tax return. The tax authorities also found that “Tech Distributor S.A.” had incorrectly included “other income” in the calculation of its operating margin for the purposes of applying the Transactional Net Margin Method (TNMM). Finally, some of the companies selected as comparables were rejected and “comparability adjustments” were also disregarded. After making these adjustments to the benchmark analysis, the profit margin of “Tech Distributor S.A.” was outside the interquartile range and therefore the profit was adjusted to the median. “Tech Distributor S.A. appealed to the Tax Tribunal. Decision of the Tax Tribunal The Tribunal dismissed the appeal and upheld the assessment of the tax ... Read more

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. At the same time, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such ... Read more

Following an audit, the Greek tax authorities determined that the profit of “Pharma Distributor Ltd” for sales and service activities had not been determined in accordance with the arm’s length principle. The tax authorities issued an assessment of additional taxable income, rejecting the resale price method used by “Pharma Distributor Ltd” and instead applying the TNMM. An appeal was filed by “Pharma Distributor Ltd”. Judgment of the Tax Court The Court dismissed the appeal in part and allowed it in part. The tax authorities’ assessment was largely upheld in relation to sales activities, where it was found that the prices charged by “Pharma Distributor Ltd” were outside the interquartile range. In relation to the service activities, the Court found that the remuneration for these activities was within the arm’s length range and therefore annulled the assessment. Excerpts “In the light of the above, as regards the applicant company’s intra-group transactions Nos 1 to 4, there is a question of non-compliance ... Read more

For example, a tested party engaged in the marketing and distribution of goods purchased in controlled transactions may have developed marketing intangibles in its geographic area of operation, including customer lists, customer relationships, and customer data. It may also have developed advantageous logistical know-how or software and other tools that it uses in conducting its distribution business. The impact of such intangibles on the profitability of the tested party should be considered in conducting a comparability analysis ... Read more

In a transfer pricing analysis where the most appropriate transfer pricing method is the resale price method, the cost-plus method, or the transactional net margin method, the less complex of the parties to the controlled transaction is often selected as the tested party. In many cases, an arm’s length price or level of profit for the tested party can be determined without the need to value the intangibles used in connection with the transaction. That would generally be the case where only the non-tested party uses intangibles. In some cases, however, the tested party may in fact use intangibles notwithstanding its relatively less complex operations. Similarly, parties to potentially comparable uncontrolled transactions may use intangibles. Where either of these is the case, it becomes necessary to consider the intangibles used by the tested party and by the parties to potentially comparable uncontrolled transactions as one comparability factor in the analysis ... Read more

This section provides supplemental guidance for applying the rules of Chapters I – III in situations where one or both parties to a controlled transaction uses intangibles in connection with the sale of goods or the provision of services, but where no transfer of intangibles or interests in intangibles occurs. Where intangibles are present, the transfer pricing analysis must carefully consider the effect of the intangibles involved on the prices and other conditions of controlled transactions ... Read more

The need to consider the use of intangibles by a party to a controlled transaction involving a sale of goods can be illustrated as follows. Assume that a car manufacturer uses valuable proprietary patents to manufacture the cars that it then sells to associated distributors. Assume that the patents significantly contribute to the value of the cars. The patents and the value they contribute should be identified and taken into account in the comparability analysis of the transaction consisting in the sales of cars by the car manufacturer to its associated distributors, in selecting the most appropriate transfer pricing method for the transactions, and in selecting the tested party. The associated distributors purchasing the cars do not, however, acquire any right in the manufacturer’s patents. In such a case, the patents are used in the manufacturing and may affect the value of the cars, but the patents themselves are not transferred ... Read more

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from ... Read more

Fulford India Ltd. imported active pharmaceutical ingredients (APIs) from related Group companies and sold them in India. The cost plus method had been used by Fulford to determine the arm’s length price of the controlled transactions. Following an audit for the financial year 2003-04, the tax authorities determined that the CUP method was the most appropriate method and issued an assessment of additional taxable income. An appeal was made to the Income Tax Appellate Tribunal. Judgment The Tribunal dismissed Fulford’s appeal and upheld the decision of the tax authorities to apply the CUP method. Excerpts “In the instant case, the appellant’s therapeutic segment are distinct i.e. systematic anti-infectives, dermatologicals, oral steroids, anti histamine having distinct process, patent, formulations and regulatory requirements. Thus CPM is not the appropriate method in the instant case. Accordingly, their manufacturing into final product cannot be clubbed together to compare gross profits with gross profits of manufacturing of products related to distinct generic or APIs procured ... Read more

N. S.P.A. was issued a notice of assessment in regards of transfer pricing. The PLI initially taken into consideration by the tax authorities was the return on sales (ROS). The company observed that, since the uniform application of such a PLI to the amount of all revenues was not possible, it was necessary to take into consideration only the revenues deriving from intra-group transactions. At this point, the tax authorities, instead of simply requesting the income statement for these transactions, proceeded to the assessment on the basis of a completely different PLI, the ROA (return on assets: operating profit to total assets). An appeal was filed by N. S.P.A with the Provincial Tax Commission and in a judgment issued in 2015 the commission concluded that the tax authorities had failed to comply with its duty of fairness and that it had used a different method in the assessment without exploring the possibility of correcting the initial objection, thus completely nullifying ... Read more

A complaint was filed by a “Medic-distributor” regarding a tax assessment issued by the tax authorities for FY2009 and FY2010 concerning the arm’s length price of pharmaceutical products purchased from related parties for distribution and a loan granted to a related party at an interest rate below the market interest rate. The case was dismissed by the court of first instance and was subsequently appealed to the Supreme Administrative Court. Judgment The Supreme Administrative Court dismissed the appeal and upheld the assessment issued by the tax authorities. Excerpts “The medicinal products subject to the assessment were sold to the related party at prices more than twice lower than the acquisition prices, and the cassator has not proved its claims that the reason for this was expiry of the expiry date, therefore, the tax authorities correctly assessed that there was a tax evasion (and not a tax evasion – as stated throughout the first instance judgment) within the meaning of Article ... Read more

For example, a tested party engaged in the marketing and distribution of goods purchased in controlled transactions may have developed marketing intangibles in its geographic area of operation, including customer lists, customer relationships, and customer data. It may also have developed advantageous logistical know-how or software and other tools that it uses in conducting its distribution business. The impact of such intangibles on the profitability of the tested party should be considered in conducting a comparability analysis ... Read more

In a transfer pricing analysis where the most appropriate transfer pricing method is the resale price method, the cost-plus method, or the transactional net margin method, the less complex of the parties to the controlled transaction is often selected as the tested party. In many cases, an arm’s length price or level of profit for the tested party can be determined without the need to value the intangibles used in connection with the transaction. That would generally be the case where only the non-tested party uses intangibles. In some cases, however, the tested party may in fact use intangibles notwithstanding its relatively less complex operations. Similarly, parties to potentially comparable uncontrolled transactions may use intangibles. Where either of these is the case, it becomes necessary to consider the intangibles used by the tested party and by the parties to potentially comparable uncontrolled transactions as one comparability factor in the analysis ... Read more

This section provides supplemental guidance for applying the rules of Chapters I – III in situations where one or both parties to a controlled transaction uses intangibles in connection with the sale of goods or the provision of services, but where no transfer of intangibles or interests in intangibles occurs. Where intangibles are present, the transfer pricing analysis must carefully consider the effect of the intangibles involved on the prices and other conditions of controlled transactions ... Read more

The need to consider the use of intangibles by a party to a controlled transaction involving a sale of goods can be illustrated as follows. Assume that a car manufacturer uses valuable proprietary patents to manufacture the cars that it then sells to associated distributors. Assume that the patents significantly contribute to the value of the cars. The patents and the value they contribute should be identified and taken into account in the comparability analysis of the transaction consisting in the sales of cars by the car manufacturer to its associated distributors, in selecting the most appropriate transfer pricing method for the transactions, and in selecting the tested party. The associated distributors purchasing the cars do not, however, acquire any right in the manufacturer’s patents. In such a case, the patents are used in the manufacturing and may affect the value of the cars, but the patents themselves are not transferred ... Read more

The applicant, ARROW International CR, a.s., seeks a judgment of the Supreme Administrative Court annulling the judgment of the Regional Court, and referring the case back to that court for further proceedings. The question of whether the applicant carried out business transactions in the tax year 2005/2006 with a related party (Arrow International, Inc., hereinafter referred to as ‘Arrow US’) in a manner which did not comply with the principles of normal business relations and whether, as a result, the applicant’s basis for calculating the corporate income tax rebate was unjustifiably increased and the special condition for applying the tax rebate under Article 35a(2)(d) of Act No 586/1992 Coll. was breached is decisive for the assessment of the merits of the present case, on income taxes, as in force until 31 December 2006 (‘the Income Tax Act’). Pursuant to Section 35(6) of the same Act, such an act has the effect that the entitlement to the discount ceases and the ... Read more

Fulford India Ltd. imported active pharmaceutical ingredients (APIs) from related group companies and sold them in India. The TNM method was used for determening transfer prices. Following an audit for FY 2006-07 and 2007-08, the tax administration found the CUP method to be the most appropriate. Fulford India argued that the CUP method requires stringent comparability and any differences which could materially affect the price in the open market should be taken into consideration. In the pharmaceutical world, APIs whith similar properties may still be different in relation to quality, efficiancy, impurities etc. Therefore, the two products cannot be compared. In court, it was further explained that Fulford also performed secondary manufacturing functions, converting the APIs into formulations. Hence, Fulford could be descriped as a value added distributor. Judgment The Court concluded that the selection of the best method should be based on functional analysis and the characterisation of the transactions and the entities. The fact that Fulford had secondary ... Read more